MGM Resorts International — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; filed August 7, 2015. Financial results below are unaudited. Unless stated otherwise, amounts are in U.S. dollars.
Business context
MGM Resorts owns and operates casino resorts, principally in the United States, and controls MGM China, which operates MGM Macau and is developing MGM Cotai. Its reportable segments are wholly owned domestic resorts and MGM China. Results reflect sharply weaker Macau gaming, partly offset by improved domestic resort performance.
Financial performance and liquidity
- Q2 revenue: $2.385 billion, down 8% from $2.581 billion. Q2 operating income was $349 million versus $354 million; net income attributable to MGM Resorts was $97 million versus $110 million. Diluted EPS was $0.17 versus $0.22.
- First-half revenue: $4.717 billion, down 9% from $5.211 billion. Operating income was $744 million versus $771 million. Net income attributable to MGM Resorts increased to $267 million from $213 million; diluted EPS was $0.50 versus $0.42.
- Segment trends: Q2 domestic resort revenue rose 4% to $1.705 billion and Adjusted Property EBITDA rose 11% to $458 million; margin expanded 158 basis points to 26.9%. MGM China revenue fell 33% to $557 million and Adjusted EBITDA fell to $132 million from $210 million; margin declined 168 basis points to 23.7%.
- Cash flow: First-half operating cash flow was $447 million, down from $804 million. Capital expenditures were $594 million, compared with $370 million. Investing cash use was $177 million; financing provided $354 million. Cash and cash equivalents ended the period at $2.342 billion.
- Liquidity and debt: Cash plus cash deposits with maturities over 90 days totaled approximately $2.543 billion. Debt carrying value was $13.370 billion, including $875 million of senior notes classified as current and subsequently repaid at maturity in July. The company reported $1.1 billion available under its senior credit facility. Total assets were $27.150 billion and stockholders’ equity was $9.177 billion.
- Interest: First-half net interest expense was $420 million; cash interest paid was $399 million. Management estimated approximately $795 million of cash interest payments over the next 12 months based on then-current debt and rates.
Material changes and unusual items
- Macau market gross gaming revenue declined 37% in the first half, according to the filing. MGM China VIP turnover fell 54% in Q2 and 52% in the first half; VIP and main-floor table revenue both declined.
- Domestic Las Vegas Strip REVPAR increased 6% in Q2 and 4% in the first half. Q2 occupancy was 96%; average daily rate was $150 versus $141 a year earlier.
- First-half earnings benefited from MGM Resorts’ $80 million share of a CityCenter construction-litigation settlement gain. CityCenter also distributed a $400 million special dividend, of which MGM received $200 million.
- Substantially all $1.45 billion of 4.25% convertible notes converted into approximately 78 million common shares in April. The share count increased materially; 563.1 million shares were outstanding at June 30, versus 491.3 million at year-end 2014.
- Foreign tax credit valuation allowances increased by $82 million in the first half, including $40 million recorded as a direct reduction of income tax benefit. MGM China goodwill of $2.8 billion was not impaired in the interim test, but estimated fair value exceeded carrying value by only 9%.
Outlook, commitments and risks
- Management expected MGM Cotai to open in Q4 2016, with an estimated project budget of $3.0 billion, excluding capitalized interest and land costs. MGM National Harbor, estimated at $1.3 billion, was expected to be completed in Q4 2016; MGM Springfield, estimated at $760 million, in late 2018. The Las Vegas Arena, estimated at $350 million, was scheduled for completion in the first half of 2016.
- The company forecast 2015 capital spending of $430 million at domestic resorts and corporate entities excluding National Harbor and Springfield, plus $340 million for National Harbor, $60 million for Springfield and $50 million for the arena. MGM China expected about $800 million for Cotai and $60 million for MGM Macau improvements.
- The Profit Growth Plan launched in July 2015 and was expected to provide approximately $300 million in annualized Adjusted EBITDA benefit, with initial results potentially in the second half of 2015 and full realization targeted by end-2017. These are management expectations, not guarantees.
- Management cited Macau policy and economic pressures, stricter transit-visa rules, the casino smoking ban and competition as factors affecting results. It nevertheless expected long-term Macau market growth.
- Debt covenants, substantial development spending, variable interest rates, foreign exchange exposure, gaming regulation, construction execution and potential tax-credit valuation changes are material risks. A 100-basis-point increase in LIBOR was estimated to increase annual interest cost by $27 million; a similar HIBOR increase by $12 million.
- A July 2015 agreement to sell Circus Circus Reno and MGM’s 50% Silver Legacy interest for $73 million plus working capital was subject to regulatory and customary closing conditions. A proposed $75 million settlement of legacy securities litigation, funded by directors’ and officers’ insurers, remained subject to final documentation and court approval.
Important facts for investors to verify
- Whether Macau gaming and MGM China VIP volumes stabilize, and the resulting effect on revenue, margins, cash flow and goodwill valuation.
- Actual project spending, financing and opening schedules for Cotai, National Harbor, Springfield and the arena, compared with management estimates.
- Progress toward the Profit Growth Plan’s stated $300 million annualized EBITDA target and the basis for that non-GAAP measure.
- Post-quarter debt changes: the July repayment of $875 million of notes and MGM China’s repayment of revolving borrowings and increase in term loans to $1.55 billion.
- Whether the proposed securities-litigation settlement receives court approval, and whether the asset-sale agreement closes on disclosed terms.
- Assumptions underlying foreign tax credit realization and the 9% MGM China goodwill valuation cushion.