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WYNN > SEC Filings for WYNN > Form 10-Q on 9-Nov-2011All Recent SEC Filings

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Form 10-Q for WYNN RESORTS LTD


9-Nov-2011

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with, and is qualified in its entirety by, the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q. Unless the context otherwise requires, all references herein to the "Company," "we," "us" or "our," or similar terms, refer to Wynn Resorts, Limited, a Nevada corporation, and its consolidated subsidiaries.

Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements. Certain information included in this Quarterly Report on Form 10-Q contains statements that are forward-looking, including, but not limited to, statements relating to our business strategy and development activities as well as other capital spending, financing sources, the effects of regulation (including gaming and tax regulations), expectations concerning future operations, margins, profitability and competition. Any statements contained in this report that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing, in some cases you can identify forward-looking statements by terminology such as "may," "will," "should," "would," "could," "believe," "expect," "anticipate," "estimate," "intend," "plan," "continue" or the negative of these terms or other comparable terminology. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by us. These risks and uncertainties include, but are not limited to:

• adverse tourism and trends reflecting current domestic and international economic conditions;

• volatility and weakness in world-wide credit and financial markets and from governmental intervention in the financial markets;

• general global macroeconomic conditions;

• decreases in levels of travel, leisure and consumer spending;

• continued high unemployment;

• fluctuations in occupancy rates and average daily room rates;

• conditions precedent to funding under our credit facilities;

• continued compliance with all provisions in our credit agreements;

• competition in the casino/hotel and resort industries and actions taken by our competitors;

• doing business in foreign locations such as Macau (including the risks associated with developing gaming regulatory frameworks);

• restrictions or conditions on visitation by citizens of mainland China to Macau;

• new development and construction activities of competitors;

• our dependence on Stephen A. Wynn and existing management;

• our dependence on a limited number of resorts and locations for all of our cash flow;

• leverage and debt service (including sensitivity to fluctuations in interest rates);

• changes in federal or state tax laws or the administration of such laws;

• changes in state law regarding water rights;

• changes in U.S. laws regarding healthcare;

• changes in gaming laws or regulations (including the legalization of gaming in certain jurisdictions);


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• approvals under applicable jurisdictional laws and regulations (including gaming laws and regulations);

• the impact that an outbreak of an infectious disease or the impact that a natural disaster may have on the travel and leisure industry;

• the consequences of military conflicts in the Middle East and any future security alerts and/or terrorist attacks; and

• pending or future legal proceedings.

Further information on potential factors that could affect our financial condition, results of operations and business are included in this report and our other filings with the SEC. You should not place undue reliance on any forward-looking statements, which are based only on information currently available to us. We undertake no obligation to publicly release any revisions to such forward-looking statements to reflect events or circumstances after the date of this report.

Overview

We are a developer, owner and operator of destination casino resorts. We currently own and operate two casino resort complexes. In Las Vegas, Nevada, we own and operate Wynn Las Vegas, a destination casino resort which opened on April 28, 2005. In December 2008, we expanded Wynn Las Vegas with the opening of Encore at Wynn Las Vegas. We refer to the fully integrated Wynn Las Vegas and Encore at Wynn Las Vegas resort as our "Las Vegas Operations." In the Macau Special Administrative Region of the People's Republic of China ("Macau"), we own and operate Wynn Macau, which opened on September 6, 2006, and was subsequently expanded. On April 21, 2010 we opened Encore at Wynn Macau, a further expansion of Wynn Macau. We refer to the fully integrated Wynn Macau and Encore at Wynn Macau resort as our "Macau Operations."

Our Resorts

The following table sets forth information about our resorts as of October 2011:



                                                                                     Approximate
                               Hotel Rooms  &          Approximate Casino         Number of  Table            Approximate
                                   Suites                Square Footage                 Games               Number of  Slots
Las Vegas Operations                     4,750                     186,000                      220                     2,490
Macau Operations                         1,008                     265,000                      500                       945

Las Vegas Operations

Wynn Las Vegas I Encore is located at the intersection of the Las Vegas Strip and Sands Avenue, and occupies approximately 217 acres of land fronting the Las Vegas Strip. In addition, we own approximately 18 acres across Sands Avenue, a portion of which is utilized for employee parking, and approximately 5 acres adjacent to the golf course on which an office building is located.

Our Las Vegas resort complex features:

• Approximately 186,000 square feet of casino space, offering 24-hour gaming and a full range of games, including private gaming salons, a sky casino, a poker room, and a race and sports book;

• Two luxury hotel towers with a total of 4,750 spacious hotel rooms, suites and villas;

• 35 food and beverage outlets featuring signature chefs;

• A Ferrari and Maserati automobile dealership;

• Approximately 97,000 square feet of high-end, brand-name retail shopping, including stores and boutiques by Alexander McQueen, Brioni, Cartier, Chanel, Dior, Graff, Hermes, Louis Vuitton, Manolo Blahnik, Oscar de la Renta, Vertu and others;


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• Recreation and leisure facilities, including an 18-hole golf course, swimming pools, private cabanas and two full service spas and salons;

• Two showrooms; and

• Three nightclubs and a beach club.

In January 2011, we completed a refurbishment and upgrade to the resort rooms at Wynn Las Vegas. A remodel of the suites was completed in early May 2011. These remodels were completed at a cost of $61 million, substantially less than the project budget of $83 million.

In response to our evaluation of our Las Vegas Operations and the reactions of our guests, we have and expect to continue to make enhancements and refinements to this resort complex.

Macau Operations

We operate Wynn Macau I Encore under a 20-year casino concession agreement granted by the Macau government in June 2002.

Our Macau resort complex features:

• Approximately 265,000 square feet of casino space, offering 24-hour gaming and a full range of games, including private gaming salons, a sky casino and a poker area;

• Two luxury hotel towers with a total of 1,008 spacious rooms and suites;

• Casual and fine dining in eight restaurants;

• Approximately 54,200 square feet of high-end, brand-name retail shopping, including stores and boutiques by Bvlgari, Cartier, Chanel, Dior, Dunhill, Ferrari, Giorgio Armani, Gucci, Hermes, Hugo Boss, Louis Vuitton, Miu Miu, Piaget, Prada, Rolex, Tiffany, Tudor, Van Cleef & Arpels, Versace, Vertu, Zegna and others;

• Recreation and leisure facilities, including two health clubs and spas, a salon, a pool; and

• Lounges and meeting facilities.

In response to our evaluation of our Macau Operations and the reactions of our guests, we have made and expect to continue to make enhancements and refinements to this resort complex.

Future Development

Approximately 142 acres of land comprising Wynn Las Vegas is currently improved with a golf course. While we may develop this property in the future, we have no immediate plans to do so.

In September 2011, Palo Real Estate Company Limited and Wynn Resorts (Macau) S.A., each an indirect subsidiary of Wynn Macau Limited, formally accepted the terms and conditions of a draft land concession contract from the Macau government for approximately 51 acres of land in the Cotai area of Macau. Following government approval, we anticipate constructing a full scale integrated resort containing a casino, approximately 1,500 rooms, convention, retail, entertainment and food and beverage offerings on this land. We continue to finalize the project scope, timeline and budget.

Results of Operations

Our results for the nine months ended September 30, 2011 include the operations of Encore at Wynn Macau for the full period, whereas the nine months ended September 30, 2010 only include the operations of Encore at Wynn Macau from its opening on April 21, 2010.


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The table below presents our net revenues (amounts in thousands):

                                 Three Months Ended               Nine Months Ended
                                    September 30,                   September 30,
                                2011            2010            2011            2010
      Net revenues
      Las Vegas Operations   $   346,936     $   334,524     $ 1,132,374     $   971,026
      Macau Operations           951,368         671,425       2,793,555       1,976,484

                             $ 1,298,304     $ 1,005,949     $ 3,925,929     $ 2,947,510

Reliance on only two resort complexes (in two geographic regions) for our operating cash flow exposes us to certain risks that competitors, whose operations are more geographically diversified, may be better able to control. In addition to the concentration of operations in two resort complexes, many of our customers are premium gaming customers who wager on credit, thus exposing us to increased credit risk. High-end gaming also increases the potential for variability in our results.

Operating Measures

Certain key operating statistics specific to the gaming industry are included in our discussion of our operational performance for the periods for which a Condensed Consolidated Statement of Operations is presented. There are two methods used to calculate win percentage in the casino industry. In Las Vegas and in the general casino in Macau, customers usually purchase cash chips from gaming tables. The cash and net markers used to purchase the cash chips from gaming tables are deposited in the gaming table's drop box. This is the base of measurement that we use in the casino at our Las Vegas Operations and in the general casino at our Macau Operations for calculating win percentage.

In our VIP casino in Macau, customers primarily purchase non-negotiable chips, commonly referred to as rolling chips, from the casino cage and there is no deposit into a gaming table drop box from chips purchased from the cage. Non-negotiable chips can only be used to make wagers. Winning wagers are paid in cash chips. The loss of the non-negotiable chips in the VIP casino is recorded as turnover and provides a base for calculating VIP casino win percentage. Because of this difference in chip purchase activity, the measurement base used in the general casino is not the same that is used in the VIP casino. It is customary in Macau to measure VIP casino play using this rolling chip method.

The measurement method in Las Vegas and in the general casino in Macau tracks the initial purchase of chips at the table while the measurement method in our VIP casino in Macau tracks the sum of all losing wagers. Accordingly, the base measurement in the VIP casino is much larger than the general casino. As a result, the expected win percentage with the same amount of gaming win is smaller in the VIP casino in Macau when compared to the general casino in Las Vegas and Macau.

Even though both use the same measurement method, we experience different win percentages in the general casino activity in Las Vegas versus Macau. This difference is primarily due to the difference in the mix of table games and customer playing habits between the two casinos. Each type of table game has its own theoretical win percentage.

Below are definitions of the statistics discussed:

• Table games win is the amount of drop or turnover that is retained and recorded as casino revenue.

• Drop is the amount of cash and net markers issued that are deposited in a gaming table's drop box.

• Turnover is the sum of all losing rolling chip wagers within our Wynn Macau VIP program.


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• Rolling chips are identifiable chips that are used to track VIP wagering volume (turnover) for purposes of calculating incentives.

• Slot win is the amount of handle (representing the total amount wagered) that is retained by us and is recorded as casino revenue.

• Average Daily Rate ("ADR") is calculated by dividing total room revenue (less service charges, if any) by total rooms occupied.

• Revenue per Available Room ("REVPAR") is calculated by dividing total room revenue (less service charges, if any) by total rooms available.

Financial results for the three months ended September 30, 2011 compared to the three months ended September 30, 2010.

Revenues

Net revenues for the three months ended September 30, 2011 are comprised of $1,020.2 million in casino revenues (78.6% of total net revenues) and $278.1 million of net non-casino revenues (21.4% of total net revenues). Net revenues for the three months ended September 30, 2010 are comprised of $765.4 million in casino revenues (76.1% of total net revenues) and $240.5 million of net non-casino revenues (23.9% of total net revenues).

Casino revenues are comprised of the net win from our table games and slot machine operations. Casino revenues for the three months ended September 30, 2011 of $1,020.2 million represents a $254.8 million (or 33.3%) increase from casino revenues of $765.4 million for the three months ended September 30, 2010.

Our Las Vegas Operations experienced an $11.5 million decrease in casino revenues, from $138.4 million for the three months ended September 30, 2010 to $126.9 million for the three months ended September 30, 2011. This decline is primarily due to a decrease in our average table games win percentage (before discounts) from 22.8% for the three months ended September 30, 2010 to 18.3% for the three months ended September 30, 2011. Our average table games win percentage for the three months ended September 30, 2011 was below the expected range of 21% to 24%. Table games drop for the quarter increased 10.7% compared to the prior year quarter. Slot machine handle at our Las Vegas Operations decreased 2.4% compared to the prior year quarter, however slot machine win increased 11.2% as our slot machine hold percentage increased for the quarter.

Casino revenues at our Macau Operations, including Encore at Wynn Macau which opened on April 21, 2010, increased $266.3 million for the three months ended September 30, 2011, compared to the prior year quarter. We experienced a 47.3% increase in the VIP revenue segment due to a 45% increase in turnover and an increase in our win percentage compared to the prior year quarter. Our win as a percent of turnover was 2.95%, which compares to our expected range of 2.7% to 3.0%, and to 2.88% in the prior year quarter. In our general casino, drop increased 16.4% when compared to the prior year quarter and the average table games win percentage was 27.7%, which is within our revised expected range of 26% to 28%. The average table game win percentage at our Macau Operations for the three months ended September 30, 2010 was 22.8%. Slot machine handle increased 6.9% compared to the prior year quarter primarily due to increased visitation at our resort. Slot machine win increased by 10.3% due to this increase in handle and an increase in our hold percentage.

For the three months ended September 30, 2011, room revenues were approximately $120.1 million, an increase of $18.5 million (18.3%) compared to prior year quarter room revenue of $101.6 million. Room revenue at our Las Vegas Operations increased $14.1 million (18.7%) compared to the prior year quarter. In Las Vegas, room rates increased during the three months ended September 30, 2011, compared to the three months ended September 30, 2010, and we also experienced a slight increase in occupancy rate. Room revenue at our Macau Operations increased approximately $4.4 million due to an increase in the average daily room rate and occupancy rate compared to the prior year quarter.


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The table below sets forth key operating measures related to room revenue.

                                           Three Months Ended
                                              September 30,
                                         2011              2010
                  Average Daily Rate
                  Las Vegas            $     240        $      210
                  Macau                      315               287
                  Occupancy
                  Las Vegas                 88.3 %            87.8 %
                  Macau                     93.7 %            87.6 %
                  REVPAR
                  Las Vegas            $     212        $      184
                  Macau                      295               251

Other non-casino revenues for the three months ended September 30, 2011 included food and beverage revenues of approximately $142.9 million, retail revenues of approximately $67.2 million, entertainment revenues of approximately $21.9 million, and other revenues from outlets, including the spa and salon, of approximately $16.4 million. Other non-casino revenues for the three months ended September 30, 2010 included food and beverage revenues of approximately $129.4 million, retail revenues of approximately $52.3 million, entertainment revenues of approximately $18.1 million, and other revenues from outlets such as the spa and salon, of approximately $15.5 million. Food and beverage revenues at our Las Vegas Operations increased $7.5 million (6.7%), while our Macau Operations increased $6 million (33.6%), as compared to the prior year quarter. The increase in Las Vegas is due primarily to business in our nightclubs, catering business and restaurants. The increase in Macau is primarily due to increased visitation to our resort. Retail revenues at our Macau Operations increased $14.1 million (44.6%), while retail at our Las Vegas Operations increased $0.8 million (3.9%). The increase at Wynn Macau is due primarily to strong same-store sales growth at our resort. Entertainment revenues increased over the prior year quarter primarily due to increased revenue from Garth Brooks performances and the Le Rêve production show, both in Las Vegas.

Departmental, Administrative and Other Expenses

For the three months ended September 30, 2011, departmental expenses included casino expenses of $679.5 million, room expenses of $31.1 million, food and beverage expenses of $73.3 million, and entertainment, retail and other expenses of $52.2 million. Also included are general and administrative expenses of approximately $107.9 million and $4.3 million charged as a provision for doubtful accounts receivable. For the three months ended September 30, 2010, departmental expenses included casino expenses of $500.3 million, room expenses of $30.6 million, food and beverage expenses of $72.2 million, and entertainment, retail and other expenses of $50.1 million. Also included are general and administrative expenses of approximately $103 million and approximately $0.9 million charged as a provision for doubtful accounts receivable. Casino expenses have increased for the three months ended September 30, 2011 over the prior year quarter due primarily to an increase in casino revenues at our Macau Operations where we incur a gaming revenue tax and other levies at a rate totaling 39% in accordance with the concession agreement. Room expenses were flat as the increase in revenue was primarily due to increased average daily rates. Food and beverage and entertainment, retail and other expenses increased commensurate with the increase in revenues.

Depreciation and amortization

Depreciation and amortization for the three months ended September 30, 2011 was $100.5 million compared to $99.3 million for the three months ended September 30, 2010.

During the construction of our properties, costs incurred in the construction of the buildings, improvements to land and the purchases of assets for use in operations were capitalized. Once these properties opened, their assets were placed into service and we began recognizing the associated depreciation expense. Depreciation


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expenses will continue throughout the estimated useful lives of these assets. In addition, we continually evaluate the useful life of our property and equipment, intangibles and other assets and adjust them when warranted.

The maximum useful life of assets at Wynn Macau is the remaining life of the gaming concession or land concession, which currently expire in June 2022 and August 2029, respectively. Consequently, depreciation related to Wynn Macau is charged on an accelerated basis when compared to our Las Vegas Operations.

Property charges and other

Property charges and other for the three months ended September 30, 2011 were $9.7 million compared to $17.5 million for the three months ended September 30, 2010. For the three months ended September 30, 2011 property charges and other include miscellaneous renovations and abandonments at our resorts, including modification of the Encore at Wynn Las Vegas retail esplanade and the closure of our Blush nightclub.

Property charges and other for the three months ended September 30, 2010 include a contract termination payment of $14.9 million related to a management contract for certain of the nightclubs at Wynn Las Vegas. The remaining charges were for miscellaneous renovations, abandonments and gain/loss on sale of equipment at our resorts.

In response to our evaluation of our resorts and the reactions of our guests, we continue to remodel and make enhancements at our resorts.

Other non-operating costs and expenses

Interest income was $2.7 million for the three months ended September 30, 2011 compared to $1 million for the three months ended September 30, 2010. During 2011 and 2010, our short-term investment strategy has been to preserve capital while retaining sufficient liquidity. While we have recently invested in certain corporate bond securities and commercial paper which contributed to the increase in interest income, the majority of our investments were in money market funds and time deposits with a maturity of three months or less.

Interest expense was $57.5 million for the three months ended September 30, 2011, compared to $60.3 million for the three months ended September 30, 2010. We had no capitalized interest during either period. Our interest expense decreased compared to the prior year quarter primarily due to a decrease in amounts outstanding under our Wynn Las Vegas and Wynn Macau bank credit revolving facilities.

Changes in the fair value of our interest rate swaps are recorded as an increase (or decrease) in swap fair value in each period. We recorded a gain of approximately $4.1 million for the three months ended September 30, 2011 resulting from the increase in the fair value of our interest rate swaps from June 30, 2011 to September 30, 2011. For the three months ended September 30, 2010 we recorded an expense of $0.4 million resulting from the decrease in the fair value of interest rate swaps between June 30, 2010 and September 30, 2010. For further information on our interest rate swaps, see Item 3 - "Quantitative and Qualitative Disclosures about Market Risk."

As described in our 2010 Annual Report on Form 10-K, we completed a tender offer for our then outstanding 6 5/8% First Mortgage Notes due 2014 and subsequent call of all the remaining amounts once the tender was completed. In connection with this transaction, we recorded a loss on extinguishment of debt of $63 million. This included the tender offer consideration, the call premium and the related write off of the unamortized debt issue costs and original issue discount.

Income Taxes

For the three months ended September 30, 2011 and 2010, we recorded tax expense of $4.3 million and $9 million, respectively. Our provision for income taxes is primarily comprised of increases in our domestic valuation allowance for U.S. foreign tax credits not expected to provide a U.S. tax benefit in future years, foreign


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taxes assessable on the dividends of Wynn Macau, S.A. and foreign tax provisions related to our international marketing offices. Since June 30, 2010, we have no longer considered our portion of the tax earnings and profits of Wynn Macau, Limited to be permanently invested. No additional U.S. tax provision has been made with respect to amounts not considered permanently invested as we anticipate that U.S. foreign tax credits should be sufficient to eliminate any U.S. tax provision relating to such repatriation. To the extent that book earnings exceed the tax earnings and profits of Wynn Macau, Limited, such excess is considered permanently invested. For the three months ended September 30, 2011 and 2010, we recognized income tax benefits related to excess tax deductions associated with stock compensation costs of $2.8 million and $3.6 million, respectively.

Effective September 6, 2006, Wynn Macau, S.A. received a 5-year exemption from Macau's 12% Complementary Tax on casino gaming profits. On November 30, 2010 Wynn Macau, S.A. received an additional 5-year exemption through December 31, 2015. Accordingly, the Company was exempted from the payment of approximately $22.8 million and $13.2 million in such taxes during the three months ended September 30, 2011 and 2010, respectively. Our non-gaming profits remain subject to the Macau Complementary Tax and casino winnings remain subject to the Macau Special Gaming tax and other levies together totaling 39% in accordance with our . . .

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