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MGM > SEC Filings for MGM > Form 10-Q on 9-Nov-2012All Recent SEC Filings




Quarterly Report

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

This management's discussion and analysis of financial condition and results of operations ("MD&A") contains forward-looking statements that involve risks and uncertainties. Please see "Cautionary Statement Concerning Forward-Looking Statements" for a discussion of the uncertainties, risks and assumptions that may cause our actual results to differ materially from those discussed in the forward-looking statements. This discussion should be read in conjunction with our historical financial statements and related notes thereto and the other disclosures contained elsewhere in this Quarterly Report on Form 10-Q, and the audited consolidated financial statements and notes for the fiscal year ended December 31, 2011, which were included in our Form 10-K, filed with the SEC on February 29, 2012. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods. MGM Resorts International together with its subsidiaries may be referred to as "we," "us" or "our." MGM China Holdings Limited together with its subsidiaries is referred to as "MGM China."

Executive Overview

Our primary business is the ownership and operation of casino resorts, which includes offering gaming, hotel, convention, dining, entertainment, retail and other resort amenities. We believe that we own and invest in several of the premier casino resorts in the world and have continually reinvested in our resorts to maintain our competitive advantage. Most of our revenue is cash-based, through customers wagering with cash or paying for non-gaming services with cash or credit cards. We rely heavily on the ability of our resorts to generate operating cash flow to repay debt financings, fund maintenance capital expenditures and provide cash for future development. Our results of operations are affected by decisions we make related to our capital allocation, our access to capital and our cost of capital. Our access to lower cost capital has improved, and over the next few years we remain committed to further deleveraging our balance sheet and improving our credit profile.

Our results of operations do not tend to be seasonal in nature, though a variety of factors may affect the results of any interim period, including the timing of major Las Vegas conventions, the amount and timing of marketing and special events for our high-end customers and the level of play during major holidays, including New Year and Chinese New Year. Our results do not depend on key individual customers, although our success in marketing to customer groups, such as convention customers, or the financial health of customer segments, such as business travelers or high-end gaming customers from a particular country or region, can affect our results. Certain of our resorts earn significant revenues from the high-end gaming business, which may lead to variability in our results.

We have two reportable segments that are based on the regions in which we operate: wholly owned domestic resorts and MGM China. We currently operate 15 wholly owned resorts in the United States. MGM China's operations consist of the MGM Macau resort and casino and the development of a gaming resort in Cotai. We have additional business activities including investments in unconsolidated affiliates, our MGM Hospitality operations and certain other corporate and management operations. CityCenter is our most significant unconsolidated affiliate, which we also manage for a fee. Our operations which have not been segregated into separate reportable segments are reported as "corporate and other" operations in our reconciliations of segment results to consolidated results.

Wholly Owned Domestic Resorts

Over half of the net revenue from our wholly owned domestic resorts is derived from non-gaming operations including hotel, food and beverage, entertainment and other non-gaming amenities. We utilize our significant convention and meeting facilities to maximize hotel occupancy and customer volumes during off-peak times such as mid-week or during traditionally slower leisure travel periods, which also leads to better labor utilization. Our operating results are highly dependent on the volume of customers at our resorts, which in turn affects the price we can charge for our hotel rooms and other amenities. We market to different customer segments to manage our hotel occupancy, such as targeting large conventions to increase mid-week occupancy.

We generate a significant portion of our revenue from our wholly owned domestic resorts in Las Vegas, Nevada, which exposes us to certain risks, such as increased competition from new or expanded Las Vegas resorts, and from the expansion of gaming in the United States.

While adverse conditions in the economic environment affected our operating results in recent years, we believe positive trends, such as increased visitation and consumer spending, will continue. However, we believe that certain aspects of the current economy, such as continued weaknesses in employment and the housing market, will limit economic growth in the United States and temper our recovery. Because of these economic conditions, we have increasingly focused on managing costs and staffing levels across all our resorts and will continue to strive to achieve additional operating efficiencies. However, as a result of our leveraged business model, our operating results are significantly affected by our ability to generate operating revenues.

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Key performance indicators related to gaming and hotel revenue at our wholly owned domestic resorts are:

Gaming revenue indicators - table games drop and slots handle (volume indicators); "win" or "hold" percentage, which is not fully controllable by us. Our normal table games hold percentage is in the range of 19% to 23% of table games drop and our normal slots hold percentage is in the range of 7.5% to 8.5% of slots handle; and

Hotel revenue indicators - hotel occupancy (a volume indicator); average daily rate ("ADR," a price indicator); and revenue per available room ("REVPAR," a summary measure of hotel results, combining ADR and occupancy rate). Our calculation of ADR, which is the average price of occupied rooms per day, includes the impact of complimentary rooms. Complimentary room rates are determined based on an analysis of retail or "cash" rates for each customer segment and each type of room product to estimate complimentary rates which are consistent with retail rates. Complimentary rates are reviewed at least annually and on an interim basis if there are significant changes in market conditions. Because the mix of rooms provided on a complimentary basis, particularly to casino customers, includes a disproportionate suite component, the composite ADR including complimentary rooms is slightly higher than the ADR for cash rooms, reflecting the higher retail value of suites.

MGM China

On June 3, 2011, we and Ms. Ho, Pansy Catilina Chiu King ("Ms. Pansy Ho") completed a reorganization of the capital structure and the initial public offering of 760 million shares of MGM China on The Stock Exchange of Hong Kong Limited (the "IPO"), representing 20% of the post issuance base capital stock of MGM China, at an offer price of HKD 15.34 per share. Pursuant to this reorganization, we acquired, through a wholly owned subsidiary, an additional 1% of the overall capital stock of MGM China for HKD 15.34 per share, or approximately $75 million, and thereby became the owner of 51% of MGM China, which owns MGM Grand Paradise, S.A. ("MGM Grand Paradise"), the Macau company that owns the MGM Macau resort and casino ("MGM Macau") and the related gaming subconcession and land concession and is in the process of developing a gaming resort in Cotai.

Through the acquisition of the additional 1% interest of MGM China, we obtained a controlling interest and were required to consolidate MGM China as of June 3, 2011. Prior to the IPO, we held a 50% interest in MGM Grand Paradise, which was accounted for under the equity method. The acquisition of the controlling financial interest was accounted for as a business combination and we recognized 100% of the assets, liabilities and noncontrolling interests of MGM China at fair value at the date of acquisition. The fair value of the equity of MGM China was determined by the IPO transaction price and equaled approximately $7.5 billion. The carrying value of our equity method investment was significantly less than our share of the fair value of MGM China, resulting in a $3.5 billion gain on the acquisition.

We believe our investment in MGM China plays an important role in extending our reach internationally and will foster future growth and profitability. Asia is the fastest-growing gaming market in the world and Macau is the world's largest gaming destination in terms of revenue, and has continued to grow over the past few years despite the global economic downturn.

Our MGM China operations primarily consist of MGM Macau. Revenues at MGM Macau are generated primarily from gaming operations made up of two distinct market segments: main floor and high-end ("VIP"). MGM Macau main floor operations consist of both table games and slot machines offered to the public, which usually consists of walk-in and day trip visitors. VIP players play mostly in dedicated VIP rooms or designated gaming areas. VIP customers can be further divided into customers sourced by in-house VIP programs and those sourced through gaming promoters. A significant portion of our VIP volume is generated through the use of gaming promoters, also known as junket operators. These operators introduce high-end gaming players to MGM Macau, assist these customers with travel arrangements and extend gaming credit to these players.

VIP gaming at MGM Macau is conducted by the use of special purpose nonnegotiable gaming chips called "rolling chips." Gaming promoters purchase these rolling chips from MGM Macau and in turn they sell these chips to their players. The rolling chips allow MGM Macau to track the amount of wagering conducted by each gaming promoter's clients in order to determine VIP gaming play. In exchange for the gaming promoters' services, MGM Macau pays them either through rolling chip turnover-based commissions or through revenue-sharing arrangements. The estimated portion of the gaming promoter payments that represent amounts passed through to VIP customers is recorded net against casino revenue, and the estimated portion retained by the gaming promoter for its compensation is recorded to casino expense.

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In addition to the key performance indicators used by our wholly owned domestic resorts, MGM Macau utilizes "turnover," which is the sum of rolling chip wagers won by MGM Macau (rolling chips purchased plus rolling chips exchanged less rolling chips returned). Turnover provides a basis for measuring VIP casino win percentage. Normal win for VIP gaming operations at MGM Macau is in the range of 2.7% to 3.0% of turnover. MGM Macau's main floor historical table games hold percentage is in the range of 20% to 30% of table games drop. Normal slots hold percentage at MGM Macau is in the range of 5.5% to 7.5% of slots handle.

Corporate and Other

Corporate and other includes our investments in unconsolidated affiliates, MGM Hospitality and certain management and other operations.

CityCenter. We own 50% of CityCenter. The other 50% of CityCenter is owned by Infinity World Development Corp ("Infinity World"), a wholly owned subsidiary of Dubai World, a Dubai, United Arab Emirates government decree entity. CityCenter consists of Aria, a casino resort; Mandarin Oriental Las Vegas, a non-gaming boutique hotel; Crystals, a retail and entertainment district; and Vdara, a luxury condominium-hotel. In addition, CityCenter features residential units in the Residences at Mandarin Oriental and Veer. We receive a management fee of 2% of revenues for the management of Aria and Vdara, and 5% of EBITDA (as defined in the agreements governing our management of Aria and Vdara). In addition, we receive an annual fee of $3 million for the management of Crystals.

Other unconsolidated affiliates. We also own 50% interests in Grand Victoria and Silver Legacy. Grand Victoria is a riverboat casino in Elgin, Illinois; an affiliate of Hyatt Gaming owns the other 50% of Grand Victoria and also operates the resort. Silver Legacy is located in Reno, adjacent to Circus Circus Reno, and the other 50% is owned by Eldorado LLC.

MGM Hospitality. MGM Hospitality seeks to leverage our management expertise and well-recognized brands through strategic partnerships and international expansion opportunities. We have entered into management agreements for hotels in the Middle East, North Africa, India and, through its joint venture with Diaoyutai State Guesthouse, The People's Republic of China. MGM Hospitality opened its first resort, MGM Grand Sanya on Hainan Island, The People's Republic of China in early 2012.

Borgata. We have a 50% economic interest in Borgata Hotel Casino & Spa ("Borgata") located on Renaissance Pointe in the Marina area of Atlantic City, New Jersey. Boyd Gaming Corporation ("Boyd") owns the other 50% of Borgata and also operates the resort. Our interest is held in trust and is currently offered for sale pursuant to our amended settlement agreement with the New Jersey Department of Gaming Enforcement ("DGE") and approved by the New Jersey Casino Control Commission ("CCC"). The terms of the amended settlement agreement mandate the sale by March 2014. We have the right to direct the sale through March 2013, subject to approval of the CCC, and the trustee is responsible for selling the trust property during the following 12-month period.

We consolidate the trust because we are the sole economic beneficiary and we account for our interest in Borgata under the cost method. As of September 30, 2012, the trust had $149 million of cash and investments, of which $120 million is held in U.S. treasury securities with maturities greater than three months but less than one year, and is recorded within "Prepaid expenses and other." For the three and nine months ended September 30, 2012, $12 million and $38 million, respectively, were withdrawn from the trust account for the payment of property taxes and interest on our senior credit facility, as authorized in accordance with the terms of the trust agreement.

Results of Operations

The following discussion is based on our consolidated financial statements for the three and nine months ended September 30, 2012 and 2011.

Summary Financial Results

The following table summarizes our financial results:

                                         Three Months Ended            Nine Months Ended
                                           September 30,                 September 30,
                                        2012           2011           2012           2011
                                                          (In thousands)
Net revenues                         $ 2,254,978    $ 2,233,587    $ 6,866,333    $ 5,552,423
Operating income                         137,401        112,574        505,382      3,966,039
Net income (loss)                       (154,674 )     (106,575 )     (428,415 )    3,254,245
Net income (loss) attributable to
MGM Resorts International               (181,159 )     (123,786 )     (543,864 )    3,228,328

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Our results of operations include the results of MGM China on a consolidated basis following the June 3, 2011 date of acquisition. Prior to that date, results of operations of MGM Macau were reflected under the equity method of accounting. See "Operating Results - Income (loss) from Unconsolidated Affiliates."

Consolidated net revenue for the three months ended September 30, 2012 increased 1% driven by a 7% increase in MGM China net revenue. Net revenue for the year-to-date period increased 24%, primarily due to the consolidation of MGM China. See section below for additional information related to segment revenues.

Consolidated operating income was $137 million for the three months ended September 30, 2012 compared to $113 million for the three months ended September 30, 2011. Operating income in the current year quarter was affected by $18 million related to our share of a CityCenter residential inventory impairment charge and $16 million related to costs CityCenter accrued for the Harmon demolition. The current year quarter results benefited from improved operating results at MGM China. Operating income in the prior year was affected by an $80 million impairment charge related to Circus Circus Reno.

Consolidated operating income was $505 million for the year-to-date period ended September 30, 2012 and was impacted by the items noted above. Consolidated operating income of $4.0 billion for the nine months ended September 30, 2011 was affected by the items above and also by $26 million related to our share of a CityCenter residential inventory impairment charge and a gain of $3.5 billion related to the MGM China transaction, both in the second quarter of 2011.

Corporate expense increased 45% to $63 million for the third quarter of 2012 and increased 23% to $148 million for the year-to-date period primarily as a result of additional legal and professional services and as a result of costs associated with development efforts in Maryland, Massachusetts and Toronto.

Depreciation and amortization in the third quarter of 2012 decreased $21 million from 2011, partially due to certain assets becoming fully depreciated and also impacted by lower expense at MGM China resulting from the accelerated amortization of its customer list intangible asset. Depreciation for the year-to-date period increased to $701 million and included $283 million of depreciation and amortization for MGM China.

Operating Results - Detailed Segment Information

The following table presents net revenue and Adjusted EBITDA by reportable segment. Management uses Adjusted Property EBITDA as the primary profit measure for our reportable segments. See "Non-GAAP Measures" for additional Adjusted EBITDA information:

                                        Three Months Ended            Nine Months Ended
                                          September 30,                 September 30,
                                       2012           2011           2012           2011
                                                         (In thousands)
Net revenues:
Wholly owned domestic resorts       $ 1,486,155    $ 1,509,375    $ 4,470,981    $ 4,421,113
MGM China                               665,074        623,050      2,076,460        816,034
Reportable segment net revenues       2,151,229      2,132,425      6,547,441      5,237,147
Corporate and other                     103,749        101,162        318,892        315,276
                                    $ 2,254,978    $ 2,233,587    $ 6,866,333    $ 5,552,423

Adjusted EBITDA:
Wholly owned domestic resorts       $   324,764    $   347,594    $   990,894    $   978,942
MGM China                               152,491        139,326        503,572        185,748
Reportable segment Adjusted
Property EBITDA                         477,255        486,920      1,494,466      1,164,690
Corporate and other                    (104,872 )      (42,989 )     (190,266 )      (32,760 )
                                    $   372,383    $   443,931    $ 1,304,200    $ 1,131,930

See below for detailed discussion of segment results related to our wholly owned domestic operations and MGM China. Corporate and other revenue includes revenues from MGM Hospitality and management operations and reimbursed revenue primarily related to our CityCenter management agreement. Adjusted EBITDA loss related to corporate and other for the three month period increased primarily as a result of our share of CityCenter residential impairment and accrued Harmon demolition costs at CityCenter as discussed above and an increase in corporate expense. For the nine month period, corporate and other Adjusted EBITDA loss increased due to these factors and MGM Macau being recorded as an equity method investment prior to June 3, 2011. The nine month period increase was offset in part by the inclusion of our share of a CityCenter residential impairment charge in the second quarter of 2011, as described above.

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Wholly owned domestic resorts. The following table presents detailed net revenue at our wholly owned domestic resorts:

                                    Three Months Ended                         Nine Months Ended
                                      September 30,                              September 30,
                                       Percentage                                 Percentage
                            2012         Change          2011          2012         Change          2011
                                                           (In thousands)
Casino revenue, net:
Table games              $   204,286            2 %   $   199,502   $   588,531            4 %   $   566,629
Slots                        417,107            1 %       414,202     1,241,349            3 %     1,210,423
Other                         17,860           18 %        15,152        52,822            6 %        49,667
Casino revenue, net          639,253            2 %       628,856     1,882,702            3 %     1,826,719
Non-casino revenue:
Rooms                        378,994           (3 )%      390,649     1,163,038            1 %     1,151,486
Food and beverage            342,242           (2 )%      349,813     1,068,537            2 %     1,048,323
Entertainment, retail
and other                    285,043           (6 )%      301,781       835,866           (3 )%      861,025
Non-casino revenue         1,006,279           (3 )%    1,042,243     3,067,441            0 %     3,060,834
                           1,645,532           (2 )%    1,671,099     4,950,143            1 %     4,887,553
Less: Promotional
allowances                  (159,377 )         (1 )%     (161,724 )    (479,162 )          3 %      (466,440 )
                         $ 1,486,155           (2 )%  $ 1,509,375   $ 4,470,981            1 %   $ 4,421,113

Net revenue related to wholly owned domestic resorts for the third quarter of 2012 decreased 2% compared to the prior year third quarter primarily due to a decrease in non-casino revenue. Casino revenue increased primarily due to a 2% increase in table games revenue. Table games hold percentage was 20.4% in the current year quarter and 19.5% in the prior year quarter. Slot revenue was up 1% for the third quarter.

Net revenue related to wholly owned domestic resorts increased 1% for the year-to-date period, driven by an increase in casino revenue. Table games revenue increased 4% for the year-to-date period with a hold percentage of 18.9% compared to 18.5% for the prior year period. Slots revenue increased 3% on a year-to-date basis.

Rooms revenue in the third quarter of 2012 decreased 3%, with a 2% decrease in Las Vegas Strip REVPAR. Rooms revenue for the 2012 year-to-date period increased 1% with a 2% increase in Las Vegas Strip REVPAR. The following table shows key hotel statistics for our Las Vegas Strip resorts:

                                        Three Months Ended       Nine Months Ended
                                          September 30,            September 30,
                                        2012         2011        2012         2011
Occupancy                                    92 %         95 %        92 %         92 %

Average Daily Rate (ADR) $ 124 $ 124 $ 129 $ 126 Revenue per Available Room (REVPAR) 114 117 119 116

Adjusted Property EBITDA for wholly owned domestic resorts decreased 7% compared to the third quarter of 2011 primarily due to lower non-casino revenues. Adjusted Property EBITDA for Bellagio was negatively affected by a significantly lower than normal table games hold percentage and Adjusted Property EBITDA for The Mirage was positively affected by a significantly higher than normal hold percentage. Adjusted Property EBITDA for wholly owned domestic resorts increased 1% for the year-to-date period.

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MGM China. The following table presents summary financial results for MGM China beginning on June 3, 2011. Prior to June 3, 2011, the results of MGM Macau were accounted for under the equity method of accounting:

                     Three Months Ended        Nine Months Ended
                       September 30,             September 30,
                      2012        2011         2012         2011
                                    (In thousands)
Net revenues       $  665,074   $ 623,050   $ 2,076,460   $ 816,034
Operating income       60,527      40,788       218,869      60,236
Net income             56,820      29,594       217,102      45,109

For the three months ended September 30, 2012, net revenue for MGM China was $665 million, a 7% increase over the prior year quarter, driven by increases in volume for main floor table games and slots of 10% and 37%, respectively. VIP table games turnover decreased 5% from the prior year quarter, while hold percentage was 3.0% in the current year quarter compared to 2.9% in the prior year quarter. MGM China's operating income was $61 million for the three months ended September 30, 2012 and Adjusted EBITDA was $152 million. Branding fee expense was $5 million in the current year quarter, as the annual branding fee cap was reached in August, compared to $11 million in the prior year quarter. Adding back the branding fees in both periods, Adjusted EBITDA increased 5%.

Net revenue for MGM China for the nine month period ended September 30, 2012 was $2.1 billion, a 10% increase over MGM Macau's prior year results, driven by increases in volume for main floor table games and slots of 10% and 34%, respectively. VIP table games turnover decreased 2% from the prior year, while hold percentage was 3.1% in the current year compared to 3.0% in the prior year period. MGM China's operating income was $219 million for the nine month period ended September 30, 2012 and Adjusted EBITDA was $504 million, which included $30 million of branding fee expense. Branding fees expense was $14 million in the prior year-to-date period. Adding back the branding fees in both periods, Adjusted EBITDA increased 14% over MGM Macau's prior year results for the nine month period ended September 30, 2012.

Operating Results - Details of Certain Charges

Property transactions, net consisted of the following:

                                       Three Months Ended            Nine Months Ended
                                          September 30,                September 30,
                                       2012           2011          2012           2011
                                                        (In thousands)
Grand Victoria investment
impairment charge                   $         -    $        -    $    85,009    $        -
. . .
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