Wynn Resorts, Limited — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a standalone fourth-quarter filing; selected fourth-quarter results are included below. Filed February 28, 2019. Amounts are in U.S. dollars unless noted.
Business context
Wynn develops and operates integrated casino resorts. Its operations comprise Wynn Palace and Wynn Macau in Macau (the company owns approximately 72% of Wynn Macau, Limited) and Wynn Las Vegas. Encore Boston Harbor was under construction, with an opening expected in mid-2019.
Financial performance
| Metric | FY 2018 | FY 2017 | Change |
|---|---|---|---|
| Operating revenue | $6.718 billion | $6.070 billion | +10.7% |
| Operating income | $735.5 million | $1.056 billion | -30.3% |
| Net income attributable to Wynn Resorts | $572.4 million | $747.2 million | -23.4% |
| Diluted earnings per share | $5.35 | $7.28 | Down |
| Adjusted Property EBITDA | $2.044 billion | $1.811 billion | +12.9% |
| Operating cash flow | $961.5 million | $1.877 billion | Down |
Operating margin was approximately 10.9%, versus 17.4% in 2017. Adjusted Property EBITDA margin was approximately 30.4%, versus 29.8%. Adjusted Property EBITDA is a non-GAAP measure and excludes, among other items, interest, taxes, depreciation, pre-opening costs, and litigation settlement expense.
- Revenue by operation: Wynn Palace revenue rose 35.8% to $2.758 billion; Wynn Macau fell 1.8% to $2.295 billion; Las Vegas fell 2.2% to $1.666 billion.
- Segment EBITDA: Wynn Palace increased 60.0% to $843.9 million; Wynn Macau decreased 3.6% to $733.2 million; Las Vegas decreased 10.6% to $467.3 million.
- Revenue mix: Casino revenue was $4.785 billion (+12.7%); non-casino revenue was $1.933 billion (+5.9%). Wynn Palace growth was driven by higher VIP turnover and mass-market table drop. Wynn Macau results were pressured by lower VIP win percentage; Las Vegas casino revenue also declined.
- Fourth quarter: Revenue was $1.688 billion, operating income $246.3 million, net income $515.5 million, and net income attributable to Wynn Resorts $464.9 million, or $4.32 diluted EPS. Fourth-quarter results included a $390.9 million income-tax benefit related to clarified U.S. tax reform guidance.
Cash flow, debt, and liquidity
- Cash and cash equivalents were $2.215 billion at year-end, down from $2.804 billion. Current assets were $2.641 billion and current liabilities $1.882 billion.
- Operating cash flow was $961.5 million. Investing cash outflow was $1.223 billion, including $1.476 billion of capital expenditures; financing cash outflow was $324.3 million. Capital spending exceeded operating cash flow by approximately $514 million.
- Long-term debt was approximately $9.42 billion net of issuance costs and discounts (gross principal was $9.541 billion). The company separately described approximately $9.42 billion of outstanding debt. Management said it was in compliance with debt covenants at December 31, 2018.
- Available borrowing capacity under listed facilities and the commitment letter totaled approximately $731 million, including a $250 million commitment expiring April 5, 2019. The company expects to fund operations, debt service, and development using operating cash flow, existing cash, and credit facilities, but cannot assure cash flows will be sufficient.
- Interest expense, net of capitalized interest, was $381.8 million; the weighted-average interest rate on total debt was 4.80%. Approximately 47.3% of long-term debt was fixed-rate. A 100-basis-point change in variable rates was estimated to affect annual interest cost by $50.3 million.
Material changes and unusual items
- Operating income declined despite revenue and Adjusted Property EBITDA growth, principally reflecting a $463.6 million litigation settlement expense associated with the Redemption Note claims, higher Wynn Palace gaming taxes, and increased corporate costs.
- Net income included a $497.3 million income-tax benefit, including the $390.9 million incremental U.S. tax reform benefit recorded in the fourth quarter. The 2017 comparison included a $329.0 million tax benefit, including a $339.9 million provisional U.S. tax reform benefit.
- The company repaid the $1.94 billion Redemption Note in March 2018. It issued 5.3 million shares for net proceeds of $915.2 million, used to repay bridge and other borrowings. It also repurchased approximately 1.48 million shares for $156.7 million and declared $2.75 per share in 2018 dividends.
- Revenue-recognition accounting guidance was adopted in 2018, with prior periods recast for comparability; the company reported no impact on operating income or net income.
Outlook, risks, and contingencies
- Management expected Encore Boston Harbor to open in mid-2019. Its estimated total project budget was approximately $2.6 billion, of which $2.03 billion had been incurred by year-end 2018. The Massachusetts license required gaming operations to commence by June 2020, subject to potential extension.
- Other planned projects included approximately $425 million for Wynn Las Vegas golf-course reconfiguration and additional meeting space, and approximately $62 million for Wynn Macau enhancements. Management expected the golf course to reopen in fourth-quarter 2019, the Las Vegas meeting space to open in first-quarter 2020, and Macau enhancements to be completed in 2019.
- The Macau gaming concession was scheduled to expire June 26, 2022. Renewal, extension, or a new concession was not assured; loss of the concession could materially affect the business.
- Regulatory investigations followed allegations concerning former Chairman and CEO Stephen A. Wynn, who resigned in February 2018. Nevada regulators completed their investigation and imposed a $20 million fine on February 26, 2019; the amount was accrued at year-end. The Massachusetts Gaming Commission investigation was ongoing.
- Litigation included a Massachusetts license-related action seeking $1 billion in compensatory damages plus treble damages; management said the probability and potential loss could not be determined. Stockholder derivative and securities actions were also pending, with outcomes and reasonably possible losses not estimable from the filing.
- Key risks include dependence on a small number of resorts and premium international customers, Macau and China travel and monetary-transfer restrictions, gaming-promoter relationships, volatile gaming win rates, competition, high leverage, construction costs and timing, regulatory and concession risk, and foreign-exchange, interest-rate, cybersecurity, and credit-collection risks.
Important facts for investors to verify
- Whether Encore Boston Harbor opened on schedule and within budget, obtained its operating approvals, and met Massachusetts licensing deadlines.
- Progress and terms of the Macau concession renewal or extension process ahead of the June 2022 expiration.
- The continuing effects of regulatory proceedings and litigation related to former management, including the Massachusetts investigation and pending claims.
- Cash generation, debt maturities and covenant headroom, floating-rate exposure, and the company’s ability to fund construction, dividends, and debt service.
- Whether Wynn Palace’s growth can offset weaker Wynn Macau and Las Vegas results, and how much results are affected by VIP win-rate volatility.
- The realization and timing of tax benefits, including foreign tax credit carryforwards; the filing reports $3.19 billion of FTC carryforwards and substantial valuation allowances.