MGM Resorts International quarterly report, Q1 FY2013

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MGM Resorts International — Q1 2013 Form 10-Q

Business context and period: Unaudited results for the three months ended March 31, 2013, compared with Q1 2012. MGM operates casino resorts, with reportable segments of wholly owned domestic resorts and MGM China; it owns 51% of MGM China and 50% of CityCenter.

Financial performance and liquidity

  • Revenue: Net revenue was $2.352 billion, up 3% from $2.288 billion. Casino revenue rose 5%; rooms increased 2%, while food and beverage fell 4%.
  • Profitability: Operating income was $301.8 million versus $192.6 million. Consolidated net income was $22.6 million versus a $203.3 million loss; net income attributable to MGM Resorts was $6.5 million versus a $217.3 million loss. Diluted EPS was $0.01 versus $(0.44).
  • Margins and EBITDA: Operating margin was approximately 12.8%, versus 8.4% (calculated as operating income divided by net revenue). Adjusted EBITDA, a non-GAAP measure, was $524.4 million versus $430.3 million; its margin was approximately 22.3% versus 18.8%.
  • Cash flow: Operating cash flow was $194.7 million, down from $291.7 million. Capital expenditures were $97.4 million, implying operating cash flow less capex of approximately $97.2 million. Cash and cash equivalents ended at $1.481 billion, down $62.9 million from year-end.
  • Debt and liquidity: Long-term debt was $13.691 billion, compared with $13.589 billion at December 31, 2012; estimated fair value was $14.7 billion. The company had $1.05 billion of available capacity under its senior credit facility and $1.0 billion of current assets beyond current liabilities (current ratio approximately 1.30). It repaid $462 million of 6.75% notes at maturity on April 1, 2013, using cash and a prior $110 million revolver draw.

Material changes versus Q1 2012

  • Domestic resort Adjusted Property EBITDA increased 12% to $361.0 million, principally on stronger table games revenue and hold. Table games revenue rose 16%; hold was 21.9%, compared with 18.7%.
  • MGM China revenue rose 6% to $747.6 million and Adjusted EBITDA increased to $180.5 million from $164.5 million. Main-floor table games and slots win increased 26% and 19%, respectively; VIP turnover rose 15%, while VIP hold declined to 2.8% from 3.2%.
  • CityCenter’s net revenue increased 32% to $315.1 million, and MGM’s share of its operating results improved to $11.7 million of income from an $18.6 million loss.
  • Interest expense declined $58.9 million to $225.4 million, mainly reflecting December 2012 refinancing. Depreciation and amortization fell $24.9 million, largely due to an extended Macau gaming concession amortization period.
  • Prior-year results included a $58.7 million loss on early debt retirement. Q1 2013 also included $8.5 million of net property transaction expense and $2.1 million of preopening/start-up expense.

Outlook, commentary, and key risks

  • Management expected Las Vegas to benefit from continuing market trends and expected Macau growth to continue, while noting that Macau growth had recently slowed and new smoking restrictions were being implemented. These are expectations, not formal earnings guidance.
  • The company planned approximately $2.6 billion of MGM Cotai development spending, excluding land and capitalized interest, for a resort with about 1,600 rooms, 500 gaming tables, and 2,500 slots. MGM China was required to complete development within 60 months of the land concession’s January 2013 effective date; the filing identifies opening by January 2018 as a risk.
  • Management expected 2013 capital expenditures of $350 million at domestic resorts and $250 million for MGM China and Cotai, excluding land and capitalized interest. It expected to fund debt obligations and planned spending with operating cash flow, cash, and available credit. The senior credit facility imposed a $500 million 2013 capital-expenditure limit and minimum trailing-four-quarter EBITDA covenant; reported covenant EBITDA was $1.2 billion versus a $1.0 billion minimum at March 31.
  • Tax items materially affected the quarter: a $65 million increase in tax provision from remeasuring MGM Grand Paradise’s deferred tax liability; a $38 million tax benefit from settling IRS matters for 2003–2004; and a $9 million provision increase for a U.S. federal deferred-tax valuation allowance.
  • CityCenter exposure: MGM had funded $698 million under its completion guarantee and accrued a $21 million liability. Contractor claims exceeded the accrued amount by approximately $154 million; $112 million of condo proceeds was held pending resolution of litigation. Perini’s amended lien was approximately $191 million, and trial was scheduled for January 2014. The Harmon building was considered structurally deficient and slated for demolition; estimated demolition cost was approximately $32 million. MGM said it did not believe it was responsible for additional Harmon remediation funding, but noted that circumstances could change.
  • Other risks: Substantial indebtedness, refinancing and covenant constraints, competition, gaming regulation, dependence on Macau junket operators, project execution and construction costs, and Las Vegas market concentration. Variable-rate borrowings were 25% of total; a 100-basis-point increase in LIBOR or HIBOR was estimated to raise annual interest cost by $29 million or $6 million, respectively.

Most important facts for investors to verify

  1. Whether stronger casino volumes and hold rates persist, given that gaming hold can fluctuate and helped drive Q1 comparisons.
  2. Whether operating cash flow recovers from $194.7 million and supports debt service, capex, and Cotai development.
  3. Debt maturities, refinancing capacity, covenant headroom, and the effect of interest-rate changes.
  4. The final cost and timing of MGM Cotai, including land-concession payments and the targeted opening timetable.
  5. Developments in Perini/CityCenter litigation, the completion-guarantee accrual, and potential Harmon demolition or remediation costs.
  6. The sustainability of reported earnings after the quarter’s significant tax adjustments and the effect of MGM China distributions on cash available to the consolidated group.