MGM Resorts International — Q2 2017 Form 10-Q
Business context and reporting period. MGM Resorts owns and operates casino resorts, with two reportable segments: domestic resorts and MGM China. This unaudited filing covers the three and six months ended June 30, 2017; comparisons are with the same 2016 periods. Amounts below are in U.S. dollars.
Key financial results
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net revenue | $2.642 billion | $2.270 billion | $5.350 billion | $4.479 billion |
| Operating income | $501 million | $769 million | $998 million | $1.085 billion |
| Net income attributable to MGM | $211 million | $474 million | $417 million | $541 million |
| Diluted earnings per share | $0.36 | $0.83 | $0.72 | $0.95 |
| Adjusted EBITDA | $740 million | $1.002 billion | $1.503 billion | $1.545 billion |
- Revenue rose 16% in Q2 and 19% in the first half. Growth mainly reflected the Borgata acquisition and MGM National Harbor opening, with first-half contributions also from domestic non-casino revenue and MGM China gaming revenue.
- Operating income and attributable net income fell year over year, despite higher revenue. A major factor was the prior-year CityCenter gain on the sale of Crystals: MGM recorded a $406 million gain in Q2 2016 and $397 million in the first half of 2016.
- Domestic resorts’ same-store Adjusted Property EBITDA increased 1% in Q2 and 8% in the first half; same-store margins were 30.8% and 31.7%, respectively. MGM China’s Adjusted EBITDA was $116 million in Q2, down from $119 million, and $259 million in the first half, up from $233 million; its reported margins were 25.9% and 27.3%, respectively.
- Las Vegas Strip first-half REVPAR increased 5% year over year; Q2 occupancy was 94%, ADR $161 and REVPAR $151. Domestic same-store Q2 casino revenue decreased 5%, primarily reflecting lower table-games revenue and hold.
Cash flow, liquidity and debt
- First-half operating cash flow was $939 million, versus $614 million in 2016. Investing cash outflow was $593 million, including $873 million of capital expenditures; financing cash outflow was $33 million. Cash increased $310 million to $1.757 billion at June 30.
- Cash included $403 million at MGM China and $377 million at MGP. Current assets were $2.485 billion and current liabilities $2.680 billion.
- Principal debt outstanding was approximately $13.3 billion; reported debt carrying value, net of discounts and issuance costs, was $13.198 billion. The estimated fair value of long-term debt was $14.1 billion. The filing estimates $717 million of cash interest payments over the next 12 months.
- The company reported compliance with its credit-facility covenants. The $1.25 billion corporate revolving facility and $600 million MGP revolving facility were undrawn at quarter-end. MGM China had $602 million drawn on its $1.45 billion revolver; MGM National Harbor had $30 million drawn on its $100 million revolver.
- On July 24, 2017, MGM redeemed $475 million of 11.375% notes due 2018; it expected an approximately $30 million early-retirement loss.
Material changes, outlook and risks
- Q2 results included a $41 million credit to NV Energy exit expense after the obligations were modified, shortening the period of certain charges to 2022. Borgata recorded a $72 million property-tax settlement; MGM’s share of the benefit was approximately $36 million after its payment to Boyd Gaming under the acquisition agreement.
- Management cited stronger domestic resort margins, robust Las Vegas convention business and improving Macau market trends. Macau gross gaming revenue increased 17% in the first half, according to the filing. MGM cautioned that Macau performance depends on China’s economy, policy, travel restrictions and gaming-promoter activity.
- MGM Cotai was expected to open in Q4 2017, with a project budget of approximately $3.3 billion, excluding specified development fees, capitalized interest and land costs. The Macau government would determine table allocation, expected to be below the resort’s 500-table capacity. MGM Springfield was expected to be completed in late 2018, at an estimated cost of approximately $960 million, excluding capitalized interest and land costs.
- For the remainder of 2017, management expected capital expenditures of approximately $390 million at domestic resorts and corporate entities (excluding National Harbor and Springfield), $40 million at National Harbor, $215 million at Springfield, and $575 million at MGM Cotai plus $37 million at MGM Macau. These are estimates, not earnings guidance.
- Key risks include substantial debt and fixed/percentage rent obligations under the MGP master lease; development and opening risks at Cotai and Springfield; Macau gaming-concession renewal and government table allocation; interest-rate and foreign-exchange exposure; and uncertainty in realizing foreign tax-credit deferred tax assets. A 100-basis-point increase in LIBOR was estimated to raise annual interest cost by $16 million after swaps; the comparable HIBOR increase was estimated at $22 million.
- The effective tax rate was 23.5% for Q2 and 21.6% for the first half, versus 1.6% and 4.7% in 2016. The prior-year periods included an approximately $85 million tax benefit from reducing the valuation allowance on foreign tax credits. Management’s tax estimates depend on future profitability, distributions and Macau tax arrangements.
- A shareholder’s appeal concerning the court-approved settlement of legacy securities litigation was scheduled for oral argument on September 13, 2017. The company said other routine litigation was not expected to have a material adverse effect. The filing also identifies potential U.S. tax-policy changes as a risk.
Important facts for investors to verify
- Whether MGM Cotai opened on schedule, its final cost, and the Macau government’s gaming-table allocation.
- Progress, cost and timing for MGM Springfield and the company’s remaining development spending.
- Debt maturities, refinancing costs, available revolver capacity and the ability to meet substantial lease and interest obligations from operating cash flow.
- Whether Macau revenue and MGM China margins sustain improvement, given gaming mix, hold volatility, mainland China policy and concession-renewal uncertainty.
- Future tax-rate and foreign-tax-credit valuation-allowance changes, including developments in Macau tax arrangements and U.S. tax policy.
- Outcome of the securities-settlement appeal and any material change in litigation or other contingencies.