Wynn Resorts, Limited — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also reports fourth-quarter results; it is an annual report, not a standalone quarterly filing. Amounts below are U.S. dollars unless stated otherwise.
Business context
Wynn Resorts develops and operates destination casino resorts. Its portfolio comprised Wynn Macau and Wynn Palace in Macau, Wynn Las Vegas, and the Wynn Boston Harbor project under construction. The company owned approximately 72% of Wynn Macau, Limited. Wynn Palace opened August 22, 2016; management expected Wynn Boston Harbor to open in mid-2019.
Financial and operating performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Net revenue | $4.466 billion | $4.076 billion | +9.6% |
| Operating income | $521.7 million | $658.8 million | -20.8% |
| Net income attributable to Wynn Resorts | $242.0 million | $195.3 million | +23.9% |
| Diluted EPS | $2.38 | $1.92 | +$0.46 |
| Adjusted Property EBITDA | $1.259 billion | $1.186 billion | +6.2% |
| Net cash from operating activities | $970.5 million | $572.8 million | +$397.7 million |
| Capital expenditures, net | $1.226 billion | $1.921 billion | -$695.3 million |
Operating margin was approximately 11.7% in 2016, versus 16.2% in 2015. Adjusted Property EBITDA margin was approximately 28.2%, versus 29.1%. Adjusted Property EBITDA is a non-GAAP measure and is not a substitute for operating income or cash flow.
Fourth-quarter 2016 net revenue was $1.300 billion, operating income $138.9 million, net income $126.6 million, net income attributable to Wynn Resorts $113.8 million, and diluted EPS $1.18. Fourth-quarter 2015 figures were $946.9 million, $151.9 million, $104.8 million, $87.2 million, and $0.86, respectively.
- Revenue mix: Casino revenue was $3.268 billion, up 11.4%; non-casino revenue was $1.198 billion, up 4.8%. Wynn Palace contributed $583.3 million in total revenue and $103.0 million in Adjusted Property EBITDA from its August opening.
- Property trends: Wynn Macau revenue declined 8.1% to $2.264 billion and Adjusted Property EBITDA fell 3.8% to $681.5 million. VIP turnover declined 18.8%, table drop 5.6%, and slot handle 14.5%; higher VIP win percentage partly offset lower volume. Las Vegas revenue rose 0.4% to $1.619 billion, while Adjusted Property EBITDA was nearly flat at $474.8 million.
- Costs and earnings: Operating costs rose 15.4% to $3.945 billion, primarily reflecting Wynn Palace, including higher depreciation and pre-opening costs. Pre-opening costs were $154.7 million, including $129.8 million for Wynn Palace and $22.7 million for Boston Harbor. Net income attributable to the parent increased mainly because 2015 included a $126.0 million debt-extinguishment loss; 2016 operating income nevertheless declined.
- Cash flow and liquidity: Operating cash flow was $970.5 million; investing cash outflow was $1.288 billion, mainly capital spending. Financing provided $691.9 million, including $930.0 million of Wynn America facility borrowings and $217.0 million cash proceeds from the retail joint venture, partly offset by $325.2 million of dividends paid. Year-end cash and equivalents were $2.453 billion; available-for-sale investments were $301.5 million.
- Debt and obligations: Long-term debt was $10.125 billion, up from $9.150 billion. Cash less reported debt was approximately $7.672 billion. The company reported $13.495 billion in contractual commitments, including principal and estimated interest payments. Management believed it was in compliance with debt covenants at year-end. A 1 percentage-point change in variable rates was estimated to change annual interest cost by $34.6 million.
Changes, outlook, risks and unusual items
- Wynn Palace added substantial Macau capacity and revenue, but its opening also drove higher expenses. Wynn Macau continued to face weaker business volumes and competition from new Cotai resorts. Management noted Macau gaming revenue fell in 2016 despite a modest increase in tourist arrivals.
- Wynn Boston Harbor had an estimated total project budget of approximately $2.4 billion, including license fees, construction, capitalized interest, pre-opening and land costs; $466.8 million had been incurred by year-end. Management expected a mid-2019 opening. The filing provides no formal earnings or revenue guidance.
- In December 2016, the company sold Crown a 49.9% interest in the existing Las Vegas retail joint venture for $292.0 million consideration ($217.0 million cash and a $75.0 million interest-free note). Crown also agreed to pay $180.0 million for a 49.9% interest in a joint venture for additional retail space expected to open in early 2018.
- Unusual items included a $65.0 million gain from the decrease in fair value of the Redemption Note, $54.8 million in property charges and other, and a first-quarter correction of $25.6 million of interest that should previously have been capitalized. The company said the correction was immaterial to prior periods; it increased 2016 parent-attributable net income by $18.5 million.
- The $1.94 billion principal Redemption Note issued in connection with the 2012 redemption of a former shareholder’s stock had a year-end fair value of $1.82 billion. The related litigation and regulatory investigations remained unresolved; management said it could not estimate the probability of outcome or reasonably possible loss.
- Key risks include reliance on a small number of resorts and on Stephen A. Wynn; Macau demand, mainland China travel and anti-corruption policies; gaming promoter relationships and collection of international gaming receivables; intense competition; construction cost, schedule, environmental and licensing risks at Boston Harbor; high leverage and covenant/refinancing exposure; foreign exchange and interest-rate risk; and regulatory, anti-money-laundering and FCPA compliance.
- Macau’s concession could be redeemed by the government beginning in June 2017 and expires in June 2022 unless extended. The filing describes potential compensation for redemption, but loss of the concession or failure to extend it would materially affect Macau operations. The filing also reports ongoing Okada-related litigation and inquiries, and a pending Massachusetts challenge to the Boston-area license award at the time of filing.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting; management also concluded disclosure controls and financial reporting controls were effective.
Most important facts for investors to verify
- Whether Wynn Palace sustains its initial contribution and whether Macau volume, particularly VIP turnover, continues to recover or deteriorate.
- Boston Harbor’s remaining cost, funding needs, construction progress, environmental remediation exposure and ability to meet its schedule and license conditions.
- Debt maturities, available borrowing capacity, covenant headroom, subsidiary restrictions on distributions, and sensitivity to interest rates and refinancing conditions.
- Developments in the Okada-related litigation and investigations, including any effect on the Redemption Note valuation, cash obligations or licenses.
- Macau concession renewal or redemption developments, gaming-promoter exposure, and collectability of receivables; casino receivables were $211.6 million, with a $53.9 million allowance at year-end.
- Whether the $65.0 million Redemption Note fair-value gain and the interest-capitalization correction affect comparability when assessing recurring earnings.