Item 7. Management’s Discussion and Analysis
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In this MD&A, there are statements concerning the future operating and future financial performance of MSG Entertainment. Words such as “expects,” “anticipates,” “believes,” “estimates,” “may,” “will,” “should,” “could,” “potential,” “continue,” “intends,” “plans,” and similar words and terms used in the discussion of future operating and future financial performance identify forward-looking statements. Investors are cautioned that such forward-looking statements are not guarantees of future performance, results or events and involve risks and uncertainties and that actual results or developments may differ materially from the forward-looking statements as a result of various factors. Factors that may cause such differences to occur include, but are not limited to:
• the level of our expenses, including our corporate expenses;
• the level of our revenues, which depends in part on the popularity of the Christmas Spectacular , the professional sports teams whose games are played at The Garden and other events which are presented in our venues, and our ability to attract such events;
• the on-ice and on-court performance of the professional sports teams whose games we host in our venues;
• the level of our capital expenditures and other investments;
• general economic conditions, especially in the New York City and Chicago metropolitan areas where we have business activities;
• the demand for sponsorship and suite arrangements;
• competition, for example, from other venues and sports and entertainment options, including of new competing venues;
• the effect of any postponements or cancellations by third-parties or the Company of scheduled events, whether as a result of a pandemic or other public health emergency due to operational challenges and other health and safety concerns (such as the partial cancellation of the 2021 production of the Christmas Spectacular ) or otherwise;
• the extent to which attendance at our venues may be impacted by government actions, renewed health concerns by potential attendees and reduced tourism;
• the impact on the payments we receive under the Arena License Agreements that require the Knicks of the NBA and the Rangers of the NHL to play their home games at The Garden as a result of government-mandated capacity restrictions, league restrictions and/or social-distancing or vaccination requirements, if any, at Knicks and Rangers games;
• changes in laws, guidelines, bulletins, directives, policies and agreements, and regulations under which we operate;
• any economic, social or political actions, such as boycotts, protests, work stoppages or campaigns by labor organizations, including the unions representing players and officials of the NBA and NHL, or other work stoppage;
• seasonal fluctuations and other variations in our operating results and cash flow from period to period;
• enhancements or changes to existing productions and the investments associated with such enhancements or changes;
• business, reputational and litigation risk if there is a cyber or other security incident resulting in loss, disclosure or misappropriation of stored personal information, or disclosure of confidential information or other breaches of our information security;
• our ability to effectively manage any impacts of a pandemic or other public health emergency (including COVID-19 variants) as well as renewed actions taken in response by governmental authorities or certain professional sports leagues, including ensuring compliance with rules and regulations imposed upon our venues, to the extent applicable;
• activities or other developments (such as a pandemic or other public health emergency) that discourage or may discourage congregation at prominent places of public assembly, including our venues;
• the acquisition or disposition of assets or businesses and/or the impact of, and our ability to successfully pursue, acquisitions or other strategic transactions;
• our ability to successfully integrate acquisitions, new venues or new businesses into our operations;
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• our internal control environment and our ability to identify and remedy any future material weaknesses;
• the costs associated with, and the outcome of, litigation, including any negative publicity, and other proceedings to the extent uninsured, including litigation or other claims against companies we invest in or acquire;
• the impact of governmental regulations or laws, changes in how those regulations and laws are interpreted, as well as the continued benefit of certain tax exemptions and the ability to maintain necessary permits or licenses;
• the impact of any government plans to redesign New York City’s Penn Station;
• the impact of sports league rules, regulations and/or agreements and changes thereto;
• the substantial amount of debt incurred, the ability of our subsidiaries to make payments on, or repay or refinance, such debt under the National Properties Credit Agreement and our ability to obtain additional financing, to the extent required;
• financial community perceptions of our business, operations, financial condition and the industries in which we operate;
• the performance by MSG Sports of its obligations under various agreements with the Company and ongoing commercial arrangements, including the Arena License Agreements;
• the tax-free treatment of the MSGE Distribution;
• failure of the Company or Sphere Entertainment to satisfy its obligations under transition services agreements, or other agreements entered into in connection with the MSGE Distribution; and
• the additional factors described under “Risk Factors” in this Annual Report on Form 10-K.
We disclaim any obligation to update or revise the forward-looking statements contained herein, except as otherwise required by applicable federal securities laws. Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
All dollar amounts included in the following MD&A are presented in thousands, except as otherwise noted.
Introduction
This MD&A is provided as a supplement to, and should be read in conjunction with, the Company’s audited consolidated and combined annual financial statements and footnotes thereto included in Item 8 of this Annual Report on Form 10-K to help provide an understanding of our financial condition, changes in financial condition and results of operations.
Our MD&A is organized as follows:
MSGE Distribution and Business Overview. This section provides a general description of our business, as well as other matters that we believe are important in understanding our results of operations and financial condition and in anticipating future trends.
Results of Operations. This section provides an analysis of our results of operations for Fiscal Year 2024 and 2023, on a consolidated and combined basis, respectively. Analysis of our results of operations for Fiscal Year 2023, including a comparison of Fiscal Year 2023 to Fiscal Year 2022, is included in the Company’s Annual Report on Form 10-K for Fiscal Year 2023 filed on August 18, 2023.
Liquidity and Capital Resources. This section provides a discussion of our financial condition and liquidity, as well as an analysis of our cash flows for Fiscal Year 2024 and Fiscal Year 2023. The discussion of our financial condition and liquidity includes summaries of our primary sources of liquidity, our contractual obligations and off-balance sheet arrangements that existed at June 30, 2024.
Seasonality of Our Business. This section discusses the seasonal performance of our business.
Recently Issued Accounting Pronouncements and Critical Accounting Policies. This section cross-references a discussion of critical accounting policies considered to be important to our financial condition and results of operations and which require significant judgment and estimates on the part of management in their application . Our critical accounting policies and recently issued accounting pronouncements, are discussed included in Item 7 and 8, respectively, of this Annual Report on Form 10-K.
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MSGE Distribution and Business Overview
On the MSGE Distribution Date, Sphere Entertainment distributed approximately 67% of the shares of outstanding common stock of MSG Entertainment to its stockholders, with Sphere Entertainment retaining approximately 33% of the outstanding shares of common stock of MSG Entertainment (in the form of Class A common stock), referred to herein as the MSGE Retained Interest, immediately following the MSGE Distribution. As a result, the Company became an independent publicly traded company on April 21, 2023 through the MSGE Distribution. Following the completion of the secondary offering by Sphere Entertainment of the Company’s Class A Common Stock on September 22, 2023, Sphere Entertainment no longer owns any of the Company’s outstanding common stock.
In the MSGE Distribution, stockholders of Sphere Entertainment received (a) one share of MSG Entertainment’s Class A common stock, par value $0.01 per share, for every share of Sphere Entertainment’s Class A common stock, par value $0.01 per share, held of record as of the close of business, New York City time, on April 14, 2023 (the “Record Date”), and (b) one share of MSG Entertainment’s Class B common stock, par value $0.01 per share, for every share of Sphere Entertainment’s Class B common stock, par value $0.01 per share, held of record as of the close of business, New York City time, on the Record Date.
The Company is a live entertainment company comprised of iconic venues and marquee entertainment content. Utilizing the Company’s powerful brands and live entertainment expertise, the Company delivers unique experiences that set the standard for excellence and innovation while forging deep connections with diverse and passionate audiences.
We manage our business through one reportable segment. The Company’s portfolio of venues includes: The Garden, the Theater at Madison Square Garden, Radio City Music Hall, the Beacon Theatre, and The Chicago Theatre. The Company also includes the original production, the Christmas Spectacular, and our entertainment and sports bookings business, which showcases a broad array of compelling concerts, family shows and special events, as well as a diverse mix of sporting events, for millions of guests annually.
The Company conducts a significant portion of its operations at venues that it either owns or operates under long-term leases. The Company owns The Garden, the Theater at Madison Square Garden and The Chicago Theatre, and leases Radio City Music Hall and the Beacon Theatre.
All of the Company’s revenues and assets are attributed to or located in the United States and are primarily concentrated in the New York City metropolitan area.
Description of Our Business
The Company produces, presents and hosts live entertainment events, including (i) concerts, (ii) sports events, and (iii) other live events such as family shows, performing arts events and special events, in our diverse collection of venues. The scope of our collection of venues enables us to showcase acts that cover a wide spectrum of genres and popular appeal.
Although we primarily license our venues to third-party promoters for a fee, we also promote or co-promote shows. If we serve as promoter or co-promoter of a show, we have economic risk relating to the event.
The Company also creates, produces and/or presents live productions that are performed in the Company’s venues. This includes the Christmas Spectacular production, which features the world-famous Rockettes and which has been performed at Radio City Music Hall for 90 years.
The Company also historically owned a controlling interest in Boston Calling Events, LLC (“ BCE”), the entertainment production company that owns and operates the Boston Calling Music Festival. The Company disposed of its controlling interest in BCE on December 2, 2022.
Revenue Sources
The Company earns revenue from several primary sources: ticket sales to our audiences for live events that we produce or promote/co-promote, license fees for our venues paid by third-party promoters or licensees in connection with events that we do not produce or promote/co-promote, facility and ticketing fees, concessions, sponsorships and signage, suite license fees at The Garden, merchandising and tours at certain of our venues. The amount of revenue and expense recorded by the Company for a given event depends to a significant extent on whether the Company is promoting or co-promoting the event or is licensing a venue to a third party or MSG Sports. See “— Description of Our Business — Revenue Sources — Venue License Fees” below for further discussion of our venue licensing arrangements with MSG Sports.
Revenues from Entertainment Offerings
Ticket Sales and Suite Licenses
For our productions and for entertainment events in our venues that we promote, we recognize revenues from the sale of tickets to our audiences. We sell tickets to the public through our box office, via our websites and ticketing agencies and through group sales. The
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amount of revenue we earn from ticket sales depends on the number of shows and the mix of events that we promote, the capacity of the venue used, the extent to which we can sell to fully utilize the capacity, and ticket prices.
The Garden has 22 Event Level suites, 1 Event Level Club Space, 58 Lexus Level suites, 18 Infosys Level suites, the Madison Club, Chase Lounge and the Hub Loft. Suite licenses at The Garden are generally sold to corporate custom ers with the majority being multi-year licenses with annual escalators.
Under standard suite licenses, the licensees pay an annual license fee, which varies depending on the location of the suite. The license fee includes, for each seat in the suite, tickets for events at The Garden for which tickets are sold to the general public, subject to certain exceptions. In addition, suite holders separately pay for food and beverage service in their suites at The Garden. Revenues from the sale of suite licenses are shared between the Company and MSG Sports. Revenues for the Company’s suite license arrangements are recorded on a gross basis, as the Company is the principal in such transactions and controls the related goods or services until transfer to the customer. MSG Sports’ share of the Company’s suite license revenue is recognized in the combined statements of operations as a component of direct operating expenses. The revenue sharing expense recognized by the Company for MSG Sports’ share of suite license revenue at The Garden is based on a 67.5% allocation to MSG Sports pursuant to the Arena License Agreements.
Venue License Fees
For entertainment events held at our venues that we do not produce, promote or co-promote, we typically earn revenue from venue license fees charged to the third-party promoter or producer of the event. The amount of license fees we charge varies by venue, as well as by the size of the production and the number of days utilized, among other factors. Our fees typically include both the cost of renting space in our venues and costs for providing event staff, such as front-of-house and back-of-house staff, including stagehands, electricians, laborers, box office staff, ushers and security as well as production services such as staging, lighting and sound.
Pursuant to the Arena License Agreements, the Company receives 30% of revenues, net of taxes and credit card fees, recorded on a net basis (agent), from the sale of MSG Sports teams merchandise sold at The Garden.
Under the Arena License Agreements, the Company shares certain sponsorship and signage revenues with MSG Sports. Pursuant to these agreements, MSG Sports has the rights to sponsorship and signage revenue that is specific to Knicks and Rangers events. The Company and MSG Sports also entered into sponsorship sales representation agreements, under which the Company has the right and obligation to sell and service sponsorships for the sports teams of MSG Sports, in exchange for a commission.
Facility and Ticketing Fees
For all public and ticketed events held in our venues aside from MSG Sports home games, we also earn additional revenues on substantially all tickets sold, whether we promote/co-promote the event or license the venue to a third party. These revenues are earned in the form of certain fees and assessments, including the facility fees we charge, and vary by venue.
Signage and Sponsorship
We earn revenues through the sale of signage space and sponsorship rights in connection with our venues, productions and other live entertainment events. Signage revenues generally involve the sale of advertising space at The Garden during entertainment events and otherwise in our venues. We also earn our revenues through the sale of outdoor signage around the Madison Square Garden complex I.
Sponsorship agreements may require us to use the name, logos and other trademarks of sponsors in our advertising and in promotions for our venues, productions and other live entertainment events. Sponsorship arrangements may be exclusive within a particular sponsorship category or non-exclusive and generally permit a sponsor to use the name, logos and other trademarks of our productions, events and venues in connection with their own advertising and in promotions in our venues or in the community.
Food, Beverage, and Merchandise Revenues
Food and beverage
We sell food and beverages during substantially all events held at our venues. In addition to concession-style sales of food and beverages, which represent the majority of our concession revenues, we also generate revenue from catering for our suites at The Garden. Pursuant to the Arena License Agreements related to the use of The Garden by MSG Sports, the Company shares with MSG Sports revenues and related expenses associated with sales of food and beverages (including suite catering) during Knicks and Rangers games at The Garden.
Revenue generated from in-venue food and beverage sales at MSG Sports’ events is recognized by the Company on a gross basis, with a corresponding revenue sharing expense for MSG Sports’ share of such sales recorded within direct operating expense. The Arena License Agreements require the Company to pay 50% of the net proceeds generated from in-venue food and beverage sales to MSG Sports.
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Merchandise
We earn revenues from the sale of merchandise related to our proprietary productions and other live entertainment events that take place at our venues. The majority of our merchandise revenues are generated through on-site sales during performances of our productions and other live events. We also generate revenues from sales of our Christmas Spectacular merchandise, such as ornaments and apparel, through traditional retail channels. Revenues associated with Christmas Spectacular merchandise are generally recorded on gross basis (as principal). Typically, revenues from our merchandise sales at our non-proprietary events relate to sales of merchandise provided by the artist, the producer or promoter of the event and are generally subject to a revenue sharing arrangement and are generally recorded on a net basis (as agent).
Arena License Fees and Other Leasing Revenue
The Company is party to Arena License Agreements with MSG Sports that, among other things, require the Knicks and the Rangers to play their home games at The Garden in exchange for fixed annual license fees scheduled to be paid monthly over the term of the agreement. The Company accounts for these license fees as operating lease revenue given that the Company provides MSG Sports with the right to direct the use of and obtain substantially all of the economic benefit from The Garden during Knicks and Rangers home games. Operating lease revenue is recognized on a straight-line basis over the term, adjusted pursuant to the terms of the Arena License Agreements, which is comprised of non-consecutive periods of use when MSG Sports uses The Garden generally for their professional sports teams’ preseason and regular season home games. As such, operating lease revenue is recognized ratably as events occur.
Expenses
Our principal expenses are payments made to performers of our productions, staging costs and day-of-event costs associated with events, and advertising costs. In addition, our expenses include costs associated with the ownership, lease, maintenance and operation of our venues, along with our corporate and other supporting functions.
Performer Payments
Our proprietary productions are performed by talented actors, dancers, singers, musicians and entertainers. In order to attract and retain this talent, we are required to pay our performers an amount that is commensurate with both their abilities and the demand for their services from other entertainment companies. Our productions typically feature ensemble casts (such as the Rockettes), where most of our performers are paid based on a standard “scale,” pursuant to collective bargaining agreements we negotiate with the performers’ unions. Certain performers, however, have individually negotiated contracts.
Staging Costs
Staging costs for our proprietary events as well as other events that we promote include the costs of sets, lighting, display technologies, special effects, sound and all of the other technical aspects involved in presenting a live entertainment event. These costs vary substantially depending on the nature of the particular show, but tend to be highest for large-scale theatrical productions, such as the Christmas Spectacular . For concerts we promote, the performer usually provides a fully produced show. Along with performer salaries, the staging costs associated with a given production are an important factor in the determination of ticket prices.
Day-of-Event Costs
For days in which the Company stages its productions, promotes an event or provides one of our venues to a third-party promoter under a license fee arrangement, the event is charged the variable costs associated with such event, including box office staff, stagehands, ticket takers, ushers, security, and other similar expenses. In situations where we provide our venues to a third-party promoter under a license fee arrangement, day-of-event costs are typically included in the license fees charged to the promoter. Under the Arena License Agreements related to the use of The Garden by MSG Sports, the Company is reimbursed for day-of-event costs (as defined under the Arena License Agreements). The Company records such reimbursements as reductions to direct operating expenses.
Venue Usage
The Company’s consolidated and combined financial statements include expenses associated with the ownership, maintenance and operation of The Garden, which the Company and MSG Sports use in their respective operations.
Revenue Sharing Expenses
As discussed above, MSG Sports’ share of the Company’s suites licenses, venue signage and certain sponsorship and concessions revenue is reflected within direct operating expense as revenue sharing expenses.
Marketing and Advertising Costs
We incur significant costs promoting our productions and other events through various advertising campaigns, including advertising on social and digital platforms, television, outdoor platforms and radio, and in newspapers. In light of the intense competition for
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entertainment events, such expenditures are a necessity to drive interest in our productions and encourage members of the public to purchase tickets to our shows.
Other Expenses
The Company’s selling, general and administrative expenses primarily consist of administrative costs, including compensation, professional f ees, advertising sales commissions, as well as sales and marketing costs, including non-event related advertising expenses. Operating expenses also include corporate overhead costs and venue operating expenses. Venue operating expenses include the non-event related costs of operating the Company’s venues, and include such costs as rent for the Company’s leased venues, real estate taxes, insurance, utilities, repairs and maintenance, and labor related to the overall management of the venues.
Factors Affecting Results of Operations
In addition to the discussion under the section “Factors Affecting Comparability” below, the operating results of our business are largely dependent on our ability to attract concerts and other events to our venues, revenues under various agreements entered into with MSG Sports, and the continuing popularity of the Christmas Spectacular at Radio City Music Hall. Certain of these factors in turn depend on the popularity and/or performance of the professional sports teams whose games we host at The Garden.
Our Company’s future performance is dependent in part on general economic conditions and the effect of these conditions on our customers. Weak economic conditions may lead to lower demand for suite licenses and tickets to our live productions, concerts, family shows and other events, which would also negatively affect concession and merchandise sales, and lower levels of sponsorship and venue signage. These conditions may also affect the number of concerts, family shows and other events that take place in the future. An economic downturn could adversely affect our business and results of operations.
The Company may explore additional opportunities to expand our presence in the entertainment industry. Any new investment may not initially contribute to operating income, but is intended to become operationally profitable over time.
Factors Affecting Comparability
MSGE Distribution
The activities from April 21, 2023 to June 30, 2023 included in the statement of operations for the year ended June 30, 2023 are prepared on a consolidated basis, as the Company became a standalone public company on April 21, 2023. The Company's combined statements of operations for the years ended June 30, 2022 and 2021, as well as the financial information for the period of July 1, 2022 to April 20, 2023 that is included in the results of operations for the year ended June 30, 2023 were prepared on a standalone basis derived from the consolidated financial statements and accounting records of the Company’s former parent, Sphere Entertainment, and are presented as carve-out financial statements as MSG Entertainment was not a standalone public company prior to the MSGE Distribution.
The combined statements of operations for the year ended June 30, 2022, as well as the financial information for the period of July 1, 2022 to April 20, 2023 that is included in the results of operations for the year ended June 30, 2023, include allocations for certain support functions that were provided on a centralized basis and not historically recorded at the business unit level by Sphere Entertainment, such as expenses related to executive management, finance, legal, human resources, government affairs, information technology, and venue operations among others. As part of the MSGE Distribution, certain corporate and operational support functions were transferred to the Company and therefore, charges were reflected in order to burden all business units comprising Sphere Entertainment’s historical operations. These expenses were allocated on the basis of direct usage when identifiable, with the remainder allocated on a pro-rata basis of combined assets, headcount or other measures of the Company and Sphere Entertainment, which are recorded as a reduction of either direct operating expenses or selling, general and administrative expenses.
Management believes the assumptions underlying the combined financial statements, including the assumptions regarding allocating general corporate expenses, are reasonable. Nevertheless, the combined financial statements do not include all of the actual expenses that would have been incurred by the Company and may not reflect its combined results of operations, financial position and cash flows had it been a separate, standalone company during the periods presented. Actual costs that would have been incurred if the Company had been a separate, standalone company would depend on multiple factors, including organizational structure and strategic decisions made in various areas, including information technology and infrastructure. See Note 1. Description of Business and Basis of Presentation to the consolidated and combined financial statements included in Item 8 of this Annual Report on Form 10-K for additional information.
Advertising Sales Representation Agreement Termination
Prior to December 31, 2022, the Company was a party to an advertising sales representation agreement (the “Networks Advertising Sales Representation Agreement”) with Sphere Entertainment’s subsidiary, MSGN Holdings, L.P. (“MSG Networks”), pursuant to which the Company had the exclusive right and obligation to sell MSG Networks advertising availabilities for a commission. The Networks Advertising Sales Representation Agreement was terminated effective as of December 31, 2022. For Fiscal Years 2024,
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2023, and 2022 , the Company recognize d $0, $8,802 and $20,878 of revenues, respectively, under the Networks Advertising Sales Representation Agreement.
As a result, after December 31, 2022, the Company no longer recognizes advertising sales commission revenue or the employee costs related to the Networks Advertising Sales Representation Agreement, which has impacted the operating results of the Company and will impact the operating results of the Company on a go forward basis.
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Results of Operations
Effective for the third quarter of Fiscal Year 2024, the Company modified its presentation of revenues and direct operating expenses. Total revenue is now presented in three categories consisting of (i) Revenues from entertainment offerings, (ii) Food, beverage, and merchandise revenues, and (iii) Arena license fees and other leasing revenues. In addition, total direct operating expenses is now presented in two categories consisting of (i) Entertainment offerings and leasing direct operating expenses and (ii) food, beverage, and merchandise direct operating expenses. Prior period financial information has been revised to conform with the current period presentation.
Consolidated and Combined Results of Operations
Comparison of Fiscal Year 2024 versus Fiscal Year 2023
The table below sets forth, for the periods presented, certain historical financial information.
Years Ended June 30, Change
2024 2023 Amount Percentage
Revenues
Revenues from entertainment offerings
$ 723,897 $ 643,885 $ 80,012 12 %
Food, beverage, and merchandise revenues 162,092 135,933 26,159 19 %
Arena license fees and other leasing revenue 73,276 71,678 1,598 2 %
Total revenues 959,265 851,496 107,769 13 %
Direct operating expenses
Entertainment offerings, arena license fees, and other leasing direct operating expenses (a)
(475,502) (420,301) (55,201) (13) %
Food, beverage, and merchandise direct operating expenses
(93,334) (79,628) (13,706) (17) %
Total direct operating expenses (568,836) (499,929) (68,907) (14) %
Selling, general and administrative expenses (206,963) (180,216) (26,747) (15) %
Depreciation and amortization (53,876) (60,463) 6,587 11 %
Gains, net on dispositions — 4,361 (4,361) NM
Restructuring charges (17,649) (10,241) (7,408) (72) %
Operating income 111,941 105,008 6,933 7 %
Interest income 2,976 7,244 (4,268) (59) %
Interest expense (57,954) (51,869) (6,085) (12) %
Other (expense) income, net (4,672) 17,389 (22,061) NM
Income from operations before income taxes 52,291 77,772 (25,481) (33) %
Income tax benefit (expense) 92,009 (1,728) 93,737 NM
Net income 144,300 76,044 68,256 90 %
Less: Net loss attributable to nonredeemable noncontrolling interests — (553) 553 NM
Net income attributable to MSG Entertainment’s stockholders $ 144,300 $ 76,597 $ 67,703 88 %
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(a) Venue operations and infrastructure costs are not specifically allocated to each revenue stream, but are instead attributed in their entirety to service revenue which is the Company’s principal revenue stream. Leasing direct operating expenses materially consist of venue operations and infrastructure costs. As a result, the Company combines service and leasing direct operating expenses as “Entertainment offerings, arena license fees, and other leasing direct operating expenses” for presentation purposes.
NM — Absolute percentages greater than 200% and comparisons from positive to negative values or to zero values are considered not meaningful.
Revenues
Revenues for Fiscal Year 2024 increased $107,769 as compared to Fiscal Year 2023.
Revenues from Entertainment Offerings
For Fiscal Year 2024, the increase in revenues from entertainment offerings was primarily due to (i) higher event-related revenues of $51,147, (ii) an increase in revenues subject to the sharing economics with MSG Sports pursuant to the Arena License Agreements of $17,233, (iii) an increase in revenues from the presentation of the Christmas Spectacular production of $15,750, partially offset by (iv) lower revenues of $8,802 due to the termination of the Networks Advertising Sales Representation Agreement.
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For Fiscal Year 2024, the increase in event-related revenues primarily reflects higher revenues from concerts of $40,721, due to an increase in the number of concerts at the Company’s venues, and to a lesser extent, higher average per-concert revenue in the current year.
For Fiscal Year 2024, the increase in revenues subject to the sharing of economics with MSG Sports pursuant to the Arena License Agreements primarily reflects higher suite license fee revenue and, to a lesser extent, higher commissions on merchandise sales, both as compared to the prior year.
For Fiscal Year 2024, the increase in revenues from the presentation of the Christmas Spectacular production, as compared to the prior year period, was primarily due to higher ticket-related revenues. This reflected higher per-show revenue and, to a lesser extent, an increase in the number of performances as compared to the prior year. The increase in per-show ticket-related revenues was due to higher average ticket yield and higher average per-show attendance as compared to the prior year.
The Company had 193 Christmas Spectacular performances during Fiscal Year 2024’s holiday season, as compared to 181 performances in the Fiscal Year 2023’s holiday season. For this year’s holiday season, more than 1,000,000 tickets were sold, as compared to more than 930,000 tickets sold in the prior year. The Company had 193 Christmas Spectacular performances during this year’s holiday season, as compared to 181 performances in the prior year’s holiday season.
Food, Beverage, and Merchandise Revenues
For Fiscal Year 2024, the increase in food, beverage and merchandise revenues was primarily due to higher food and beverage sales at concerts held at the Company’s venues, and at Knicks and Rangers games at The Garden, and to a lesser extent, higher food, beverage, and merchandise sales from the presentation of the Christmas Spectacular production.
For Fiscal Year 2024 the increase in food and beverage sales at concerts was due to an increase in the number of concerts held at the Company’s venues and to a lesser extent, higher average per-concert revenues in the current year.
For Fiscal Year 2024 the increase in food and beverage sales at Knicks and Rangers games was due to higher average per-game revenues, and to a lesser extent, an increase in the number of games held at The Garden.
For Fiscal Year 2024 the increase in food and beverage sales at the Christmas Spectacular production was primarily due to higher average per-show revenues, and to a lesser extent, an increase in the number of performances in the current year.
Direct operating expenses
Direct operating expenses for Fiscal Year 2024 increased $68,907 as compared to Fiscal Year 2023.
Direct Operating Expenses Associated with Entertainment Offerings, Arena License Fees and Other Leasing
For Fiscal Year 2024, the increase in direct operating expenses associated with entertainment offerings, arena license fees, and other leasing reflects (i) higher event-related expenses of $30,037, (ii) higher expenses associated with the sharing of economics with MSG Sports pursuant to the Arena License Agreements of $14,818, (iii) higher expenses related to the presentation of the Christmas Spectacular production of $3,279, and (iv) higher venue operating costs of $2,729.
For Fiscal Year 2024, the increase in event-related expenses was primarily due to higher direct operating expenses from concerts of $22,814, which was due to the increase in the number of concerts at the Company’s venues and, to a lesser extent, higher per-concert expenses.
For Fiscal Year 2024, the increase in expenses associated with the sharing of economics with MSG Sports pursuant to the Arena License Agreements primarily reflects direct operating expenses incurred as a result of the increase in suite license fee revenues.
Direct Operating Expenses Associated with Food, Beverage, and Merchandise
For Fiscal Year 2024, the increase in food, beverage and merchandise direct operating expenses was primarily driven by (i) the related increase in food and beverage sales at concerts held at the Company’s venues, (ii) the related increase in food and beverage sales at Knicks and Rangers games and, (iii) the increase in food, beverage, and merchandise sales related to the presentation of the Christmas Spectacular production.
Selling, general, and administrative expenses
Selling, general, and administrative expenses for Fiscal Year 2024 increased $26,747, or 15%, to $206,963 as compared to Fiscal Y ear 2023. Results for Fiscal Year 2024 reflect MSG Entertainment on a fully standalone basis. Results for Fiscal Year 2023 through the April, 20, 2023 spin-off date reflect the allocation of corporate and administrative costs based on the accounting requirements for the preparation of carve-out financial statements. These results do not include all of the expenses that would have been incurred by MSG Entertainment had it been a standalone public company for the prior year. This was the primary driver of the overall increase in
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selling, general and administrative expenses, partially offset by the impact of the Company’s transition services agreement with Sphere Entertainment.
Depreciation and amortization
Depreciation and amortization for Fiscal Year 2024 decreased $6,587, or 11%, to $53,876 as compared to $60,463 in Fiscal Year 2023, primarily due to certain intangible assets being fully amortized and the disposal of a corporate aircraft during Fiscal Year 2023.
Gains, net on dispositions
Gains, net on dispositions for Fiscal Year 2024 was $0 as compared to $4,361 in Fiscal Year 2023. The net gains in Fiscal Year 2023 reflect the gain on sale of the Company’s controlling interest in Boston Calling Events, LLC (the “BCE Disposition”), partially offset by the net loss on the disposal of a corporate aircraft.
Restructuring charges
Restructuring charges for Fiscal Year 2024 increased $7,408, to $17,649 as compared to $10,241 in Fiscal Year 2023. The restructuring charges relate to the termination benefits for certain corporate executives and employees.
Operating income
Operating income for Fiscal Year 2024 improved $6,933 to $111,941 as compared to operating income of $105,008 in Fiscal Year 2023. The improvement in operating income was primarily due to the increase in revenues, partially offset by higher direct operating expenses and selling, general and administration expenses.
Interest income
For Fiscal Year 2024, interest income decreased $4,268 to $2,976 as compared to interest income of $7,244 in Fiscal Year 2023 primarily due to (i) the impact of the MSGE Distribution, which impacted the year-over-year comparability of results since the prior year period included carve-out allocations and (ii) lower average balances in the Company’s cash, cash equivalents and restricted cash, partially offset by higher interest rates.
Interest expense
Interest expense for Fiscal Year 2024 was $57,954 as compared to interest expense of $51,869 in Fiscal Year 2023, an increase of $6,085, primarily due to higher interest rates on borrowings and higher revolver borrowings under the National Properties Facilities.
Other (expense) income, net
For Fiscal Year 2024, other expense, net was $4,672 as compared to other income, net of $17,389 for Fiscal Year 2023, a change of $22,061. The change was primarily due to (i) a change from an unrealized gain to an unrealized loss of $9,235 associated with the investment in Townsquare Media, Inc., (ii) the absence of a $8,406 unrealized gain associated with the investment in DraftKings Inc. recognized in the prior year period, and (iii) higher net periodic benefit costs of $15 associated with the Company’s Pension Plans.
Income taxes
Income tax benefit for Fiscal Year 2024 of $92,009 differs from income tax expense derived from applying the statutory federal rate of 21% to the pretax income primarily due to (i) income tax benefit due to a decrease in the valuation allowance of $108,506 and (ii) income tax benefit of $4,487 related to return to provision adjustments, partially offset by (iii) state income tax expense of $9,039.
Income tax expense for Fiscal Year 2023 of $1,728 differs from income tax expense derived from applying the statutory federal rate of 21% to the pretax income primarily due to (i) income tax benefit due to a decrease in the valuation allowance of $34,147, partially offset by (ii) state income tax expense of $13,033 and (iii) income tax expense of $3,861 related to nondeductible officers’ compensation.
Note 16. Income Taxes to the consolidated and combined financial statements included elsewhere in this Annual Report on Form 10-K for further details on the components of income tax and a reconciliation of the statutory federal rate to the effective tax rate.
Adjusted operating income (loss) (“AOI”)
The Company has amended the definition of adjusted operating income so that the impact of the non-cash portion of operating lease costs related to the Company’s Arena License Agreements with MSG Sports is no longer excluded in all periods presented.
The Company evaluates its performance based on several factors, of which the key financial measure is adjusted operating income, a non-GAAP financial measure. We define adjusted operating income as operating income excluding:
(i) depreciation, amortization and impairments of property and equipment, goodwill and intangible assets,
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(ii) share-based compensation expense,
(iii) restructuring charges or credits,
(iv) merger, spin-off, and acquisition-related costs, including merger-related litigation expenses,
(v) gains or losses on sales or dispositions of businesses and associated settlements,
(vi) the impact of purchase accounting adjustments related to business acquisitions,
(vii) gains and losses related to the remeasurement of liabilities under the executive deferred compensation plan, and
(viii) amortization of capitalized cloud computing arrangement costs.
The Company believes that the exclusion of share-based compensation expense or benefit allows investors to better track the performance of the Company’s business without regard to the settlement of an obligation that is not expected to be made in cash. The Company eliminates merger, spin-off, and acquisition-related costs, when applicable, because the Company does not consider such costs to be indicative of the ongoing operating performance of the Company as they result from an event that is of a non-recurring nature, thereby enhancing comparability. In addition, management believes that the exclusion of gains and losses related to the remeasurement of liabilities under the executive deferred compensation plan, provides investors with a clearer picture of the Company’s operating performance given that, in accordance with GAAP, gains and losses related to the remeasurement of liabilities under the executive deferred compensation plan are recognized in Operating income whereas gains and losses related to the remeasurement of the assets under the executive deferred compensation plan, which are equal to and therefore fully offset the gains and losses related to the remeasurement of liabilities, are recognized in Other (expense) income, net, which is not reflected in Operating income.
The Company believes AOI is an appropriate measure for evaluating the operating performance of the Company on a consolidated and combined basis. AOI and similar measures with similar titles are common performance measures used by investors and analysts to analyze the Company’s performance. The Company uses revenues and AOI measures as the most important indicators of its business performance and evaluates management’s effectiveness with specific reference to these indicators.
AOI should be viewed as a supplement to and not a substitute for operating income, net income, cash flows from operating activities, and other measures of performance and/or liquidity presented in accordance with GAAP. Since AOI is not a measure of performance calculated in accordance with GAAP, this measure may not be comparable to similar measures with similar titles used by other companies. The Company has presented the components that reconcile operating income, the most directly comparable GAAP financial measure, to AOI.
The following is a reconciliation of operating income to adjusted operating income for Fiscal Year 2024 as compared to Fiscal Year 2023:
Years Ended June 30, Change
2024 2023 Amount Percentage
Operating income $ 111,941 $ 105,008 $ 6,933 7 %
Share-based compensation expense 24,544 29,521 (4,977) (17) %
Depreciation and amortization 53,876 60,463 (6,587) (11) %
Restructuring charges 17,649 10,241 7,408 72 %
Gains, net on dispositions — (4,361) 4,361 NM
Merger, spin-off, and acquisition costs (a)
2,035 — 2,035 NM
Amortization of capitalized cloud computing arrangement costs 1,008 600 408 68 %
Remeasurement of deferred compensation plan liabilities 452 121 331 NM
Adjusted operating income (b)
$ 211,505 $ 201,593 $ 9,912 5 %
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NM (not meaningful) — Absolute percentages greater than 200% and comparisons from positive to negative values or to zero values are considered not meaningful.
(a) This adjustment represents non-recurring costs incurred and paid by the Company for the sale of the MSGE Retained Interest by Sphere Entertainment.
(b) The Company has amended the definition of adjusted operating income so that the impact of the non-cash portion of operating lease revenue related to the Company’s Arena License Agreements with MSG Sports is no longer excluded in all periods presented. Pursuant to GAAP, recognition of operating lease revenue is recorded on a straight-line basis over the term of the agreement based upon the value of total future payments under the arrangement. As a result, operating lease revenue is comprised of a contractual cash component plus or minus a non-cash component for each period presented. Adjusted operating income includes operating lease revenue of (i) $42,769 of revenue collected in cash for Fiscal Year 2024 and $41,524 of revenue collected in cash for Fiscal Year 2023 , respectively, and (ii) a non-cash portion $25,299 for Fiscal Year 2024 and $26,545 for Fiscal Year 2023, respectively.
NM — Absolute percentages greater than 200% and comparisons from positive to negative values or to zero values are considered not meaningful.
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Net loss attributable to nonredeemable noncontrolling interests
For Fiscal Year 2024, the Company posted a net loss attributable to nonredeemable noncontrolling interests of $0 in comparison to a net loss attributable to nonredeemable noncontrolling interests of $553 for Fiscal Year 2023. These amounts in the prior year period represent the share of net loss of BCE that is not attributable to the Company, prior to the BCE Disposition on December 2, 2022.
Comparison of Fiscal Year 2023 versus the Fiscal Year 2022
Analysis of our results of operations for Fiscal Year 2023, including a comparison of Fiscal Year 2023 to Fiscal Year 2022, is included in the Company’s Annual Report on Form 10-K, dated August 18, 2023.
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Liquidity and Capital Resources
Overview
Sources and Uses of Liquidity
Our primary sources of liquidity are cash and cash equivalents, cash flows from the operations of our businesses and available borrowing capacity under the National Properties Revolving Credit Facility (as defined below). Our principal uses of cash include working capital-related items (including funding our operations), capital spending, debt service, investments and related loans and advances to affiliates that we may fund from time to time. We may also use cash to continue to repurchase shares of our Class Common A Stock pursuant to the share repurchase program authorized by our Board of Directors on March 29, 2023, of which there was approximately $110,000 remaining as of June 30, 2024. Our decisions as to the use of our available liquidity will be based upon the ongoing review of the funding needs of the business, the optimal allocation of cash resources, and the timing of cash flow generation. To the extent that we desire to access alternative sources of funding through the capital and credit markets, market conditions could adversely impact our ability to do so at that time.
We regularly monitor and assess our ability to meet our net funding and investing requirements. As of June 30, 2024, the Company’s unrestricted cash and cash equivalents balance was $33,255. The principal balance of the Company’s total debt outstanding as of June 30, 2024 was $625,625 and the Company had $131,174 of available borrowing capacity under its revolving credit facility. We believe we have sufficient liquidity from cash and cash equivalents, available borrowing capacity under our credit facilities and cash flows from operations to fund our operations, and satisfy any obligations for the foreseeable future. See Note 12. Credit Facilities to the consolidated and combined financial statements included elsewhere in this Annual Report on Form 10-K for a discussion of the National Properties Facilities.
Financing Agreements
General. MSG National Properties, MSG Entertainment Holdings and certain subsidiaries of MSG National Properties are party to the National Properties Credit Agreement, providing for a five-year, $650,000 National Properties Term Loan Facility and a five-year, $150,000 National Properties Revolving Credit Facility. Up to $25,000 of the National Properties Revolving Credit Facility is available for the issuance of letters of credit. As of June 30, 2024, outstanding letters of credit were $18,826 and the remaining balance available under the National Properties Revolving Credit Facility was $131,174.
Interest Rates. Borrowings under the current National Properties Facilities bear interest at a floating rate, which at the option of MSG National Properties may be either (a) a base rate plus an applicable margin ranging from 1.50% to 2.50% per annum, determined based on the total leverage ratio of MSG National Properties and its restricted subsidiaries, or (b) adjusted Term SOFR (i.e., Term SOFR plus 0.10%) plus an applicable margin ranging from 2.50% to 3.50% per annum, determined based on the total leverage ratio of MSG National Properties and its restricted subsidiaries. The National Properties Credit Agreement requires MSG National Properties to pay a commitment fee ranging from 0.30% to 0.50% in respect of the daily unused commitments under the National Properties Revolving Credit Facility. MSG National Properties is also required to pay customary letter of credit fees, as well as fronting fees, to banks that issue letters of credit pursuant to the National Properties Credit Agreement. The interest rate on the National Properties Facilities as of June 30, 2024 was 7.94%.
Principal Repayments. Subject to customary notice and minimum amount conditions, the Company may voluntarily repay outstanding loans under the National Properties Facilities or terminate commitments under the National Properties Revolving Credit Facility, at any time, in whole or in part, subject only to customary breakage costs in the case of prepayment of Term SOFR loans. The National Properties Facilities will mature on June 30, 2027. The principal obligations under the National Properties Term Loan Facility are to be repaid in quarterly installments beginning with the fiscal quarter ended March 31, 2023, in an aggregate amount equal to 2.50% per annum (0.625% per quarter), stepping up to 5% per annum (1.25% per quarter) in the fiscal quarter ending September 30, 2025, with the balance due at the maturity of the facility. Under certain circumstances, MSG National Properties is required to make mandatory prepayments on loans outstanding, including prepayments in an amount equal to the net cash proceeds of certain sales of assets or casualty insurance and/or condemnation recoveries (subject to certain reinvestment, repair or replacement rights), subject to certain exceptions.
Covenants. The National Properties Credit Agreement includes financial covenants requiring MSG National Properties and its restricted subsidiaries to maintain a specified minimum liquidity level, a specified minimum debt service coverage ratio and specified maximum total leverage ratio. The minimum liquidity level is set at $50,000, and is tested based on the level of average daily liquidity, consisting of cash and cash equivalents and available revolving commitments, over the last month of each quarter over the life of the National Properties Facilities. The debt service coverage ratio covenant began testing in the fiscal quarter ended December 31, 2022, and is set at a ratio of 2:1 before stepping up to 2.5:1 in the fiscal quarter ending September 30, 2024. The leverage ratio covenant began testing in the fiscal quarter ended June 30, 2023. It is tested based on the ratio of MSG National Properties and its restricted subsidiaries’ consolidated total indebtedness to adjusted operating income, with an initial maximum ratio of 6:1, which stepped down to 5.5:1 in the fiscal quarter ended June 30, 2024 and steps down to 4.5:1 in the fiscal quarter ending June 30, 2026. As of June 30, 2024, MSG National Properties and its restricted subsidiaries were in compliance with the covenants of the National Properties Credit Agreement.
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In addition to the financial covenants discussed above, the National Properties Credit Agreement and the related security agreement contain certain customary representations and warranties, affirmative and negative covenants and events of default. The National Properties Credit Agreement contains certain restrictions on the ability of MSG National Properties and its restricted subsidiaries to take certain actions as provided in (and subject to various exceptions and baskets set forth in) the National Properties Credit Agreement, including the following: (i) incur additional indebtedness; (ii) create liens on certain assets; (iii) make investments, loans or advances in or to other persons; (iv) pay dividends and distributions or repurchase capital stock (which will restrict the ability of MSG National Properties to make cash distributions to the Company); (v) repay, redeem or repurchase certain indebtedness; (vi) change its lines of business; (vii) engage in certain transactions with affiliates; (viii) amend their respective organizational documents; (ix) merge or consolidate; and (x) make certain dispositions.
Guarantors and Collateral. All obligations under the National Properties Facilities are guaranteed by MSG Entertainment Holdings and MSG National Properties’ existing and future direct and indirect domestic subsidiaries, other than the subsidiaries that own The Garden and certain other excluded subsidiaries (the “Subsidiary Guarantors”).
All obligations under the National Properties Facilities, including the guarantees of those obligations, are secured by certain of the assets of MSG National Properties and the Subsidiary Guarantors (collectively, “Collateral”) including, but not limited to, a pledge of some or all of the equity interests held directly or indirectly by MSG National Properties in each Subsidiary Guarantor. The Collateral does not include, among other things, any interests in The Garden or the leasehold interests in Radio City Music Hall and the Beacon Theatre.
See Note 12. Credit Facilities to the consolidated and combined financial statements included elsewhere in this Annual Report on Form 10-K for additional information regarding the National Properties Credit Agreement, such as the scheduled repayment requirement of $16,250 in Fiscal Year 2025 and $32,500 in Fiscal Year 2026.
Letters of Credit
The Company uses letters of credit to support its business operations. As of June 30, 2024, the Company had letters of credit outstanding for an aggregate of $18,826 issued under the National Properties Revolving Credit Facility.
Cash Flow Discussion
As of June 30, 2024, cash, cash equivalents and restricted cash totaled $33,555, as compared to $84,355 as of June 30, 2023. The following table summarizes the Company’s cash flow activities for Fiscal Years 2024 and 2023:
Years Ended June 30,
2024 2023
Net cash provided by operating activities $ 111,266 $ 135,694
Net cash (used in) provided by investing activities (62,371) 30,305
Net cash used in financing activities (99,695) (144,217)
Net (decrease) increase in cash, cash equivalents and restricted cash $ (50,800) $ 21,782
Operating Activities
Net cash provided by operating activities for Fiscal Year 2024 decreased by $24,428 as compared to Fiscal Year 2023, primarily due to (i) a decrease in Net income adjusted for non-cash items of $5,958, and (ii) a decrease in cash flows from changes in working capital of $18,470. The decrease in cash flows from changes in working capital were driven by a larger decrease in accounts payable, accrued and other current and non-current liabilities; an increase in accounts receivable versus a decrease in the prior year period; a decrease in deferred revenue versus an increase in the prior year period; and a larger increase in prepaid expenses and other current and non-current assets, in each case as compared to Fiscal Year 2023 . These decreases in working capital cash flows were partially offset by positive net cash inflows from related party receivables and payables versus net cash outflows in the prior year period; and an increase in net operating lease liabilities in the current year.
Investing Activities
Net cash flows from investing activities for Fiscal Year 2024 decreased by $92,676 as compared to Fiscal Year 2023 primarily due to (i) an increase of $58,300 in loans to related parties related to the DDTL faci lity, ( ii) the absence of $27,904 in proceeds received from the dispositions of BCE and the corporate aircraft recognized in Fiscal Year 2023 and (iii) an increase of $8,993 in capital expenditures in the current year period as compared to Fiscal Year 2023.
Financing Activities
Net cash used in financing activities for Fiscal Year 2024 decreased by $44,522 to $99,695 as compared to Fiscal Year 2023 primarily due to (i) the absence in net transfers to Sphere Entertainment and Sphere Entertainment’s subsidiaries under carve-out accounting principles in the current period and (ii) an increase in proceeds received from the National Properties Revolving Credit Facility in Fiscal Year 2024, partially offset by (i) an increase in principal repayments on the National Properties Term Loan Facilities and the
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National Properties Revolving Credit Facility, (ii) an increase in stock repurchases, and (iii) taxes paid in lieu of shares for equity based compensation recognized in Fiscal Year 2024 .
Contractual Obligations
As of June 30, 2024, the approximate future payments under our contractual obligations were as follows:
Payments Due by Period (c)
Total Year 1 Years 2-3 Years 4-5 More Than
5 Years
Leases (a)
$ 889,726 $ 7,353 84,285 89,853 $ 708,235
Debt repayments (b)
625,625 16,250 609,375 — —
Total future contractual obligation payments $ 1,515,351 $ 23,603 $ 693,660 $ 89,853 $ 708,235
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(a) Includes contractually obligated minimum lease payments for operating leases having an initial noncancellable term in excess of one year for the Company’s venues, including various corporate offices. These commitments are presented exclusive of the imputed interest used to reflect the payment’s present value. See Note 9. Leases to the consolidated and combined financial statements included elsewhere in this Annual Report on Form 10-K for more information.
(b) See Note 12. Credit Facilities to the consolidated and combined financial statements included elsewhere in this Annual Report on Form 10-K for more information regarding the principal repayments required under the National Properties Credit Agreement.
(c) Pension obligations have been excluded from the table above as the timing of the future cash payments is uncertain. See Note 13. Pension Plans and Other Postretirement Benefit Plans to the consolidated and combined financial statements included elsewhere in this Annual Report on Form 10-K for more information on the future funding requirements under our pension obligations.
Off Balance Sheet Arrangements
As of June 30, 2024, the Company had the following off balance sheet arrangements:
Commitments
June 30, 2025 June 30, 2026 June 30, 2027 June 30, 2028 June 30, 2029 Thereafter Total
Contractual obligations $ 12,924 $ 5,272 $ 12,701 $ 12,823 $ 12,896 $ 247,735 $ 304,351
Letters of credit 18,827 — — — — — 18,827
Total commitments $ 31,751 $ 5,272 $ 12,701 $ 12,823 $ 12,896 $ 247,735 $ 323,178
Seasonality of Our Business
The revenues the Company earns from the Christmas Spectacular and arena license fees from MSG Sports in connection with the Knicks’ and Rangers’ use of The Garden generally means the Company earns a disproportionate share of its revenues and operating income in the second and third quarters of the Company’s fiscal year, with the first and fourth fiscal quarters being disproportionately lower.
Recently Issued Accounting Pronouncements and Critical Accounting Estimates
Recently Issued Accounting Pronouncements
See Note 2. Summary of Significant Accounting Policies to the consolidated and combined financial statements included in Item 8 of this Annual Report on Form 10-K for discussion of recently issued accounting pronouncements.
Critical Accounting Estimates
Critical accounting estimates are those that management believes are the most important to the portrayal of our financial condition and results and require the most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Judgments and uncertainties may result in materially different amounts being reported under different conditions or using different assumptions. In addition to the critical accounting estimates disclosed below, see Note 17. Related Party Transactions to the consolidated and combined financial statements included elsewhere in this Annual Report on Form 10-K for further details on corporate allocations recorded in the consolidated and combined financial statements.
The preparation of the Company’s consolidated and combined financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Management believes its use of estimates in the consolidated and combined financial statements to be reasonable. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
Revenue Recognition – Arrangements with Multiple Performance Obligations
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The Company enters into arrangements with multiple performance obligations, such as multi-year sponsorship agreements, which may derive revenues for the Company, as well as Sphere Entertainment and MSG Sports within a single arrangement. The Company also derives revenue from similar types of arrangements which are entered into by Sphere Entertainment and MSG Sports. Payment terms for such arrangements can vary by contract, but payments are generally due in installments throughout the contractual term. The performance obligations included in each sponsorship agreement vary and may include advertising and other benefits such as, but not limited to, signage at The Garden and the Company’s other venues, digital advertising, and event or property specific advertising, as well as non-advertising benefits such as suite licenses and event tickets. To the extent the Company’s multi-year arrangements provide for performance obligations that are consistent over the multi-year contractual term, such performance obligations generally meet the definition of a series as provided for under the accounting guidance. If performance obligations are concluded to meet the definition of a series, the contractual fees for all years during the contract term are aggregated and the related revenue is recognized proportionately as the underlying performance obligations are satisfied.
The timing of revenue recognition for each performance obligation is dependent upon the facts and circumstances surrounding the Company’s satisfaction of its respective performance obligation. The Company allocates the transaction price for such arrangements to each performance obligation within the arrangement based on the estimated relative standalone selling price of the performance obligation. The Company’s process for determining its estimated standalone selling prices involves management’s judgment and considers multiple factors including company specific and market specific factors that may vary depending upon the unique facts and circumstances related to each performance obligation. Key factors considered by the Company in developing an estimated standalone selling price for its performance obligations include, but are not limited to, prices charged for similar performance obligations, the Company’s ongoing pricing strategy and policies, and consideration of pricing of similar performance obligations sold in other arrangements with multiple performance obligations.
The Company incurs costs such as commissions to obtain its multi-year sponsorship agreements. The Company assesses such costs for capitalization on a contract by contract basis. To the extent costs are capitalized, the Company estimates the useful life of the related contract asset which may be the underlying contract term or the estimated customer life depending on the facts and circumstances surrounding the contract. The contract asset is amortized over the estimated useful life.
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