WYNN RESORTS LTD quarterly report, Q2 FY2016

Business context and reporting period

Wynn Resorts, Limited filed this unaudited Form 10-Q for the quarter ended June 30, 2016. The company operates integrated casino resorts in Macau and Las Vegas and was developing Wynn Palace in Macau and Wynn Boston Harbor in Massachusetts. Wynn owns 72% of Wynn Macau, Limited.

Financial performance and position

Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.

• Q2 net revenue increased 1.7% and company-attributable net income rose 24.7%; operating income fell 12.8%. Operating margin was approximately 13.9%, compared with 16.3% a year earlier.
• Six-month net revenue declined 3.6% and Adjusted Property EBITDA declined 0.9%. The prior-year six-month attributable profit was substantially affected by a $120.0 million debt-extinguishment loss.
• At June 30, cash and cash equivalents were $1,902.3 million and investment securities totaled $303.3 million. Current assets were $2,414.5 million versus current liabilities of $991.9 million.
• Long-term debt was $9,457.0 million, up from $9,149.7 million at December 31, 2015. Total stockholders’ equity was only $1.7 million; Wynn Resorts’ own stockholders’ deficit was $69.6 million. Management reported compliance with debt covenants.
• For the six months, operating cash flow was $369.9 million, investing cash outflow was $605.8 million, and financing cash inflow was $59.2 million. Cash decreased $177.8 million. Capital expenditures, net of construction payables and retention, were $548.9 million; dividends paid were $212.8 million.

Material changes versus comparable periods

• Q2 Macau revenue increased 3.6% to $639.3 million, principally from higher casino win. VIP turnover fell 23.8%, but VIP win percentage increased to 3.98% from 2.92%; mass-market table win percentage rose to 20.0% from 17.5%. Macau Adjusted Property EBITDA increased 9.8%.
• For the first half, Macau revenue fell 5.7% to $1,247.6 million. VIP turnover declined 22.5%, mass-market table drop fell 3.7%, and Macau slot win declined 15.3%. Macau Adjusted Property EBITDA decreased 1.1%.
• Las Vegas revenue was down 1.1% in Q2 and 0.2% for the first half; segment Adjusted Property EBITDA was broadly flat. Q2 Las Vegas room revenue increased with higher average daily rates, while occupancy declined.
• Pre-opening expense rose to $45.9 million in Q2 and $79.7 million in the first half, largely for Wynn Palace. Property charges and other were $11.3 million in Q2, including $7.5 million of Las Vegas asset-abandonment charges tied mainly to retail-space construction.
• Six-month net interest expense fell to $114.0 million from $153.2 million, primarily because more interest was capitalized during construction. The 2015 comparison included the debt-extinguishment loss.

Outlook, commentary, risks and unusual items

• Wynn Palace, a 1,700-room Cotai resort, was scheduled to open August 22, 2016. The company reported approximately $3.9 billion incurred against a total project budget of approximately $4.2 billion. The general contractor disputed assessed liquidated damages and sought additional compensation and time; the company rejected those requests.
• Wynn Boston Harbor’s estimated total project budget was $1.9–$2.1 billion. The company expected to fund current developments primarily through available credit facilities. As of July 1, available Wynn America borrowing capacity was $1.14 billion, net of letters of credit; the company also entered a $198.5 million cash-collateralized WML revolving facility in July.
• Management cited continued Macau VIP weakness amid economic and political conditions in Macau and China, regional effects on gaming promoters and premium customers, and exposure to gaming-receivable collection. The filing gives no numeric full-year earnings or revenue guidance.
• In Q1 2016, the company corrected immaterial prior-period interest capitalization errors by reducing 2016 interest expense $25.6 million and increasing six-month attributable net income by $18.5 million. The filing says the correction was immaterial to previously issued financial statements.
• Okada-related litigation, including claims challenging the share redemption and the $1.88 billion fair-value Redemption Note, remained unresolved; management could not estimate the likelihood of outcome or reasonably possible loss. Related governmental investigations and potential regulatory consequences were also disclosed. A separate Massachusetts license appeal and Somerville environmental proceedings remained pending; the company said it would defend against the claims.
• Approximately 75% of debt was fixed-rate, including swaps. Management estimated a 100-basis-point change in variable rates would change annual interest cost by $23.6 million. It also estimated a 1% change in the U.S. dollar/Hong Kong dollar exchange rate could produce a $28.9 million foreign-currency transaction gain or loss.
• The board had authorized up to $1 billion in share repurchases, but no common shares were repurchased in Q2. A $0.50-per-share dividend was declared for payment in August 2016.

Important facts for investors to verify

1. Wynn Palace’s actual opening date, ramp-up, final cost, and resolution of the contractor’s compensation and liquidated-damages dispute.
2. Macau gaming volumes and win rates, particularly whether VIP turnover and mass-market demand stabilize after first-half declines.
3. Debt balances, borrowing availability, cash location and accessibility, and the company’s ability to fund Wynn Palace, Wynn Boston Harbor, dividends, and debt service.
4. Developments and potential financial effects of Okada-related litigation, investigations, and Massachusetts licensing or environmental proceedings.
5. The earnings impact and comparability effect of the $25.6 million interest-capitalization correction, and the sustainability of reported casino win percentages.