MGM Resorts International quarterly report, Q2 FY2014

MGM Resorts International — Q2 2014 Form 10-Q

Business context and reporting period. The unaudited filing covers the quarter and six months ended June 30, 2014, compared with the corresponding 2013 periods. MGM Resorts operates casino resorts in the U.S. and Macau; its two reportable segments are wholly owned domestic resorts and MGM China, in which it owns 51%. Figures below are in U.S. dollars; financial statement amounts are generally shown in millions.

Financial results

Metric	Q2 2014	Q2 2013	Six months 2014	Six months 2013
Net revenue	$2,581m	$2,481m	$5,211m	$4,833m
Operating income	$340m	$232m	$753m	$533m
Net income (loss)	$174m	$(31)m	$365m	$(8)m
Net income (loss) attributable to MGM Resorts	$106m	$(93)m	$214m	$(86)m
Adjusted EBITDA (non-GAAP)	$586m	$541m	$1,212m	$1,066m

• Net revenue increased 4% in Q2 and 8% year to date. Operating margin, calculated from reported figures, was about 13.2% in Q2 versus 9.3%, and 14.4% year to date versus 11.0%.
• Adjusted Property EBITDA for domestic resorts was $414m in Q2, up 10%, with a 25.3% margin (up about 80 basis points); year-to-date EBITDA was $817m, up 11%, with a 25.5% margin.
• MGM China Q2 revenue was $828m, down 1%, and Adjusted EBITDA was $210m. Excluding branding fees, EBITDA rose 3%; margin increased about 90 basis points to 25.4%. Year-to-date revenue was $1,769m, up 12%, and EBITDA was $451m, up 17% excluding branding fees, with a 25.5% margin.
• The Q2 and year-to-date earnings improvement includes income tax benefits of $53m and $56m, respectively. Q2 included a $31m benefit from settlement of IRS examinations for 2005–2009; the tax benefit also reflects assumptions about future foreign tax credit realization.

Cash flow, debt and liquidity

• Six-month operating cash flow was $804m, versus $730m in 2013. Investing cash outflow was $402m, including $370m of capital expenditures, up from $243m a year earlier. Financing cash outflow was $840m, including debt repayments and $314m in distributions to noncontrolling owners. Cash declined $439m to $1,365m; MGM China held $658m of cash.
• Debt totaled approximately $12.9bn at June 30, down from $13.4bn at December 31, 2013. The filing reports $317m as current debt and $12.6bn as long-term debt. Management also cites approximately $1.5bn of principal maturities within one year, primarily the $1.45bn 4.25% convertible notes due 2015; the company said its share price was above the notes’ conversion price. Estimated cash interest over the next 12 months was $797m.
• The company had $1.2bn of available capacity under its senior credit facility. Current assets of $2,166m were below current liabilities of $2,560m. Management said it expected to meet debt and investment needs with operating cash flow, cash and available borrowing capacity.
• Interest expense was $204m in Q2 and $413m year to date, down from $215m and $440m, respectively. Variable-rate borrowings were 26% of total debt; a 100-basis-point increase in LIBOR was estimated to raise annual interest cost by $28m, with a further $6m estimated for a comparable HIBOR increase on MGM China debt.

Material changes and management commentary

• Domestic results benefited from higher casino and non-casino revenues. Las Vegas visitor volume rose 4.2% and average Strip room rates rose 6.9% in the first half, according to the cited local authority. Strip occupancy was 96% in Q2 versus 95%; ADR was $141 versus $134, and RevPAR was $135 versus $127.
• In Macau, strong main-floor gaming offset weaker Q2 VIP play. MGM China’s Q2 VIP table revenue fell 18%, while main-floor table revenue increased 41%; VIP turnover declined 10%. For the first half, main-floor table revenue increased 43% and VIP turnover rose 1%. Management cited macroeconomic factors in mainland China as affecting VIP volumes, while expressing an expectation of continued Macau market growth.
• Property transactions were $33m in Q2 2014, including a $29m impairment of the Grand Victoria investment, versus $88m in Q2 2013, which included a $37m Grand Victoria impairment and a $45m corporate-building impairment. Grand Victoria’s estimated value for MGM’s 50% interest was $140m.
• Management attributed lower depreciation partly to prior-year accelerated depreciation on assets being replaced in room remodels and to assets at MGM China becoming fully depreciated. General and administrative and corporate expenses increased, including higher payroll, utility and professional-fee costs.

Outlook, projects and risks

• The filing provides no formal consolidated earnings guidance. Management expected domestic resorts to benefit from improving economic conditions and cited Macau growth prospects, while acknowledging uncertainty in China and weaker VIP activity.
• MGM Cotai was budgeted at approximately $2.9bn, excluding development fees eliminated in consolidation, capitalized interest and land, and was anticipated to open in 2016. The company expected MGM China to spend about $500m on Cotai in 2014; first-half capital spending included $170m for the project. The land concession requires completion by January 2018.
• MGM National Harbor was estimated to cost about $1.2bn, with completion expected in the second half of 2016; planned 2014 capital spending, including land costs, was $110m. MGM Springfield’s proposed cost was about $690m, but a Massachusetts ballot initiative to prohibit casino gambling was scheduled for November 2014; the final licensing payment was contingent on the initiative failing. Expected initial license and land costs were $85m and $40m if awarded.
• A proposed Las Vegas arena with AEG was estimated at $350m, targeted for 2016 completion and contingent on permanent financing. MGM expected to invest $50m in 2014 subject to financing.
• CityCenter construction litigation remained significant. MGM had funded $727m under its completion guarantee and accrued a $128m liability; $72m of condominium proceeds was held in escrow for eligible construction obligations or reimbursement after litigation resolution. A trial was scheduled to begin September 23, 2014. An insurer’s separate arbitration claim had indeterminate damages, and MGM said it could not estimate a loss range.
• Other principal risks include substantial leverage and refinancing needs, credit-facility covenants, gaming regulation and competition, dependence on gaming promoters for Macau VIP business, construction and development execution, currency and interest-rate movements, and the status of MGM’s Borgata licensing request. The filing reported no material change to previously disclosed risk factors.

Important facts for investors to verify

• Whether operating cash generation and available credit can cover the 2015 convertible-note maturity, interest costs and planned capital spending.
• Whether Macau main-floor growth can offset further VIP weakness and sustain MGM China’s margins and cash contributions.
• Progress, total funding requirements and opening schedules for Cotai and National Harbor, and the outcome of the Massachusetts casino ballot initiative.
• Developments in the Perini litigation, the insurer arbitration and the CityCenter completion-guarantee exposure.
• Whether the tax-credit assumptions underlying the reported tax benefits and deferred tax assets remain supportable.