Wynn Resorts, Limited — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. The filing was signed February 28, 2018. It reports full-year results and unaudited quarterly data, including fourth-quarter results; it is not a standalone quarterly filing.
Business context
Wynn develops and operates integrated casino resorts. Its operations comprise Wynn Macau and Wynn Palace in Macau, Wynn Las Vegas, and the Wynn Boston Harbor project under construction. Wynn Resorts owned approximately 72% of Wynn Macau, Limited at year-end. Wynn Palace, opened in August 2016, contributed a full year of operations for the first time in 2017.
Financial performance and liquidity
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net revenue | $6.306 billion | $4.466 billion |
| Operating income | $1.056 billion | $522 million |
| Net income attributable to Wynn Resorts | $747 million | $242 million |
| Diluted earnings per share | $7.28 | $2.38 |
| Adjusted Property EBITDA | $1.811 billion | $1.259 billion |
| Net cash from operating activities | $1.877 billion | $971 million |
Revenue increased 41.2%, while Adjusted Property EBITDA rose 43.8%. Operating margin was approximately 16.7%, versus 11.7% in 2016. Net income attributable to the company grew 208.8%, substantially aided by a provisional $339.9 million tax benefit from U.S. tax reform. The effective tax rate was negative 58.7%; absent the tax benefit, reported earnings growth would have been materially lower. Adjusted Property EBITDA is a non-GAAP measure and does not include interest, taxes, depreciation, capital spending or debt principal payments.
Fourth quarter: Revenue was $1.689 billion, operating income $301 million, net income $544 million and net income attributable to Wynn Resorts $492 million; diluted EPS was $4.77. The quarter included the provisional U.S. tax-reform benefit.
Cash, debt and liquidity: Cash and cash equivalents were $2.804 billion at year-end, and available-for-sale investments totaled $327 million. Total debt carrying value was approximately $9.629 billion, including the $1.879 billion fair-valued Redemption Note; reported total long-term obligations were $9.673 billion. The company reported $1.601 billion of available capacity under credit facilities, including letters of credit. Current assets were $3.424 billion and current liabilities $1.930 billion. Operating cash flow less capital expenditures was approximately $941 million; investing cash outflow was $958 million, primarily reflecting $935 million of capital expenditures. Dividends paid were $321 million.
Interest expense, net of capitalized interest, increased to $389 million from $289 million, mainly as less interest was capitalized after Wynn Palace construction ended. The company recorded a $55 million loss on debt extinguishment and a $60 million loss from the Redemption Note fair-value change. Approximately 66.3% of debt principal bore fixed interest rates; management estimated a 100-basis-point increase in variable rates would raise annual interest cost by $33 million.
Material changes and operating trends
- Macau revenue increased 62.4% to $4.625 billion, led by Wynn Palace, whose Adjusted Property EBITDA rose to $528 million from $103 million. Wynn Macau revenue increased 9.8%; VIP turnover grew 23.9%.
- Las Vegas revenue rose 3.9% to $1.681 billion, and Adjusted Property EBITDA increased 10.0% to $522 million.
- Casino revenue grew 51.4% and represented 78.5% of net revenue, compared with 73.2% in 2016. Non-casino revenue rose 13.3%.
- Customer deposits increased to $1.050 billion from $600 million. Management attributed much of the operating cash-flow improvement to Wynn Palace and higher customer deposits.
- Debt was refinanced during the year: Wynn Macau, Limited issued $600 million of 2024 notes and $750 million of 2027 notes; Wynn Las Vegas issued $900 million of 2027 notes. The company tendered or redeemed certain 2021 and 2022 notes.
Outlook, risks and unusual items
- Projects: Wynn Boston Harbor had an estimated total budget of approximately $2.5 billion, with $1.13 billion incurred by year-end; management expected a mid-2019 opening. The construction manager’s guaranteed maximum price was $1.32 billion, subject to contractual adjustments. Phase 1 of the Wynn Las Vegas golf-course redevelopment was estimated at $500 million, with a first-half 2020 opening target.
- Leadership and regulatory scrutiny: Stephen A. Wynn resigned as CEO and Chairman on February 6, 2018, following workplace misconduct allegations reported in January. An independent board committee began an investigation and expanded it to review workplace policies. Nevada and Massachusetts regulators opened reviews, and Macau’s regulator was monitoring the matter. The company warned of possible reputational, legal, licensing and operational effects.
- Litigation and control: The company faced ongoing Okada-related litigation over the 2012 share redemption and Redemption Note, as well as derivative and securities claims relating to the allegations against Mr. Wynn. The company said it could not determine the probability or reasonably possible loss for these matters. A dispute over the Wynn stockholders agreement could also affect change-of-control provisions in certain debt documents.
- Other material risks: Wynn depends on a limited number of resorts and on travel, premium customers and gaming promoters; it faces Macau concession renewal in 2022, competition, Chinese travel and spending restrictions, gaming regulation, credit-collection exposure, construction and environmental risks, and variable-rate and foreign-exchange exposure. Macau smoking restrictions were scheduled to tighten by December 31, 2018.
- Tax and accounting: The $339.9 million U.S. tax-reform benefit was provisional. The company disclosed $3.62 billion of foreign tax credit carryforwards, with a $3.27 billion valuation allowance. It expected the 2018 adoption of the new revenue standard to reduce reported revenue and operating expenses, with no material effect on financial condition or net income expected.
- Dividend: Wynn paid $2.00 per share for 2017 and announced a $0.50-per-share dividend payable in February 2018. Subsidiary debt restrictions limit distributions to the parent.
Investor verification priorities
- Separate recurring operating performance from the provisional tax benefit and other non-operating items when assessing FY2017 and fourth-quarter earnings.
- Track Wynn Palace’s ongoing ramp-up, Macau market conditions, VIP turnover and Wynn Macau concession renewal developments.
- Verify Wynn Boston Harbor’s remaining funding needs, construction progress, opening schedule and exposure to environmental remediation and licensing requirements.
- Review debt maturities, covenant headroom, restrictions on subsidiary distributions, and any change-of-control consequences linked to litigation or governance developments.
- Monitor the outcomes of the workplace investigations, regulatory reviews and related lawsuits, including any effects on licenses, leadership, reputation or financial exposure.