Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 1998, for MGM Grand, Inc. (now MGM Resorts International). The company operates major resort properties including MGM Grand Las Vegas, MGM Grand Australia, and MGM Grand South Africa, and holds a 50% interest in the New York-New York Hotel and Casino (NYNY). The reporting period reflects ongoing capital expansion under the "Master Plan" in Las Vegas and the development of new projects in Detroit and Atlantic City.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 1998 | Nine Months Ended Sep 30, 1998 | Nine Months Ended Sep 30, 1997 |
|---|---|---|---|
| Net Revenues | $193,707 | $558,919 | $614,982 |
| Operating Income | $34,182 | $89,443 | $136,947 |
| Net Income | $17,052 | $47,713 | $77,605 |
| Diluted EPS | $0.31 | $0.83 | $1.32 |
| Cash from Operations (9mo) | - | $104,241 | $127,737 |
| Capital Expenditures (9mo) | - | ($297,624) | ($119,084) |
| Cash and Equivalents (Sep 30, 1998) | $90,772 | - | - |
| Long-Term Debt (Sep 30, 1998) | $536,026 | - | - |
Material Changes vs. Prior Period
- Revenue Decline: Net revenues decreased 7.1% in the quarter and 9.1% for the nine-month period compared to 1997. This was driven primarily by a 13.6% drop in consolidated casino revenues (due to lower baccarat volume and win percentages at Las Vegas) and a 30.3% decrease in income from the unconsolidated affiliate (NYNY) as it normalized from its first year of operations.
- Profitability Compression: Operating income fell 39.7% for the nine-month period. While operating expenses increased 3.4% due to new assets and higher food/beverage costs, the revenue decline was the primary driver of lower margins.
- Debt Structure: Long-term debt increased significantly from $47.2 million at year-end 1997 to $536.0 million at September 30, 1998. This reflects the issuance of $500 million in Senior Collateralized Notes in February 1998 to fund capital projects.
- Share Repurchase: The company executed a tender offer in July 1998, repurchasing approximately 10.8 million shares for $210.5 million as part of a 12 million share program.
Outlook, Risks, and Management Commentary
- Capital Projects: The company is heavily invested in the "Master Plan" for MGM Grand Las Vegas, with approximately $255.7 million expended through September 1998. Remaining 1998 capital expenditures are estimated at $105.4 million, including $29 million for the MGM Grand Detroit project and $1.6 million for Atlantic City land acquisition.
- Future Operations: MGM Grand Detroit anticipates opening a temporary gaming facility in the summer of 1999 pending licensing. MGM Grand South Africa casinos in Nelspruit, Witbank, and Johannesburg are now operational.
- Risks: Management highlights risks related to high leverage, sensitivity to interest rate fluctuations, foreign currency exchange rates (impacting Australia operations), and the need for governmental approvals for new casino licenses in Detroit and Atlantic City.
- Accounting Changes: The company noted the upcoming adoption of SOP 98-5 in Q1 1999, which will require expensing start-up costs as incurred rather than capitalizing them.
Investor Verification Checklist
- Verify the sustainability of the 13.6% decline in casino revenues at MGM Grand Las Vegas and whether it reflects a temporary market shift or a structural change in gaming volume.
- Confirm the timeline and regulatory status of the MGM Grand Detroit and Atlantic City projects, as these represent significant future capital outlays and revenue potential.
- Assess the impact of the $500 million debt issuance on future interest coverage ratios, given the increase in interest expense to $17.7 million for the nine-month period.
- Monitor the performance of the New York-New York Hotel and Casino (NYNY) joint venture, as its earnings contribution dropped significantly from its inaugural year.
- Review the remaining $6 million share repurchase authorization and the company's strategy for executing it in the open market.