Wynn Resorts, Limited — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Wynn Resorts develops and operates integrated casino resorts in Macau and Las Vegas and is building Wynn Palace in Macau and Wynn Boston Harbor in Massachusetts. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 | Change / context |
|---|---|---|---|
| Net revenue | $997.7 | $1,092.2 | Down 8.7% |
| Operating income | $158.3 | $185.1 | Down 14.5% |
| Net income (loss), consolidated | $105.8 | $(13.9) | Prior-year result included a $116.2 million debt-extinguishment loss |
| Net income (loss) attributable to Wynn Resorts | $75.2 | $(44.6) | Diluted EPS was $0.74 versus $(0.44) |
| Adjusted Property EBITDA | $300.3 | $323.0 | Down 7.0%; non-GAAP supplemental measure |
| Cash from operating activities | $115.4 | $(15.0) | Improved primarily with changes in ordinary working capital |
| Capital expenditures | $273.2 | $519.6 | Primarily related to Wynn Palace; investing cash outflow was $272.7 million |
| Cash and cash equivalents | $2,107.3 | $2,080.1 at Dec. 31, 2015 | Quarter-end balance |
| Long-term debt | $9,408.6 | $9,149.7 at Dec. 31, 2015 | Includes the $1,889.4 million Redemption Note |
Available-for-sale investments totaled $251.9 million. The company reported $168.5 million of available capacity under the Wynn Macau revolver and approximately $1.07 billion under Wynn America credit facilities, including undrawn term-loan capacity subject to its borrowing period. Current liabilities were $970.6 million; total stockholders’ equity was $80.9 million.
Material changes and operating trends
- Macau net revenue fell 13.8% to $608.2 million; Las Vegas net revenue edged up 0.7% to $389.4 million. Macau Operations Adjusted Property EBITDA declined 9.9% to $191.2 million, while Las Vegas declined 1.5% to $109.0 million.
- Macau casino revenue decreased 13.9%. VIP turnover fell 21.4% to $13.47 billion, and mass-market table drop fell 5.6%; management cited weak economic and political conditions in Macau and China and lower premium-customer activity. Macau mass-market table win percentage also fell 1.3 percentage points.
- Las Vegas casino revenue was nearly flat, down 0.5%. Room revenue increased 5.5%, supported by a 5.3% rise in average daily rate, while table drop declined 17.2%.
- Operating expenses fell 7.5%, mainly from lower casino expenses and gaming taxes associated with reduced Macau revenue. Pre-opening costs rose to $33.8 million from $16.1 million, primarily for Wynn Palace and Wynn Boston Harbor.
- Net interest expense declined to $44.8 million from $78.0 million, primarily because capitalized interest increased by $37.5 million. Weighted-average debt rose to $9.40 billion from $7.53 billion a year earlier, while the weighted-average interest rate declined to 3.95% from 4.69%.
Outlook, commentary, risks and unusual items
- Projects: Management expected Wynn Palace to open in Q3 2016. Its total budget was approximately $4.2 billion, with about $3.7 billion incurred by March 31. The general contractor sought extensions and additional compensation; the company disputed those requests and said it would enforce the contract’s liquidated-damages provisions. Wynn Boston Harbor’s estimated budget was $1.9–$2.1 billion; the company had begun remediation, site preparation and pre-construction work.
- Liquidity outlook: The company expected to fund operations, debt service, development and resort enhancements from operating cash flow, existing cash and available credit facilities. It cautioned that future operating cash flows and refinancing may not be sufficient or available on acceptable terms.
- Prior-period interest correction: In Q1 2016 the company recorded a $25.6 million reduction in interest expense for interest that should have been capitalized in 2014 and 2015. Management deemed the prior-period amounts immaterial, but the catch-up increased Q1 2016 net income attributable to Wynn Resorts by $18.5 million and EPS by $0.18. The filing states that correcting the relevant Q1 2015 amount in that period would have reduced interest expense by $5.1 million and increased attributable income by $3.7 million.
- Legal and regulatory exposure: The Okada redemption litigation and related claims remain unresolved; management could not estimate the probability of outcome or reasonably possible loss. The Redemption Note’s fair value was $1.89 billion and depends on assumptions that include litigation and regulatory outcomes. The company also disclosed ongoing investigations and other derivative and Macau-related litigation. A Massachusetts waterways-license appeal could delay construction in the affected portion of the Boston project site.
- Other risks: The company cited Macau and China economic conditions, visitation restrictions, gaming regulation, customer credit and receivable collection, construction execution, leverage, floating interest rates, foreign-exchange exposure and dependence on a limited number of resorts. A 100-basis-point change in variable rates was estimated to change annual interest cost by $22.6 million; a 1% change in the U.S. dollar/Hong Kong dollar rate was estimated to cause a $33.0 million transaction gain or loss.
- Capital returns: The board increased the share-repurchase authorization to up to $1 billion on April 14, 2016. After quarter-end, Wynn Macau paid a dividend to shareholders, including $290.1 million attributable to Wynn Resorts; the company also declared a $0.50-per-share dividend payable in May. The Q1 dividend declared was $0.50 per share, compared with $1.50 in Q1 2015.
Most important facts for investors to verify
- How much Q1 2016 reported earnings and EPS depended on the $25.6 million interest correction, and how management’s immateriality conclusion affects period-to-period comparisons.
- Whether Macau VIP and mass-market demand stabilizes, and whether Las Vegas operating trends offset continued weakness in Macau.
- Wynn Palace’s opening timing, final cost and resolution of the contractor dispute; Boston project permitting and construction progress.
- Debt maturities, actual availability and conditions on credit facilities, and the company’s ability to fund development while servicing debt and returning capital.
- Developments in the Okada-related litigation and investigations, Massachusetts proceedings, and any resulting financial, regulatory or debt-covenant consequences.