WYNN RESORTS LTD quarterly report, Q2 FY2012

Business context and reporting period

Wynn Resorts, Limited’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2012. The company operates Wynn/Encore resorts in Las Vegas and Macau; Macau contributed about 72% of second-quarter net revenue. Financial amounts below are in U.S. dollars; dollar figures are in millions unless stated otherwise.

Key financial metrics

• Second-quarter casino revenue fell 11.9% to $953.4 million; net revenue declined 8.4%. For the six months, casino revenue fell 4.1% and net revenue fell 2.3%.
• Second-quarter net income attributable to the company rose 13.1%; six-month attributable net income declined 5.8%. Six-month diluted EPS increased despite lower attributable earnings, reflecting fewer weighted-average shares after the share redemption.
• Operating income and margin improved in the quarter partly because the prior-year quarter included a $107.5 million University of Macau donation charge. A $17.3 million credit to doubtful-account expense also benefited Q2 2012.
• Cash and cash equivalents were $1,933.2 million at June 30, 2012, versus $1,262.6 million at year-end; investment securities totaled $273.6 million. Six-month operating cash flow was $660.8 million, down from $831.0 million. Capital expenditures were $115.3 million.
• Total debt carrying value was $5,458.0 million, including the $1,936.4 million redemption note; current debt was $165.8 million. The redemption note bears 2% interest and is due in 2022. Total liabilities were $6,885.1 million and total equity $595.5 million.
• At June 30, the company reported $84.2 million available under the Wynn Las Vegas facility and no outstanding Wynn Macau revolving borrowings. Management said it believed cash, operating cash flow and credit availability would cover anticipated 2012 capital needs. Approximately 92% of long-term debt was fixed-rate; a 1% change in variable rates was estimated to change annual interest cost by $4.6 million.

Material changes versus comparable periods

• Las Vegas Q2 net revenue decreased to $345.6 million from $390.8 million; Macau Q2 net revenue declined to $907.6 million from $976.5 million. For the first half, Las Vegas revenue fell to $708.4 million, while Macau revenue edged up to $1,858.3 million.
• Las Vegas casino results were affected by below-expected table-game hold: Q2 win percentage was 15%, versus 27.6% a year earlier and a stated expected range of 21%–24%. Macau VIP turnover and slot activity weakened in Q2; Macau general-casino table-game hold exceeded the expected range.
• Adjusted Property EBITDA decreased 14.1% in Q2 and 9.1% for the six-month period. Las Vegas EBITDA fell in both comparisons; Macau EBITDA was slightly lower in Q2 but higher for the six months.
• Interest expense rose to $73.9 million in Q2 and $135.9 million for six months, mainly reflecting the $1.94 billion redemption note and $900 million of new Wynn Las Vegas notes, partly offset by repayment of term loans.
• In February, the company redeemed and canceled 24.55 million shares held by Aruze USA, issuing the $1.94 billion promissory note. Shares outstanding fell substantially and company stockholders’ equity declined from $2,089.0 million at year-end to $341.6 million at June 30.
• On March 12, Wynn Las Vegas issued $900 million of 5.375% first-mortgage notes due 2022 and used part of the proceeds to repay term loans. On July 31, after quarter-end, Wynn Macau amended its facilities to provide $2.3 billion equivalent of term and revolving capacity, with a possible $200 million increase.

Outlook, commentary, risks and unusual items

• Wynn Cotai is planned as an integrated resort with about 2,000 rooms. The company estimated a project budget of $3.5 billion–$4.0 billion; the Macau land concession was finalized in May 2012. The company stated it expected to fund 2012 needs from cash, operations and available facilities, but gave no specific earnings or revenue guidance.
• The Q2 doubtful-account reserve adjustment benefited operating income by $30.9 million and net income attributable to Wynn Resorts by $23.3 million. The filing identifies this as a change in estimate based on collection history and current trends.
• Litigation and regulatory matters relate to the Aruze/Okada share redemption and allegations concerning gifts to foreign gaming officials, the University of Macau donation, and related corporate governance disputes. The SEC had opened an informal inquiry; the company said it was cooperating. Management could not estimate the probability or range of loss for derivative litigation. The filing warns of potential regulatory, legal, debt-covenant and reputational consequences.
• The redemption note and share redemption are disputed in litigation. A related cross-claim could, if successful, potentially trigger a change of control under debt documents, requiring a 101% repurchase offer for certain notes and potentially constituting a credit-agreement default.
• Other disclosed risks include dependence on two resort locations and premium-credit customers, gaming and visitation regulation, competition, economic and travel conditions, foreign-exchange exposure, leverage, and cybersecurity. Management reported compliance with debt covenants at June 30. No interest-rate swaps remained outstanding at quarter-end.
• A $0.50 per-share dividend was declared in May and paid in June; another $0.50 dividend was announced in July for payment in August. Subsidiary debt restrictions constrain the ability to upstream cash and pay dividends.

Important facts for investors to verify

• Whether gaming hold and Macau VIP turnover recover, and how much reported earnings depend on volatile table-game results.
• The sustainability of earnings after excluding the $30.9 million doubtful-account benefit and considering the unusual prior-year donation charge.
• Funding, total costs, timing and financing needs for the $3.5 billion–$4.0 billion Wynn Cotai project, including use of the expanded Wynn Macau credit facilities.
• The terms, accounting value, enforceability and litigation outcome of the $1.94 billion redemption note, plus any resulting change-of-control or refinancing implications.
• Cash availability at the parent versus subsidiaries, debt-service needs, covenant limits, and the extent to which operating cash flow can fund dividends and development spending.
• Progress and outcomes of the Okada-related litigation, SEC inquiry and other regulatory reviews, including any material financial or licensing consequences.