Business context and reporting period
Wynn Resorts, Limited filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2011. It operates Wynn Las Vegas and Wynn Macau, including Encore at each resort. Macau represented about 71.4% of consolidated net revenue in Q2 2011. Results versus 2010 are not fully comparable: Encore at Wynn Macau opened April 21, 2010, so 2011 includes a full comparable operating period.
Financial performance
Amounts below are in millions of U.S. dollars except per-share data and percentages.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net revenue | $1,367.4 | $1,032.6 | $2,627.6 | $1,941.6 |
| Operating income | $213.0 | $148.1 | $493.6 | $263.0 |
| Operating margin | 15.6% | 14.3% | 18.8% | 13.5% |
| Net income attributable to Wynn Resorts | $122.0 | $52.4 | $295.8 | $79.4 |
| Diluted earnings per share | $0.97 | $0.42 | $2.36 | $0.64 |
| Adjusted Property EBITDA | $447.0 | $281.4 | $852.0 | $523.3 |
- Net revenue rose 32.4% in Q2 and 35.3% in the first half. Casino revenue drove most of the increase; Q2 casino revenue was $1,082.0 million, up 37.1%.
- Q2 segment revenue was $390.8 million in Las Vegas and $976.5 million in Macau; Adjusted Property EBITDA was $132.7 million and $314.3 million, respectively. For the first half, segment revenue was $785.4 million in Las Vegas and $1,842.2 million in Macau.
- Operating income and earnings improved year over year despite a $107.5 million charge for the present value of Wynn Macau’s University of Macau donation commitment. The charge is included in property charges and other; it reduced reported operating income.
- The company declared and paid a $0.50-per-share dividend in May. A further $0.50-per-share dividend was declared July 14, payable August 11, 2011.
Cash flow, debt and liquidity
- First-half operating cash flow was $831.0 million, versus $422.6 million in 2010. Capital expenditures were $51.3 million, compared with $188.6 million, primarily reflecting lower development spending; the 2011 amount related mainly to the Las Vegas room and suite remodel.
- Cash and cash equivalents were $1,685.0 million at June 30, 2011, up from $1,258.5 million at year-end. The company also held $172.0 million of held-to-maturity securities. Current assets were $2,070.9 million and current liabilities $1,158.3 million.
- Total debt, including current maturities, was $3,146.2 million, down from $3,267.5 million at December 31, 2010. Current debt was $150.9 million; management cited $75 million of debt maturities for the remainder of 2011. No borrowings were outstanding under the Wynn Las Vegas or Wynn Macau revolvers at quarter-end.
- Available revolving capacity was $347.5 million for Las Vegas and $1.0 billion for Macau. Management said cash balances and operating cash flow should meet anticipated 2011 capital needs. Cash access is affected by subsidiary debt restrictions; approximately $961.7 million was held by Wynn Macau Limited and its subsidiaries, in which Wynn Resorts owns 72.3%.
- First-half interest expense was $116.5 million, versus $102.9 million; cash interest paid was $113.1 million. Management attributed higher interest expense mainly to less capitalized interest and higher rates on first mortgage notes.
Material changes versus prior comparable period
- Macau operations benefited from resort expansion and market growth. In Q2, Macau VIP turnover increased 50.6%, while general-casino drop rose 25.9%; the company also reported increased slot handle and higher room occupancy. The opening of Encore Macau in April 2010 makes year-over-year comparisons partly expansion-driven.
- Las Vegas Q2 casino revenue increased $41.1 million, supported by 10% higher drop and a 27.6% table-games win rate, above the stated 21%–24% expected range. Room rates improved, although occupancy declined to 89.2% from 92.6%.
- The company revised its expected general-casino table-games win percentage at Wynn Macau from 21%–23% to 26%–28%, based on experience since Encore Macau opened. Q2 actual was 27.8%. Macau VIP win as a percentage of turnover was 2.89%, within the 2.7%–3.0% expected range.
- First-half operating cash flow increased substantially, while capital expenditures fell. Debt declined by about $121 million from year-end, principally reflecting repayment of revolving borrowings and scheduled principal payments.
Outlook, commentary, risks and unusual items
- No quantified full-year revenue or earnings guidance is provided. Management stated that it believed cash flow and existing cash balances would be adequate for anticipated 2011 capital requirements.
- The company is awaiting final Macau government approval for a roughly 52-acre Cotai land concession. A proposed integrated resort would include a casino and approximately 1,500 rooms; project scope and budget remained under development. A separate $50 million payment is due after publication of the company’s land rights in the government gazette.
- The University of Macau Development Foundation contribution totals $135 million: $25 million paid in May 2011 and $10 million annually from 2012 through 2022. A discounted $107.5 million expense was recorded in Q2; subsequent discount accretion is expected to be recorded as donation expense.
- Macau gaming revenue is subject to taxes and levies totaling 39% under the concession agreement. Wynn Macau’s exemption from Macau’s 12% Complementary Tax on casino gaming profits was extended through December 31, 2015. In July 2011, an annual payment of approximately $1.9 million for 2011–2015 was ratified in lieu of certain tax on dividend distributions.
- Management identified exposure to economic and travel conditions, reliance on two resort complexes, premium-customer credit and collection risk, gaming-win volatility, competition, Macau regulatory and visitation risks, leverage, interest rates, foreign exchange and legal proceedings. Approximately 75% of markers were due from customers outside the United States, primarily in Asia. Management reported compliance with debt covenants at June 30.
- APC is seeking approximately $32 million under a disputed engagement agreement. The company denies the claim; a court denied APC’s motion to compel arbitration, and APC appealed. The company also appealed U.S. and Macau tax examination findings; management did not expect significant payments and considered its uncertain-tax-position liability adequate.
- Interest-rate swaps do not qualify for hedge accounting, so changes in fair value affect reported income. About 95% of long-term debt was fixed-rate, including swaps; a 1% change in variable rates was estimated to change annual interest cost by $1.5 million.
Important facts for investors to verify
- How much of the revenue and EBITDA growth reflects sustained operating trends versus Encore Macau’s first full-year comparison and unusually high table-games win rates.
- The timing and funding of the $135 million Macau university contribution, including the expected future accretion expense.
- Availability of cash across the parent and subsidiaries, subsidiary dividend restrictions, upcoming maturities, and continued covenant compliance.
- Final approval, scope, budget and financing needs for the Cotai development, as well as the conditions triggering the separate $50 million land-related payment.
- Developments in the APC dispute and the U.S. and Macau tax appeals, including any change in management’s assessment of exposure.