Wynn Resorts, Ltd. - 10-Q Summary (Period Ended Sept 30, 2006)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2006. Wynn Resorts, Limited operates two primary destination casino resorts: Wynn Las Vegas (opened April 2005) and Wynn Macau (opened September 6, 2006). The company is also constructing "Encore at Wynn Las Vegas," expected to open in early 2009, and the second phase of Wynn Macau, scheduled to open in stages throughout 2007. The financial statements for the prior year periods (2005) have been restated to eliminate hedge accounting for interest rate swaps.
Key Financial Metrics
| Metric | Three Months Ended Sept 30, 2006 | Nine Months Ended Sept 30, 2006 |
|---|---|---|
| Net Revenues | $318.1 million | $868.7 million |
| Net Income | $715.7 million | $684.2 million |
| Diluted EPS | $6.43 | $6.22 |
| Operating Cash Flow | N/A | $170.2 million |
| Cash and Equivalents (Sept 30, 2006) | $1.40 billion | |
| Total Debt (Long-term + Current) | $2.38 billion | |
| Adjusted EBITDA | $79.6 million | $233.9 million |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 26.5% for the quarter and 91.9% for the nine-month period compared to 2005. This growth is driven by Wynn Las Vegas operating for a full period in 2006 (vs. partial in 2005) and the inclusion of 25 days of operations from Wynn Macau.
- Profitability Surge: Net income turned from a loss of $9.2 million (Q3 2005) to a profit of $715.7 million (Q3 2006). This is primarily due to a one-time gain on sale of subconcession right of $899.4 million recorded in September 2006.
- Operating Loss: Despite the net income, the company reported an operating loss of $18.7 million for the quarter and $7.3 million for the nine months, largely due to significant pre-opening costs ($36.8 million for the quarter) and depreciation.
- Restatement: Prior year results were restated to reflect mark-to-market adjustments on interest rate swaps as non-operating income/expense rather than comprehensive income.
Outlook, Risks, and Unusual Items
- Unusual Item: The $899.4 million gain from selling the Macau subconcession right to Publishing & Broadcasting, Ltd. (PBL) is a non-recurring event that significantly inflated net income and cash balances.
- Development Progress: Construction on Encore is on schedule with a $1.74 billion budget. Wynn Macau Phase 2 is also progressing, with an opening expected in stages starting February 2007.
- Financing: In August 2006, the company refinanced Wynn Las Vegas credit facilities, increasing capacity to $1.125 billion and reducing interest margins. A loss on extinguishment of debt of $10.8 million was recorded.
- Risks: Key risks include the company's dependence on only two properties for cash flow, high leverage, credit risk associated with high-end gaming markers, and regulatory risks in Macau. The company notes that Wynn Macau's initial win percentages were below expected ranges but anticipates normalization over time.
- Tax Exemption: Wynn Macau received a 5-year exemption from Macau's 12% Complementary Tax on casino gaming profits effective September 6, 2006.
Investor Verification Checklist
- Non-Recurring Gains: Verify the sustainability of earnings by excluding the $899.4 million subconcession sale gain from net income analysis.
- Operating Margins: Review Adjusted EBITDA ($79.6M Q3) as a more accurate indicator of core operational performance than Net Income.
- Debt Covenants: Confirm compliance with debt covenants, specifically the consolidated interest coverage ratio, given the high debt load ($2.38B) and ongoing construction costs.
- Wynn Macau Performance: Monitor future quarters for normalization of Wynn Macau's table game win percentages, which were initially below management expectations.
- Encore Budget: Track capital expenditures against the $1.74 billion budget for Encore to ensure no significant cost overruns requiring additional equity or debt.