MGM Resorts International — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparative period is Q1 2017. MGM Resorts operates casino resorts in the U.S. and Macau. MGM Cotai opened February 13, 2018. Results are unaudited.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $2.822 billion | $2.718 billion | +4% |
| Operating income | $360 million | $497 million | -27% |
| Income before taxes | $181 million | $315 million | -43% |
| Net income attributable to MGM | $223 million; $0.38 diluted EPS | $206 million; $0.36 diluted EPS | +8% |
| Adjusted EBITDA | $701 million | $763 million | -8% |
| Operating cash flow | $578 million | $405 million | +$172 million |
| Capital expenditures | $419 million | $456 million | -$37 million |
Operating cash flow less capital expenditures was approximately $159 million, versus negative $51 million in Q1 2017. This simple cash-flow measure is not company-defined free cash flow. The increase in reported net income occurred despite lower operating income and pretax income, principally because the company recorded an $85 million income tax benefit, compared with a $62 million tax provision a year earlier. Management said the effective tax rate would have been approximately a 14% provision absent specified tax items.
Segments and operating trends
- Domestic resorts: Revenue was $2.099 billion, down 1%; Adjusted Property EBITDA was $616 million, down 5%, with a 29.4% margin, 113 basis points lower. Las Vegas Strip room revenue fell 5%; occupancy was 89% versus 91%, ADR was $168 versus $172, and REVPAR was $150 versus $157.
- MGM China: Revenue was $596 million, up 25%, including $85 million from MGM Cotai. Adjusted Property EBITDA was $152 million versus $145 million, but margin declined to 25.5% from 30.5%, reflecting Cotai’s early ramp-up and Macau cost and business-mix factors. Excluding license fees, EBITDA increased 5%.
- Consolidated operating income was pressured by $67 million in preopening and start-up expenses, versus $15 million a year earlier. Management attributed the increase mainly to MGM Cotai, with additional spending for MGM Springfield and the Park MGM rebranding. Corporate expense rose to $100 million from $73 million.
Cash, debt and liquidity
- Cash and cash equivalents were $1.525 billion at March 31, 2018, including $726 million at MGM China and $280 million at MGP. Total current assets were $2.393 billion and current liabilities were $3.587 billion.
- Debt was $13.4 billion in principal amount ($13.282 billion net of discounts and issuance costs); reported long-term debt was $12.743 billion, with $540 million classified as current. Management estimated $1.8 billion of principal payments and $730 million of cash interest due in the next 12 months.
- Management said it expected to meet obligations and planned capital expenditures using cash, operating cash flow and revolving-credit availability. The company and relevant subsidiaries reported compliance with credit-facility covenants at quarter-end. MGM China was pursuing an amendment to extend maturity and reduce or reschedule amortization; completion was not reported.
- Q1 financing included $362 million of share repurchases and $68 million of common dividends. The company repurchased a further approximately $310 million of shares after quarter-end. The quarterly dividend was $0.12 per share, up from $0.11 a year earlier.
Outlook, material developments and risks
- Management expected MGM Springfield to open August 24, 2018. Its estimated development cost was approximately $960 million, excluding capitalized interest and land-related costs.
- For the remainder of 2018, planned capital expenditures were approximately $475 million at domestic resorts and corporate entities (excluding Springfield), $325 million on MGM Cotai, $295 million on Springfield, and $100 million for other MGM China improvements.
- After quarter-end, the Operating Partnership agreed to acquire the Hard Rock Rocksino Northfield Park for approximately $1.06 billion, with closing expected in the second half of 2018, subject to approvals and other conditions. MGM and its venture partner also agreed to sell Grand Victoria Casino; MGM expected approximately $162 million of net proceeds, subject to adjustments and closing conditions.
- CityCenter agreed to sell Mandarin Oriental Las Vegas and adjacent parcels for approximately $214 million. CityCenter recorded an impairment charge, but MGM’s share was fully offset by a reversal of basis differences.
- MGM faces lawsuits related to the October 1, 2017 Las Vegas shooting. The company said liability was reasonably possible, but it could not estimate a range; it believes losses in excess of insurance coverage are unlikely. Other key risks include substantial debt and fixed lease commitments, refinancing and interest-rate exposure, Macau regulatory and gaming risks, development and opening risks, and sensitivity to travel demand and competition.
- Q1 2018 adopted revenue-recognition rules retrospectively. The changes affected the classification of revenue and expense items but, according to the filing, did not materially affect operating income, net income or cash flows.
Important facts for investors to verify
- Whether MGM Cotai’s ramp-up improves Macau margins and whether its early operating costs or gaming trends persist.
- Progress on MGM China’s credit-facility amendment and refinancing of the substantial principal and interest due over the next 12 months.
- Whether domestic resort room demand, convention activity and margins recover after the reported Las Vegas declines.
- The timing, final costs and opening status of MGM Springfield, and actual spending against the company’s 2018 capital plans.
- Developments in the shooting-related litigation, including insurance coverage and any eventual estimate of potential liability.
- Closing, proceeds and conditions for the Rocksino acquisition and Grand Victoria sale, and the effect of post-quarter share repurchases on liquidity and leverage.
- How much of reported earnings reflects recurring operations versus the quarter’s tax benefits; the filing says provisional Tax Act accounting could be adjusted.