WYNN RESORTS LTD quarterly report, Q1 FY2013

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Business context and reporting period

Wynn Resorts, Limited reported unaudited results for the three months ended March 31, 2013, compared with the first quarter of 2012. The company operates casino resorts in Macau and Las Vegas; Macau subsidiary Wynn Macau, Limited is 72.3% owned.

Key financial metrics

Amounts are in U.S. dollars; financial statement figures are in millions unless noted.

  • Revenue: Net revenue was $1,378.7 million, up 5.0% year over year. Macau generated $992.1 million (+4.3%); Las Vegas generated $386.6 million (+6.6%).
  • Profit: Operating income was $333.6 million, up 28.3%; operating margin was approximately 24.2%, versus 19.8%. Net income was $272.1 million, including $69.2 million attributable to noncontrolling interests. Net income attributable to Wynn Resorts was $203.0 million, versus $140.6 million; diluted EPS was $2.00 versus $1.23.
  • Property performance: Adjusted Property EBITDA was $451.1 million, up 15.5%; approximately 32.7% of net revenue versus 29.7%. Macau EBITDA was $330.7 million and Las Vegas EBITDA $120.4 million. This non-GAAP measure is not a substitute for operating income or operating cash flow.
  • Cash flow: Operating cash flow was $420.9 million versus $338.5 million. Investing activities provided $14.8 million, including restricted-cash releases; capital expenditures were $58.8 million, including about $46 million for Cotai site preparation and resort renovations. Financing activities used $102.3 million, including $101.7 million of dividends paid. Cash and cash equivalents increased $331.5 million to $2,056.7 million.
  • Liquidity and debt: At March 31, cash and cash equivalents were $2,056.7 million; current investment securities were $96.6 million, and total available-for-sale securities were $139.7 million. Restricted cash was $59.6 million. Total debt carrying value was approximately $5,782.2 million, including the $1,936.4 million Redemption Note; current debt was $1.1 million. Wynn Macau had no revolver borrowings and $1.55 billion of revolving availability. Management reported compliance with debt covenants.
  • Other balance-sheet items: Total assets were $7,535.9 million and current liabilities $1,234.5 million. Total equity was $274.7 million; Wynn Resorts parent-company stockholders’ deficit was $157.0 million.
  • Shareholder returns: The company declared a $1.00-per-share dividend for the quarter, compared with $0.50 a year earlier. A further $1.00-per-share dividend was announced April 25, payable May 23, 2013, subject to the stated record date.

Material changes versus the prior comparable period

  • Casino revenue rose 5.5%. Macau casino revenue increased 4.3%, primarily due to a higher VIP win percentage; Las Vegas casino revenue increased 11.8%, primarily due to a higher table-games win percentage.
  • Macau VIP turnover fell 15.3%, while VIP win rate increased to 3.14% from 2.59%. Macau slot handle declined 23.4%. Las Vegas table-games win rate rose to 26.7% from 22.8%.
  • Room revenue increased 2.5%. Las Vegas occupancy improved to 82.9% from 79.3%, and ADR to $258 from $255; Macau ADR declined to $315 from $324, while occupancy rose to 93.8% from 91.3%.
  • Operating income improved as revenue growth and lower general and administrative costs, doubtful-account provision, entertainment/retail costs, and property charges more than offset higher departmental costs. The doubtful-account provision fell to $7.0 million from $18.1 million; management cited a revised reserve methodology.
  • Interest expense increased to $75.4 million from $62.1 million, principally reflecting the Redemption Note and other 2012 borrowing changes. Cash interest paid rose to $121.4 million from $60.6 million.
  • Basic weighted-average shares fell to 100.2 million from 112.7 million, largely due to the 2012 redemption and cancellation of 24.5 million shares held by Aruze USA. The lower share count contributed to the per-share comparison.

Outlook, commentary, risks and unusual items

  • Management expected operating cash flow, existing cash and available credit to cover anticipated capital needs for the remainder of 2013, but cautioned that additional financing, if needed, might not be available. Management gave no specific earnings guidance.
  • The Cotai integrated resort was budgeted at $3.5–$4.0 billion, with opening expected in the first half of 2016. Foundation and piling work had begun; management expected to enter a guaranteed-maximum-price construction contract in the first half of 2013.
  • Applications for gaming licenses and proposed projects in Massachusetts and Pennsylvania were competitive; outcomes were not expected until early 2014, and proceeding would require significant company funding.
  • The company relies on two resort complexes in two regions and has exposure to premium gaming customers wagering on credit. About 85% of casino markers were owed by customers outside the U.S., primarily in Asia, creating collection and geographic economic risks.
  • Key legal and regulatory uncertainty concerns the Okada parties’ challenges to the share redemption and related claims, counterclaims and investigations. Management said it could not estimate the probability or range of loss; a material adverse judgment or settlement could materially affect financial condition. A court ordered an escrow account for interest payments tendered on the Redemption Note; the company said it would receive a release and indemnity. The DOJ obtained a six-month stay of certain discovery in May 2013 while it investigated the Okada parties’ alleged conduct. The Nevada Gaming Control Board reported no violations concerning allegations against the company regarding Wynn-related Macau activities.
  • Elaine Wynn’s cross-claim could, if successful, affect control-related provisions in Wynn Las Vegas debt documents and potentially trigger a repurchase offer at 101% of principal plus accrued interest. The company also disclosed other pending litigation and regulatory inquiries, including an SEC informal inquiry and a DOJ investigation referenced in the filing concerning the University of Macau donation.
  • The $1.94 billion Redemption Note bears 2% interest, matures in 2022, is subordinated to other borrowed debt and may be prepaid at the company’s discretion. The company’s dividend capacity is constrained by subsidiary debt covenants. An assumed 1% U.S. dollar/Hong Kong dollar exchange-rate movement was estimated to produce an approximately $12.7 million foreign-currency transaction gain or loss.
  • Management stated disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.

Important facts for investors to verify

  1. Whether the increase in Macau and Las Vegas casino results is sustainable, given lower Macau VIP turnover and the effect of higher-than-prior-year win rates.
  2. Actual Cotai project cost, construction contract terms, funding sources and progress against the first-half 2016 opening target.
  3. Debt service and liquidity capacity, including the Redemption Note, interest costs, subsidiary dividend restrictions and availability of the Macau revolver.
  4. Developments and potential financial or regulatory consequences in the Okada-related litigation, DOJ/SEC inquiries and derivative actions, including any change-of-control implications.
  5. Credit collection trends for international casino markers, and exposure to Macau/Hong Kong currency movements and tourism or gaming-market changes.
  6. Whether announced dividends can be funded and paid while complying with subsidiary debt covenants and maintaining planned investment capacity.