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Rev. Nov. 30, 2017

MGM Resorts International: Accounts Receivable

As an analyst with a local investment firm, Jane Douglas had the opportunity to work on some interesting
projects. This one would be no exception. Her manager, Evan Crenshaw, had been reading through a recent
report regarding MGM Resorts International (MGM Resorts) when he noticed a drop in the company’s bad
debt expense estimate for the year 2016. He had asked Douglas to investigate. He knew a decrease like this
could indicate an improvement in collectability from customers, but he also knew the expense was subject to
estimates from management. He needed to know whether to interpret the decline as a good sign or not.

Douglas had only been to a casino a couple of times, but on both occasions, she had found the experience
fascinating. Her first visit to a casino had been during a trip with friends to Las Vegas, Nevada, three years ago.
She wasn’t sure what to expect, but after entering, she followed her friends to the slot machines. That’s where
most of her friends spent their time, and they seemed to know a bit about how to play. Douglas started with
the quarter slots. She obtained a prepaid card at a kiosk and inserted it into one of the machines; the balance
on the card increased or decreased depending on whether she won or lost the round, and after a few rounds,
she cashed in her card at the same kiosk where she had obtained it and received a little more than she had paid
for it in return.

Then she strolled around the casino to get an idea of what else there was to do. She saw blackjack, craps,
roulette, poker, and other table games being played on the main casino floor. She didn’t try her hand at any of
these—they were beyond her comfort level. She noticed that some customers obtained chips from the dealer
in exchange for cash right there at their table, while the dealer gave other customers a document known as a
“marker,” to sign, after which they received chips without any cash changing hands. Still other players arrived
at their table with a marker they had obtained at the cashier’s cage, presented it to the dealer, and received chips
in exchange. Douglas very much enjoyed watching customers play the table games and spent much of her time
just observing players winning rounds and accumulating chips, or losing rounds and chips when their luck
wasn’t good. When customers finished their table-game play, she noticed some of them took their remaining
chips to the cashier’s cage to exchange for cash.

Douglas was the most fascinated by what she thought must be the high rollers. She watched many of them
enter the special game rooms, reserved for premium, or VIP, players, where they spent much of their time. She
observed these players making big bets—so big that it was clear why they hadn’t brought their cash with them.
Like some of the players she had seen at the table games on the main floor, these players signed markers in
exchange for credit. She realized that it was the markers of these high rollers that created most of a casino’s
accounts receivable, and the individuals signing these markers were responsible for the receivables balances
that she was getting prepared to analyze.

She was eager to get started with her analysis.

This public-sourced case was prepared by Luann J. Lynch, Almand R. Coleman Professor of Business Administration. It was written as a basis for class
discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright 2017 by the University of Virginia Darden
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Company Description

MGM Resorts was an entertainment and hospitality company operating casino resorts in the United States
and Macau, a Special Administrative Region (SAR) of China.1 By 2016, the company owned and operated 14
casino resorts in the United States, 9 of which were in Las Vegas. It owned and operated one casino resort in
Macau, the world’s largest gaming destination as measured by gaming revenues, with an additional casino resort
under development there expected to open in 2017. MGM Resorts’ amenities included gaming, best-in-class
hotels, entertainment, conventions, dining, and retail operations. Exhibit 1 provides a list of resorts owned and
operated by MGM Resorts.

Revenues for MGM Resorts in 2016 totaled $9.5 billion. Of that total, $4.9 billion came from casino
operations, $2.0 billion from hotel rooms, $1.6 billion from food and beverage, and $1.6 billion from other
sources, offset by $0.8 billion in promotional allowances (see Exhibit 2). The company reported financial
information for two business segments—domestic (United States) and MGM China (see Exhibit 3). Seventy-
five percent of 2016 revenues were from MGM U.S. resorts, and 20% were from MGM China (the remaining
5% were associated with unconsolidated affiliates and other corporate operations and management services).
By the end of 2016, the company employed approximately 52,000 full-time and 17,000 part-time employees in
U.S. operations and 6,000 employees at MGM Macau.

Consistent with an entertainment and resort approach to the market, over half of the revenue in MGM
U.S. resorts came from such nongaming operations as hotel, food and beverage, entertainment, and retail.
MGM Resorts operated approximately 27% of the casino hotel rooms in Las Vegas via its hotels there that
carried such famous names as Bellagio, MGM Grand, and The Mirage, among others. The company’s U.S.
casinos offered slot machines, table games, sports and race wagering, and upscale gambling amenities for
premium players. Customers included the premium players, and leisure, wholesale, business, and group (e.g.,
conventions, meetings, associations) travelers.

In addition to its U.S. resorts, MGM Resorts owned a 56% interest in MGM China, up from 50% in 2011,
when it had reported its financial results as an unconsolidated equity method affiliate. It operated one casino
under this segment—MGM Macau, with another, MGM Cotai, under development on the Cotai Strip in Macau,
and expected to open in 2017. A significant number of MGM Macau’s customers were from mainland China.
Unlike at the MGM U.S. casino resorts, revenues at MGM Macau were generated almost exclusively from
gaming operations, with just over 6% coming from nongaming sources; gaming revenues came primarily from
VIP casino gaming operations (38%), main floor gaming operations (53%), and slot machine operations (9%).

VIP players at MGM Macau were located through two sources: (1) external gaming promoters and (2)
internal marketing programs. External gaming promoters, who operated VIP gaming rooms on MGM Macau
property, extended credit to those VIP customers, and offered VIP players complementary hotel, food and
beverage services, and other amenities. MGM Resorts compensated those gaming promoters through revenue-
sharing agreements and through commissions based on rolling chip turnover, where gaming activity was tracked
through special nonnegotiable gaming chips. MGM Resorts also gave these promoters a complementary
allowance of hotel, food and beverage services, and other amenities to use for their VIP customers; this
allowance was based on a promoter’s percentage of the turnover from the table games they generated. And
MGM Macau sometimes extended credit to those gaming promoters, resulting in accounts receivable on the
MGM Resorts’ balance sheet.

1 In 1982, the Special Administrative Region (SAR) was established through Article 31 of the Constitution of the People’s Republic of China. A SAR

was its own administrative region that operated with a lot of autonomy, and with little interference from the Central Government and Chinese Communist
Party. It had its own leader, government, political system, monetary system, legal system, and educational system. It operated as a capitalist economy.
Article 31 allowed China to set up SARs as necessary. In 2017, there were two SARs—Macau and Hong Kong.

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The second source of VIP players at MGM Macau was through direct marketing–efforts by the company
itself, often through personal contact from MGM Resorts’ marketing personnel. VIP players located through
this route were paid a commission based on the program in which they participated, and, as a result, main floor
gaming operations tended to be somewhat more profitable than VIP gaming. In response, MGM China began
to dedicate an area in its casino to premium gaming spaces on the main floor in an effort to attract premium
players to main floor gaming operations.

Casino Markers

Markers were unsecured debt instruments that casinos used to extend credit to casino customers. It was a
convenient way for players to gamble without carrying large sums of cash. Although markers were issued in
varying amounts (as low as $500) to both customers playing slot machines and customers playing table games,
customers that played table games were issued more markers than those playing slot machines, and premium
customers were issued more markers than those who tended to place lower bets. Generally, markers were legally
enforceable debt instruments in the United States and Macau, but not legally enforceable in many foreign
countries. The U.S. assets of customers from foreign countries, however, could be sought to satisfy gambling
debts incurred in the United States.

To obtain a marker, a player first completed an application for credit before his or her trip to the casino.
The application required the player to provide personal identification, place of employment, and bank account
information from several financial institutions. After being approved for a line of credit and then arriving at the
casino, the player could request a marker, essentially a cash advance, either at the cashier’s cage or the game
table of choice. Players often repaid their markers prior to leaving the casino, although the amount borrowed
typically wasn’t due for 15 to 30 days, depending on the casino’s terms.

Accounts Receivable at MGM Resorts

Douglas began her assignment by accessing the 2016 MGM Resorts’ annual report. She obtained a copy of
the following company information for her analysis:
consolidated balance sheets, consolidated statements of operations, and consolidated statements of
cash flows (Exhibit 4)
excerpts from the footnote on significant accounting policies (Exhibit 5)
accounts receivable footnote (Exhibit 6)
excerpts from management’s discussion and analysis (MD&A) related to the allowance for doubtful
casino accounts receivable (Exhibit 7).

After reviewing each of the above, Douglas decided to collect some of the same information from MGM
Resorts’ annual reports for several years prior to 2016, so she could compile a small set of trend data to use in
her analysis (Exhibits 8 and 9).

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Exhibit 1
MGM Resorts International: Accounts Receivable
Resorts Owned and Operated by MGM Resorts

Data source: Company 2016 SEC Form 10-K.

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Exhibit 2
MGM Resorts International: Accounts Receivable
Sources of 2016 Revenue

2016 Revenues (a)
2% Retail
9% Other
5%
Entertainment
48% Casino

16% F&B

20% Hotel

(a) Before promotional allowances.

Data source: MGM Resorts International annual report, 2016; chart created by author.

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Exhibit 3
MGM Resorts International: Accounts Receivable
2016 Reportable Segment Financial Information
($ in thousands)

Domestic (U.S.) MGM China

Net revenues (a) $ 7,055,718 $1,920,487

Adjusted property EBITDA (b) 2,063,016 520,736

Total assets (c) 16,451,461 8,443,411

PP&E, net (d) 14,353,971 2,857,626

Capital expenditures (e) 317,951 984,355

(a) Excludes $478,918 Corporate and Other. Net of promotional allowances.

(b) Adjusted EBITDA before corporate expense and stock compensation expense, where adjusted EBITDA is
earnings before interest and other non-operating income (expense), taxes, depreciation and amortization,
preopening and start-up expenses, NV Energy exit expense, gain on Borgata transaction, goodwill
impairment charges, property transaction, net.
(c) Excludes $3,333,625 Corporate and Other and $55,196 eliminated in consolidation.
(d) Excludes $1,268,622 Corporate and Other and $55,196 eliminated in consolidation.
(e) Excludes $973,446 Corporate and Other and $13,279 eliminated in consolidation.

Source: MGM Resorts International annual report, 2016.

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Exhibit 4
MGM Resorts International: Accounts Receivable
2016 Financial Statements
Panel A: Consolidated Balance Sheets

Source: MGM Resorts International annual report, 2016.

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Exhibit 4 (continued)

Panel B: Consolidated Statements of Operations

Source: MGM Resorts International annual report, 2016.

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Exhibit 4 (continued)

Panel C: Consolidated Statements of Cash Flows—Cash Flows from Operating Activities

Source: MGM Resorts International annual report, 2016.

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Exhibit 5
MGM Resorts International: Accounts Receivable
Excerpts from Footnote on Significant Accounting Policies from 2016 Annual Report

Source: MGM Resorts International annual report, 2016.

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Exhibit 6
MGM Resorts International: Accounts Receivable
Accounts Receivable Footnote from 2016 Annual Report

Source: MGM Resorts International annual report, 2016.

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Exhibit 7
MGM Resorts International: Accounts Receivable
Excerpt from MD&A from 2016 Annual Report

Source: MGM Resorts International annual report, 2016.

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Exhibit 8
MGM Resorts International: Accounts Receivable
Information about Accounts Receivable
($ in thousands)

Casino AR Hotel AR Other AR Total Total Net Bad Debt

Allowance AR Expense

2008 243,600 112,985 46,437 99,606 303,416 80,293

2009 261,025 117,390 87,165 97,106 368,474 54,074
2010 229,318 119,887 66,449 93,760 321,894 29,832
2011 347,679 165,410 79,848 101,207 491,730 39,093
2012 294,312 147,476 99,800 97,911 443,677 57,068
2013 309,620 156,201 104,109 81,713 488,217 14,969
2014 307,152 149,268 106,527 89,602 473,345 46,698
2015 285,182 157,489 127,677 89,789 480,559 54,691
2016 332,443 169,321 139,080 97,920 542,924 10,863

Data source: MGM Resorts International annual reports, 2008–2016; chart created by author.

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Exhibit 9
MGM Resorts International: Accounts Receivable
Information about Casino AR and Allowance
($ in thousands)

Casino Casino Casino % of Casino Casino % % Casino %

AR Allowance Allowance Casino AR: Allowance: Casino AR at U.S. Casino
as % of AR over MGM MGM AR @ Resorts AR @
Casino AR 180 Days China China U.S. from U.S.
Resorts Customers Resorts
from Residing from Far
U.S. in Foreign East
Countries

2008 243,600 92,278 38% 21% 52% 34%

2009 261,025 88,557 34% 24% 40% 46%
2010 229,318 85,547 37% 28% 36% 51%

Nov 2020 to May 2021.

2011 347,679 94,800 27% 18% 28% 61%
2012 294,312 90,452 31% 23% 27% 63%
2013 309,620 73,081 24% 16% 78,000 4,000 31% 69% 57%
2014 307,152 84,397 27% 24% 68,000 13,000 30% 70% 54%
2015 285,182 86,010 30% 26% 40,000 9,000 37% 63% 44%
2016 332,443 92,424 28% 21% 35,000 8,000 53% 47% 35%

Data source: MGM Resorts International annual reports, 2008–2016; chart created by author.

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