Business context and reporting period
Wynn Resorts, Limited’s Form 10-K covers the fiscal year ended December 31, 2013; it is an annual report, not a standalone fourth-quarter filing. The company operates Wynn Macau (72.3% owned) and Wynn Las Vegas, and is developing Wynn Palace in Macau. Fourth-quarter figures are included in the filing’s unaudited quarterly table.
Financial performance
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Net revenue | $5.621 billion | $5.154 billion |
| Operating income | $1.290 billion | $1.029 billion |
| Net income | $1.004 billion | $729 million |
| Net income attributable to Wynn Resorts | $729 million; diluted EPS $7.17 | $502 million; diluted EPS $4.82 |
| Operating cash flow | $1.677 billion | $1.186 billion |
| Capital expenditures | $507 million | $241 million |
- Revenue rose 9.1%; operating income rose 25.3%; parent-attributable net income rose 45.1%. Operating margin was approximately 23.0%, versus 20.0% in 2012; attributable net margin was approximately 13.0%, versus 9.7%.
- Adjusted property EBITDA, a non-GAAP measure, was $1.811 billion, up 14.9% from $1.576 billion. Macau contributed $1.324 billion and Las Vegas $487 million.
- Macau revenue was $4.041 billion, up 10.2%; Las Vegas revenue was $1.580 billion, up 6.3%. Casino revenue increased 11.3%, while non-casino revenue was broadly stable.
- Cash and cash equivalents were $2.435 billion at year-end, with $254 million of available-for-sale investments and $280 million of restricted cash and investments. Total debt was approximately $6.588 billion. Total assets were $8.377 billion and total equity $132 million; Wynn Resorts parent-company stockholders’ equity remained in deficit at $185 million.
- Interest expense, net of capitalized interest, was $299 million. The company reported a $40 million loss on debt extinguishment and a $17.6 million income tax benefit. Approximately 96% of debt was fixed-rate, including swaps; management estimated a 1-percentage-point variable-rate change would affect annual interest cost by about $2.3 million.
- For Q4 2013, net revenue was $1.520 billion, operating income $368 million, net income $290 million, and parent-attributable net income $214 million (diluted EPS $2.10). Q4 2012 comparatives were $1.289 billion, $258 million, $166 million, and $111 million (diluted EPS $1.10), respectively.
Material changes versus the prior comparable period
- Improved casino results drove much of the annual earnings increase. Macau casino revenue rose 10.6%, reflecting stronger general-casino and VIP table-game results; VIP turnover rose 3.1% and win as a percentage of turnover increased to 3.01% from 2.84%.
- Las Vegas casino revenue increased 15.3%, with table-games win up 16.0%; the reported table-games win percentage rose to 25.1% from 21.9%. The filing cautions that gaming win percentages can fluctuate.
- Operating cash flow increased by $491 million, supported by higher operating income and favorable changes in accounts payable and accrued expenses. Investing cash outflow increased to $678 million, principally as Wynn Palace spending accelerated.
- Debt increased from approximately $5.783 billion to $6.588 billion. The company issued $600 million of Wynn Macau senior notes and $500 million of Wynn Las Vegas notes, increased Wynn Macau term borrowing by $200 million, and refinanced/redeemed its 2017 notes.
- Wynn Resorts paid $7.00 per share in 2013 dividends, versus $9.50 in 2012. In January 2014, it announced a $1.25-per-share dividend and said the quarterly dividend had been increased to that level.
Outlook, risks, contingencies and unusual items
- Management said Wynn Palace remained on schedule to open in the first half of 2016. Its total budget was $4 billion, with $704 million invested by year-end 2013. The general contractor’s guaranteed maximum price was HK$20 billion (about $2.57 billion), subject to specified adjustments; completion was backed by a parent guarantee and a 5% performance bond.
- The company withdrew its Pennsylvania gaming-license application and had applied for a Massachusetts license, with an outcome expected by the end of the first half of 2014. Management noted the project would require significant company funding. No formal earnings or revenue guidance is stated in the supplied filing text.
- Management believed cash from operations, existing cash and Wynn Macau facility availability would be adequate for anticipated 2014 capital needs. Wynn Macau had $1.55 billion available under its revolving facility; management believed it was covenant-compliant and did not expect mandatory excess-cash-flow repayments in 2014. Dividends and cash transfers remain subject to subsidiary debt restrictions.
- Wynn Palace entails substantial construction, schedule, cost, labor, permitting and financing risks. The company’s operating cash flow depends on just two resort complexes, and results are exposed to tourism, competition, premium-player volatility, credit collections, mainland China visitation policies, Macau regulation, currency movements and leverage.
- Major ongoing litigation and investigations concern the 2012 redemption of former shareholder Aruze USA’s 24.55 million shares for a $1.94 billion, 2% subordinated note due 2022. The Okada-related parties challenge the redemption; the company said it could not determine the probability or reasonably possible loss. Federal discovery in the principal case was stayed through May 2, 2014. Related derivative claims and regulatory inquiries include a government investigation into the University of Macau donation; the company said it had received no target letter or subpoena regarding that donation.
- Elaine Wynn’s cross-claim over the stockholders agreement could, if successful, trigger change-of-control provisions and potential repurchase offers on certain Wynn Las Vegas notes. The filing also identifies potential regulatory, FCPA, anti-money-laundering, cybersecurity, insurance and concession-renewal risks.
- Unusual accounting and earnings factors include a $14.9 million 2013 benefit to operating income from a casino-receivable reserve adjustment (versus $30.9 million in 2012), $23 million of accelerated stock-compensation expense tied to the former COO’s retirement, and $40.4 million of debt-extinguishment loss. Macau’s casino-profit tax exemption runs through December 31, 2015; renewal or extension is not assured.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether Macau and Las Vegas gaming gains reflect sustainable volume and operating performance or unusually favorable hold; review win rates alongside turnover, drop and table-games win.
- Wynn Palace’s remaining funding needs, final cost, construction progress and opening timetable against the $4 billion budget and first-half 2016 target.
- Debt maturities, covenant headroom, subsidiary restrictions on dividends, and the practical availability of cash held in Macau or restricted for development.
- Developments in the Aruze/Okada litigation, related investigations and any potential change-of-control consequences from the Elaine Wynn cross-claim.
- Casino receivable collection experience and reserve assumptions, including the concentration of foreign customers and the reserve benefit recorded in 2013.
- Whether Macau tax exemptions and concession arrangements are maintained, and how mainland China travel policies, competition and currency exposure affect results.