MGM Resorts International — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. MGM Resorts owns and operates casino resorts, with reportable segments in wholly owned domestic resorts and MGM China; it also has interests in CityCenter and other affiliates. Amounts below are in U.S. dollars.
Financial results and liquidity
- Revenue: Q2 net revenue was $2.481 billion, up 7% year over year; first-half revenue was $4.833 billion, up 5%. Q2 casino revenue increased 11%, the primary driver of consolidated growth.
- Profitability: Q2 operating income was $232 million versus $175 million; first-half operating income was $533 million versus $368 million. Operating margins, calculated from reported figures, were approximately 9.3% and 7.5% for Q2 2013 and Q2 2012, and 11.0% and 8.0% for the respective six-month periods.
- Net loss: Consolidated net loss was $31 million for Q2 and $8 million for the first half. Net loss attributable to MGM Resorts was $93 million for Q2 ($0.19 per share) and $86 million for the first half ($0.18 per share), improving from $145 million and $363 million, respectively, in 2012.
- Adjusted EBITDA: $541 million in Q2, up from $501 million; $1.066 billion for the first half, up from $932 million. This is a non-GAAP measure and excludes certain expenses, including property transactions and depreciation.
- Segment performance: Q2 domestic-resort revenue was $1.536 billion, up 2%, and Adjusted Property EBITDA was $376 million, up 9%. MGM China revenue was $835 million, up 18%, and Adjusted EBITDA was $205 million. First-half Adjusted Property EBITDA increased 11% at domestic resorts and 10% at MGM China.
- Cash flow: First-half operating cash flow was $730 million, compared with $512 million. Investing used $240 million, including $243 million of capital expenditures; financing used $754 million. Cash declined $265 million to $1.279 billion, including $840 million held at MGM China.
- Debt and liquidity: Long-term debt was $13.112 billion at June 30, down from $13.589 billion at year-end; estimated fair value was $13.9 billion. The company reported $1.16 billion of available borrowing capacity under its senior credit facility. Current assets were $2.210 billion and current liabilities $2.098 billion. The company cited $687 million of non-MGM China principal maturities and an estimated $806 million of cash interest due within 12 months.
Changes versus the prior period
- Revenue and operating income improved in both Q2 and the first half, supported by casino growth and higher resort earnings. MGM China’s VIP turnover and main-floor table-game volume grew, while domestic room revenue benefited from higher rates and occupancy.
- Interest expense fell by $62 million in Q2 and $121 million in the first half, primarily reflecting the December 2012 refinancing. In May 2013, the term loan B rate was reduced by 75 basis points.
- Cash from operations increased year over year, partly reflecting higher MGM China operating cash flow and working-capital movements. Cash nevertheless fell, in part due to debt repayment and distributions to noncontrolling owners.
- Debt declined following repayment at maturity of $462 million of 6.75% senior notes in April. The company also recorded $44.5 million of corporate-building impairment and a $36.6 million impairment of its Grand Victoria investment.
Outlook, material items and risks
- Management expected improving Las Vegas and Macau market trends to continue through the rest of 2013, while acknowledging economic uncertainty in China and Macau’s new smoking restrictions. These are expectations, not guarantees.
- MGM Resorts planned a roughly $2.6 billion MGM Cotai resort development, excluding land and capitalized interest, with approximately 1,600 rooms, 500 gaming tables and 2,500 slot machines. The filing cited 2013 capital spending expectations of $350 million at domestic resorts and $350 million at MGM China, including approximately $290 million for Cotai.
- CityCenter litigation and guarantee: Perini asserted substantial construction claims; management said defendants could be liable for up to $178 million, before possible counterclaim offsets. MGM had funded $704 million under its completion guarantee, accrued $59 million, and said a further $20 million liability was reasonably possible. CityCenter held $112 million of condominium proceeds available for qualifying construction-lien claims after resolution of the litigation. Trial was scheduled to begin February 2014.
- Harmon: Engineering reports described significant structural defects and potential earthquake-related collapse; CityCenter sought court approval to demolish the building. MGM estimated demolition at approximately $30 million and stated it did not believe it would fund additional Harmon remediation under its guarantee, while noting the view could change as events developed.
- Tax and unusual items: First-quarter tax effects included a $65 million increase in tax provision from remeasurement of MGM Grand Paradise’s deferred tax liability, a $38 million provision reduction following an IRS settlement, and a $26 million first-half provision increase from a U.S. federal deferred-tax valuation allowance. Q2 included $17 million of CityCenter statutory-interest expense in non-operating items. Nevada’s settlement and legislation resolved disputes over tax on complimentary meals without financial-statement impact.
- Other risks: High indebtedness, credit-facility covenants, variable interest rates, gaming regulation and competition, Macau gaming-junket dependence, Cotai construction and licensing, CityCenter exposures, and potential asset impairments remain material. Collective bargaining agreements covering most Las Vegas union employees expired May 31, 2013; negotiations were ongoing, with agreements extended indefinitely subject to termination rights.
- The senior credit facility required minimum trailing-four-quarter EBITDA of $1.0 billion at June 30, rising to $1.05 billion for the next two quarter-ends; reported covenant EBITDA was $1.2 billion. Management reported covenant compliance and stated 2013 capital spending remained within the $500 million facility limit.
Investor verification priorities
- Reconcile GAAP losses to Adjusted EBITDA and assess the recurring versus one-time effects of impairments, interest, and tax items.
- Review debt maturities, interest costs, credit-facility availability and covenant headroom, including the significant upcoming cash-interest burden.
- Track MGM Cotai construction costs, financing, schedule, land-premium payments and the assumptions behind expected Macau growth.
- Monitor the Perini litigation, Harmon demolition proceedings, CityCenter guarantee accruals, available condo proceeds and any further contingent funding.
- Assess the durability of casino-volume and hold trends, Las Vegas room-rate growth, and labor negotiations and related operating risks.