MGM Resorts International — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Unless otherwise indicated, financial amounts below are in U.S. dollars. MGM Resorts owns and operates casino resorts in the U.S. and Macau, and holds interests in several unconsolidated resorts. Its reportable segments are wholly owned domestic resorts and MGM China.
Key financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net revenue | $2.210 billion | $2.332 billion | Down 5% |
| Operating income | $316 million | $395 million | Down 20% |
| Net income | $91 million | $213 million | Down 57% |
| Net income attributable to MGM | $67 million | $170 million | Down 61% |
| Diluted EPS | $0.12 | $0.33 | Down 64% |
| Cash from operating activities | $225 million | $176 million | Up $49 million |
| Capital expenditures | $427 million | $292 million | Up $135 million |
- Segment performance: Domestic resort revenue increased 3% to $1.619 billion; Adjusted Property EBITDA rose 24% to $485 million, with a 29.9% margin, up 524 basis points. MGM China revenue fell 26% to $469 million and Adjusted EBITDA fell to $114 million from $148 million; its margin increased 77 basis points to 24.3%.
- Balance sheet at March 31: Cash and cash equivalents were $1.665 billion, including $595 million at MGM China. Current assets were $2.402 billion and current liabilities $2.088 billion. Debt was $12.929 billion on the balance sheet, including current debt; management reported $13.1 billion of principal indebtedness. Estimated fair value of long-term debt was $13.6 billion.
- Cash flow and investment: Operating cash flow improved year over year, while investing activities used $430 million, principally reflecting capital expenditures. Financing activities provided $201 million. Cash declined by $5 million during the quarter.
Material changes versus the prior period
- Domestic resort results strengthened, supported by Las Vegas rooms and gaming. Las Vegas Strip occupancy was 91% versus 90%, ADR was $162 versus $152, and REVPAR was $147 versus $136. Domestic rooms revenue increased 7%; table-games revenue benefited from a higher hold percentage despite lower table-games volume.
- MGM China was pressured by a weaker Macau gaming market. Its VIP table-games revenue declined 41%; VIP turnover declined 34%, and VIP hold was 3.0% versus 3.3%. Main-floor table-games revenue declined 8%.
- Consolidated income from unconsolidated affiliates dropped to $15 million from $117 million. Q1 2015 included MGM’s $80 million share of a CityCenter construction-litigation settlement gain. Q1 2016 included CityCenter charges, including accelerated depreciation related to the Zarkana closure and costs associated with the Crystals sale.
- The tax line shifted from a $56 million benefit in Q1 2015 to a $21 million provision in Q1 2016. The filing attributes the change primarily to a lower expected benefit from foreign tax credits; this makes the year-over-year net-income comparison less representative of operating trends.
- Interest expense declined to $185 million from $216 million, partly reflecting prior debt reduction and refinancing activity. Higher capitalized interest on development projects partially offset the decrease in gross interest expense.
Outlook, management commentary, and significant items
- Management said the Profit Growth Plan was ahead of schedule. It expected approximately $300 million of annualized Adjusted EBITDA benefit to be fully realized by the end of 2017; Q1 operating income benefited by about $59 million from initiatives, including MGM’s share of CityCenter benefits.
- Management expected MGM Cotai, with an estimated $3.0 billion project budget, to open at the end of Q1 2017. MGM National Harbor, with an estimated $1.3 billion cost, was expected to open in Q4 2016. MGM Springfield, estimated at $865 million, was expected to be completed in late 2018. These estimates exclude specified interest and land-related costs; project timing and cost remain subject to development risks.
- For full-year 2016, management anticipated about $1.5 billion of MGM Cotai capital spending, $665 million including land costs for National Harbor, $115 million including land costs for Springfield, and $440 million at domestic resorts and corporate entities excluding those projects. MGM China also expected approximately $50 million of capital improvements at MGM Macau.
- MGM Growth Properties (MGP): MGP completed its IPO on April 25, 2016 at $21 per share. MGM retained control and consolidated MGP, while contributing specified resort real estate to MGP’s operating partnership and leasing the properties back under a triple-net master lease. Initial annual rent was $550 million, with specified escalators. The filing states that the transaction did not qualify for sale-leaseback accounting. MGP’s public ownership is reflected as noncontrolling interest.
- Following the IPO, MGM reported approximately $12.3 billion of principal debt after giving effect to specified refinancing and note repayments/redemptions. Management estimated $769 million of cash interest payments over the next 12 months based on then-current debt and rates, and expected to fund maturities and planned spending through operating cash flow, cash, and available facilities.
- CityCenter sold Crystals in April for approximately $1.1 billion. CityCenter expected to recognize a gain in Q2; MGM expected to record its 50% share, subject to basis adjustments. CityCenter also declared a $990 million special distribution related to the sale; MGM’s $540 million share of distributions was paid in May.
- Principal risks: Management highlighted Macau weakness and reliance on VIP gaming promoters, substantial indebtedness, large development commitments, interest-rate and foreign-exchange exposure, regulatory and construction risks, and the ongoing sensitivity of results to travel demand and gaming outcomes. The $550 million annual master-lease obligation and triple-net costs add fixed commitments and could constrain liquidity and investment flexibility.
- Management’s foreign-tax-credit valuation depends on assumptions about future profits and distributions from MGM China and renewal of Macau’s complementary-tax exemption. Changes in those assumptions could materially affect the tax provision and valuation allowance.
- The filing reported a securities class-action settlement approved by the court, funded by directors’ and officers’ insurers, with one objector appealing. Management said routine other litigation was not expected to have a material adverse effect. Disclosure controls were judged effective as of March 31, 2016.
Important facts for investors to verify
- Whether Macau demand, particularly VIP turnover, stabilizes and how MGM China’s revenue and margins respond.
- Progress, total funding needs, cost control, and opening schedules for Cotai, National Harbor, and Springfield.
- The post-IPO debt structure, refinancing costs, available liquidity, and capacity to meet debt service alongside development spending.
- Whether domestic operating improvements and the Profit Growth Plan deliver the expected benefits after the MGP lease obligations and other costs.
- Future MGP rent escalations and distributions, the effect of the lease on MGM’s cash flow, and the governance procedures for transactions between MGM and MGP.
- Foreign-tax-credit realizability and any resulting valuation-allowance changes; also, the status of the appeal of the securities settlement.