Wynn Resorts, Ltd. - Q1 2009 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2009. Wynn Resorts, Limited operates two primary destination casino resorts: Wynn Las Vegas (including the Encore expansion opened in December 2008) and Wynn Macau. The company is currently constructing Encore at Wynn Macau, expected to open in 2010. The reporting period reflects the impact of a global economic slowdown, reduced consumer spending, and visa restrictions affecting travel to Macau.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 |
|---|---|---|
| Net Revenues | $739.96 million | $778.71 million |
| Operating Income | $27.14 million | $91.41 million |
| Net Income (Loss) | $(33.81) million | $46.72 million |
| Diluted EPS | $(0.30) | $0.41 |
| Adjusted Property EBITDA | $158.49 million | $197.83 million |
| Cash from Operations | $60.72 million | $138.34 million |
| Cash and Equivalents (End of Period) | $1.72 billion | $1.24 billion |
| Total Debt (Long-term + Current) | $4.76 billion | $4.29 billion |
Material Changes vs. Prior Period
- Revenue Decline: Net revenues decreased 5.0% year-over-year. Casino revenues dropped 8.5% to $541.7 million, driven by a 15.2% decline in Wynn Macau's VIP segment and a 2.5% decrease in Las Vegas table game drop.
- Profitability Shift: The company reported a net loss of $33.8 million compared to a net income of $46.7 million in the prior year. This was primarily due to lower operating income, increased interest expense, and a $15.9 million tax provision related to valuation allowances.
- Expense Increases: Depreciation and amortization rose 61.7% to $101.5 million due to the full quarter of depreciation for the Encore at Wynn Las Vegas expansion. General and administrative expenses increased to $93.5 million.
- Unusual Items: The quarter included a $10.6 million gain on the extinguishment of debt (repurchase of First Mortgage Notes) and a $14.9 million write-off of aircraft purchase deposits.
- Liquidity: Cash balances increased by $584.8 million, bolstered by a $202.3 million secondary stock offering and $500 million in borrowings under the Wynn Macau revolver.
Outlook, Risks, and Management Commentary
- Economic Environment: Management cites adverse tourism trends, contracting credit markets, and reduced consumer spending as primary headwinds. Las Vegas operations are expected to continue experiencing lower occupancy and room rates.
- Cost Reductions: The company has implemented efficiency initiatives, including pay reductions for salaried employees, reduced work weeks for hourly staff, and a suspension of the 401(k) employer match.
- Debt Covenant Amendment: On April 17, 2009, the company amended its Wynn Las Vegas credit agreement to waive the Consolidated Leverage Ratio until June 2011 and reduce the Interest Coverage Ratio requirement. In exchange, the company repaid $238 million of revolver loans and agreed to a higher interest rate spread.
- Controls and Procedures: Management identified a material weakness in internal controls over financial reporting related to the computation of deferred tax accounts. Disclosure controls and procedures were deemed ineffective as of March 31, 2009. Remediation plans include hiring additional tax staff and engaging an external firm for review.
- Construction: Encore at Wynn Macau construction is ongoing with a budget of approximately $700 million; $254.6 million has been incurred to date.
Investor Verification Checklist
- Material Weakness Remediation: Verify the progress of hiring tax staff and the implementation of external review processes to address the identified internal control deficiency.
- Debt Covenant Compliance: Monitor the company's ability to meet the amended leverage and interest coverage ratios under the new credit agreement terms.
- Macau VIP Performance: Track the recovery of Wynn Macau's VIP segment, which saw a 27.9% decrease in turnover, and the impact of ongoing visa restrictions.
- Encore at Wynn Macau Budget: Confirm that the $700 million construction budget remains on track given the current economic climate and funding sources.
- Cash Flow Sustainability: Assess whether operating cash flows will remain sufficient to service the $4.76 billion debt load and fund capital expenditures without further equity dilution.