Wynn Resorts, Limited — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. Amounts below are in U.S. dollars; financial statement amounts have been converted from thousands to millions where appropriate.
Business context
Wynn operates destination casino resorts in Macau and Las Vegas and owns 72.3% of Wynn Macau, Limited. The company is constructing Wynn Palace in Cotai, Macau. Results are exposed to casino win volatility, premium-customer credit risk, and dependence on two resort complexes.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net revenue | $1,390.1m | $1,298.5m | $4,101.0m | $3,865.2m |
| Operating income | $314.0m | $247.1m | $921.7m | $771.3m |
| Net income | $248.8m | $165.2m | $713.7m | $562.9m |
| Net income attributable to Wynn Resorts | $182.0m | $112.0m | $514.8m | $390.7m |
| Diluted earnings per share | $1.79 | $1.11 | $5.07 | $3.71 |
| Adjusted Property EBITDA | $435.6m | $402.6m | $1,312.4m | $1,177.3m |
- Q3 net revenue increased 7.1%; operating income increased 27.1%. Nine-month net revenue increased 6.1%; operating income increased 19.5%.
- Operating margin was approximately 22.6% in Q3 versus 19.0% a year earlier, and 22.5% for the nine-month period versus 20.0%. These margins are calculated from reported revenue and operating income.
- Macau generated $997.6m of Q3 revenue and $329.1m of Adjusted Property EBITDA; Las Vegas generated $392.5m and $106.5m, respectively. Q3 EBITDA rose in Macau, while Las Vegas EBITDA declined from $110.4m.
- Growth reflected stronger casino results, especially table-game results. Q3 Macau casino revenue rose 10.1%; Las Vegas casino revenue rose 3.9%. For the nine months, casino revenue increased 7.1% overall, including a 16.7% increase in Las Vegas, which management attributed mainly to a higher table-game win percentage.
- Operating cash flow for the nine months was $1,281.3m, up from $989.2m. Management attributed the improvement to stronger operating income and favorable working-capital movements, particularly accounts payable and accrued expenses.
- Capital expenditures were $324.8m for the nine months, including approximately $249m for Wynn Palace site preparation and piling. Investing cash outflow was $490.6m; financing cash outflow was $476.8m, including $631.7m of dividends paid.
- At September 30, cash and cash equivalents were $2,041.2m; restricted cash and investment securities totaled $698.7m across current and noncurrent classifications. Available-for-sale securities had a fair value of $255.7m. The company also reported $1.55bn of available Wynn Macau revolving-credit capacity.
- Total debt carrying value was $6,210.0m, including the $1,936.4m Redemption Note; current debt was $223.5m. Total debt increased from $5,782.8m at December 31, 2012. The company reported $7,828.3m of total liabilities and $241.3m of total equity.
- Approximately 96% of long-term debt was fixed-rate. Management estimated that a 1% change in variable rates would change annual interest cost by $2.3m. Nine-month interest expense, net of capitalized interest, was $222.7m, compared with $211.0m.
Material changes, outlook, and unusual items
- Wynn Palace: The estimated project budget is approximately $4bn, including land, pre-opening costs, capitalized interest, and opening inventories. Management said the project remained on schedule for opening in the first half of 2016. The construction contract has a guaranteed maximum price of HK$20bn (approximately $2.57bn), subject to specified adjustments. The general contractor’s parent provided a completion guarantee, and a performance bond covers 5% of the contract price.
- Debt transactions: Wynn Las Vegas issued $500m of 4.25% senior notes due 2023, partly to fund the tender for its 2017 notes. The untendered $225.3m principal was redeemed on November 1, 2013, after quarter-end. Wynn Macau issued $600m of 5.25% notes due 2021 on October 16, 2013, receiving approximately $591.5m net proceeds for working capital and general corporate purposes.
- Liquidity outlook: Management believed cash, operating cash flow, and available credit would cover anticipated capital needs for the remainder of 2013, while cautioning that future financing may not be available on acceptable terms. Debt agreements restrict subsidiary distributions and dividends. Wynn Macau’s $200m term-loan increase was designated for Wynn Palace costs.
- Dividends: The company declared $1.00 per share for Q3, and after quarter-end announced a further $1.00 per share dividend and a separate $3.00 per share dividend. Subsidiary debt restrictions may constrain funds available to the parent.
- Reserve adjustment: A nine-month adjustment to casino receivable reserve estimates benefited operating income by $14.9m and Wynn Resorts-attributable net income by $12.0m, or $0.12 per diluted share. The comparable 2012 adjustment benefited operating income by $30.9m and attributable net income by $23.3m, or $0.22 per diluted share.
- Other unusual items: The Q3 provision for doubtful accounts rose to $11.3m from $5.3m, which management attributed to collection timing. Nine-month stock-based compensation expense rose to $35.1m from $13.7m, including an approximately $23m charge related to accelerated vesting following the former COO’s retirement. Debt extinguishment costs of $26.6m were recorded in the nine-month period.
- Legal and regulatory exposure: Litigation over the 2012 redemption of Aruze USA shares and related investigations remained unresolved. Management said it could not determine the probability of outcome or reasonably possible loss; an adverse material judgment or settlement could materially affect financial condition. The company also disclosed an APC arbitration claim seeking approximately $32m. The SEC said its inquiry into the University of Macau donation was completed without an intended enforcement recommendation; other government inquiries and derivative litigation were also described.
- Other risks and developments: The company cited Macau visitation and regulatory risks, casino competition, economic and travel conditions, customer credit and win volatility, interest and foreign-exchange exposures, and reliance on key management. Approximately 55% of cash balances were foreign-currency denominated; a 1% U.S. dollar/Hong Kong dollar exchange-rate change was estimated to produce an approximately $10.9m transaction gain or loss. The Pennsylvania gaming-license application was withdrawn after quarter-end; a Massachusetts application remained competitive, with an outcome not expected until 2014 and significant potential expenditure.
Most important facts for investors to verify
- Whether Macau and Las Vegas casino revenue and margins can be sustained without unusually favorable table-game outcomes.
- Wynn Palace’s remaining cost, funding needs, construction milestones, and first-half 2016 opening target.
- Debt maturities, interest burden, subsidiary distribution restrictions, and the practical availability of reported cash and credit facilities.
- The consequences of the Aruze/Okada litigation and investigations, including any potential change-of-control offer under debt documents.
- The quality and collectability of casino receivables, and the effect of the reserve adjustment on reported earnings.
- Whether declared dividends can be funded at the parent level given subsidiary debt covenants and ongoing development spending.