Wynn Resorts, Limited — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014. The filing is unaudited. Wynn Resorts operates resorts in Macau and Las Vegas and was developing Wynn Palace in Macau; its Massachusetts gaming license became effective after quarter-end.
Financial performance and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net revenue | $1.370 billion | $1.390 billion | $4.296 billion | $4.101 billion |
| Operating income | $332.6 million | $314.0 million | $1.051 billion | $921.7 million |
| Net income attributable to Wynn Resorts | $191.4 million | $182.0 million | $622.2 million | $514.8 million |
| Diluted earnings per share | $1.88 | $1.79 | $6.10 | $5.07 |
| Adjusted Property EBITDA | $458.8 million | $435.6 million | $1.421 billion | $1.312 billion |
- Q3 net revenue declined 1.4%, while parent-attributable net income rose 5.2%. Nine-month revenue increased 4.7% and parent-attributable net income rose 20.9%. Approximate operating margin was 24.3% in Q3 versus 22.6% a year earlier.
- Q3 revenue was mixed by location: Macau net revenue fell 5.6% to $942.3 million; Las Vegas rose 9.0% to $427.8 million. Las Vegas casino revenue benefited partly from a higher table-games win percentage despite lower table-games drop. Macau’s lower VIP turnover and win rate offset stronger mass-market results.
- Nine-month Adjusted Property EBITDA increased 7.0% in Macau and 11.4% in Las Vegas. For Q3, Macau EBITDA fell 1.1%, while Las Vegas EBITDA rose 25.1%. Adjusted Property EBITDA is a non-GAAP measure and excludes significant costs, including interest and capital expenditures.
- Operating cash flow for the first nine months was $974.1 million, down from $1.281 billion, mainly because of decreases in customer deposits and accounts payable/accrued expenses. Capital expenditures were $707.1 million, primarily for Wynn Palace.
- At September 30, cash and cash equivalents were $2.891 billion, short-term investment securities were $250.7 million, and available borrowing capacity under the Wynn Macau revolving facility was $1.48 billion. Total debt was $7.342 billion, including the $1.936 billion Redemption Note; long-term debt was $7.341 billion. Total equity was $293.4 million.
- Cash dividends paid during the nine months totaled $690.4 million. The company declared $3.75 per share for the first three quarters. After quarter-end it announced a $2.50-per-share dividend, comprising a new $1.50 quarterly dividend and an additional $1.00 payment.
Material changes and unusual items
- Wynn Macau issued $750 million of additional 5.25% senior notes in March 2014. Debt increased from $6.587 billion at December 31, 2013 to $7.342 billion at September 30, 2014; the company also repurchased $68.4 million principal of Wynn Las Vegas notes.
- Wynn Palace construction in progress rose to $1.244 billion from $558.6 million at year-end. The estimated total project budget is approximately $4.1 billion, with $1.4 billion incurred by September 30. The company expected opening in the first half of 2016.
- A nine-month adjustment to casino receivables reserves benefited operating income by $8.7 million and parent-attributable net income by $6.8 million, or $0.07 per diluted share. The comparable 2013 adjustment benefited parent-attributable income by $12.0 million.
- The company recorded a $7.4 million nine-month loss on debt extinguishment, compared with $26.6 million in 2013, and a $1.5 million loss from changes in swap fair value, compared with a $13.1 million gain in 2013.
- On November 7, 2014, the Massachusetts gaming license awarded to Wynn MA became effective; the company paid an $85 million license fee. It plans a resort in Everett. The filing gives no project budget or opening date for that resort.
Outlook, risks, and contingencies
- Management said operating cash flow, cash balances, and credit-facility availability should cover anticipated capital needs over the next 12 months, but cautioned that additional financing may not be available if needed. It expects Wynn Palace pre-opening costs to increase as development progresses.
- Management cited dependence on only two resort complexes, premium customers’ credit use and collectability, and the volatility of high-end gaming. Macau VIP turnover fell 17.4% in Q3; the company’s expected VIP win rate is 2.7%–3.0%. Macau mass-market table-games win percentage is affected by casino-cage chip purchases and should not be treated as a directly comparable volume measure.
- Approximately 96% of long-term debt was fixed-rate. A 1% change in variable interest rates would change annual interest cost by approximately $3.0 million. Foreign-currency cash was about 12% of cash balances; a 1% change in the dollar/Hong Kong dollar exchange rate would result in an estimated $6.3 million transaction gain or loss. The company reported no currency hedging.
- The Okada-related redemption litigation and counterclaims remain unresolved. Management said it could not determine the probability of outcome or reasonably possible loss; a material adverse judgment or settlement could materially affect financial condition. Related investigations and derivative litigation are also disclosed. Wynn Macau (Macau) S.A. said it was cooperating with a Macau anti-corruption commission information request concerning Cotai land.
- After quarter-end, Revere and a labor union challenged the Massachusetts gaming commission’s license decision. Wynn MA is not named as a defendant. The company also disclosed litigation-related risks and restrictions on subsidiaries’ ability to distribute funds to the holding company.
Important facts for investors to verify
- Whether Macau VIP turnover and win rates stabilize, and how much reported casino performance reflects gaming win percentage rather than customer volume.
- Wynn Palace’s remaining funding needs, total cost, construction progress, and expected first-half 2016 opening.
- Debt maturities, interest costs, covenant compliance, and the practical availability of subsidiary cash and the $1.48 billion revolving capacity to the parent.
- Developments and potential financial exposure in the Okada litigation, related investigations, and the Massachusetts license challenge.
- The sustainability of the higher dividend alongside Wynn Palace spending, debt levels, and reduced operating cash flow.