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Written by: Brian Egger
My middle-school and high-school-age sons occasionally ask me for help with their math homework. I have limited recall of geometry, trigonometry and calculus, so I can’t offer much assistance with those subjects. But I do retain an intuitive grasp of basic algebra. I also appreciate the value algebra offers in solving real-life problems.
I’ve told my sons that algebra was one of my most valuable secondary-school classes and still has relevance in my professional life. Reading the footnotes and management discussion and analysis (MD&A) sections of 10K reports provides occasional opportunities to use algebra in solving analytical problems.
Companies occasionally (and, in some instances, I suspect, inadvertently) drop clues in the footnotes and the MD&A sections of their financial documents that, when pieced together, reveal the values of undisclosed financial line items and performance metrics. Those written disclosures sometimes provide a more detailed picture of company operations than that available in the data tables that appear in 10K reports.
The example below is a fictitious rendering, based on my rough recollection of reviewing gaming company 10Ks during the late-1990s and early-2000s. The October 1998 opening of Bellagio and March 1999 debut of Mandalay Bay exacerbated competitive pressure on older Las Vegas resorts.
I therefore closely monitored the extent to which Mandalay Resort Group’s flagship Circus Circus casino, open since 1968, would fare in the wake of the 1998-99 launches of those more modern resorts.
Historical Sidenote: In the early 2000s, Mandalay Resort Group, the successor of Circus Circus Enterprises, owned Circus Circus and Mandalay Bay. MGM Resorts owned Bellagio. In 2005, MGM Resorts acquired Mandalay Resort Group, leaving it with ownership of all three casinos. In 2019, MGM Resorts sold Circus Circus to developer Phil Ruffin.
In the example below, I assumed that Mandalay Resort Group’s fiscal 2002 and 2003 10K filings featured high-level disclosures of segment Ebitda (earnings before interest, taxes, depreciation and amortization), while omitting results for individual casinos. (Mandalay did disclose Ebitda for individual casinos during those years, but my hypothetical example assumed they did not).
I also assumed that Mandalay Resort Group provided single-sentence descriptions of year-over-year growth trends for its properties, including references to percentage and dollar-value changes.
In my scenario, Mandalay’s segment-level Ebitda disclosure for its Las Vegas segment was more opaque than it actually was -- and limited to the values visible in the following image. The cells covered by post-it notes in the image represent amounts that I assumed were known to company insiders, but invisible to readers of its 10K report:
Note: All amounts in USD millions. Source: Mandalay Resort Group and MGM Resorts 10Ks.
I also assumed that Mandalay Resort Group’s MD&A section included the following brief characterizations of growth trends for its Circus Circus Las Vegas casino’s Ebitda:
2002 10K Report: “Circus Circus’ Ebitda fell 11.9% in fiscal 2002.”
2003 10K Report: “Circus Circus’ Ebitda declined $8.5 million in fiscal 2002."
Taken individually, those two short sentences told me little about the performance of Circus Circus Las Vegas. I might have been tempted to abandon my search for deeper insights into the financial performance of Mandalay Resort Group’s casinos. However, when analyzed in tandem, the sentences provided enough information to approximate the Ebitda earned by Circus Circus in fiscal 2002 and 2003.
My first step in trying to draw insights from the growth rates and values in Mandalay’s written disclosure was to frame an algebraic statement for each of the sentences, expressed as two equations with two unknown variables. (I labeled those variables x for fiscal 2001 Ebitda and y for fiscal 2002 Ebitda):
My next steps were to solve for the values of x and y:
The growth rates and dollar-value increases disclosed in the hypothetical single-sentence assertions in Mandalay’s 2003 10K were rounded to one decimal place, but they provided enough information to approximate the values of Circus Circus’ fiscal 2001 and 2002 Ebitda, shown in the following image:
Note: All amounts in USD millions. Source: Mandalay Resort Group and MGM Resorts 10Ks.
The quest for insight into asset-specific performances can prove challenging when companies modify their segment disclosure practices (as MGM Resorts International, its predecessor companies and competitors have done from time to time).
Over some periods, these entities reported property-level revenue and Ebitda results. During other intervals, they disclosed only aggregated results for their multi-property Las Vegas segments.
In my example, Mandalay’s disclosure lacked the specificity I would have preferred to see. However, I was still able to calculate the company’s property-level performance. Critical analysis of company performance discussions and the use of rudimentary algebra provided valuable insight.
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