Business Context and Reporting Period
Company: MGM MIRAGE (formerly MGM Grand, Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2003
Business Overview: One of the world's largest gaming companies, operating a portfolio of casino resorts primarily in Las Vegas, Nevada, with additional properties in Primm (NV), Detroit (MI), Biloxi (MS), Atlantic City (NJ), and Darwin (Australia). The company operates in a single segment: casino resorts.
Key Financial Metrics
| Metric | 2003 | 2002 |
|---|---|---|
| Net Revenues | $3,908.8 million | $3,792.2 million |
| Operating Income | $713.1 million | $757.7 million |
| Net Income | $243.7 million | $292.4 million |
| Diluted EPS (Net Income) | $1.61 | $1.83 |
| Total Debt (incl. capital leases) | $5,533.5 million | $5,222.2 million |
| Cash and Cash Equivalents | $178.0 million | $211.2 million |
| Operating Cash Flow | $703.0 million | $828.0 million |
| Capital Expenditures | $550.2 million | $300.0 million |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 3% to $3.91 billion, driven by a 5% increase in room revenues and 8% in food and beverage, partially offset by a 3% decline in table games revenue due to the Iraq war and SARS outbreak in early 2003.
- Profitability Decline: Operating income decreased 6% to $713 million. This was primarily due to a 6% increase in payroll and benefits expenses (driven by a 19% rise in health insurance costs and union contract wage increases) and higher interest expense due to reduced capitalized interest.
- Debt Increase: Total debt increased approximately 6% to $5.53 billion, largely due to the issuance of $600 million in 6% Senior Notes in September 2003 to fund capital expenditures and share repurchases.
- Discontinued Operations: The company classified the Golden Nugget Subsidiaries and its online gaming website as discontinued operations in 2003. The sale of the Golden Nugget Subsidiaries closed in January 2004 for net proceeds of $213 million.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Capital Investment: The company expects to continue heavy investment in existing resorts in 2004, including the completion of the Bellagio expansion (928-room tower) and a new Cirque du Soleil show at MGM Grand Las Vegas.
- Borgata Impact: The Borgata (50% owned joint venture in Atlantic City), which opened in July 2003, is expected to have a more meaningful positive impact on results in 2004 with a full year of operations.
- Detroit Development: Plans for a permanent $575 million casino in Detroit are currently suspended pending the resolution of the Lac Vieux litigation, which has resulted in a court injunction prohibiting construction.
- UK Expansion: The company has entered into several strategic agreements in the United Kingdom (Bristol, London, Newcastle, Sheffield) contingent on proposed gaming law reforms.
Risks and Contingencies
- Legal Proceedings: Significant litigation includes the Lac Vieux case affecting Detroit development, class-action slot machine litigation (Poulos), and shareholder litigation regarding the Boardwalk acquisition.
- Regulatory Environment: Operations are subject to extensive regulation in Nevada, Michigan, Mississippi, New Jersey, and Australia. Changes in gaming laws or tax rates could materially impact results.
- Competition: Intense competition in Las Vegas, including a new resort expected to open in 2005, and potential expansion of Native American gaming in California.
- Debt and Liquidity: The company carries significant indebtedness ($5.5 billion). Credit ratings were downgraded to below investment grade (BB+ by S&P, Ba1 by Moody's) in 2002 and 2003, though the company successfully amended credit facilities and issued new debt.
Key Facts for Investor Verification
- Asset Sales: Verify the closing and final proceeds of the Golden Nugget Subsidiaries sale (closed Jan 2004) and the proposed sale of MGM Grand Australia (agreed Feb 2004 for approx. $150 million).
- Detroit Litigation: Monitor the status of the Lac Vieux litigation, as it directly blocks the construction of the permanent Detroit casino facility.
- UK Regulatory Approval: Track the progress of UK gambling legislation reforms, which are a condition precedent for the company's multiple UK joint venture agreements.
- Debt Covenants: Review compliance with financial covenants in the Senior Credit Facility (max leverage ratio of 5.5:1, minimum coverage ratio of 2.75:1).
- Share Repurchases: Note that the company has 8 million shares remaining available for repurchase under the November 2003 authorization.