Wynn Resorts, Ltd. - 10-Q Summary (Period Ended Sept 30, 2007)
Business Context and Reporting Period
This Quarterly Report on Form 10-Q covers the three and nine months ended September 30, 2007. Wynn Resorts, Limited operates two major destination casino resorts: Wynn Las Vegas (opened April 2005) and Wynn Macau (opened September 2006). The company is currently constructing "Encore at Wynn Las Vegas," expected to open in early 2009, and expanding Wynn Macau, including the "Wynn Diamond Suites" project expected to open in 2010.
Key Financial Metrics
| Metric (Nine Months Ended Sept 30, 2007) | Amount ($ in thousands) |
|---|---|
| Net Revenues | $1,976,244 |
| Operating Income | $320,628 |
| Net Income | $192,695 |
| Diluted EPS | $1.77 |
| Operating Cash Flow | $542,297 |
| Cash and Cash Equivalents (Sept 30, 2007) | $829,060 |
| Total Long-Term Debt | $2,400,705 |
| Capital Expenditures (Net) | ($704,101) |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 128% to $1.98 billion for the nine months ended Sept 30, 2007, compared to $869 million in the prior year period. This surge is primarily driven by the inclusion of a full nine months of Wynn Macau operations versus only 25 days in 2006.
- Profitability: Operating income improved from a loss of $7.3 million in 2006 to $320.6 million in 2007. Net income decreased to $192.7 million from $684.2 million in 2006; the prior year figure was significantly inflated by a one-time $899.4 million gain on the sale of a subconcession right.
- Expense Increases: Operating costs rose to $1.66 billion from $877.6 million, reflecting the full operational costs of Wynn Macau, including a 39% gross win tax. Property charges increased to $51.4 million due to abandonment costs related to Wynn Macau expansion reconfigurations.
- Debt Structure: In July 2007, the company converted $224.1 million of 6% Convertible Subordinated Debentures into common stock, reducing long-term debt. Concurrently, the company entered a new $1 billion term loan facility.
Outlook, Risks, and Management Commentary
- Construction Progress: Encore at Wynn Las Vegas is on schedule for an early 2009 opening with a project budget of approximately $2.2 billion. Wynn Macau expansion is progressing, with the Wynn Diamond Suites contract executed in November 2007 for $347.8 million.
- Capital Markets: In October 2007 (subsequent to the period end), the company completed a secondary common stock offering raising $664.1 million. In November 2007, $400 million of First Mortgage Notes were issued.
- Key Risks: The company faces risks related to the completion of major construction projects (Encore and Wynn Macau expansions) on time and within budget. There is significant exposure to credit risk from high-end gaming customers, with 63% of markers due from foreign customers, primarily in Asia. The company is also subject to foreign currency fluctuations regarding the Macau pataca and Hong Kong dollar.
- Taxation: The effective tax rate for the nine months was 20%, lower than the U.S. federal rate, due to Macau's tax holiday on casino gaming profits and lower foreign tax rates.
Investor Verification Checklist
- Construction Budgets: Verify the current status and cost adherence of the $2.2 billion Encore project and the $550-$600 million Wynn Diamond Suites expansion.
- Credit Exposure: Review the allowance for doubtful accounts, which increased to 36.5% of casino receivables, and assess the collectibility of foreign markers.
- Debt Covenants: Confirm compliance with debt covenants, particularly regarding liquidity requirements and restricted payments for dividends.
- Macau Regulatory Environment: Monitor the stability of the Macau gaming concession and tax holiday status.
- Subsequent Financing: Review the terms and impact of the October 2007 stock offering and November 2007 bond issuance on future leverage ratios.