MGM

Business Context and Reporting Period

Company: MGM Mirage (now MGM Resorts International)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and six months ended June 30, 2008
Business Overview: MGM Mirage operates 17 wholly-owned casino resorts and holds 50% interests in four others, including CityCenter (a major Las Vegas Strip development), Borgata, Grand Victoria, and MGM Grand Macau. The company acts largely as a holding company for its casino and resort operations.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net revenues decreased 2% year-over-year. Casino revenue dropped 3% (driven by a 6% decline in table games volume), while Rooms revenue fell 6% due to lower Average Daily Rates (ADR) and reduced occupancy on the Las Vegas Strip.
• Profitability Compression: Operating income decreased 26% to $675 million. This was driven by lower revenues, higher depreciation, and the absence of prior-year residential profits from The Signature at MGM Grand. On a comparable basis (excluding residential profits and insurance recoveries), operating income declined 21%.
• Net Income Volatility: Net income dropped significantly to $231 million from $528 million. The prior year included a $264 million pre-tax gain from the disposal of discontinued operations (Primm Valley and Laughlin properties), which did not recur in 2008.
• Debt Increase: Long-term debt increased by approximately $1.8 billion to $13.0 billion, primarily due to borrowings to fund capital expenditures and share repurchases.
• Share Repurchases: The company repurchased 18.2 million shares for $1.2 billion during the six-month period, including a joint tender offer with Dubai World.

Outlook, Risks, and Unusual Items

• Monte Carlo Fire: A rooftop fire in January 2008 closed the Monte Carlo resort for approximately three weeks. While insurance recoveries of $19 million were recorded in operating income, a significant portion of suites remained out of service through June 30, 2008, impacting room revenue.
• CityCenter Development: The company is a 50% owner of CityCenter, expected to open in late 2009. Construction costs for the remainder of 2008 are estimated at $1.5 billion. The company and its partner, Dubai World, provided $500 million loans each during the period to fund near-term costs.
• Economic Headwinds: Management cited weakness in the U.S. economy, specifically the housing market, credit concerns, and higher travel costs, as primary drivers for the decline in group room nights (down 9%) and Las Vegas Strip REVPAR (down 5%).
• Legal Proceedings: A class action lawsuit regarding ticket processing fees at Mandalay Bay was filed in July 2008. A separate lawsuit regarding credit card receipt disclosures (FACTA) was settled favorably in June 2008.
• Debt Covenants: As of June 30, 2008, the company maintained a leverage ratio of 3.7:1 and an interest coverage ratio of 4.3:1, well within the required limits of 6.5:1 and 2.0:1, respectively.

Investor Verification Checklist

• CityCenter Funding: Verify the status of project financing negotiations for CityCenter and the potential for additional equity contributions required from MGM Mirage and Dubai World.
• Monte Carlo Recovery: Confirm the timeline for the full reopening of Monte Carlo suites and the final settlement status of the business interruption insurance claim.
• Debt Maturities: Review the schedule for debt maturities in 2008, specifically the $196 million in senior notes repaid in August and the potential repurchase of $150 million in 7% debentures.
• Regional Performance: Analyze the divergence between Las Vegas Strip performance (declining) and regional markets like MGM Grand Detroit (gaining market share) to assess portfolio resilience.
• Share Repurchase Authorization: Monitor the utilization of the new 20 million share repurchase authorization approved in May 2008.