MGM Resorts International — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; comparative periods ended September 30, 2012. Amounts below are U.S. dollars. MGM Resorts operates domestic casino resorts and controls MGM China; it also has significant unconsolidated investments, including a 50% interest in CityCenter.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net revenue | $2.463bn | $2.255bn | $7.296bn | $6.866bn |
| Operating income | $247.8m | $137.4m | $781.2m | $505.4m |
| Net income (loss), consolidated | $23.6m | $(154.7)m | $15.6m | $(428.4)m |
| Net loss attributable to MGM Resorts | $(31.9)m | $(181.2)m | $(118.3)m | $(543.9)m |
| Adjusted EBITDA (non-GAAP) | $489.9m | $372.4m | $1.556bn | $1.304bn |
| Operating margin | 10.1% | 6.1% | 10.7% | 7.4% |
Margins are calculated using reported net revenue. Adjusted EBITDA is a company-defined non-GAAP measure and is not a substitute for operating income, net income, or operating cash flow.
- Segment results: Q3 domestic resort revenue rose 4% to $1.548bn and Adjusted Property EBITDA rose 8% to $350.1m. MGM China revenue grew 22% to $808.5m and Adjusted EBITDA rose to $190.8m. For the first nine months, domestic revenue grew 2% and Adjusted Property EBITDA 10%; MGM China revenue grew 15% and Adjusted EBITDA 14%.
- Cash flow: Nine-month operating cash flow was $1.096bn, versus $887.3m. Capital expenditures were $379.6m, implying approximately $716.2m of operating cash flow less capital expenditures, compared with approximately $570.5m in 2012. Investing used $371.4m; financing used $891.9m. Cash declined $168.1m to $1.375bn.
- Balance sheet and liquidity: At September 30, cash was $1.375bn, current assets $2.284bn, current liabilities $2.161bn, and working capital $122.5m. Long-term debt was $13.035bn, down from $13.589bn at year-end 2012; estimated debt fair value was $14.2bn. The company reported $1.09bn available under its senior credit facility. Debt includes $553m of MGM China facility borrowings.
- Interest: Nine-month interest expense declined to $648.9m from $836.4m, primarily reflecting the December 2012 refinancing. The filing estimates $784m of cash interest payments and $537m of principal maturities within 12 months, excluding MGM China.
Material changes versus the prior period
- Consolidated revenue increased 9% in Q3 and 6% year to date, mainly due to casino growth. Operating income improved substantially, while MGM Resorts’ attributable net loss narrowed but remained a loss.
- Domestic Q3 table-games volume rose 5%; hold was 21.5%, versus 20.4%. Las Vegas Strip occupancy was 93%, ADR $127, and REVPAR $117, compared with 92%, $124, and $114, respectively.
- MGM China Q3 VIP turnover grew 28% and main-floor table-games drop 10%. VIP hold declined to 2.8% from 3.0%, while main-floor hold increased to 35.3% from 29.6%.
- Lower interest expense and improved CityCenter results contributed to higher operating performance. Corporate and other Adjusted EBITDA loss narrowed to $51.0m for Q3 from $104.9m.
- Property transactions included a $20.4m Q3 impairment on Nevada land. Nine-month charges also included $36.6m for the Grand Victoria investment and $44.5m for corporate buildings. The prior-year period included an $85.0m Grand Victoria impairment.
Outlook, risks, contingencies, and unusual items
- Development and spending: MGM Resorts planned approximately $2.6bn for MGM Cotai, excluding land and capitalized interest, for a resort expected to include about 1,600 rooms, 500 gaming tables, and 2,500 slots. The filing identifies opening by January 2018 as a risk. MGM China expected approximately $320m of 2013 capital improvements, including about $270m for Cotai. The company expected approximately $325m of corporate and domestic resort capital expenditures in the 12 months ending December 31, 2013.
- Debt covenants and rate exposure: The parent’s credit facility requires minimum trailing EBITDA of $1.05bn at September 30, 2013; reported covenant EBITDA was $1.26bn. Variable-rate borrowings were 26% of total borrowings; a 100-basis-point LIBOR increase was estimated to raise annual interest cost by $29m. MGM China was in compliance with its facility covenants.
- CityCenter and Perini litigation: CityCenter’s construction dispute remains material; trial was set for April 28, 2014. MGM Resorts estimated probable liability of $143m for the lawsuit and had accrued $82m under its completion guarantee, net of available condo proceeds and estimated offsets. It had funded $711m under the guarantee. These are distinct disclosed estimates and should not be treated as directly interchangeable.
- Harmon: A court authorized demolition of the structurally deficient Harmon building. The company stated it did not believe it would have to fund additional remediation under its guarantee, but acknowledged that this view depended on developing litigation and other factors. No contingent Harmon payment to CityCenter was accrued.
- Post-quarter CityCenter refinancing: In October 2013, CityCenter entered a $1.775bn secured credit facility, redeemed its existing notes, and converted approximately $738m of sponsor notes to equity. MGM Resorts expected to record its share of an approximately $70m fourth-quarter non-operating debt-retirement loss.
- Taxes and other items: A $65m first-quarter tax provision increase followed remeasurement of MGM Grand Paradise deferred taxes; a tax settlement reduced provision by $38m. A U.S. federal deferred-tax valuation allowance increased provision by $64m for the first nine months, including $38m in Q3. The Nevada complimentary-meal tax dispute was settled without financial-statement impact.
- Additional risks: Significant leverage and refinancing needs; competition and economic sensitivity; Macau gaming regulation and reliance on junket operators; construction and joint-venture exposure; pending securities litigation; and labor negotiations. Approximately 30,000 employees were covered by collective bargaining agreements, with most Las Vegas agreements expired and extended while negotiations continued. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether revenue and EBITDA growth—particularly in Macau—persists after accounting for gaming hold variability and non-GAAP adjustments.
- Debt maturity, interest-payment, covenant, and available-credit assumptions, including the effect of rates and planned capital spending.
- Final exposure and timing for the Perini case, CityCenter completion guarantee, and Harmon demolition; compare the $143m probable lawsuit estimate with the $82m accrued guarantee liability and related offsets.
- Actual Cotai construction costs, funding needs, schedule, and opening progress, along with the expected CityCenter refinancing charge.
- Tax-asset recoverability, future tax provisions, labor agreement outcomes, and the status of MGM’s New Jersey licensure and Borgata interest.