MGM Resorts International — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. Unless otherwise noted, amounts are in U.S. dollars. MGM operates wholly owned domestic resorts and holds a controlling interest in MGM China; it also has investments in unconsolidated resorts.
Financial results and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net revenue | $2.281 billion | $2.485 billion | $6.998 billion | $7.696 billion |
| Operating income | $297 million | $286 million | $1.041 billion | $1.057 billion |
| Net income attributable to MGM | $66 million | $(20) million | $334 million | $192 million |
| Diluted earnings per share | $0.12 | $(0.04) | $0.61 | $0.39 |
| Adjusted EBITDA | $526 million | $506 million | $1.724 billion | $1.737 billion |
Q3 operating income increased despite lower consolidated revenue, while nine-month operating income and Adjusted EBITDA were slightly lower year over year. Q3 net income attributable to MGM improved to a profit from a loss in the prior-year quarter. The company recorded income tax benefits of $16 million in Q3 and $77 million year to date.
- Segments: Q3 domestic resort revenue rose 4% to $1.636 billion and Adjusted Property EBITDA rose 25% to $411 million; its EBITDA margin increased 435 basis points to 25.1%. MGM China revenue fell 33% to $529 million and Adjusted EBITDA fell to $128 million, with margin down 268 basis points to 24.2%.
- Cash flow: Nine-month operating cash flow was $738 million, down from $1.023 billion. Capital expenditures were $1.001 billion, versus $617 million; operating cash flow less capital expenditures was approximately negative $263 million.
- Liquidity and debt: Cash and cash equivalents were $1.808 billion at September 30, including $808 million at MGM China. Debt was $12.821 billion; $1.2 billion was available under the senior credit facility. Management cited approximately $777 million of cash interest payments expected over the next 12 months. Debt due within one year was classified as long-term because the company said it had the intent and ability to refinance it.
- Balance sheet: Total assets were $26.680 billion and total stockholders’ equity was $9.240 billion. Cash declined from $1.714 billion at year-end 2014, while total debt declined from $14.159 billion.
Material changes and unusual items
- Macau weakness drove the consolidated revenue decline: nine-month MGM China revenue decreased 33%, with VIP table games revenue down 43% and main-floor table games revenue down 22%. VIP turnover fell 53%; higher hold percentages partly offset lower play.
- Domestic resorts benefited from stronger gaming and hotel results. Las Vegas Strip Q3 occupancy was 96%, ADR was $141, and REVPAR was $135; REVPAR increased 8% year over year. Management also cited robust convention business.
- CityCenter recorded a $160 million gain in Q1 from construction litigation and related settlements; MGM recognized its 50% share, $80 million. CityCenter also distributed $400 million, of which MGM received $200 million.
- In April, holders converted substantially all of $1.45 billion of convertible notes into approximately 78 million MGM shares. The conversion increased share count and reduced reported debt; the company also retired approximately 6 million shares received through related capped-call transactions.
- Cash operating cash flow was lower year over year, in part because MGM China operating cash flow declined to $316 million from $572 million. Capital spending rose substantially, including spending on MGM Cotai and domestic developments.
- Following a second-quarter interim impairment test prompted by weaker MGM China cash flows and market capitalization, management reported that MGM China goodwill was not impaired; estimated fair value exceeded carrying value by 9%. No third-quarter interim test was deemed necessary.
Outlook, management commentary, and risks
- Management expected MGM Cotai, with an estimated $3.0 billion project budget, to open in Q4 2016. MGM National Harbor was estimated at $1.3 billion, with completion expected in Q4 2016. MGM Springfield was expected to be completed in late 2018; its design and cost review was ongoing, and management said costs could exceed the prior $760 million estimate. These estimates exclude specified items such as capitalized interest and land-related costs.
- For full-year 2015, the company anticipated capital expenditures of approximately $430 million at domestic resorts and corporate entities excluding National Harbor and Springfield, $370 million for National Harbor, $20 million for Springfield, and a $50 million Las Vegas Arena investment. MGM China expected approximately $600 million for MGM Cotai and $60 million for MGM Macau improvements.
- The August 2015 Profit Growth Plan was expected to deliver approximately $300 million in annualized Adjusted EBITDA benefit, fully realized by the end of 2017. Management said the plan had begun to show results. Q3 corporate expense included $18 million of costs related to the plan and strategic review; nine-month costs were $19 million.
- On October 29, 2015, after quarter-end, MGM announced a proposed MGM Growth Properties REIT and IPO. The plan contemplated a roughly 30% public economic interest in an operating partnership, approximately $4 billion of related debt, and a long-term triple-net lease to MGM. Completion was targeted for Q1 2016 but remained subject to approvals, financing, market conditions, and other conditions; the company could change or abandon the proposal.
- Management described Macau as increasingly challenging amid weaker Chinese economic conditions, policy initiatives, and the casino smoking ban, while noting transit-visa restrictions were eased in July 2015. The company cited long-term growth potential but no formal consolidated earnings guidance is provided in the supplied filing text.
- Key risks include substantial indebtedness, refinancing and covenant constraints, Macau market and gaming-promoter exposure, project cost and completion risks, possible impairment, foreign tax-credit valuation assumptions, regulatory approvals, competition, and travel or economic disruptions. A securities class-action settlement for $75 million, funded by directors’ and officers’ insurers, was awaiting final court approval; a hearing was scheduled for December 15, 2015.
Important facts for investors to verify
- Whether Macau revenue, VIP turnover, and MGM China margins stabilize, and how MGM Cotai’s schedule and total cost develop.
- Whether domestic resort gains and the Profit Growth Plan’s projected $300 million annualized benefit are sustained and achieved.
- How planned construction spending, operating cash generation, interest payments, and debt refinancing affect liquidity and leverage.
- Whether the proposed REIT and IPO receive approvals and financing on terms that deliver the expected proceeds and debt reduction.
- Whether MGM China goodwill and foreign tax-credit deferred tax assets remain supportable under future operating results and tax assumptions.