Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 1998, for MGM Grand, Inc. (now MGM Resorts International). The Company operates the MGM Grand Hotel/Casino in Las Vegas and Darwin, Australia, and holds a 50% interest in the New York-New York Hotel and Casino (NYNY) in Las Vegas. It also manages casinos in South Africa and is in the development phase for major projects in Detroit and Atlantic City.
Key Financial Metrics
| Metric | Q1 1998 | Q1 1997 |
|---|---|---|
| Net Revenues | $179.8 million | $197.5 million |
| Operating Income | $28.2 million | $51.5 million |
| Net Income | $16.3 million | $30.2 million |
| Diluted EPS | $0.28 | $0.51 |
| Operating Cash Flow | $23.7 million | $9.6 million |
| Cash and Equivalents (Ending) | $437.3 million | $45.4 million |
| Long-Term Debt | $544.6 million | $47.2 million |
Material Changes vs. Prior Period
- Revenue Decline: Net revenues decreased 9.0% to $179.8 million. This was driven by a 10.6% drop in consolidated casino revenues (due to lower table game win percentages and volume at MGM Grand Las Vegas) and a 30.7% decrease in income from the unconsolidated affiliate (NYNY) as the property normalized after its first year of operations.
- Profitability Compression: Operating income fell 45.4% to $28.2 million, and Net Income dropped 46.1% to $16.3 million. While operating expenses increased slightly (3.3%) due to marketing and new F&B operations, the primary driver of lower income was the revenue decline.
- Debt and Liquidity Surge: Long-term debt increased significantly from $47.2 million to $544.6 million following the issuance of $500 million in Senior Collateralized Notes in February 1998. Consequently, cash and cash equivalents jumped from $34.6 million to $437.3 million.
- Capital Expenditures: Investing cash outflows rose to $118.7 million (from $39.4 million) primarily due to $94.4 million spent on the MGM Grand Las Vegas "Master Plan" expansion.
Outlook, Risks, and Management Commentary
- Expansion Projects: The Company is heavily investing in the $700+ million "Master Plan" for MGM Grand Las Vegas, with approximately $256.9 million remaining to be spent in 1998. Development agreements have been approved for MGM Grand Detroit and MGM Grand Atlantic City, though construction is subject to governmental approvals.
- Financing Strategy: The Company maintains a $1.25 billion revolving credit facility (with options to increase) and recently utilized a shelf registration to issue $500 million in notes. Management expects to fund operations and capital expenditures through cash flow, cash on hand, and credit facilities.
- Risks: Forward-looking statements are subject to risks including construction delays, dependence on management, high leverage and debt service sensitivity to interest rates, foreign currency fluctuations, and changes in gaming regulations or tax laws.
- Accounting Changes: The Company noted the upcoming adoption of SOP 98-5, which will require expensing start-up costs as incurred rather than capitalizing them, affecting future reporting for projects like Atlantic City.
Investor Verification Checklist
- Verify the status of governmental approvals for the Detroit and Atlantic City projects, as construction is contingent upon these.
- Monitor the utilization of the $1.25 billion credit facility and the impact of rising interest rates on the new $500 million debt tranche.
- Track the progress and cost overruns of the MGM Grand Las Vegas "Master Plan," which has significant remaining capital requirements for 1998.
- Assess the normalization of earnings from the New York-New York Hotel and Casino joint venture following its first-year surge.
- Review the impact of the new SOP 98-5 accounting standard on future start-up cost reporting for new developments.