MGM Resorts International — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; filed August 8, 2012. MGM Resorts owns and operates casino resorts in the U.S. and, through its 51% controlling interest, MGM Macau. Results include MGM China only from June 3, 2011, making year-over-year comparisons uneven.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net revenue | $2.324 billion | $1.806 billion | $4.611 billion | $3.319 billion |
| Operating income | $175 million | $3.684 billion | $368 million | $3.853 billion |
| Net income (loss) attributable to MGM Resorts | ($145 million) | $3.442 billion | ($363 million) | $3.352 billion |
| Adjusted EBITDA (non-GAAP) | $501 million | $366 million | $932 million | $688 million |
| Operating cash flow | Not stated separately | Not stated separately | $512 million | $297 million |
Revenue grew 29% in Q2 and 39% year to date, substantially reflecting the inclusion of MGM China for a full period in 2012 versus only from June 3 in 2011. Adjusted EBITDA increased 37% in Q2 and 35% year to date. The prior-year operating and net income figures were dominated by a $3.5 billion non-cash gain on obtaining control of MGM China; 2012 results instead included an $85 million impairment of the Grand Victoria investment. Q2 2012 operating margin was approximately 7.5% and Adjusted EBITDA margin approximately 21.6%; the comparable 2011 operating margin is distorted by the acquisition gain.
Domestic resort revenue was essentially flat in Q2 and rose 3% for the first half; domestic Adjusted Property EBITDA increased 4% and 6%, respectively. Las Vegas Strip occupancy was 94% in Q2, with ADR of $131 and REVPAR of $124; REVPAR rose 5% year over year. MGM China reported Q2 revenue of $709 million and Adjusted Property EBITDA of $187 million. Management reported underlying MGM Macau revenue growth of 6% for the quarter, while VIP turnover fell 6%; comparisons reflect the change in consolidation.
Cash, debt and liquidity
- Cash and cash equivalents were $1.732 billion at June 30, 2012, down $134 million from year-end; $658 million was held by MGM China.
- Six-month operating cash flow was $512 million. Capital expenditures were $216 million, versus $85 million in the prior-year period. Cash used in investing activities was $225 million and cash used in financing activities was $422 million.
- Total reported debt was $13.367 billion, including $142 million current; debt carrying value was $13.225 billion long term. Estimated debt fair value was $14.1 billion. Cash less reported debt was approximately $11.6 billion of net debt.
- The senior credit facility had approximately $855 million of available borrowing capacity. MGM Resorts reported $1.3 billion of trailing-twelve-month covenant EBITDA against a $1.2 billion minimum requirement and stated it was in compliance with applicable covenants.
- The company issued $850 million of 8.625% notes due 2019 and $1.0 billion of 7.75% notes due 2022, using proceeds principally to repay credit-facility debt. The senior facility was amended, extending approximately $1.8 billion of loans and commitments to February 2015. Its weighted-average borrowing rate was 5.2% at quarter-end, versus 7.0% at December 31, 2011.
Material changes, outlook and risks
- Taxes: A new valuation allowance for U.S. deferred tax assets added $181 million of tax provision for the first half. A Macau tax arrangement covering 2007–2011 distributions generated a net $15 million increase in the first-half tax benefit, including reversal of previously accrued taxes. A requested extension of the arrangement remained pending; without it, later distributions may be subject to Macau complementary tax.
- CityCenter: MGM Resorts had funded $670 million under its completion guarantee, recorded a $101 million receivable and accrued a remaining estimated net obligation of $18 million. Contractor claims exceeded the accrual by about $189 million, which management said exceeded its best estimate of liability. CityCenter’s Perini litigation remained unresolved; the court ruled the mechanic’s lien valid, subject to later determination of amount and potential offsets. The trial was set for June 2013. CityCenter planned to demolish the Harmon; the court authorized demolition in July 2012 subject to conditions. Estimated demolition cost was approximately $31 million, and the company’s view that it would not fund additional remediation was subject to changing circumstances.
- Other unusual items: MGM Resorts recorded an $85 million impairment on its 50% Grand Victoria investment, citing weaker performance, market-share loss and lower forecast cash flows. Silver Legacy filed for Chapter 11 in May 2012; its debt was non-recourse to MGM Resorts and the investment carrying value had already been reduced to zero.
- Management outlook: No formal earnings guidance was provided. Management expected to meet debt service and planned capital needs through operating cash flows, cash and available credit. Excluding MGM China, approximately $997 million of principal and $1.0 billion of interest were expected to come due or be paid through June 30, 2013. Domestic capital expenditures were projected at approximately $365 million for 2012, including about $170 million for the remainder of the year; management anticipated a similar level of domestic resort investment in 2013, subject to board approval.
- Development and principal risks: MGM China was pursuing government approval to lease a Cotai site for a potential integrated resort; construction timing depended on approval. Risks include high leverage and refinancing needs, credit-facility restrictions, sensitivity to economic and travel conditions, Las Vegas competition, gaming regulation and licensing, Macau VIP reliance on junket operators, interest-rate and foreign-exchange exposure, and CityCenter construction disputes. A 100-basis-point rate increase was estimated to raise annual interest cost by about $13 million on the senior facility and $6 million on MGM Grand Paradise debt.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to its previously disclosed risk factors.
Important facts for investors to verify
- Reconcile reported revenue growth and year-over-year earnings with MGM China’s differing consolidation periods and the 2011 $3.5 billion acquisition gain.
- Assess debt maturities, cash interest requirements, credit-facility availability, covenant headroom and the ability to refinance obligations as they fall due.
- Track the CityCenter completion-guarantee exposure, Perini lien and litigation outcome, Harmon demolition costs, and possible effects on MGM Resorts’ funding obligations.
- Monitor MGM China’s operating trends, VIP turnover and hold, Macau tax treatment, gaming subconcession and progress on the proposed Cotai development.
- Review the assumptions behind the Grand Victoria impairment and the potential financial effects of the Nevada complimentary-meal sales-tax dispute.