Thursday, May 8, 2008

Part 2 Mohegan 2Qtr Earnings: Tribe Reports 21% Drop In Quarterly Net Income

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Tribal members are a diverse group and we acknowledge the difficulty in presenting financial news that is both understandable and relevant to such a broad group.

Overview

The tribe's business arm, the Mohegan Tribal Gaming Authority or MTGA, files a complete set of financial statements with the federal Securities and Exchange Commission (SEC) four times a year. Each of those reporting periods is for three months which is why they are called quarterly filings. The fourth and last filing of the fiscal year (which begins every October 1st and ends September 30th) includes financial statements that have been reviewed by an independent auditor. Sometimes this is also referred to as the audit report. None of these SEC filings includes information on the tribal government operations, which is a separate entity from MTGA, except largely for the amounts of money reimbursed or transferred to the tribal government.

There are three components to a complete set of financial statements: a balance sheet, an income statement and a statement of cash flows. Prior to MTGA's release of the complete set of financial statements, a press release will be issued that gives the public a glimpse at the income statement, also called the quarterly earnings. That is what ocurred yesterday. The full set of financial statements are expected to be issued within two weeks.

MTGA Profits and Adjusted Profits

What did yesterday's quarterly earnings show? Well, there is always one figure that is looked at first and that is the "bottom line", also known as the earnings or net income or profit. The quarterly earnings report issued yesterday showed a bottom line of $33.5 million, a 21% drop from the same quarter last year. In other words, this was the profit for the three-month period of January 1st to March 31st.

Of course the income statement has many numbers but I'm sure you would agree that this one number is the most important by far. Neither the New London Day, Hartford Courant or Norwich Bulletin reported this profit figure in their articles on yesterday's earnings. They rarely do.

As mentioned in yesterday's article, "Part 1 Mohegan 2Qtr Earnings", this bottom line (or profit) figure does not take into account two important figures that are important for us as tribal members to properly analyze the profits.

Both of the figures that we should take into account are about the same amount, which makes it easier to remember: MTGA expects to distribute $80 million to the tribal government this year and was projected to pay our former management company (Trading Cove) about $80 million this year based on their 5% cut of Mohegan Sun revenues. So three months' worth of these amounts comes to $20 million. Keep in mind that, for accounting purposes none of that $20 million distribution to the tribal government is deducted from profits but about $7 million of the estimated $20 million owed to Trading Cove has already been deducted. In other words, out of the $40 million of the above two costs, $7 million has already been deducted so we need to further reduce the reported "bottom line" by $33 million that hasn't been accounted for. What is left over if you reduce the reported $33.5 million in reported profits (see "bottom line" figure above) by that $33 million? Its not much (less than $1 million) but that is what we call the "adjusted" profits, and you may want to think of it as the amount left over hypothetically to assist in repaying MTGA's debt (currently at $1.37 billion).

Other Considerations

There are other factors that should be taken into account that may brighten the picture somewhat and we will cover that once the complete financial statements are issued within a week or two. That discussion will involve depreciation and capital improvements, which kind of balance each out but will help in better understanding MTGA's financial picture.

Another factor that should be taken into account is that we may be paying Trading Cove slightly less than $80 million this year - due to lower than anticipated revenues - and we will report that to you but it certainly isn't materially less and, for educational purposes, it is easier to remember at this point that the amount is about the same amount that MTGA distributes to the tribal government.

Drilling Down

The profit number and the adjusted profit number is a good starting point to begin an analysis on the income statement. How else can you get oriented without knowing the profit and adjusted profit figures, which the New London Day and Hartford Courant neglects to report?

In the case of the three months that just ended we can come to the conclusion that there's not that much money remaining after taking into account all relevant costs. In Part 3 of this series "Mohegan 2Qtr Earnings," we'll cover the income statement in further detail but until Part 3 is written - we'll shoot for today - read the New London Day and Hartford Courant articles for more details. How's that for contrarian thinking? And, of course, one should read the tribe's press release on its earnings.

Keep in mind when reading the articles that "revenues" do not take into account any expenses. Just to provide two examples, revenues for slot machines is the money lost by customers (also called the casino "win" and is the money that goes into the machines less the amounts paid out to customers) and revenues for restaurants are what the customers pay for their meals before any operating expenses are deducted.