Wynn Resorts, Limited — Q1 2014 Form 10-Q
Business context and period. The unaudited filing covers the three months ended March 31, 2014, compared with Q1 2013. Wynn operates resorts in Macau and Las Vegas, owns 72.3% of Wynn Macau, and is developing Wynn Palace in Cotai.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Net revenue | $1,513.6 million | $1,378.7 million | +9.8% |
| Operating income | $376.8 million | $333.6 million | +13.0% |
| Operating margin | 24.9% | 24.2% | +0.7 percentage points |
| Net income | $303.0 million | $272.1 million | +11.4% |
| Net income attributable to Wynn Resorts | $226.9 million | $203.0 million | +11.8% |
| Diluted EPS | $2.22 | $2.00 | +11.0% |
| Adjusted Property EBITDA | $494.6 million | $451.1 million | +9.7% |
| Cash from operating activities | $209.2 million | $420.9 million | Down $211.6 million |
Macau net revenue rose 14.2% to $1,132.7 million; Las Vegas net revenue fell 1.5% to $380.9 million. Macau Adjusted Property EBITDA increased to $384.3 million from $330.7 million, while Las Vegas declined to $110.3 million from $120.4 million. Consolidated casino revenue rose 10.8%; non-casino revenue increased 5.6%.
Operating cash flow fell primarily because customer deposits decreased by $193.2 million, despite stronger operating income. Investing activities provided $17.9 million, including $199.8 million of restricted cash applied to Wynn Palace costs, partly offset by $178.1 million of capital expenditures. Financing activities provided $612.8 million, principally from debt issuance, and included $126.4 million of dividends paid.
At March 31, cash and cash equivalents were $3.274 billion and investment securities were $254.8 million. Current assets were $3.839 billion and current liabilities $1.255 billion. Long-term debt was $7.330 billion, including the $1.936 billion Redemption Note; the Wynn Macau revolving facility had no borrowings and $1.55 billion available. Management reported compliance with debt covenants. Wynn declared a $1.25-per-share dividend in Q1 and announced another $1.25-per-share dividend payable in May.
Material changes versus Q1 2013
- Macau casino revenue increased 15.1%, driven by VIP turnover growth of 26.7% and general-casino table-games win growth of 23.7%. VIP win as a percentage of turnover fell from 3.14% to 2.79%.
- Las Vegas casino revenue declined 11.9%, primarily as table-games win percentage fell from 26.7% to 20.7%. Las Vegas room revenue increased 12.6%, supported by higher occupancy and average daily rate.
- Operating expenses rose 8.8%; general and administrative expense increased 17.2%. Depreciation and amortization decreased 17.1%, and doubtful-account expense shifted from a $7.0 million provision to a $2.7 million benefit.
- Debt increased from $6.587 billion at year-end 2013, largely reflecting Wynn Macau’s March issuance of $750 million of 5.25% senior notes due 2021. Wynn Las Vegas also repurchased and canceled $12.0 million principal of 7.75% notes, recording a $1.5 million extinguishment loss.
Outlook, commentary, risks and unusual items
- Wynn Palace: The company reported a $4.0 billion total project budget, with $866.7 million incurred by March 31, and remained on schedule for an opening in the first half of 2016. The general-contractor price is subject to specified adjustments. Management expected pre-opening costs to rise as construction progressed.
- Liquidity outlook: Management believed operating cash flow, cash on hand and credit-facility availability would cover anticipated capital needs for the rest of 2014, while cautioning that additional financing might not be available if needed.
- Expansion: Wynn had applied for a Massachusetts gaming license and expected an outcome by the end of Q3 2014; proceeding would require significant company funds. It was also exploring international opportunities.
- Legal and regulatory exposure: The Okada-related redemption litigation and counterclaims remained unresolved; management could not estimate the probability or range of loss. An adverse material judgment or settlement could affect financial condition. Related investigations and regulatory actions could also have adverse consequences. A separate APC arbitration hearing occurred in April 2014, with a decision expected after post-hearing briefs.
- Debt and market risks: Approximately 97% of long-term debt was fixed-rate; a 1% change in variable rates was estimated to affect annual interest cost by $2.3 million. Approximately 63% of cash balances were denominated in foreign currencies, primarily Hong Kong dollars; a 1% dollar/Hong Kong dollar move was estimated to produce an approximately $14.2 million transaction gain or loss.
- Other items: Macau casino winnings remained subject to gaming taxes and levies totaling 39%; Wynn Macau’s exemption from Macau’s 12% Complementary Tax on casino gaming profits ran through December 31, 2015. The quarter included $9.9 million of property charges, primarily for Macau VIP-room renovations, and a $1.5 million debt-extinguishment loss. The filing gave no clear full-year earnings or revenue guidance.
Important facts for investors to verify
- Whether Macau growth persists and how VIP turnover and win percentage affect results; compare this with continued Las Vegas gaming performance.
- Wynn Palace spending against its $4.0 billion budget, schedule, financing needs and projected opening date.
- Debt maturities, facility availability, dividend capacity and restrictions on subsidiary distributions to the parent.
- Developments and potential financial effects in the Okada litigation, related investigations and APC arbitration, including any change-of-control implications under debt documents.
- Changes in customer deposits and gaming-receivable collections, as well as exposure to foreign-exchange and interest-rate movements.