Business Context and Reporting Period
Company: MGM MIRAGE (now MGM Resorts International)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2002
Business Overview: One of the world's largest gaming companies, operating a portfolio of casino resorts primarily in Las Vegas, Nevada, with additional properties in Detroit, Michigan; Biloxi, Mississippi; and Darwin, Australia. The company also holds joint venture interests in Monte Carlo (Las Vegas) and Borgata (Atlantic City).
Key Financial Metrics
| Metric | 2002 | 2001 |
|---|---|---|
| Net Revenues | $4.03 billion | $3.97 billion |
| Operating Income | $766.8 million | $627.9 million |
| Net Income | $292.4 million | $169.8 million |
| Diluted EPS | $1.83 | $1.06 |
| Operating Cash Flow | $828.0 million | $795.9 million |
| Total Debt | $5.22 billion | $5.47 billion |
| Cash and Equivalents | $211.2 million | $209.0 million |
| Stockholders' Equity | $2.66 billion | $2.51 billion |
Liquidity: As of December 31, 2002, the company had approximately $685 million in available liquidity under bank credit facilities. Moody's downgraded the company's senior notes to one level below investment grade (Ba1) in January 2002, resulting in the pledging of substantially all assets as collateral.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 1% to $4.03 billion. Casino revenues rose 1% to $2.19 billion, driven by a 5% increase in slot revenues, though table games revenues declined 4% due to weakness in international and national high-end play.
- Profitability: Operating income increased 22% to $766.8 million, and Net Income increased 72% to $292.4 million. This improvement was driven by lower operating expenses (down 2% to $3.30 billion) due to cost containment measures implemented after the September 11, 2001 attacks, and a reduction in restructuring charges and asset write-downs.
- Restructuring Credits: The company recorded a net restructuring credit of $17 million in 2002, compared to a charge of $23.7 million in 2001. This included a $10 million credit from the reversal of a lease termination accrual and a $10 million credit from re-hiring previously laid-off employees.
- Asset Impairments: Write-downs and impairments decreased significantly to $14.7 million in 2002 from $48.0 million in 2001. The 2002 charges included $8 million for property damage at Beau Rivage from Tropical Storm Isidore and $5 million related to the revised Detroit development agreement.
- Debt Reduction: Total debt decreased by approximately $243 million to $5.22 billion. The company repaid $270 million of bank debt during the year.
Guidance, Outlook, Risks, and Unusual Items
Outlook and Future Projects
- Detroit Permanent Casino: A revised development agreement with the City of Detroit targets a permanent facility opening by January 2006, with an estimated cost of $575 million. Construction is currently prohibited by an injunction pending the resolution of litigation regarding the casino selection process.
- Bellagio Expansion: A 928-room Spa Tower expansion is planned for completion in late 2004 at an estimated cost of $375 million.
- Atlantic City: Development activities on the company's wholly-owned Renaissance Pointe land were suspended in October 2002. The company continues its 50% joint venture with Boyd Gaming on the Borgata project, expected to open in summer 2003.
- Technology: The company is implementing IGT's EZ-Pay cashless gaming system across approximately 18,000 slot machines at an estimated cost of $84 million.
Risks and Contingencies
- Legal Proceedings:
- Detroit Litigation: The 6th Circuit Court of Appeals issued an injunction prohibiting construction of the permanent Detroit casino pending appeal of a ruling that the city's selection ordinance violated the First Amendment.
- Cash Transaction Reporting: In February 2003, the company self-reported violations regarding cash transaction reporting. Management and the Nevada Gaming Control Board are investigating; fines or sanctions are currently undetermined.
- Class Action Lawsuits: Pending litigation regarding slot machine mechanics (Poulos and Detroit Slot Machine Litigation) remains unresolved.
- Regulatory Environment: Operations are subject to extensive regulation in Nevada, Michigan, Mississippi, and Australia. Changes in laws or the denial of licenses could materially adversely affect operations.
- Competition: Increased competition in Las Vegas, the expansion of Native American gaming in California (impacting Primm and Laughlin operations), and potential legalization of gaming in other jurisdictions pose risks.
- Concentration of Ownership: Tracinda Corporation beneficially owns approximately 53% of the outstanding common stock, giving it control over the election of the Board of Directors.
Investor Verification Checklist
- Debt Covenants: Verify compliance with leverage and interest coverage ratios required by senior credit facilities, especially following the credit rating downgrade.
- Detroit Project Status: Monitor the resolution of the Lac Vieux litigation and the injunction preventing construction of the permanent Detroit casino.
- Regulatory Fines: Track the outcome of the self-reported cash transaction reporting violations and potential fines from the Nevada Gaming Control Board or federal authorities.
- Capital Expenditures: Assess the funding requirements for the Bellagio Spa Tower ($375 million) and the Detroit permanent facility ($575 million) against projected cash flows.
- Receivables Quality: Review the allowance for doubtful accounts, which stood at 51% of casino receivables, given the significant exposure to international high-rollers and economic conditions in the Far East.