Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2005, for MGM MIRAGE (now MGM Resorts International). The reporting period is significantly impacted by the completion of the merger with Mandalay Resort Group on April 25, 2005. The company operates a portfolio of casino resorts primarily in Las Vegas, Nevada, with additional properties in Detroit, Mississippi, Atlantic City, and Macau. As of June 30, 2005, approximately 55% of outstanding shares were owned by Tracinda Corporation.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2005 | Six Months Ended June 30, 2005 |
|---|---|---|
| Net Revenues | $1,715,956,000 | $2,920,091,000 |
| Operating Income | $377,929,000 | $671,105,000 |
| Net Income | $141,168,000 | $252,247,000 |
| Diluted EPS | $0.48 | $0.85 |
| Operating Cash Flow | N/A | $618,925,000 |
| Cash and Equivalents | $306,495,000 | $306,495,000 |
| Total Debt (Long-term + Current) | $12,268,897,000 | $12,268,897,000 |
| Available Liquidity | $2.2 billion | $2.2 billion |
Note: All figures in thousands except per share data and liquidity estimates.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 60% for the quarter and 37% year-to-date compared to 2004, driven primarily by the inclusion of Mandalay Resort Group operations for two months. On a same-store basis (excluding Mandalay), revenue growth was 11% for the quarter and 12% year-to-date.
- Profitability: Operating income increased 45% for the quarter and 30% year-to-date. Net income from continuing operations rose 39% for the quarter and 27% year-to-date.
- Debt Structure: Long-term debt increased significantly from $5.46 billion at year-end 2004 to $12.27 billion at June 30, 2005, reflecting the assumption of Mandalay debt and new borrowings to fund the acquisition.
- Interest Expense: Net interest expense rose to $167 million for the quarter (from $93 million in 2004) due to increased leverage from the merger.
Outlook, Risks, and Management Commentary
- Merger Integration: Management highlights the strategic value of the Mandalay acquisition, which enhances the Las Vegas Strip portfolio and provides sites for future development. Mandalay contributed $524 million in net revenues and $131 million in operating income for the two months of ownership.
- Operational Trends: Strong hotel and gaming trends were reported despite new competition. Same-store REVPAR (Revenue Per Available Room) increased 16% for the quarter. Slot revenue grew 7% on a same-store basis.
- Future Capital Projects: Significant capital commitments include:
- Project CityCenter: A $5 billion development on the Las Vegas Strip, with the first phase anticipated to open in 2009.
- MGM Grand Macau: Construction began in Q2 2005 with a budget of $975 million; opening expected in late 2007.
- Detroit Permanent Facility: Plans are underway following the resolution of the Lac Vieux litigation.
- Risks and Contingencies:
- Legal Proceedings: The Lac Vieux litigation regarding Detroit casino development was resolved favorably in April 2005. Shareholder litigation regarding the Mandalay merger remains pending.
- Market Risk: The company is exposed to interest rate risk on variable-rate debt. A 100 basis-point change in LIBOR would impact annual interest costs by approximately $51 million.
- Regulatory: Operations depend on gaming licenses and approvals in various jurisdictions, including the pending licensure for Grand Victoria in Illinois.
Investor Verification Checklist
- Merger Accounting: Verify the preliminary purchase price allocation for the Mandalay acquisition, specifically the $1.2 billion goodwill and $246 million in intangible assets, noting these are subject to adjustment for one year.
- Debt Covenants: Confirm compliance with financial covenants. As of June 30, 2005, the leverage ratio was 5.5:1 (limit 7.5:1) and interest coverage was 3.1:1 (minimum 2.0:1).
- Capital Expenditures: Review the $232 million in capital expenditures for the six months ended June 30, 2005, and the projected $5 billion cost for Project CityCenter.
- Discontinued Operations: Note that 2004 results included income from discontinued operations (Golden Nugget and MGM Grand Australia sales), which are not present in 2005, affecting year-over-year comparability.
- Stock-Based Compensation: Review the pro forma impact of SFAS 123(R), which would reduce reported net income by $16.4 million for the six months ended June 30, 2005, effective January 1, 2006.