MGM Resorts International — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; filed November 7, 2018. MGM owns and operates casino resorts in the U.S. and Macau. MGM Springfield opened August 24, and MGM Cotai, opened in February, contributed to year-over-year growth. Unless stated otherwise, amounts below are U.S. dollars.
Financial results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $3.03B | $2.83B | $8.71B | $8.20B |
| Operating income | $410.9M | $492.7M | $1.13B | $1.49B |
| Net income attributable to MGM | $142.9M | $148.4M | $490.1M | $564.6M |
| Diluted EPS | $0.26 | $0.26 | $0.86 | $0.97 |
| Adjusted EBITDA | $715.9M | $779.4M | $2.11B | $2.28B |
Revenue grew 7% in Q3 and 6% year to date, led chiefly by MGM Cotai and Springfield. Q3 operating margin was approximately 13.6% versus 17.4%; diluted-shareholder net income margin was approximately 4.7% versus 5.2% (calculated from reported figures). Adjusted EBITDA is a non-GAAP measure, not a substitute for operating income or cash flow.
- Segment trends: Q3 domestic resorts Adjusted Property EBITDA fell 12% to $626.9M; domestic same-store EBITDA fell 13%, with margin down 313 basis points to 28.3%. Las Vegas Strip room revenue and REVPAR declined, and management cited lower Strip casino and non-casino revenue and Park MGM rebranding disruption. MGM China revenue rose 37% to $606.0M, while Adjusted Property EBITDA increased to $130.0M; its margin declined 594 basis points to 21.5%, mainly amid MGM Cotai’s ramp-up.
- Cash flow: Nine-month operating cash flow was $1.40B, down from $1.51B. Capital expenditures were $1.22B; investing cash outflow was $1.80B, including the Northfield acquisition. Cash declined to $1.30B from $1.50B at year-end.
- Debt and liquidity: Long-term debt, net, was $14.66B; principal debt was approximately $14.8B. Cash was $1.30B versus current liabilities of $2.98B. MGM reported $798M in estimated cash interest payments over the next 12 months and expected to meet debt and capital needs with operating cash flow, cash and available credit. Credit-facility covenants were met. The filing reports approximately 29% of borrowings as variable-rate after interest-rate swaps.
- Other balance-sheet/capital items: Total assets were $29.97B and total stockholders’ equity $10.75B. MGM repurchased approximately 35M shares for $1.1B in the first nine months; about $1.5B remained under the $2.0B authorization at September 30. Quarterly dividends were $0.12 per share.
Material changes and unusual items
- Operating income and attributable net income fell despite revenue growth. Higher depreciation, general and administrative costs, preopening expenses, and interest expense weighed on results.
- Preopening and start-up expenses were $46.9M in Q3 and $132.9M year to date, primarily related to Springfield and Cotai. Depreciation and amortization rose to $300.5M in Q3 and $865.5M year to date.
- Q3 property transactions included a $45M gain from the Grand Victoria sale; year-to-date property transactions were a net $19.5M gain. CityCenter recorded a $133M loss on the Mandarin Oriental sale for the nine months; MGM recognized a $12M gain from reversal of related basis differences.
- Nine-month tax results included a $72M noncash Tax Act measurement-period benefit and reversal of $41M in deferred taxes following extension of MGM China’s Macau annual-fee arrangement. The company said it continued to evaluate Tax Act effects and expected to finalize provisional amounts in Q4 2018.
- MGM adopted ASC 606 retrospectively in 2018. It changed revenue presentation for promotional allowances, loyalty obligations, and gaming promoter commissions; management said the changes did not materially affect operating income, net income, or cash flows.
Outlook, commitments and risks
- Management estimated remaining-2018 capital expenditures of approximately $115M for domestic resorts and corporate (excluding Springfield), $85M for Cotai, $80M for Springfield, and $20M for other MGM China improvements. These are estimates, not earnings guidance.
- Planned acquisitions included Empire City for approximately $850M, subject to approvals and expected to close in Q1 2019, and Northfield operating assets for approximately $275M, expected to close in the first half of 2019. The Empire City deal includes potential additional consideration of $50M if specified table-game licensing conditions are met.
- The Northfield real-estate acquisition by MGP closed in July for approximately $1.1B. MGM agreed to acquire its operating assets and lease the real estate from MGP; the related intercompany effects will be eliminated in consolidation.
- Key risks include substantial indebtedness and fixed rent obligations to MGP, interest-rate and foreign-exchange exposure, competition, regulatory and Macau concession risks, reliance on gaming promoters, and exposure to Las Vegas demand and travel disruptions. The filing gives no numerical earnings or revenue guidance.
- October 1, 2017 shooting-related lawsuits remain at an early stage. MGM said liability was reasonably possible but that it could not estimate a range; it believes losses in excess of insurance coverage are unlikely. This is not an admission of liability.
- MGM expected to adopt lease accounting ASC 842 in 2019, with the principal anticipated effect being recognition of operating-lease right-of-use assets and liabilities. Management identified ongoing margin-improvement efforts as a risk, noting expected benefits may not be achieved or sustained.
Important facts for investors to verify
- Whether domestic resort weakness, especially Las Vegas Strip room and gaming trends and Park MGM disruption, continued after Q3.
- MGM Cotai’s operating ramp and margin trajectory, and the financial contribution of the newly opened Springfield property.
- Debt, refinancing needs, credit availability, interest costs, and fixed MGP rent obligations relative to operating cash flow and planned investment.
- Closing, financing, regulatory and lease terms for the Northfield operating-assets and Empire City transactions.
- Subsequent developments, insurance coverage and potential financial exposure in the October 1 litigation, as well as final Tax Act accounting adjustments.