MGM Resorts International quarterly report, Q3 FY2014

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MGM Resorts International — Form 10-Q Summary

Reporting period: Quarter and nine months ended September 30, 2014. Amounts are in U.S. dollars; financial statement figures are unaudited. MGM Resorts owns and operates casino resorts, with two reportable segments: wholly owned domestic resorts and MGM China.

Financial performance and liquidity

  • Third-quarter revenue: $2.485 billion, up 1% year over year. Operating income was $286.5 million, versus $262.8 million; operating margin rose to approximately 11.5% from 10.7%.
  • Third-quarter earnings: Consolidated net income was $50.4 million, but MGM Resorts International reported a $20.3 million attributable net loss, or $0.04 per share, reflecting $70.7 million attributable to noncontrolling interests. Adjusted EBITDA, a non-GAAP measure, was $505.9 million, essentially flat year over year.
  • Nine-month results: Revenue was $7.696 billion, up 5%; operating income was $1.057 billion, up 31%. Consolidated net income was $414.7 million, and attributable net income was $192.4 million, compared with an attributable loss of $114.9 million in 2013. Adjusted EBITDA increased 10% to $1.737 billion.
  • Segment trends: Third-quarter domestic resort revenue increased 2%, while Adjusted Property EBITDA fell 6% to $328.0 million, pressured by lower casino revenue and higher payroll costs. MGM China revenue declined 2%, but Adjusted EBITDA increased 12% to $213.8 million. For nine months, domestic revenue rose 5% and Adjusted Property EBITDA rose 5%; MGM China revenue rose 7% and Adjusted EBITDA rose 15%.
  • Cash flow and investment: Nine-month operating cash flow was $1.023 billion, down from $1.096 billion. Capital expenditures were $617.5 million, compared with $379.6 million. Cash and cash equivalents declined $488.9 million from year-end to $1.313 billion at September 30.
  • Debt and liquidity: Long-term debt totaled $12.915 billion, including $1.192 billion classified as current; the filing separately cites approximately $2.4 billion of principal maturities within one year, primarily the $1.45 billion convertible notes and $875 million notes. The company had $1.2 billion of available borrowing capacity under its senior credit facility. Estimated cash interest over the next 12 months was $797 million. Trailing-four-quarter covenant EBITDA was $1.36 billion versus a $1.20 billion minimum.
  • Margins and balance sheet: Nine-month operating margin was approximately 13.7%, versus 11.1% in 2013. Total assets were $25.448 billion and total stockholders’ equity was $7.899 billion at September 30.

Material changes versus the prior comparable period

  • Domestic non-casino activity benefited from stronger Las Vegas visitation and room pricing: nine-month Strip REVPAR rose 9%, with occupancy of 94% versus 92% and ADR of $140 versus $131. In the third quarter, domestic casino revenue fell 4%, including lower table-game volume and hold.
  • At MGM China, main-floor table-game revenue growth offset weaker VIP business. Third-quarter VIP table-game revenue declined 19%; main-floor table-game revenue increased 34%. Management cited macroeconomic factors in mainland China as a partial factor in lower VIP gaming.
  • Interest expense decreased to $202.8 million in the quarter and $616.2 million for nine months, principally due to lower average debt and prior term-loan repricing. Prior-year property impairment charges were substantially higher; 2014 included a $28.8 million impairment of the Grand Victoria investment.
  • Cash declined despite positive operating cash generation, alongside higher capital spending and distributions to noncontrolling owners. The company repaid its $508.9 million 5.875% notes at maturity in February 2014.
  • The Borgata interest returned to equity-method accounting after New Jersey regulators approved MGM’s licensure and dissolved the divestiture trust. Prior periods were adjusted retroactively; the 2014 nine-month adjustment increased income by $10 million.

Outlook, projects, risks and unusual items

  • Development plans: MGM Cotai was budgeted at approximately $2.9 billion and anticipated to open in fall 2016; MGM National Harbor was estimated at $1.2 billion, with completion expected in the second half of 2016; MGM Springfield was estimated at $760 million, with completion expected in 2017. The Las Vegas Arena was estimated at $350 million and scheduled for completion in the first half of 2016. These are management expectations, not guarantees.
  • Planned spending: Management expected full-year 2014 capital spending of $370 million at domestic resorts and corporate entities, $120 million including land costs for National Harbor, $85 million in Springfield initial license fees plus $40 million for land, and MGM China spending of $385 million on Cotai plus $55 million on MGM Macau improvements. Arena investment was estimated at $36 million for the year.
  • Debt and refinancing exposure: Management expected to meet maturities and planned investment using operating cash flow, cash and available credit. It noted that if the share price were below the conversion price when convertible debt matured, other funding would be needed for part of the repayment. The company also faces substantial leverage, covenant restrictions and variable-rate exposure.
  • Market and operating risks: Results depend on gaming volumes and hold, Macau VIP demand and gaming promoters, Las Vegas competition and travel demand, regulation and gaming-license terms, customer credit collections, construction execution, and economic conditions. A 100-basis-point rate increase was estimated to raise annual interest cost by $28 million on U.S. variable-rate borrowings and $6 million on MGM China borrowings.
  • CityCenter contingencies: MGM had funded $734 million under its completion guarantee and accrued a $152 million liability, offset in part by $72 million of condo proceeds held by CityCenter. Perini litigation trial began in October 2014; the company described approximately $172 million as its probable liability for the relevant settlement and remaining claims. Separately, an insurer asserted approximately $43 million in an arbitration; the potential liability range was not determinable. An October 2014 order required approximately $55 million of additional interim collateral, bringing total collateral to about $88 million, without deciding the merits.
  • Tax and unusual items: A settlement of IRS examinations for 2005–2009 generated a $31 million tax benefit in the second quarter. Nine-month tax results also reflected assumptions about future realization of foreign tax credits; the company estimated a net deferred foreign tax credit asset of approximately $332 million at year-end 2014 and warned that a future Macau tax exemption could require an additional valuation allowance. The third-quarter tax provision was $10.2 million.
  • Other transactions: Railroad Pass was classified as held for sale following an $8 million sale agreement, with a $1 million impairment. An October agreement to sell Gold Strike in Jean, Nevada, for $12 million was subject to approvals and closing conditions. Neither sale qualified as discontinued operations. The Massachusetts gaming-law ballot initiative failed in November 2014, allowing Springfield development to proceed as planned.

Most important facts for investors to verify

  • Debt maturities, refinancing plans, available revolver capacity, and the distinction between balance-sheet current debt and the separately disclosed $2.4 billion of principal due within one year.
  • Whether operating cash flow can support elevated development spending, interest payments and other obligations as major projects progress.
  • Macau VIP and main-floor gaming trends, including the sustainability of mass-market growth and the effect of weaker VIP demand.
  • Final CityCenter litigation and insurance-arbitration outcomes, completion-guarantee costs, and required collateral.
  • The assumptions supporting MGM’s foreign tax-credit asset and the reported nine-month earnings improvement, including the IRS settlement benefit and noncontrolling-interest allocation.
  • Progress, budgets and opening schedules for Cotai, National Harbor, Springfield and the Las Vegas Arena, alongside compliance with debt covenants.