Business Context and Reporting Period
This summary covers the Annual Report on Form 10-K for MGM MIRAGE (now MGM Resorts International) for the fiscal year ended December 31, 2007. The Company is a leading global developer and operator of casino resorts, with a significant portfolio concentrated on the Las Vegas Strip, as well as operations in other U.S. states and international markets (Macau). The reporting period includes the full-year impact of the Mandalay Resort Group acquisition (closed April 2005) and the reopening of Beau Rivage in Biloxi, Mississippi, following Hurricane Katrina.
Key Financial Metrics
| Metric | 2007 | 2006 | Change |
|---|---|---|---|
| Net Revenues | $7.69 billion | $7.18 billion | +7% |
| Operating Income | $2.86 billion | $1.76 billion | +63% |
| Net Income | $1.58 billion | $648 million | +144% |
| Diluted EPS (Net Income) | $5.31 | $2.22 | +140% |
| Total Assets | $22.73 billion | $22.15 billion | — |
| Total Debt | $11.18 billion | $12.99 billion | -14% |
| Stockholders' Equity | $6.06 billion | $3.85 billion | +57% |
| Operating Cash Flow | $994 million | $1.23 billion | -19% |
Note: The significant increase in Operating Income and Net Income in 2007 was driven by a $1.03 billion pre-tax gain on the CityCenter joint venture transaction, $284 million in Hurricane Katrina insurance recoveries, and a full year of operations at Beau Rivage.
Material Changes vs. Prior Period
- CityCenter Transaction: In November 2007, the Company formed a 50/50 joint venture with Dubai World for the CityCenter development. This resulted in a $1.03 billion pre-tax gain recognized in the fourth quarter of 2007 and a cash distribution of approximately $2.47 billion to the Company.
- Revenue Mix: Non-gaming revenue (rooms, food, beverage, entertainment) accounted for 58% of net revenues in 2007, up from 56% in 2006. Hotel revenue increased 7% year-over-year, driven by a 5% increase in Average Daily Rate (ADR) and a slight increase in occupancy to 93% on the Las Vegas Strip.
- Debt Reduction: Total debt decreased by approximately $1.8 billion in 2007. The Company repaid $1.4 billion in long-term debt at maturity and utilized proceeds from the CityCenter transaction and a $1.2 billion stock sale to Dubai World to reduce borrowings under its senior credit facility.
- Discontinued Operations: The Company sold the Primm Valley Resorts and Laughlin Properties in 2007, resulting in a combined pre-tax gain of $266 million classified as discontinued operations.
Guidance, Outlook, and Risks
Outlook and Management Commentary: Management expects continued strength in Las Vegas as a tourist destination but notes that economic conditions, specifically the downturn in the housing market and credit concerns, may negatively impact operating results, particularly at mid-market resorts outside of Las Vegas. The Company anticipates higher revenues in 2008 from the new permanent MGM Grand Detroit complex and the opening of MGM Grand Macau.
Key Risks and Contingencies:
- Significant Indebtedness: With approximately $11.2 billion in debt, the Company is vulnerable to adverse economic conditions and interest rate fluctuations. A large portion of debt is variable-rate.
- Competition: Increased competition from new and expanded resorts in Las Vegas and the expansion of Native American gaming in California pose risks to market share.
- Regulatory Environment: Operations are subject to extensive federal, state, and local gaming regulations. Violations in one jurisdiction could impact operations in others.
- Weather and Geopolitical Events: Properties in Biloxi and other regions are subject to extreme weather (e.g., hurricanes). Global events, such as terrorist attacks or economic instability in the Far East, could reduce travel volumes.
- Legal Proceedings: A nationwide class action lawsuit regarding the Fair and Accurate Credit Transactions Act (FACTA) was pending, though the Company believes the claims are unjustified.
Investor Verification Checklist
- CityCenter Gain Sustainability: Verify the extent to which the 2007 earnings growth is attributable to the one-time $1.03 billion CityCenter gain versus organic operational performance.
- Debt Covenants: Confirm the Company's compliance with financial covenants (leverage ratio of 6.5:1 and coverage ratio of 2.0:1) given the high debt load and variable interest rates.
- Capital Expenditures: Review the $2.9 billion in capital expenditures for 2007, specifically the allocation to CityCenter, MGM Grand Detroit, and ongoing resort renovations, to assess future cash flow requirements.
- Insurance Recoveries: Confirm the finality of the Hurricane Katrina insurance settlements ($635 million total) and the classification of remaining recoveries.
- Joint Venture Exposure: Assess the financial exposure and funding requirements for the CityCenter joint venture, which has an estimated net project budget of $8.0 billion.