Wynn Resorts, Limited - 10-Q Summary (Period Ended Sept 30, 2008)
Business Context and Reporting Period
This is a Quarterly Report on Form 10-Q for Wynn Resorts, Limited, covering the three and nine months ended September 30, 2008. The Company operates two primary destination casino resorts: Wynn Las Vegas (opened 2005) and Wynn Macau (opened 2006). Significant capital projects include the construction of Encore at Wynn Las Vegas (expected opening December 2008) and Encore at Wynn Macau (expected opening Q1 2010). The reporting period reflects a challenging global economic environment, characterized by financial market volatility, reduced consumer spending, and new visa restrictions impacting travel to Macau.
Key Financial Metrics
| Metric (Nine Months Ended Sept 30) | 2008 (in thousands) | 2007 (in thousands) |
|---|---|---|
| Net Revenues | $2,373,049 | $1,976,244 |
| Operating Income | $314,114 | $320,628 |
| Net Income | $369,840 | $192,695 |
| Diluted EPS | $3.36 | $1.77 |
| Cash from Operating Activities | $488,775 | $542,297 |
| Cash and Cash Equivalents (Sept 30, 2008) | $1,713,669 | $1,275,120 (Dec 31, 2007) |
| Total Debt (Long-term + Current) | $4,917,741 | $3,536,612 (Dec 31, 2007) |
| Adjusted Property EBITDA | $611,185 | $584,212 |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 20% year-over-year for the nine months ended Sept 30, 2008. This was driven primarily by a 47% increase in Wynn Macau revenues ($1.496B vs $1.005B), offsetting a 10% decline in Wynn Las Vegas revenues ($877M vs $972M).
- Profitability: Net income nearly doubled to $370M from $193M. This significant increase was largely due to a $159.7M income tax benefit recorded in 2008, compared to a $46.8M tax provision in 2007. The tax benefit resulted from a re-evaluation of foreign tax credits and deferred tax liabilities related to Wynn Macau earnings.
- Expense Increases: Operating costs rose significantly, including a $49M provision for doubtful accounts (up from $27.8M) due to economic uncertainty. Pre-opening costs increased to $26.1M (from $4.2M) related to the Encore at Wynn Las Vegas project.
- Debt Expansion: Total debt increased by approximately $1.38 billion to $4.92 billion. The Company drew $879.5M on the Wynn Las Vegas Revolver and $500M on the Wynn Macau Revolver to maintain liquidity amidst credit market volatility.
Outlook, Risks, and Management Commentary
- Encore at Wynn Las Vegas: Construction is progressing as expected with an anticipated opening in December 2008. The project budget is approximately $2.3 billion, with $1.8 billion incurred to date. Management expects lower-than-expected occupancy and casino volumes upon opening due to the economic downturn.
- Macau Outlook: While Wynn Macau continues to grow, management expects growth to slow due to new visa restrictions limiting visits from mainland China and increased competition in the region.
- Liquidity Strategy: The Company maintains a strong cash position of $1.7 billion, bolstered by recent revolver draws. Management is actively managing capital expenditures and has authorized a $1.7 billion share repurchase program, having repurchased $1.1 billion worth of stock to date.
- Risks: Key risks include continued disruption in global financial markets, reduced discretionary spending, credit availability, and the impact of the global economic slowdown on luxury travel. The Company also faces risks related to the timely completion of construction projects within budget.
Investor Verification Checklist
- Tax Benefit Sustainability: Verify the permanence of the $159.7M tax benefit and the assumptions regarding the realization of foreign tax credits for Wynn Macau.
- Encore Opening Timeline: Monitor the December 2008 opening date for Encore at Wynn Las Vegas and potential cost overruns given the $2.3B budget.
- Credit Market Exposure: Assess the impact of floating interest rates on the $1.7B+ of variable debt, despite hedging activities, given the volatility in LIBOR/HIBOR.
- Macau Visa Restrictions: Track the actual impact of new Chinese visa restrictions on Wynn Macau's VIP and mass market visitation rates in Q4 2008.
- Allowance for Doubtful Accounts: Review the adequacy of the $111M allowance for doubtful accounts given the increased provision for bad debts in the current quarter.