Wynn Resorts, Limited — Q2 2013 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2013. Wynn operates casino resorts in Macau and Las Vegas; results are unaudited and interim results are not necessarily indicative of full-year performance. Amounts below are in millions except per-share data.
Key financial results
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net revenue | $1,332.3 | $1,253.2 | $2,710.9 | $2,566.7 |
| Operating income | $274.0 | $264.1 | $607.7 | $524.2 |
| Net income attributable to Wynn Resorts | $129.8 | $138.1 | $332.7 | $278.6 |
| Diluted EPS | $1.28 | $1.37 | $3.28 | $2.59 |
| Adjusted Property EBITDA | $425.7 | $384.1 | $876.8 | $774.8 |
Q2 net revenue rose 6.3% and operating income rose 3.7%, while Wynn-attributable net income fell 6.0%. Approximate operating margin was 20.6%, versus 21.1% a year earlier. For the first half, revenue rose 5.6%, operating income 15.9%, and attributable net income 19.4%; approximate operating margin improved to 22.4% from 20.4%.
- Segments: Q2 Macau revenue was $930.9 and Adjusted Property EBITDA $290.1, versus $907.6 and $302.2. Las Vegas revenue was $401.4 and Adjusted Property EBITDA $135.7, versus $345.6 and $81.9. The Las Vegas EBITDA increase reflected a significantly higher table-games win percentage; Macau EBITDA was lower in part because the prior-year quarter benefited from a larger doubtful-account reserve adjustment.
- Cash flow: First-half operating cash flow was $910.8, compared with $660.8. Management attributed the increase to favorable movements in ordinary working-capital accounts, particularly payables and accrued expenses, and stronger casino operating results. Investing cash outflow was $125.1, including $189.7 of capital expenditures; financing cash outflow was $483.7, including $438.2 of dividends paid. Cash and cash equivalents ended the period at $2,028.2.
- Liquidity and debt: At June 30, cash and cash equivalents were $2,028.2, investments $227.6, and restricted cash approximately $243. Total debt was approximately $6,012, including the $1,936 Redemption Note; current debt was $1.1. The Macau revolving facility had $1.55 billion available, with no borrowings outstanding. Management said available cash, operating cash flow and credit-facility capacity should cover anticipated capital needs for the rest of 2013, while noting future financing availability is not assured.
Material changes and unusual items
- Q2 casino revenue increased 6.6% year over year. Macau casino revenue rose 2.2%; Las Vegas casino revenue increased 44.7%, primarily due to higher table-games win percentage. Las Vegas table-games win percentage was 21.5% versus 15.0% in Q2 2012.
- A Q2 change in casino receivable reserve estimates benefited operating income by $14.9 and Wynn-attributable net income by $12.0, or $0.12 per diluted share. A similar prior-year adjustment was larger: $30.9 to operating income and $23.3 to attributable net income. This estimate change was the primary factor behind the Q2 doubtful-account credit.
- General and administrative expense rose, in part due to accelerated vesting of a former COO’s restricted stock, increased development costs and higher stock-based compensation. The filing reports a $23 charge in Q2 related to the former COO’s retirement and accelerated vesting.
- Wynn Las Vegas issued $500 of 4.25% senior notes due 2023 and used proceeds in connection with the tender offer for its 2017 notes. The tender offer repurchased approximately $274.7 principal amount and resulted in a $26.6 debt-retirement loss. The company held restricted cash for a possible November 2013 redemption of untendered 2017 notes.
- Declared dividends were $1.00 per share for each of Q1 and Q2 2013; a further $1.00 dividend was announced after quarter-end. Debt agreements restrict certain subsidiary distributions.
Outlook, risks and contingencies
- Cotai development: Wynn estimated a total project budget of approximately $4 billion and expected opening in the first half of 2016. Pre-foundation work began in February 2013. A July 2013 construction agreement set a guaranteed maximum price of approximately HK$20 billion (about $2.57 billion) for specified contractor works, with timing and price subject to contractual adjustments. The company drew an additional $200 million equivalent under the Macau term facility after quarter-end for Cotai costs.
- Other expansion: The company had gaming-license applications and potential projects in Massachusetts and Pennsylvania, with outcomes not expected until 2014; proceeding would require significant funding.
- Litigation and regulatory matters: Litigation with the Okada Parties challenges the share redemption and Redemption Note. Management could not determine the probability or reasonably possible loss; an adverse material judgment or settlement could materially affect financial condition. The DOJ sought a discovery stay related to its investigation of alleged misconduct involving the Okada Parties; related investigations could have adverse regulatory consequences. The filing also notes possible debt change-of-control consequences if Elaine Wynn prevails on her claims concerning the stockholders agreement. Separately, the SEC’s inquiry into the University of Macau donation concluded with no recommendation for enforcement action, and the Nevada Gaming Control Board reported no violations in its investigation of allegations by Mr. Okada.
- Operating and financial risks: Results depend on two resort complexes and are exposed to gaming volatility, premium-customer credit and collection risk, tourism and economic conditions, competition, gaming regulation, leverage and interest rates, and Macau currency exposure. Approximately 83% of casino markers were due from customers outside the United States, primarily in Asia. Management reported compliance with debt covenants at June 30.
Investor verification priorities
- Assess how much of first-half operating cash-flow growth came from working-capital timing, especially the increase in accounts payable and accrued expenses.
- Evaluate the sustainability of casino win rates and the effect of the $14.9 Q2 receivable-reserve benefit on reported earnings.
- Review Cotai’s total funding requirements, construction-price and schedule adjustment provisions, and the use of additional borrowing.
- Track the Okada litigation, related government investigations, potential material liabilities and any possible change-of-control triggers under the debt agreements.
- Confirm restrictions on subsidiary distributions, the location and availability of cash, and the effect of foreign-currency movements and potential U.S. tax on repatriation.