MGM Resorts International — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparative period is Q1 2014. Unaudited consolidated results include wholly owned domestic resorts and controlled MGM China; the company also holds significant unconsolidated investments, including CityCenter and Borgata. Dollar amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net revenue | $2,332 | $2,630 | Down 11% |
| Operating income | $395 | $416 | Down 5% |
| Adjusted EBITDA | $619 | $630 | Down 2% |
| Net income attributable to MGM Resorts | $170 | $103 | Up 66% |
| Diluted EPS | $0.33 | $0.20 | Up 65% |
| Cash from operating activities | $176 | $291 | Down 40% |
Revenue is reported net of promotional allowances. The improvement in attributable net income despite lower operating income primarily reflects a $56 million income tax benefit (versus a $3 million benefit in Q1 2014) and a lower allocation of net income to noncontrolling interests. The filing reports a 2015 effective income tax rate of (36%).
- Segments: Domestic resorts revenue rose 0.5% to $1,578 million; Adjusted Property EBITDA fell 3% to $390 million and margin declined about 100 basis points to 24.7%, mainly reflecting higher payroll costs. MGM China revenue fell 33% to $630 million; Adjusted Property EBITDA declined to $148 million from $241 million, with margin down about 200 basis points to 23.6%.
- Domestic operating indicators: Las Vegas Strip occupancy was 90% versus 92%; ADR was $152 versus $147, and REVPAR was $136 versus $135. Domestic table-games revenue fell 6%, while slots revenue rose 5%.
- Macau: VIP table-games revenue fell 45%, VIP turnover declined 51%, and main-floor table-games revenue fell 13%. VIP hold rose to 3.3% from 3.0%. Management cited challenging market conditions, Chinese policy initiatives, tighter transit-visa enforcement and the Macau casino smoking ban.
- Unconsolidated affiliates and unusual item: Income from unconsolidated affiliates increased to $117 million from $23 million. MGM’s share of CityCenter earnings included an $80 million gain from the settlement of construction litigation; Borgata also contributed higher earnings. The CityCenter gain is a significant nonrecurring component of reported performance.
- Cash and working capital: Cash and equivalents were $2,196 million at quarter-end, including $469 million at MGM China. Operating cash flow declined, particularly at MGM China ($79 million versus $160 million), and was also affected by higher interest payments. Investing cash flow was positive largely because $570 million of deposits matured; capital expenditures were $292 million, up from $193 million.
- Debt and liquidity: Long-term debt was $14,552 million at March 31; the company reported $1.1 billion of available borrowing capacity under its senior credit facility. Estimated cash interest payments over the next 12 months were $820 million. Debt fair value was estimated at $15.4 billion. Current liabilities fell from $3,408 million at year-end to $1,896 million, principally reflecting debt classification changes.
Material changes, outlook and risks
- In April 2015, holders converted substantially all of the $1.45 billion 4.25% convertible notes into approximately 78 million common shares. The company received approximately 6 million shares under related capped-call transactions and retired them. This subsequent event reduces debt but increases share dilution; quarter-end common shares outstanding were about 491 million, versus 563 million reported outstanding on May 5.
- Management gave planned investment estimates, not earnings guidance. For 2015 it expected domestic capital spending of $430 million excluding National Harbor and Springfield, plus $390 million for National Harbor and $95 million for Springfield; a $50 million investment in the Las Vegas Arena; and MGM China spending of about $75 million at MGM Macau and $1.1 billion on MGM Cotai. These are forward estimates and may change.
- Major projects: MGM Cotai was expected to open in Q4 2016, with an estimated $3.0 billion project budget; National Harbor was expected to be completed in Q4 2016, at about $1.3 billion; Springfield was expected in late 2017 or early 2018, at about $760 million; and the approximately $350 million Las Vegas Arena was scheduled for the first half of 2016. Estimates exclude certain costs, including capitalized interest and land costs where stated.
- Management expected long-term Macau market growth but acknowledged current weakness and competitive challenges. Results remain exposed to Macau VIP demand, gaming-promoter dependence, regulatory and visa policies, and the scheduled March 2020 expiration of MGM Grand Paradise’s gaming subconcession.
- Credit-facility covenant headroom warrants monitoring: the restricted group’s trailing-four-quarter EBITDA was $1.35 billion against a $1.25 billion minimum, which was scheduled to rise to $1.30 billion later in 2015. The company reported compliance with its senior and MGM China credit covenants at quarter-end. Variable-rate borrowings were 25% of total debt; a 100-basis-point increase in LIBOR and HIBOR was estimated to raise annual interest costs by $27 million and $10 million, respectively.
- The company’s foreign tax-credit deferred-tax-asset estimate depends on future MGM China profitability and distributions and assumptions about Macau tax exemptions; changes could materially affect tax expense. The company also disclosed ongoing shareholder litigation, including securities cases. After quarter-end, it removed the challenged change-of-control provision from its credit agreement; plaintiffs indicated they may seek attorneys’ fees if their claims are mooted.
- CityCenter declared a $400 million special dividend in April 2015, of which MGM received $200 million. This is a subsequent-period cash receipt, not Q1 operating cash flow.
Key investor verification points
- Assess whether Macau revenue and EBITDA stabilize, especially VIP turnover, main-floor demand and margins.
- Separate recurring operating performance from the $80 million CityCenter settlement gain and the unusually large tax benefit.
- Track operating cash conversion against debt service, planned project spending and the estimated $820 million of next-12-month cash interest.
- Confirm completion dates, remaining funding needs and cost assumptions for Cotai, National Harbor, Springfield and the arena.
- Review the effects of the convertible-note conversion on debt, share count and per-share results, and monitor covenant headroom and refinancing capacity.
- Monitor foreign-tax-credit assumptions, Macau regulatory and concession risks, and the outcome of pending litigation.