MGM Resorts International — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Dollar amounts below are in millions unless otherwise noted. MGM Resorts owns and operates casino resorts in the U.S. and Macau and reports domestic resorts and MGM China as its two segments.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net revenue | $2,708 | $2,210 | +23% |
| Operating income | $497 | $316 | +57% |
| Net income attributable to MGM Resorts | $207 | $67 | +210% |
| Diluted EPS | $0.36 | $0.12 | +$0.24 |
| Adjusted EBITDA, non-GAAP | $764 | $543 | +41% |
| Operating cash flow | $405 | $225 | +$181 |
| Capital expenditures | $456 | $427 | +$29 |
- Operating income margin was approximately 18.4%, versus 14.3% a year earlier. Net income attributable to MGM Resorts was approximately 7.6% of net revenue, versus 3.0%.
- Cash and cash equivalents were $1,395 at March 31, 2017, down from $1,447 at year-end. Current assets were $2,173 and current liabilities $2,125.
- Long-term debt, net of discounts and issuance costs, was $13,099; principal debt was approximately $13,247. Estimated cash interest payments over the next 12 months were $755. The filing states the company expected to meet maturities and planned investment needs using operating cash flow, cash and available credit.
- Operating cash flow less capital expenditures was approximately negative $51. Cash declined by $51 during the quarter. MGM paid a quarterly dividend of $0.11 per share, totaling $63.
Material changes and segment performance
- Revenue growth reflected the first full comparative inclusion of Borgata, acquired in August 2016, and MGM National Harbor, which opened in December 2016, as well as growth at existing resorts and MGM China. Domestic resorts revenue rose to $2,086 from $1,619; MGM China revenue increased 7% to $502.
- Domestic resorts Adjusted Property EBITDA was $648, up 34%; excluding Borgata and National Harbor, same-store Adjusted Property EBITDA rose 15% to $557. Same-store margin increased 257 basis points to 32.5%.
- Las Vegas Strip REVPAR increased 9% to $161, with occupancy steady at 91% and ADR rising to $176 from $162. Same-store domestic casino revenue increased 4%; table-games revenue benefited partly from a higher hold percentage.
- MGM China Adjusted EBITDA increased to $143 from $114, and its margin rose 413 basis points to 28.5%. Main-floor table-games revenue increased 17%, while VIP table-games revenue declined 5% as turnover fell 16%. Higher hold percentages contributed to reported growth.
- Income from unconsolidated affiliates increased to $40 from $15, principally reflecting CityCenter’s improved results. Q1 2016 CityCenter results included charges related to accelerated theater depreciation and the Crystals sale.
- Net interest expense fell to $174 from $185. Depreciation and amortization rose to $250 from $200. The effective income tax rate was 19.8%, versus 18.9%.
Outlook, risks and contingencies
- Management expected MGM Cotai to open in Q4 2017, with a project budget of approximately $3.3 billion, excluding capitalized interest and land-related costs. Macau government allocation of gaming tables remained undetermined and was expected to be below the resort’s capacity of 500 tables.
- MGM Springfield was expected to be completed in late 2018; estimated development and construction cost was approximately $865 million, excluding capitalized interest and land-related costs.
- For the remainder of 2017, planned capital expenditures included approximately $450 million at domestic resorts and corporate entities (excluding National Harbor and Springfield), $65 million at National Harbor, $240 million at Springfield, $45 million at MGM Macau and $870 million on MGM Cotai.
- Management cited substantial indebtedness, fixed and percentage rent obligations under the MGP master lease, refinancing and interest-rate exposure, construction and opening risks, competition, regulatory requirements, Macau market conditions and gaming-promoter dependence as key risks. A 100-basis-point rate increase was estimated to increase annual interest cost by $17 million for LIBOR exposure and $20 million for HIBOR exposure.
- The MGM Cotai gaming subconcession was scheduled to expire March 31, 2020; the filing notes uncertainty about renewal and future Macau tax treatment. Foreign-tax-credit realization and related valuation allowances depend on assumptions about MGM China profitability, distributions and tax exemptions.
- Borgata agreed to a $72 million property-tax refund settlement, payable in installments by Atlantic City in 2017 and subject to conditions. If payments fail or the agreement terminates, Borgata may enforce a consent judgment of approximately $158 million. The company agreed to share half of net amounts received with Boyd Gaming.
- An appeal remained pending from the sole objector to the court-approved settlement of securities litigation. The settlement provides for a $75 million payment by directors’ and officers’ liability insurers; reversal could return the case to litigation. Management said routine other litigation was not expected to have a material adverse effect.
- Subsequent events included CityCenter’s April 2017 refinancing and $600 million dividend, of which MGM received $300 million, and an MGP term-loan repricing in May 2017. These occurred after quarter-end.
Investor verification points
- Separate organic operating trends from the acquisition and opening effects of Borgata and National Harbor; assess the impact of casino hold rates on reported growth.
- Track MGM Cotai construction spending, opening timing, final gaming-table allocation and remaining funding needs; likewise monitor Springfield’s cost and schedule.
- Review debt maturities, available revolver capacity, interest-rate exposure and the ability to service debt alongside MGP lease payments and planned capital spending.
- Verify collection and timing of Borgata’s $72 million settlement, including the potential Boyd Gaming share and fallback consent judgment.
- Monitor Macau concession renewal, tax-exemption and foreign-tax-credit assumptions, and any resulting deferred-tax or valuation-allowance changes.