Wynn Resorts, Limited — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; the filing also reports unaudited fourth-quarter results. This is an annual report, not a standalone quarterly filing. Wynn owns and operates resort complexes in Las Vegas and Macau.
Financial performance
| Metric | FY 2012 | FY 2011 | Change |
|---|---|---|---|
| Net revenue | $5.154 billion | $5.270 billion | Down 2.2% |
| Operating income | $1.029 billion | $1.008 billion | Up 2.1% |
| Net income | $728.7 million | $825.1 million | Down 11.7% |
| Net income attributable to Wynn Resorts | $502.0 million | $613.4 million | Down 18.2% |
| Diluted EPS | $4.82 | $4.88 | Down 1.2% |
| Adjusted property EBITDA | $1.576 billion | $1.635 billion | Down 3.6% |
| Cash provided by operations | $1.186 billion | $1.516 billion | Down $330 million |
Operating margin was approximately 20.0%, compared with 19.1% in 2011. Macau produced $3.667 billion of revenue and $1.167 billion of adjusted property EBITDA; Las Vegas produced $1.487 billion of revenue and $408 million of adjusted property EBITDA. Macau remained the dominant source of revenue and operating cash flow.
Casino revenue fell 3.7% to $4.035 billion, while non-casino revenue increased to $1.120 billion from $1.079 billion. Macau casino revenue declined 3.4%, principally reflecting lower VIP turnover and hold; Las Vegas casino revenue fell 5.3%, largely because of a lower table-games win percentage. Las Vegas room revenue rose as average daily rate increased to $252 from $242, despite occupancy declining to 82.9% from 86.1%.
Fourth quarter: Revenue was $1.289 billion versus $1.344 billion in Q4 2011; operating income was $258.0 million versus $274.8 million; and net income attributable to Wynn Resorts was $111.4 million versus $190.5 million. Diluted EPS was $1.10 versus $1.52.
Financial position, debt and liquidity
- At year-end, cash and cash equivalents were $1.725 billion, with $180.1 million of available-for-sale investments and $99.2 million of restricted cash. Current assets were $2.202 billion and current liabilities $1.131 billion.
- Total debt was approximately $5.783 billion, up from $3.218 billion. The increase principally reflects the $1.936 billion Redemption Note issued for redeemed shares, the $900 million Las Vegas notes, and Macau financing changes. Long-term obligations reported in selected data also include items beyond debt.
- The Redemption Note is due in 2022, bears 2% interest, is subordinated to borrowed debt, and may be prepaid at the Company’s discretion. It is subject to ongoing litigation.
- Wynn Macau established up to $2.3 billion equivalent of senior secured facilities, comprising a $750 million term loan and a $1.55 billion revolving facility, with a further $200 million upsizing option. Management said the company was in compliance with its financial covenants at year-end.
- Operating cash flow declined to $1.186 billion; capital expenditures were $241 million. Cash increased by $463 million during the year, supported in part by financing activity. Contractual commitments totaled $8.543 billion, including $5.796 billion of scheduled debt obligations and $1.973 billion of fixed interest payments.
- Total equity was $103.9 million, versus $2.223 billion in 2011; Wynn Resorts stockholders’ equity was a deficit of $259.0 million. The redemption reduced equity by approximately $1.936 billion.
Material changes and unusual items
- Revenue declined modestly, but operating income increased as lower casino expenses, depreciation and property charges offset lower casino revenue and higher general and administrative costs. Adjusted property EBITDA declined in both segments.
- A $30.9 million reduction in the doubtful-account provision benefited operating income; management attributed the adjustment to historical collection patterns and current trends. Despite this adjustment, casino receivables over 180 days rose to 37.5% from 19.8%, and the allowance was 36.9% of casino receivables.
- Interest expense increased to $288.8 million from $229.9 million, reflecting the Redemption Note, new Las Vegas notes and Macau borrowing. The Company recorded a $25.2 million loss on extinguishment of debt/exchange offer.
- 2011 property charges included a $109.6 million present-value charge for a University of Macau Development Foundation pledge. The pledge totals $135 million: a $25 million payment in 2011 and annual $10 million payments for 2012–2022. The filing reports $4.1 million of donation expense in 2012, including discount accretion.
- In 2012, the Board deemed Kazuo Okada and affiliated entities unsuitable under the Company’s charter and redeemed 24.55 million Aruze USA shares for the $1.936 billion note. The redemption is challenged in litigation. A Nevada Gaming Control Board investigation of allegations concerning Wynn and related Macau activities was reported complete in February 2013 with no Gaming Control Act or regulation violations found.
Outlook, risks and contingencies
- The Company estimated the Cotai integrated resort budget at $3.5–$4.0 billion, expected a guaranteed-maximum-price construction contract in the first half of 2013, and targeted opening in the first half of 2016. These are estimates, not assurances; cost overruns, delays, labor constraints and financing needs were identified as risks.
- Management stated that cash, operating cash flow and available Macau credit were expected to cover anticipated 2013 capital needs, while cautioning that additional financing might not be available on acceptable terms. No quantified earnings or revenue guidance was provided.
- Major exposures include dependence on two resorts and volatile premium/VIP gaming, competition, Macau visitor and policy changes, junket relationships and credit collection, gaming-license and concession risks, foreign exchange, leverage and covenant compliance, and Cotai construction execution.
- The SEC had an informal inquiry relating to the University of Macau donation and Macau gaming licenses; the Company said it was cooperating. The filing warns that investigations or litigation could lead to regulatory action and material adverse effects. Management could not estimate the probability or range of loss in the Okada redemption dispute. Other matters include APC’s approximately $32 million claim, which the Company disputes and was proceeding to arbitration.
- Elaine Wynn’s litigation concerning the stockholders agreement could, if successful, trigger a change-of-control provision in debt indentures and a repurchase offer at 101% of principal plus accrued interest. The federal derivative action was dismissed without prejudice; state derivative claims remained pending.
- The Company reported an unqualified audit opinion on its financial statements and effective internal control over financial reporting as of December 31, 2012.
Investor verification priorities
- Reconcile the $5.783 billion debt balance, including the $1.936 billion Redemption Note, and review maturity, collateral, covenant and subsidiary dividend restrictions.
- Assess the quality and aging of casino receivables, the $30.9 million reserve adjustment, and collection exposure to international customers.
- Track Cotai’s final budget, construction contract, funding plan, schedule and any changes to the expected 2016 opening.
- Follow the Okada redemption litigation, SEC inquiry, remaining derivative claims and potential change-of-control consequences.
- Evaluate Macau VIP turnover and win-rate volatility, junket economics, mainland China visitation conditions, and the concentration of cash flow in Macau and Las Vegas.