MGM Resorts International — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010; financial statements are unaudited. The company owns and operates casino resorts, primarily in Las Vegas, and holds significant joint-venture interests, including 50% of CityCenter. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net revenue | $1.538B | $1.494B | $2.995B | $2.993B |
| Operating income (loss) | ($1.049B) | $131.1M | ($1.060B) | $486.2M |
| Net income (loss) | ($883.5M) | ($212.6M) | ($980.2M) | ($107.4M) |
| Loss per share, diluted | ($2.00) | ($0.60) | ($2.22) | ($0.34) |
| Adjusted EBITDA | $242.8M | $318.1M | $398.7M | $663.0M |
Q2 net revenue rose 3% as reported, but included $90M of reimbursed costs versus $13M a year earlier; excluding reimbursed costs, revenue fell 2%. Six-month reported revenue was essentially flat; same-store revenue excluding reimbursed costs declined 3%. Management said adjusted EBITDA declined 24% in Q2 and 40% year to date; wholly owned resort Adjusted Property EBITDA declined 16% and 19%, respectively, on a same-store basis. The filing does not provide a single consolidated operating-margin figure on a directly comparable basis; management cited adjusted operating margins of 5% for both 2010 periods versus 11% for Q2 2009 and 10% for the 2009 six-month period, excluding specified items.
Cash flow, debt and liquidity
- Operating cash flow for the first six months was $349.8M, down from $388.0M. Investing cash outflow was $366.2M, including $79.1M of capital expenditures and $302M paid under the CityCenter completion guarantee. Financing cash outflow was $1.027B.
- Cash and cash equivalents were $1.013B at June 30, 2010, versus $2.056B at December 31, 2009. The company received an approximately $380M tax refund in Q2.
- Long-term debt was $13.047B, versus $12.976B at year-end; no debt was classified as current because management said it had the intent and ability to repay near-term maturities using its credit facility. Estimated debt fair value was $11.2B versus $13.0B book value.
- The amended senior credit facility included approximately $2.7B of term loans and a $2.0B revolver; available borrowing capacity was approximately $1.5B. The company reported compliance with its minimum EBITDA and capital-expenditure covenants at June 30.
- Q2 net interest expense was $291.2M versus $201.3M; six-month expense was $555.3M versus $372.9M. The company attributed the increase to higher borrowing rates and debt costs, and no interest was capitalized in 2010.
Material changes and unusual items
- A $1.122B impairment charge on MGM’s CityCenter investment drove the reported operating loss. The valuation used revised forecasts and an 11% discount rate; management described the impairment as other-than-temporary while stating it intended and believed it could retain the investment.
- MGM’s share of CityCenter residential inventory impairments was approximately $29M for Q2 and $114M for the first half, partly offset by its share of forfeited residential deposits: $28M in Q2 and $40M year to date.
- CityCenter’s reported operating loss was $128.0M for Q2 and $383.4M for the first half. MGM recognized a $142M pretax gain on debt extinguishment in Q1.
- Revenue trends were mixed: Q2 casino revenue fell 6%, including an 11% decline in table games revenue; table-games hold was about 100 basis points lower. Las Vegas Strip Q2 REVPAR declined 2% year over year. MGM cited weak consumer spending, unemployment, housing-market weakness, reduced airline capacity and lower convention demand.
- MGM issued $1.15B of 4.25% convertible notes due 2015 and $845M of 9% secured notes due 2020. It used proceeds to repay or temporarily repay credit-facility borrowings and spent $81M on capped-call transactions. It also repaid or repurchased near-term notes.
- MGM placed its 50% Borgata interest and related leased land into a divestiture trust under a New Jersey settlement requiring sale within 30 months. A July 2010 agreement to sell four Borgata ground leases and parcels for $73M remained subject to approvals and closing conditions.
Outlook, risks and contingencies
The filing gives no quantified company-wide earnings or revenue guidance. Management cautioned that interim results are not necessarily indicative of full-year results. It expected economic weakness and high unemployment to continue affecting customers, travel and spending, and emphasized cost control. CityCenter’s credit facility financial covenants begin June 30, 2011; MGM warned CityCenter may not meet them unless operating results improve significantly or debt is reduced. Further capital contributions may be requested if CityCenter cannot fund its obligations.
MGM had funded $302M under the CityCenter completion guarantee and recorded a $173M receivable for amounts expected to be repaid from residential proceeds. Its estimated remaining net obligation was $137M; the company said total net exposure could be as high as $330M, including estimated litigation costs and offsets. Contractor Perini alleged approximately $490M was owed and asserted a roughly $491M mechanic’s lien. MGM and CityCenter disputed the allegations; the potential loss beyond the claim, or any recovery on counterclaims, could not be reasonably estimated.
Other material risks include substantial indebtedness and refinancing needs, credit-facility restrictions, variable interest rates, dependence on Las Vegas and leisure/business travel, joint-venture risks, gaming regulation, and litigation. A 100-basis-point LIBOR increase above the facility’s 2% floor was estimated to increase annual interest cost by approximately $32M. The filing reported disclosure controls were effective and no material change in internal control during the quarter.
Key facts for investors to verify
- Whether CityCenter operating performance, residential sales and cash generation support the recorded investment value and avoid further impairments or partner funding calls.
- Actual exposure under the CityCenter completion guarantee, repayment of the $173M receivable, and resolution of Perini’s claim and mechanic’s lien.
- Near-term debt maturities, credit-facility availability and covenant compliance, including the ability to refinance or repay obligations.
- Whether operating trends improve: casino hold and volume, Las Vegas occupancy and REVPAR, convention demand, and results excluding reimbursed costs and unusual items.
- Completion and approvals for the Borgata land transaction and progress toward the required divestiture of MGM’s Borgata interest.