MGM Resorts International annual report, FY2011

MGM Resorts International — FY2011 Form 10-K

Reporting period: Fiscal year ended December 31, 2011; filed February 29, 2012. This is an annual report, not a standalone fourth-quarter filing. It covers MGM Resorts’ domestic resort operations and MGM China, which became consolidated on June 3, 2011 after the company acquired control and increased its interest to 51%.

Business context and reporting period

MGM Resorts operates casino resorts, hotels, convention facilities, dining, entertainment and other hospitality businesses. Its two reportable segments are wholly owned domestic resorts and MGM China, whose principal operation is MGM Macau. CityCenter, in which MGM owns 50%, is an unconsolidated affiliate. The company says performance is sensitive to customer volumes, hotel rates, high-end gaming results and economic conditions; results are not typically seasonal.

Key financial metrics

Metric	FY2011	FY2010
Net revenue	$7.849 billion	$6.056 billion
Operating income (loss)	$4.057 billion	$(1.159) billion
Net income (loss)	$3.235 billion	$(1.437) billion
Net income (loss) attributable to MGM Resorts	$3.115 billion	$(1.437) billion
Adjusted EBITDA (non-GAAP)	$1.557 billion	$930 million
Cash provided by operating activities	$675 million	$504 million
Capital expenditures	$301 million	$207 million
Cash and cash equivalents at year end	$1.866 billion	$499 million
Total assets at year end	$27.766 billion	$18.952 billion
Long-term debt, net of discounts and premiums	$13.470 billion	$12.048 billion

The reported 2011 operating income and net income include a $3.496 billion non-cash gain from obtaining control of MGM China. The annual effective tax rate was negative 14.2%: MGM reported an income tax benefit despite pretax income, principally because it did not record U.S. deferred tax on the acquisition gain. Unaudited pro forma results, assuming control from January 1, 2010 and excluding the gain, show a 2011 net loss attributable to MGM Resorts of $435 million.

Consolidated operating margin was approximately 51.7%, but is not representative of recurring operations because of the acquisition gain. Adjusted EBITDA was approximately 19.8% of reported revenue, versus 15.4% in 2010; these are non-GAAP comparisons and the revenue base also changed with MGM China consolidation. Domestic resort Adjusted Property EBITDA was $1.298 billion, up 11%, with a 22% margin, up about 130 basis points.

Operating cash flow less capital expenditures was approximately $374 million in 2011. Year-end cash included about $720 million at MGM China; the company also borrowed $778 million under its credit facility in December and repaid it shortly after year-end. Reported current assets were $2.813 billion and current liabilities $1.745 billion.

Material changes versus the prior comparable period

• Revenue rose about 30% year over year, substantially reflecting the consolidation of MGM China from June 3; MGM China contributed $1.535 billion of reported revenue and $360 million of Adjusted Property EBITDA for that partial-year period.
• Domestic resort revenue increased 5% to $5.893 billion. Las Vegas Strip REVPAR rose 13%; occupancy was 90% versus 89%, average daily rate was $127 versus $115, and REVPAR was $115 versus $102.
• Domestic non-casino revenue increased 6%; domestic casino revenue increased 1%. Domestic table-games revenue fell 3%, while slots revenue increased 3%.
• Operating cash flow increased 34%, including $354 million attributable to MGM China, partly offset by lower tax refunds. Capital expenditures increased to $301 million.
• 2011 included $179 million of property transaction charges, including impairments of Circus Circus Reno ($80 million), Borgata ($62 million) and Silver Legacy ($23 million), as well as a $26 million share of CityCenter residential impairment. 2010 property transaction charges were $1.451 billion, largely CityCenter-related.

Outlook, risks, contingencies and unusual items

• Management outlook: Management reported a recovery in domestic operations and said it believed increased visitation and consumer spending trends could continue in 2012, while employment and housing weakness could temper the recovery. It emphasized cost control, operating efficiencies and further balance-sheet deleveraging. The filing provides no consolidated numerical revenue or earnings guidance.
• Debt and refinancing: Principal debt was approximately $13.6 billion at year-end, with substantial maturities in 2013 and 2014, including $4.565 billion scheduled for 2014. The company reported compliance with its year-end covenants; trailing covenant EBITDA was $1.28 billion against a $1.2 billion minimum. The February 2012 credit-facility restatement extended approximately $1.8 billion of loans to 2015 and set escalating minimum EBITDA thresholds. In January 2012, MGM issued $850 million of 8.625% notes due 2019. These post-year-end transactions are not year-end cash or debt figures.
• CityCenter and Harmon: MGM had funded $645 million under its completion guarantee, recorded a $110 million receivable for future residential proceeds, and accrued a remaining estimated net obligation of $28 million. Contractor claims exceeded the accrued amount by approximately $185 million, according to the company. CityCenter planned to demolish the structurally disputed Harmon building; MGM estimated demolition at about $31 million and said court approval and permits remained pending. Perini alleged roughly $490 million was owed under the construction contract; trial was set for February 2013.
• Macau: MGM Macau depends in part on VIP gaming promoters and collectible gaming receivables. Its gaming subconcession is scheduled to expire in 2020 and could be terminated or redeemed under specified conditions. The filing also describes potential complementary tax on distributions; a Macau annual-fee arrangement had not been finalized at year-end. A $400 million MGM China dividend was declared in February 2012, of which MGM Resorts expected to receive about $204 million.
• Other financial and legal exposures: MGM’s 50% Borgata interest is held in a divestiture trust and must be sold by March 2014 under its New Jersey settlement; the company recorded a further $62 million impairment in 2011. Silver Legacy had $143 million of notes due in March 2012 and was considering refinancing, restructuring or bankruptcy protection; MGM wrote its investment down to zero. Other matters include securities and derivative litigation, a patent suit, tax audits and a dispute over sales/use tax on complimentary meals in Nevada.
• Broader risks: The filing highlights leverage and covenant constraints, refinancing needs, competition, economic and travel sensitivity, Las Vegas geographic concentration, interest-rate exposure, gaming regulation and licensing, labor negotiations, foreign-market and currency risks, credit losses, insurance limits, and potential asset impairments. A 100-basis-point increase in LIBOR above the applicable floor was estimated to increase annual interest cost by about $33 million; a similar HIBOR increase at MGM Grand Paradise by about $6 million.

Important facts for investors to verify

• Separate recurring operating performance from the $3.496 billion MGM China remeasurement gain; review the pro forma loss excluding that gain and the non-GAAP EBITDA reconciliation.
• Confirm the post-year-end debt transactions, amended credit-facility terms, near-term maturities, covenant headroom and actual availability of borrowing capacity.
• Track domestic resort demand and margins alongside MGM Macau revenue, VIP turnover, mass-market performance, promoter commissions and receivable collections.
• Monitor CityCenter completion-guarantee exposure, contractor litigation, the Harmon demolition process and recoveries from residential sales or litigation.
• Check the status and proceeds of the required Borgata sale, Silver Legacy’s debt resolution, Macau dividend tax arrangements and the Macau gaming subconcession.
• Review the scope of internal-control testing: management and the auditor excluded MGM China from the 2011 internal-control assessment following its acquisition; the auditor nevertheless issued an unqualified opinion on the consolidated financial statements and on controls within the assessed scope.