Wynn Resorts, Limited — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. The company operates resorts in Macau and Las Vegas and is developing Wynn Palace in Macau and a resort in Everett, Massachusetts. Amounts below are U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net revenue | $996.3 million | $1,370.0 million | $3,129.0 million | $4,295.7 million |
| Operating income | $152.8 million | $332.6 million | $507.0 million | $1,050.7 million |
| Net income attributable to Wynn Resorts | $73.8 million | $191.4 million | $85.6 million | $622.2 million |
| Diluted EPS | $0.73 | $1.88 | $0.84 | $6.10 |
| Adjusted Property EBITDA | $279.9 million | $458.8 million | $898.3 million | $1,420.8 million |
Approximate operating margin was 15.3% in Q3 (24.3% prior year); Adjusted Property EBITDA margin was 28.1% (33.5% prior year). For the nine-month period, the respective margins were 16.2% (24.5%) and 28.7% (33.1%). Adjusted Property EBITDA is a non-GAAP supplemental measure, not a substitute for operating income or cash flow.
- Cash flow: Nine-month operating cash flow was $345.5 million, down from $974.1 million. Investing activities used $1,425.9 million, including $1,331.7 million of capital expenditures, principally for Wynn Palace. Financing activities provided $798.1 million.
- Liquidity: At September 30, cash and cash equivalents were $1.90 billion and investment securities were $247.9 million. The company reported $750 million available under the amended Wynn Macau revolver and approximately $1.24 billion available under Wynn America facilities, after letters of credit.
- Debt and balance sheet: Long-term debt was $8.75 billion, versus $7.35 billion at December 31, 2014. Total stockholders’ equity was a deficit of $60.8 million, compared with equity of $211.1 million at year-end 2014.
- Dividends: Dividends declared were $0.50 per share in Q3 and $2.50 per share for the nine months. A further $0.50-per-share dividend was announced October 15, payable November 24, 2015.
Material changes and operating drivers
- Q3 net revenue declined 27.3% year over year; nine-month revenue declined 27.2%. Casino revenue fell 34.7% in Q3 and 33.9% for the nine months, while non-casino revenue was comparatively steadier.
- Macau was the principal source of weakness: Q3 Macau net revenue fell 37.9% and Macau Adjusted Property EBITDA fell 50.0%. VIP turnover declined 51.3% in Q3 and 48.7% for the nine months. Management attributed the pressure to Macau market conditions and regional economic factors affecting games promoters and premium customers. Macau mass-market table drop and win rates also declined.
- Las Vegas Q3 net revenue fell 3.9%; Las Vegas Adjusted Property EBITDA fell 12.1%. Lower table-game revenue contributed, partly offset by slot revenue and stronger food, beverage and banquet activity.
- Nine-month results included a $126.0 million loss on extinguishment of debt, primarily from the tender and redemption of 2020 notes. The company issued $1.8 billion of 5.5% notes due 2025 and amended Wynn Macau facilities, receiving $2.3 billion of term-loan proceeds to refinance existing borrowings and support development.
- A change in estimated useful lives for Wynn Macau buildings, effective September 1, reduced Q3 depreciation and increased net income by $1.8 million, or $0.01 per share. The quarter also included a $13.7 million gain from a decrease in the estimated fair value of the Redemption Note.
Outlook, risks and contingencies
- Management continued to expect Wynn Palace to open in the first half of 2016. The general contractor indicated it would miss an earlier completion milestone but remained on schedule for substantial completion by the contractual date. The project budget was approximately $4.1 billion, with about $3.1 billion incurred by September 30. The company also noted that project timing and the guaranteed maximum price may be adjusted under specified conditions.
- The Everett, Massachusetts resort was in site-preparation and pre-construction stages. Its credit facilities are intended to fund development, construction and pre-opening costs. The filing describes multiple challenges to the Massachusetts license and environmental approvals; outcomes and potential losses were not determinable.
- Material legal and regulatory uncertainty includes the Okada-related redemption litigation and investigations, including a Macau complaint seeking dissolution of Wynn Macau SA and damages. Management said it could not determine the probability of outcomes or reasonably possible losses in key matters. The company warned that an adverse material judgment or settlement could affect financial condition.
- Management cited continuing Macau weakness, reliance on a limited number of resorts, promoter and gaming-receivable collection risks, regulatory and licensing requirements, leverage and refinancing needs, and foreign-exchange exposure. Approximately 82% of long-term debt was fixed-rate, including swaps; a 100-basis-point change in variable rates was estimated to change annual interest cost by $15.5 million. About 24% of cash was denominated in foreign currencies; a 1% change in the dollar/Hong Kong dollar rate was estimated to produce a $22.7 million transaction gain or loss.
- The company said it was in compliance with debt covenants at September 30 and expected to fund planned capital needs with operating cash flow, available facilities and cash, while cautioning that operating cash flow or refinancing may not be sufficient or available on acceptable terms. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether Macau VIP and mass-market activity, promoter liquidity and collection of casino receivables stabilize or deteriorate further.
- Wynn Palace’s opening schedule, remaining project costs, funding sources and compliance with project and financing covenants.
- Available liquidity by subsidiary and any restrictions on moving cash or paying dividends, alongside the company’s debt-service and refinancing requirements.
- Developments in Okada-related litigation and investigations, and the Massachusetts license and environmental proceedings; potential losses remain unclear in the filing.
- The sensitivity of reported earnings to the Redemption Note valuation, Wynn Macau useful-life estimate, foreign exchange and interest rates.