MGM Resorts International — Q2 2018 Form 10-Q
Business context and period. MGM owns and operates casino resorts in the U.S. and Macau. This unaudited filing covers the three and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods. MGM adopted ASC 606 retrospectively, changing revenue and expense classifications but not materially affecting operating income, net income, or cash flow.
Financial results and key metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $2.859B | $2.652B | $5.681B | $5.370B |
| Operating income | $363M | $500M | $723M | $996M |
| Net income attributable to MGM | $124M | $210M | $347M | $416M |
| Diluted EPS | $0.21 | $0.36 | $0.60 | $0.72 |
| Adjusted EBITDA | $695M | $738M | $1.397B | $1.501B |
- Revenue and profit: Q2 revenue rose 8%, mainly on MGM Cotai’s opening and stronger domestic casino revenue. Operating income fell 27% and attributable net income fell 41%. Six-month revenue rose 6%, while operating income and attributable net income declined 27% and 17%, respectively.
- Segment performance: Q2 domestic resorts Adjusted Property EBITDA was $626M, down 5%, with a 28.9% margin, down 227 basis points. MGM China revenue rose 32% to $561M, including $185M from MGM Cotai; its Adjusted Property EBITDA was $120M, nearly flat, and margin fell to 21.4% from 28.0% as Cotai ramped up. For the six months, domestic Adjusted Property EBITDA declined 5% to $1.242B; MGM China increased 3% to $272M.
- Cash flow: Six-month operating cash flow was $1.093B, up from $939M. Capital expenditures were $862M, making operating cash flow less capital expenditures approximately $231M. Investing cash flow included a $200M CityCenter distribution. Cash and equivalents declined to $1.273B from $1.500B at year-end.
- Debt and liquidity: Long-term debt, net, was $13.513B at June 30, versus $12.751B at December 31; principal indebtedness was approximately $13.6B. Current liabilities were $3.065B and current assets $2.083B. MGM had no borrowings on its $1.25B parent revolver or the Operating Partnership’s $1.35B revolver; MGM China had $98M drawn on its $1.0B revolver. The company and credit-facility borrowers reported covenant compliance. Estimated cash interest for the next 12 months was $791M.
- Margins and operating drivers: Domestic casino revenue increased 8% in Q2, supported by table-games win and slots volume. Las Vegas Strip table-games win percentage was 25.2%, above the company’s stated normal range of 20%–23%. Domestic resort results were affected by Park MGM rebranding disruption and the prior-year Borgata property-tax settlement. MGM China’s lower margin reflected Cotai’s early operating ramp and lower win percentages.
Changes, outlook, and material matters
- Q2 results included higher G&A, marketing, repairs and maintenance, and depreciation, in part related to MGM Cotai. Six-month preopening and start-up expense increased to $86M from $36M, largely for MGM Cotai and MGM Springfield.
- The six-month income-tax benefit was $62M, compared with a $136M provision in 2017. It included a $72M noncash Tax Act measurement-period benefit and a tax benefit from extending Macau’s annual fee arrangement; management said some tax benefits could be reversed if future guidance changes.
- MGM issued $1.0B of 5.75% senior notes due 2025. It repurchased about 29M shares for $957M during the first half and authorized a new $2.0B repurchase program, with approximately $1.7B remaining at June 30. It paid $0.12 per share in quarterly dividends and said comparable 2018 dividends were intended, subject to conditions and board discretion.
- Management expected remaining-2018 capital spending of approximately $290M at domestic resorts and corporate entities excluding Springfield, $270M at MGM Cotai, $200M at MGM Springfield, and $35M for other MGM China improvements. MGM Springfield was expected to open August 24, 2018; the filing provides no numerical full-year earnings guidance.
- Subsequent developments: MGP completed its approximately $1.06B Rocksino acquisition on July 6, 2018. MGM entered an agreement to acquire Empire City for $850M, including assumed debt, stock, and cash; closing was expected in Q1 2019, subject to approvals. MGM and its venture partner agreed to sell Grand Victoria, with MGM expecting approximately $162M net proceeds; the transaction was expected to close in Q3 2018.
- Contingency: MGM and subsidiaries faced lawsuits related to the October 1, 2017 Las Vegas shooting. The company considered liability reasonably possible but could not estimate a range; it intended to defend the cases and stated that insurance was expected to cover losses, if any, within policy coverage.
- Key risks: substantial debt and fixed lease obligations to MGP; interest-rate, foreign-exchange, regulatory, competitive, construction and project-opening risks; dependence on Macau gaming promoters and the Macau subconcession; and the concentration of major resorts on the Las Vegas Strip. Management also cautioned that its continuous-improvement initiatives may not deliver expected results.
Important facts for investors to verify
- Whether MGM Cotai and MGM Springfield achieve expected operating performance and how Cotai’s ramp affects margins and preopening costs.
- Cash generation after capital spending, planned development commitments, debt service, and further share repurchases and dividends.
- Progress on Empire City and Grand Victoria transactions and the Rocksino acquisition’s financing and performance.
- Developments in October 1 litigation, insurance coverage, and any resulting liability or legal costs.
- Tax Act accounting updates and the recoverability of foreign tax credits, alongside debt covenants, refinancing needs, and variable-rate exposure.