Business Context and Reporting Period
Company: MGM Mirage (now MGM Resorts International)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2003
Business Overview: The Company operates casino resorts in Las Vegas, Detroit, Biloxi, and Darwin, Australia, and holds 50% interests in the Monte Carlo Resort & Casino and Borgata (opened July 2003). Approximately 55% of common stock is owned by Tracinda Corporation (Kirk Kerkorian).
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2003 | Nine Months Ended Sep 30, 2003 |
|---|---|---|
| Net Revenues | $989,645 | $2,935,233 |
| Operating Income | $162,680 | $498,648 |
| Net Income (Continuing Ops) | $43,687 | $149,087 |
| Net Income (Total) | $47,209 | $151,962 |
| Diluted EPS (Total) | $0.31 | $0.99 |
| Cash from Operating Activities | N/A | $534,290 |
| Cash and Equivalents (Sep 30, 2003) | $153,806 | $153,806 |
| Total Long-Term Debt | $5,246,878 | $5,246,878 |
| Interest Coverage Ratio | 3.4x | N/A |
| Leverage Ratio (Debt/EBITDA) | 4.8x | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 4% quarter-over-quarter (Q3 2003 vs. Q3 2002) and 2% year-to-date. Growth was driven by higher hotel occupancy (92% vs. 89%), increased Average Daily Rates (ADR), and higher non-gaming spending.
- Profitability Decline: Operating income decreased 11% in Q3 and 19% year-to-date. Net income from continuing operations dropped 40% in Q3 and 41% year-to-date.
- Key Drivers of Decline:
- Gaming Hold Percentage: Lower table games hold percentages negatively impacted casino revenue despite a 6% increase in table games volume.
- Interest Expense: Net interest expense increased due to lower capitalized interest following the suspension of the Atlantic City project and the opening of Borgata.
- Expenses: Higher preopening and start-up expenses ($7.3M in Q3 vs. $4.0M in Q3 2002) and restructuring costs ($4.0M in Q3).
- Discontinued Operations: The Company classified Golden Nugget Las Vegas, Golden Nugget Laughlin, and its online gaming site (PLAYMGMMIRAGE.com) as discontinued operations. Net income from discontinued operations was $3.5M for Q3 2003 compared to a loss of $3.4M in Q3 2002.
Guidance, Outlook, and Risks
- Capital Projects: The Company is developing a permanent casino facility in Detroit (estimated cost $575M excluding city payments) and expanding Bellagio and MGM Grand Las Vegas. Construction in Detroit is currently subject to an injunction pending litigation regarding the developer selection process.
- Debt Management: In Q3 2003, the Company issued $600M of 6.00% Senior Notes due 2009 to reduce revolver borrowings. In October 2003, the Company secured commitments for a new $2.5B senior credit facility to replace existing lines.
- Asset Sales: The Company agreed to sell the Golden Nugget subsidiaries for approximately $215M (expected completion Q1 2004). Additionally, 315 acres of land near Shadow Creek were sold in October 2003 for ~$55M, with a $37M pretax gain expected in Q4 2003.
- Risks:
- Legal: Litigation in Detroit could delay the permanent casino construction.
- Market: Sensitivity to interest rate fluctuations (100 basis point change in LIBOR impacts annual interest cost by ~$17M) and foreign economic conditions affecting high-end leisure travel.
- Regulatory: Pending investigations into NYRA operations have halted work on the Aqueduct casino project.
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with the 5.5:1 leverage ratio and 2.5:1 interest coverage ratio under the amended credit facilities.
- Detroit Project Status: Monitor the resolution of the 6th Circuit Court of Appeals litigation regarding the Detroit casino ordinance and construction injunction.
- Asset Sale Completion: Confirm the closing of the Golden Nugget sale in Q1 2004 and the realization of the $37M gain on the Shadow Creek land sale.
- Hold Percentage Trends: Assess whether the lower table games hold percentage in Q3 2003 is a temporary anomaly or a structural shift affecting future margins.
- Capital Expenditures: Review the $358M in capital expenditures for the nine months ended Sep 30, 2003, to ensure alignment with projected returns from the Bellagio expansion and new entertainment venues.