MGM Resorts International quarterly report, Q2 FY2016

MGM Resorts International — Q2 2016 Form 10-Q

Business context and reporting period

The filing covers the quarter and six months ended June 30, 2016, compared with the corresponding 2015 periods. MGM operates casino resorts, with reportable segments in domestic resorts and MGM China. The results include MGP, which MGM consolidated after its April 2016 IPO while retaining control.

Financial results and liquidity

Metric	Q2 2016	Q2 2015	Six months 2016	Six months 2015
Net revenue	$2.270 billion	$2.385 billion	$4.479 billion	$4.717 billion
Operating income	$769 million	$349 million	$1.085 billion	$744 million
Net income attributable to MGM	$474 million	$97 million	$541 million	$267 million
Diluted earnings per share	$0.83	$0.17	$0.95	$0.50
Adjusted EBITDA	$1.002 billion	$579 million	$1.545 billion	$1.198 billion

Q2 operating margin was approximately 33.9%, versus 14.6% a year earlier; the comparison was materially affected by the Crystals sale gain included in affiliate income. Q2 domestic-resort Adjusted Property EBITDA rose 12% to $515 million, with margin up 354 basis points to 30.4%. MGM China Adjusted EBITDA fell to $119 million from $132 million, although its margin increased to 26.4%.

For the six months, operating cash flow was $614 million, up from $447 million. Capital expenditures were $971 million, compared with $594 million, leaving operating cash flow less capital expenditures of negative $357 million. Investing cash flow also included $543 million of distributions from unconsolidated affiliates, principally CityCenter.

At June 30, cash and equivalents were $2.503 billion, total assets $26.549 billion, and long-term debt $12.365 billion on the balance sheet. Debt principal was $12.524 billion; the filing reports estimated cash interest payments of $744 million over the next 12 months. MGM reported $250 million drawn on its $1.5 billion senior facility, with no revolver borrowings under the MGP facility and $175 million available under the MGM National Harbor facility. Debt agreements include financial covenants and collateral provisions.

Material changes versus the prior period

• Consolidated revenue declined 5% in both Q2 and the first half, primarily because of weaker MGM China casino revenue.
• MGM China revenue fell 19% in Q2 and 22% in the first half. VIP table-games revenue fell 33% and 38%, respectively; management cited lower VIP turnover, China-market conditions, regulatory changes affecting gaming promoters, and restrictions on proxy betting.
• Domestic-resort revenue was broadly stable in Q2 and increased 1% for the first half. Las Vegas Strip REVPAR increased 3% in Q2 and 5% in the first half; rooms revenue benefited from visitation and convention demand.
• Domestic-resort Adjusted Property EBITDA increased 12% in Q2 and 18% in the first half, supported by the Profit Growth Plan. Management attributed approximately $64 million of Q2 and $125 million of first-half incremental Adjusted Property EBITDA to domestic initiatives.
• Debt and financing changed substantially with the MGP IPO and related transactions. MGM redeemed $1.23 billion of 2016 senior notes, repaid its prior credit facility, and MGP issued $1.05 billion of 5.625% notes due 2024 and borrowed under its credit facility.

Outlook, commentary, risks and unusual items

• The $406 million Q2 gain recognized by MGM from CityCenter’s sale of Crystals for approximately $1.1 billion was a major, nonrecurring contributor to reported earnings. The six-month gain recognized by MGM was $397 million. Results also included accelerated depreciation related to the closure of the Zarkana theatre.
• Management raised its Profit Growth Plan target from $300 million to approximately $400 million in annualized Adjusted EBITDA benefits, expected to be fully realized by the end of 2017; initiatives were reported ahead of schedule.
• MGM Cotai, with an estimated project budget of $3.1 billion, was expected to open in Q2 2017. MGM National Harbor, estimated at $1.4 billion, was expected to open in Q4 2016. MGM Springfield, estimated at $865 million, was expected to be completed in late 2018. These estimates exclude specified interest and land costs; Cotai’s gaming-table allocation remained subject to Macau government approval.
• On August 1, 2016, after quarter-end, MGM completed its acquisition of Boyd Gaming’s Borgata interest for $589 million in cash, taking account of working capital adjustments and approximately $575 million of Borgata debt. MGM expected to record a gain of approximately $400 million. MGP acquired Borgata’s real estate, assumed $545 million of debt and leased it back; annual master-lease rent increased by $100 million to $650 million.
• The MGP master lease requires substantial fixed and percentage rent, is triple-net, and cross-collateralizes leased properties. MGM identified rent, debt, covenant compliance, development execution, Macau market conditions, regulation, and interest-rate exposure as important risks. A 100-basis-point increase in LIBOR and HIBOR was estimated to increase annual interest costs by $27 million and $17 million, respectively.
• MGM’s Q2 income-tax provision benefited from an approximately $85 million reduction in the valuation allowance on foreign tax credits. Management said future valuation depends on assumptions about U.S. and Macau profitability, distributions, and renewal of Macau’s gaming-profit tax exemption; changes could materially affect tax expense.
• In July, MGM elected to exit NV Energy’s bundled sales system. It expected an $87 million upfront payment, including $15 million for CityCenter, and anticipated recognizing further discounted liabilities for ongoing charges in Q3 2016. The filing estimated MGM’s liability at $60 million to $80 million and CityCenter’s at $10 million to $20 million.
• A securities class-action settlement received final court approval in March 2016, funded by insurers, but one class member appealed. Management stated routine litigation was not expected to have a material adverse effect. Disclosure controls were reported effective, with no material control changes during the quarter.

Important facts for investors to verify

• How much of reported earnings growth reflects recurring resort operations versus the Crystals gain and other unusual items.
• Whether domestic cost savings and the $400 million annualized Profit Growth Plan target are achieved, and whether MGM China’s VIP-market weakness continues.
• Actual spending, opening dates, table allocations, and funding needs for Cotai, National Harbor, and Springfield.
• Post-Borgata rent burden, lease coverage and covenant headroom, together with debt maturities, interest costs, and available facility capacity.
• The final tax-valuation-allowance outcome and the amount and timing of NV Energy-related charges and liabilities.