Business context and reporting period
Wynn Resorts, Limited filed this Form 10-K for the fiscal year ended December 31, 2014. It owns and operates resorts in Macau and Las Vegas, owns 72% of Wynn Macau, and was building Wynn Palace in Cotai. In November 2014, its Massachusetts gaming license became effective.
The filing is annual, not a standalone fourth-quarter filing; it also provides unaudited fourth-quarter results. Amounts below are U.S. dollars.
Financial performance and liquidity
| Metric | FY 2014 | FY 2013 | Change |
|---|---|---|---|
| Net revenue | $5.434 billion | $5.621 billion | -3.3% |
| Operating income | $1.266 billion | $1.290 billion | -1.8% |
| Net income attributable to Wynn Resorts | $731.6 million | $728.7 million | +0.4% |
| Diluted EPS | $7.18 | $7.17 | Nearly flat |
| Adjusted Property EBITDA | $1.773 billion | $1.811 billion | -2.1% |
| Cash from operations | $1.098 billion | $1.677 billion | -34.5% |
| Capital expenditures | $1.127 billion | $506.8 million | Primarily Wynn Palace |
Operating margin was approximately 23.3%, versus 22.9% in 2013. Casino revenue fell 4.8% to $4.274 billion; non-casino revenue grew 2.6% to $1.159 billion. Macau revenue declined 6.0% to $3.797 billion, while Las Vegas revenue rose 3.6% to $1.637 billion. Macau Adjusted Property EBITDA fell 5.0%; Las Vegas increased 5.9%.
Fourth quarter: Revenue was $1.138 billion, down 25.1% year over year; operating income was $215.5 million, down 41.5%; consolidated net income was $148.2 million, down 49.0%; and net income attributable to Wynn Resorts was $109.3 million, down 48.9%. Diluted EPS was $1.07, versus $2.10.
At year-end, cash and cash equivalents were $2.182 billion and investments were $250.3 million. Long-term debt was $7.345 billion, including the $1.936 billion Redemption Note; cash less debt was approximately negative $5.16 billion. Current assets were $2.782 billion and current liabilities were $1.313 billion. The company reported $1.42 billion available under the Wynn Macau revolving facility and $1.24 billion under the Wynn America facilities, net of letters of credit. Management said expected cash, operating cash flow and borrowing capacity should meet anticipated cash needs for at least 12 months; it also said the company was in compliance with debt covenants.
Material changes versus the prior comparable period
- Macau VIP turnover decreased 12.1%, and VIP win as a share of turnover declined to 2.82% from 3.01%. Management attributed weaker Macau casino revenue chiefly to a significant slowdown among premium customers, despite stable overall visitation.
- Macau mass-market table games win increased 19.7%; Las Vegas casino revenue was broadly flat, while Las Vegas non-casino revenue helped support growth.
- Operating cash flow dropped substantially, primarily due to lower operating income and decreases in accounts payable, accrued expenses and customer deposits.
- Wynn Palace construction drove capital spending: cumulative investment was $1.8 billion against a total project budget of $4.1 billion. Pre-opening costs rose to $30.1 million from $3.2 million.
- Debt increased to $7.345 billion from $6.587 billion. During 2014, the company issued $750 million of additional 5.25% notes due 2021 and repurchased first mortgage notes in the open market.
Outlook, risks, contingencies and unusual items
Management expected Wynn Palace to open in the first half of 2016. The contractor reported it remained on track for timely completion, although conditions for an early-completion bonus would not be met. The Cotai land concession requires completion by May 2017; missing that deadline without an extension could put the concession and capitalized project costs at risk. The company had invested $1.8 billion, and the project budget was $4.1 billion.
The company had won a Massachusetts license and purchased 33 acres in Everett in January 2015, but the filing gives no clear project budget or opening date. Revere, Somerville and Boston brought legal actions challenging aspects of the licensing decision or community designations. These suits did not name Wynn MA.
Material risks include Macau demand and policy shifts in mainland China, the anti-corruption campaign, smoking restrictions, competition and dependence on VIP customers and games promoters; construction costs, labor and permitting; gaming-credit collection; extensive licensing requirements; foreign exchange and interest-rate exposure; and reliance on a limited number of resorts and on Stephen A. Wynn. The Macau gaming concession expires in June 2022 and may be redeemable by the government beginning in June 2017.
Litigation arising from the 2012 redemption of Aruze’s shares remains unresolved. The company recorded a $1.94 billion, 2% subordinated Redemption Note due in 2022; the Okada Parties challenge the redemption and seek, among other relief, restoration of the shares and unspecified damages. Management said it could not determine the probability or range of reasonably possible loss. Related regulatory inquiries and derivative actions also remain relevant; prior Nevada Gaming Control Board and SEC investigations were closed with no action. A separate Massachusetts license challenge and a Macau CCAC information request were disclosed.
Other notable items: operating cash flow was below capital expenditures; dividends paid were $942.9 million, and the company declared $6.25 per share in 2014 distributions. Macau’s exemption from its 12% Complementary Tax on casino gaming profits ran through December 31, 2015; the company reported $99.4 million of tax exemption for 2014. A $8.7 million adjustment to the doubtful-account reserve benefited 2014 operating income. In February 2015, after year-end, the company issued $1.8 billion of 5.5% notes due 2025 and used proceeds principally to refinance 2020 notes; the tender resulted in a reported $101.2 million premium loss in the first quarter of 2015. The auditors gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether Macau VIP turnover, win rate and premium-customer activity stabilized after the 2014 decline, and how gaming policy changes affect visitation.
- Wynn Palace’s updated cost, construction progress, opening timing and exposure to the May 2017 land-concession deadline.
- Current debt, refinancing terms, covenant headroom, facility availability and cash accessible to the parent after subsidiary restrictions.
- Developments and potential financial exposure in the Aruze/Okada litigation, related investigations and Massachusetts license challenges.
- Fourth-quarter deterioration and the reasons for the sharp year-over-year declines in revenue, operating income and earnings.
- Cash-flow conversion, planned capital spending and the sustainability of dividends amid high leverage and development commitments.
- Renewal or replacement of the Macau tax exemption after 2015 and realizability of the substantial foreign tax credit carryforwards.