MGM Resorts International annual report, FY2015

MGM Resorts International — FY2015 Form 10-K

Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter report. The company operates 12 wholly owned U.S. resorts and holds a controlling 51% interest in MGM China, which operates MGM Macau and is developing MGM Cotai. Results also include investments in unconsolidated affiliates.

Financial performance and liquidity

Metric	FY2015	FY2014
Net revenue	$9.19 billion	$10.08 billion
Operating income (loss)	$(156) million	$1.32 billion
Net income (loss)	$(1.04) billion	$127 million
Net income (loss) attributable to MGM Resorts	$(448) million; $(0.82) per share	$(150) million; $(0.31) per share
Adjusted EBITDA	$2.24 billion	$2.22 billion
Cash from operating activities	$1.01 billion	$1.13 billion
Capital expenditures	$1.47 billion	$872 million

• Revenue fell 9%, principally due to lower casino revenue at MGM China. Domestic resort revenue rose 2% to $6.50 billion; MGM China revenue fell 33% to $2.21 billion.
• Domestic resorts generated $1.69 billion of Adjusted Property EBITDA, up 11%, with a 26.0% margin versus 23.9%. MGM China Adjusted EBITDA declined to $540 million from $850 million; its margin was 24.4% versus 25.9%.
• The $1.47 billion non-cash MGM China goodwill impairment drove the reported operating loss. Fourth-quarter revenue was $2.19 billion, operating loss was $1.20 billion, and net loss attributable to MGM Resorts was $781 million.
• Cash and cash equivalents were $1.67 billion at year-end, including $700 million held by MGM China. The company had approximately $1.2 billion of available borrowing capacity under its senior credit facility. Current assets were $2.41 billion and current liabilities $2.24 billion.
• Year-end debt was approximately $12.8 billion principal amount, including $1.6 billion at MGM China; the parent company reported $11.3 billion excluding MGM China. Approximately $1.5 billion of principal matured in 2016. Cash interest paid in 2015 was $777 million; reported net interest expense was $798 million.
• Operating cash flow less capital expenditures was approximately negative $462 million, before other investing and financing activity. Capital spending rose sharply as Cotai and U.S. developments advanced.

Material changes versus the prior year

• Macau market gross gaming revenue declined 34% in 2015. MGM China VIP table-game revenue fell 44%, with VIP turnover down 54%; main-floor table-game revenue declined 20%.
• Domestic performance improved: Las Vegas Strip REVPAR rose 7%; occupancy was 93%, and average daily room rate increased to $149 from $139. Domestic Adjusted Property EBITDA benefited from stronger gaming and non-gaming results and about $63 million attributed to the Profit Growth Plan.
• The $1.5 billion goodwill impairment followed weaker MGM China cash-flow forecasts and lower Macau gaming-asset valuation multiples. The company also recorded a $17 million impairment of its Grand Victoria investment.
• Cash from operations declined from $1.13 billion to $1.01 billion, while capital expenditures increased from $872 million to $1.47 billion. The company received a $200 million CityCenter distribution and recorded an $80 million share of CityCenter’s construction-litigation settlement gain.
• In April, holders converted substantially all $1.45 billion of convertible notes into about 78 million common shares, increasing shares outstanding. The company repaid $875 million of senior notes at maturity and MGM China refinanced its credit facility.

Outlook, management commentary, and key risks

• Management expected approximately $300 million of annualized Adjusted EBITDA benefit from its Profit Growth Plan by the end of 2017; the plan was underway, but benefits are not assured.
• At the filing date, MGM National Harbor was expected to open in the fourth quarter of 2016; T-Mobile Arena in April 2016; MGM Cotai at the end of the first quarter of 2017; and MGM Springfield in late 2018. Estimated project costs were approximately $1.3 billion, $350 million, $3.0 billion, and $865 million, respectively, excluding specified items such as capitalized interest and land costs.
• Management described Macau as challenging and competitive, citing China economic and policy conditions, reduced VIP activity, smoking restrictions, and tighter travel measures. It expected long-term market growth but gave no specific consolidated revenue or earnings guidance.
• The proposed MGM Growth Properties REIT IPO and related transactions were targeted for the first half of 2016, subject to approvals, financing, market conditions, and other conditions. The company expected to retain control and an approximately 70% economic interest in the operating partnership; completion and proceeds were uncertain.
• Key exposures include substantial leverage and near-term maturities, debt covenants, development costs and execution, dependence on Las Vegas and Macau demand, Macau gaming-concession and Cotai land deadlines, reliance on gaming promoters, collection of gaming credit, regulatory and tax changes, labor relations, and weather, cyber, and travel disruption.
• A proposed $75 million settlement of securities class actions was awaiting final court approval as of the filing date; insurers were to fund the payment under the agreement. Management said other pending litigation was not expected to have a material aggregate effect.

Most important facts for investors to verify

• Whether MGM China’s revenue, cash flow, VIP turnover, and margins stabilized after the 2015 downturn, and the assumptions underlying the $1.5 billion goodwill impairment.
• How the company refinanced or repaid 2016 maturities and funded planned development spending, and the effect on leverage, interest cost, and covenant headroom.
• Actual project budgets, opening dates, and Macau table allocations for Cotai, National Harbor, Springfield, and T-Mobile Arena.
• Whether the proposed REIT transaction closed on terms consistent with the announced structure, including debt assumed, lease obligations, IPO proceeds, and retained control.
• Progress toward the Profit Growth Plan’s stated $300 million annualized Adjusted EBITDA target, distinguishing realized recurring savings from non-GAAP adjustments.
• The final approval and funding of the securities-litigation settlement, and any material changes in contingencies or regulatory matters.