Wynn Resorts, Limited — Q3 2016 Form 10-Q
Business context and period. Unaudited results cover the three and nine months ended September 30, 2016, compared with the same 2015 periods. Wynn operates resorts in Macau and Las Vegas and is developing Wynn Boston Harbor. Wynn Palace opened August 22, 2016, contributing 40 days of operations in the quarter; Wynn Resorts owns approximately 72% of Wynn Macau, Limited.
Financial highlights
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net revenue | $1,109.8 million | $996.3 million | $3,165.9 million | $3,129.0 million |
| Operating income | $76.9 million | $152.8 million | $382.8 million | $507.0 million |
| Net income (loss) attributable to Wynn Resorts | $(17.4) million | $96.2 million | $128.2 million | $108.1 million |
| Diluted earnings (loss) per share | $(0.17) | $0.95 | $1.26 | $1.06 |
| Adjusted Property EBITDA | $305.4 million | $279.9 million | $918.4 million | $898.3 million |
Q3 net revenue rose 11.4%, while operating income fell 49.6% and the company reported a net loss attributable to Wynn Resorts. Nine-month revenue increased 1.2% and attributable net income increased 18.6%. Calculated operating margin declined to approximately 6.9% from 15.3% in Q3, and to 12.1% from 16.2% for the nine-month period. Adjusted Property EBITDA margin was approximately 27.5% versus 28.1% in Q3 and 29.0% versus 28.7% for nine months.
Operating trends. Q3 growth reflected $164.6 million of revenue and $25.5 million of Adjusted Property EBITDA from Wynn Palace, plus higher Las Vegas revenue. Wynn Macau revenue fell 11.5% in the quarter; management attributed weakness to lower VIP and mass-market activity, Macau and China conditions, and competition from new Cotai resorts. For nine months, Wynn Macau Adjusted Property EBITDA declined 2.9%, while Las Vegas Adjusted Property EBITDA increased 3.0%.
Cash flow and liquidity. Nine-month operating cash flow was $680.8 million, versus $345.5 million in 2015; management attributed the increase primarily to working-capital changes. Investing cash outflow was $1,015.2 million, including $954.7 million of capital expenditures, of which $690.0 million related to Wynn Palace and $121.0 million to Wynn Boston Harbor. Financing cash outflow was $234.4 million, including $263.7 million in dividends, $240.4 million in debt repayments and $200.8 million moved to restricted cash, partly offset by $505.5 million of borrowings. Cash and cash equivalents were $1,510.8 million at quarter-end, down from $2,080.1 million at December 31, 2015; available-for-sale investments totaled $303.5 million. The company reported $202.9 million of restricted cash and available capacity of $409.2 million under Wynn Macau’s revolving facility and $1.14 billion under Wynn America’s facilities.
Debt and balance sheet. Long-term debt was $9,440.9 million, compared with $9,149.7 million at year-end 2015; it includes the $1,903.6 million fair-valued Redemption Note. Total stockholders’ equity was a deficit of $64.4 million, compared with positive equity of $21.8 million at year-end. Current assets were $2,057.2 million and current liabilities $1,430.3 million. Management said the company was in compliance with debt covenants at September 30. Approximately 77.8% of long-term debt, including swaps, was fixed-rate; a 100-basis-point change in variable rates was estimated to affect annual interest cost by $21.2 million.
Material changes, outlook and significant items
- Q3 operating costs rose 22.5%, led by Wynn Palace-related casino costs, pre-opening expenses, general and administrative costs, and depreciation. Pre-opening costs were $70.8 million in Q3 and $150.5 million for nine months, primarily for Wynn Palace.
- The Q3 attributable loss also reflected a $22.2 million loss from the change in the Redemption Note’s fair value and a $15.3 million Las Vegas energy-contract exit fee. The prior-year quarter included a $47.5 million fair-value gain on the note. For nine months, the fair-value change was a $19.2 million loss versus a $47.5 million gain in 2015.
- The company corrected immaterial prior-period interest capitalization during Q1 2016, reducing 2016 interest expense by $25.6 million and increasing 2016 attributable net income by $18.5 million. Management said the adjustment was immaterial to previously issued statements and expected full-year 2016 results.
- Wynn Palace’s October 2016 contractor settlement increased the guaranteed maximum construction price by HK$2.5 billion (approximately $300 million), to HK$23.1 billion (approximately $3.0 billion). The company reported total Wynn Palace investment of $4.4 billion. Boston Harbor’s estimated project budget was $1.9–$2.1 billion, with opening expected in the first half of 2019; construction began during the quarter.
- No specific earnings or revenue guidance was provided. Management said it expects to fund Boston Harbor primarily with available credit-facility capacity and expects cash needs to be met through operating cash flow, borrowing capacity and existing cash, while cautioning that operating cash flow and refinancing availability are not assured.
- After quarter-end, on October 25, 2016, the cash-collateralized WML Finance facility was increased from approximately $199.6 million to approximately $498.9 million; no additional amount had been borrowed as of the filing. On November 2, the company announced a $0.50-per-share dividend payable November 29, 2016.
Contingencies and risks. The company disclosed ongoing Okada-related litigation and investigations, including a U.S. government investigation referenced in court filings concerning a University of Macau foundation donation. Management said it could not determine the probability or reasonably possible loss for key matters; an adverse material judgment or settlement could materially affect financial condition. A separate Macau action seeks dissolution of Wynn Macau SA and damages. Challenges to the Massachusetts gaming-license award remained subject to appeal, although the Somerville and Boston disputes described in the filing had been resolved by settlement. Other stated risks include Macau and China economic or policy conditions, gaming regulation and license retention, construction costs and execution, gaming-receivable collections, leverage and interest rates, foreign exchange, and dependence on a limited number of resorts.
Most important facts for investors to verify
- Whether Wynn Palace sustains its initial contribution and whether Wynn Macau’s declining customer volumes stabilize amid Cotai competition and Macau market conditions.
- Actual Wynn Palace final completion costs and the effect of the contractor settlement, alongside Boston Harbor’s budget, funding needs and construction schedule.
- Liquidity available after restricted cash and collateral requirements, debt maturities and covenants, and the company’s capacity to maintain dividends and service debt.
- Developments in Okada-related litigation and investigations, and changes in the Redemption Note’s fair value and related legal or regulatory exposure.
- The effects of the Q1 interest-capitalization correction and the unusual Q3 pre-opening, energy-exit and fair-value items when assessing underlying earnings.