Wynn Resorts, Limited — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing, not a standalone fourth-quarter filing; unaudited Q4 figures are included below. Amounts are U.S. dollars unless stated otherwise.
Business context
Wynn Resorts develops and operates integrated casino resorts. It owns 72% of Wynn Macau, Limited, operating Wynn Macau and Encore at Wynn Macau, and owns and operates Wynn Las Vegas and Encore. The company was building Wynn Palace in Macau and beginning site work for a resort in Everett, Massachusetts.
Financial performance
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Net revenue | $4.076 billion | $5.434 billion |
| Operating income | $658.8 million | $1.266 billion |
| Operating margin | 16.2% | 23.3% |
| Net income | $281.5 million | $962.6 million |
| Net income attributable to Wynn Resorts | $195.3 million | $731.6 million |
| Diluted EPS | $1.92 | $7.18 |
| Adjusted Property EBITDA | $1.186 billion | $1.773 billion |
| Cash from operating activities | $572.8 million | $1.098 billion |
| Capital expenditures | $1.921 billion | $1.221 billion |
Net revenue fell 25.0% and Adjusted Property EBITDA fell 33.1%. Macau revenue declined 35.1% to $2.463 billion; Las Vegas revenue declined 1.5% to $1.613 billion. Casino revenue fell 31.4% overall, while non-casino revenue declined 1.4%. Macau VIP turnover dropped 46.4% to $57.9 billion, amid weaker premium-customer activity and regional economic and political pressures. Management also cited a 34.3% decline in Macau-wide gaming revenue during 2015.
Q4 2015 net revenue was $946.9 million, versus $1.138 billion in Q4 2014. Operating income was $151.9 million versus $215.5 million; net income attributable to Wynn Resorts was $87.2 million versus $109.3 million; diluted EPS was $0.86 versus $1.07.
Liquidity, debt and capital
At year-end, cash and cash equivalents were $2.080 billion and investment securities were $251.6 million. Current assets were $2.506 billion and current liabilities $1.110 billion. Cash decreased $102.1 million during the year. Operating cash flow was more than offset by investing outflows, principally $1.921 billion of capital expenditures; financing activities provided $1.216 billion.
Long-term debt was $9.213 billion, up from $7.345 billion, and total liabilities were $10.500 billion. Management described the company as highly leveraged; debt covenants restrict certain transactions and distributions. Approximately 78% of debt was fixed-rate, including swaps; a 1 percentage-point increase in variable rates was estimated to increase annual interest cost by $20.6 million. Management stated it was in compliance with debt covenants at December 31, 2015.
In 2015, the company issued $1.8 billion of 5.5% senior notes due 2025 and refinanced Wynn Macau borrowings through amended facilities. It repurchased or redeemed its 7.75% and 7.875% notes due 2020, recording a $126.0 million loss on debt extinguishment. The Redemption Note issued to Aruze had a $1.94 billion principal amount and a year-end fair value of $1.884 billion; a $52.0 million fair-value gain was recognized in 2015. The company paid $3.00 per share in dividends in 2015, down from $6.25 in 2014; subsidiary debt restrictions limit distributions to the parent.
Material changes and unusual items
- Macau Operations Adjusted Property EBITDA fell 43.7% to $708.6 million; Las Vegas Operations EBITDA fell 7.4% to $477.2 million.
- Casino revenue weakness in Macau reflected lower VIP turnover, lower mass-market table drop and win percentage, and reduced slot handle and win. Las Vegas table-game revenue also declined, partly offset by higher slot win and improved non-gaming performance in some areas.
- Pre-opening costs increased to $77.6 million, including $55.1 million for Wynn Palace and $22.6 million for Massachusetts.
- Operating cash flow declined to $572.8 million, primarily due to lower Macau operating income and working-capital changes.
- The company revised Q3 2015 results for a $33.8 million Redemption Note valuation error, increasing Q3 net income by $22.4 million after tax. It judged the revision immaterial to previously reported results. Management identified a material weakness in controls over the note valuation at September 30, 2015, changed the controls, and concluded internal control over financial reporting was effective at year-end. The auditor issued unqualified opinions on the financial statements and internal controls.
- A change in the estimated useful lives of Wynn Macau buildings reduced 2015 depreciation and increased net income by $7.4 million, or $0.01 per share.
Outlook, risks and contingencies
Management expected Wynn Palace to open in the first half of 2016, while warning that delays could push the opening into the second half. The contractor said the property would miss the projected March 25, 2016 early completion date and disputed the company’s assessment of liquidated damages. The project budget was approximately $4.1 billion, with about $3.5 billion invested by year-end 2015. Failure to meet the Macau land-concession completion deadline of May 2017, absent an extension, could jeopardize the concession and capitalized project costs.
The Massachusetts resort remained in development, with remediation, site preparation and pre-construction underway. The filing describes environmental contamination at the site and pending or recently resolved licensing, environmental and community disputes. A Somerville appeal concerning the waterways license could delay construction in the affected area.
Key risks include continued Macau weakness, Chinese travel and currency restrictions, the anti-corruption campaign, dependence on VIP customers and gaming promoters, competition and Macau gaming-table limits, credit-collection exposure, construction cost or schedule overruns, regulatory and license risks, and the company’s reliance on two operating markets. The Macau concession expires in 2022 and may be redeemed by the government beginning in 2017. The company also faces Okada-related litigation and investigations; management said it could not estimate the probability or range of loss. Environmental remediation obligations and the outcome of other legal matters are also uncertain.
Important facts for investors to verify
- Whether Macau VIP demand, promoter liquidity and receivable collections stabilize; casino receivables had a 34.7% allowance and 43.7% were over 180 days past due.
- Wynn Palace’s actual opening date, final cost, contractor dispute and any liquidated-damages recovery.
- Funding and construction progress for the Massachusetts project, including resolution of remaining environmental and waterways matters.
- Debt maturities, covenant headroom, available credit capacity and restrictions on subsidiary distributions, especially as development spending continues.
- Developments in Okada-related litigation and investigations, and any effect on the Redemption Note’s valuation or the company’s regulatory standing.
- The implications of the Q3 valuation-control weakness and whether the revised interim controls operate effectively.