MGM Resorts International — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparisons are with Q1 2018 unless otherwise noted. Amounts are in U.S. dollars. MGM operates casino resorts across Las Vegas, regional U.S. markets and Macau, and consolidates MGM Growth Properties (MGP).
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Revenue | $3.177 billion | $2.822 billion | +13% |
| Operating income | $370 million | $360 million | +3% |
| Net income | $66 million | $266 million | Down 75% |
| Net income attributable to MGM | $31 million | $223 million | Down 86% |
| Diluted EPS | $0.05 | $0.38 | Down $0.33 |
| Adjusted EBITDA (non-GAAP) | $740 million | $701 million | +5% |
| Operating cash flow | $400 million | $578 million | Down $178 million |
| Capital expenditures | $183 million | $419 million | Down $236 million |
- Revenue growth reflected MGM Springfield’s first full quarter, a full quarter of MGM Cotai operations and 25 additional tables at MGM Cotai, Empire City’s acquisition, and Northfield’s operations within MGP.
- Operating margin was approximately 11.7%, versus 12.7%. Adjusted EBITDA margin was approximately 23.3%, versus 24.9%; Adjusted EBITDA is a company-defined non-GAAP measure.
- Profit fell sharply despite higher operating income, primarily as the tax line shifted from an $85 million benefit in Q1 2018 to a $72 million provision in Q1 2019. Q1 2019 tax expense included Macau deferred-tax remeasurement, an Empire City-related state tax adjustment, and a higher foreign tax credit valuation allowance. Net interest expense rose to $216 million from $168 million.
- Segment revenue and Adjusted Property EBITDA: Las Vegas Strip $1.428 billion and $404 million (EBITDA down 10%); Regional Operations $804 million and $207 million (up 24%); MGM China $734 million and $191 million (up 23% and 26%, respectively). Las Vegas casino revenue declined 13%; MGM China growth benefited from Cotai ramp-up and new tables.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $1.223 billion at March 31, 2019, down from $1.527 billion at year-end 2018. Current assets were $2.207 billion and current liabilities $2.813 billion.
- Operating cash flow declined to $400 million, reflecting a prior-year working-capital benefit at MGM China and higher cash interest paid, partly offset by increased operating income. Investing cash outflow was $727 million, including $536 million for Empire City. Financing cash flow was positive $25 million, including MGP share issuance proceeds, alongside debt repayments and dividends.
- Long-term debt, net, was $14.731 billion on the balance sheet; principal indebtedness was approximately $14.9 billion. MGM repaid $850 million of 8.625% notes due 2019 and the Operating Partnership issued $750 million of 5.75% notes due 2027. Credit-facility covenants were reported in compliance.
- In April 2019, MGM issued $1.0 billion of 5.50% notes due 2027 and used proceeds primarily to tender for $639 million of 6.75% notes and $233 million of 5.25% notes, both due 2020.
- MGM paid a $0.13-per-share quarterly dividend during the period. No shares were repurchased in Q1; approximately $1.4 billion remained available under the $2.0 billion repurchase authorization.
Material changes, outlook and risks
- MGM acquired Empire City in January for approximately $865 million, including cash, a bridge facility and MGM shares. The acquisition contributed $37 million revenue from January 29 through quarter-end. Up to $50 million additional consideration may be payable if specified table-game licensing conditions are met.
- Management’s MGM 2020 Plan targets $300 million of annualized Adjusted EBITDA benefit: $200 million by the end of 2020 and a further $100 million by the end of 2021. The quarter included $41 million of restructuring costs and $12 million of plan implementation costs; the filing cautions that benefits may not be fully realized.
- Expected capital investment: $600–$650 million domestically, excluding $45–$50 million of Springfield closeout costs; and $350–$375 million at MGM China, including $250 million of Cotai closeout costs. Funding is expected from operating cash flow, cash and available credit facilities.
- MGM China’s gaming sub-concession was extended from March 31, 2020 to June 26, 2022. MGM paid approximately $25 million to Macau and $2 million to its concessionaire in connection with the extension, and must provide a bank guarantee of at least $101 million. An extension of its Macau gaming-profit tax exemption remained an application/expectation, not a confirmed approval.
- MGM’s master lease with MGP is a significant fixed financial commitment. Annual rent increased to $870 million after the Empire City and Park MGM lease amendments; from April 1, 2019, it increased to $946 million following the fourth lease year and Northfield addition. Most of the rent is fixed and contractually grows 2% annually through 2022. The Northfield operating-asset acquisition from MGP closed in April for approximately $301 million.
- The October 1, 2017 Las Vegas shooting litigation was in mediation. MGM said a settlement appeared reasonably possible at approximately $735 million, potentially rising to $800 million with greater claimant participation. Insurers had agreed to fund $751 million of available coverage. No settlement was described as finalized, and additional or nonparticipating claims remained possible.
- Adoption of lease accounting on January 1, 2019 resulted in recognition of $656 million of operating lease right-of-use assets and $580 million of lease liabilities; comparative periods were not recast. MGM reported $642 million of operating lease assets and $574 million of lease liabilities at March 31.
- Key stated risks include substantial debt and rent obligations, interest-rate and foreign-exchange exposure, competition, gaming regulation, reliance on Macau gaming promoters and the gaming sub-concession, execution of MGM 2020, construction and acquisition risks, and litigation. Approximately 30% of borrowings were variable-rate after swaps; a 1% Hong Kong dollar movement would affect the carrying value of cash or debt by the amounts disclosed in the filing.
Most important facts to verify
- Whether MGM’s profit decline is primarily tax-related and how much of the Q1 tax provision is nonrecurring versus indicative of future tax expense.
- Whether MGM 2020 delivers its stated $300 million annualized Adjusted EBITDA target, including the timing and costs of implementation.
- Cash generation and debt-service capacity after capital spending, dividends, and the materially higher MGP master-lease payments.
- Final settlement terms, claimant participation, insurance funding, and any exposure beyond the stated available coverage.
- Empire City and Northfield operating performance, any contingent Empire City consideration, and Macau’s approval of the requested tax-exemption extension.