Las Vegas Sands Corp. — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010. Unaudited consolidated results; dollar amounts below are U.S. dollars. The company operates in Las Vegas and Pennsylvania, Macau, and Singapore; it owned 70.3% of Sands China Ltd. (SCL).
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net revenue | $1.909 billion | $1.141 billion | $4.838 billion | $3.279 billion |
| Operating income (loss) | $383.3 million | $62.4 million | $691.9 million | $(72.7) million |
| Net income (loss) | $268.8 million | $(80.6) million | $395.2 million | $(294.7) million |
| Net income (loss) attributable to LVS | $214.5 million | $(76.5) million | $273.9 million | $(287.1) million |
| Basic / diluted EPS | $0.25 / $0.21 | $(0.19) / $(0.19) | $0.20 / $0.17 | $(0.65) / $(0.65) |
| Adjusted property EBITDA | $645.2 million | $272.3 million | $1.490 billion | $780.0 million |
Operating margin rose to 20.1% from 5.5% in Q3 and to 14.3% from a 2.2% loss for the nine-month period. Adjusted property EBITDA is a company-defined operating measure, not net income.
Cash flow, debt and liquidity
- For the first nine months, operating cash flow was $1.208 billion, versus $532.4 million in 2009. Investing used $2.526 billion, including $1.650 billion of capital expenditures; financing used $1.255 billion. Cash and cash equivalents fell by $2.561 billion to $2.395 billion.
- At September 30, cash and cash equivalents were $2.395 billion and restricted cash totaled $959.7 million. Total debt, including current maturities, was approximately $10.140 billion, down from $11.025 billion at year-end 2009. Reported current maturities were $572.5 million.
- Available borrowing capacity was $640.5 million under the U.S. senior secured facility, $595.3 million under the Macau facility, and SGD 46.4 million (about $35.2 million) under the Singapore facility. Management said cash, operating cash flow and available borrowing capacity should fund plans and support covenant compliance.
- U.S. and Macau leverage ratios were 5.9x and 1.8x, respectively, against applicable maximums of 6.5x and 3.5x. A U.S. covenant default could trigger cross-defaults involving airplane financings and senior notes; a Macau default could trigger a ferry-financing cross-default.
- Variable-rate debt was about $9.924 billion. The filing estimates that a 100-basis-point rate increase would raise annual interest cost by approximately $98.9 million. The company had interest-rate caps but did not hedge foreign-currency exposure.
Changes versus prior comparable periods
- Q3 net revenue increased 67.3%; nine-month revenue increased 47.6%. The principal contributors were Marina Bay Sands (opened in April 2010), stronger Macau operations, and the ramp-up of Sands Bethlehem, which began operating in 2009.
- Q3 adjusted property EBITDA more than doubled. Macau property EBITDA improved overall, Las Vegas benefited from higher revenue, and Bethlehem benefited partly from table games launched in July 2010. Marina Bay Sands contributed $241.6 million of Q3 and $336.1 million of nine-month adjusted property EBITDA, with no comparable 2009 period.
- Revenue gains were partly offset by higher casino costs, including Macau’s 39% gross-win tax, and increased general and administrative and depreciation expenses. Nine-month interest expense, net, rose to $231.9 million from $224.5 million; the average interest rate was 3.8% versus 3.3%.
- Q3 included a $21.7 million debt-modification/early-retirement loss, principally associated with the August U.S. facility amendment. Nine-month results also included a $16.1 million impairment of Macau equipment and a $40.6 million loss on disposal of construction materials. The 2009 comparison included a $151.2 million impairment charge.
Outlook, projects and risks
- No specific consolidated revenue or earnings guidance is provided. The company expected to progressively open most of Marina Bay Sands during 2010. Under its Singapore agreement, the entire resort must open by December 31, 2011, or the Singapore Tourism Board may draw on a security deposit of SGD 192.6 million (about $146.3 million).
- Marina Bay Sands had incurred SGD 7.23 billion (about $5.49 billion) of capitalized project costs. The company expected to spend about SGD 1.2 billion (about $0.9 billion) through 2011 to complete the resort and related costs, including about SGD 340 million during 2010.
- The company was mobilizing to resume Cotai parcels 5 and 6 using a $1.75 billion VOL credit facility and $500 million of SCL offering proceeds. Completion timing remained uncertain pending Macau construction-labor quotas. Additional funding would be needed for other Cotai development; management gave no assurance it could obtain it.
- Portions of development in Las Vegas, Pennsylvania and Macau remained suspended or delayed. The hotel tower at Sands Bethlehem was expected to open in Q2 2011; its other planned components remained suspended. Delays, insufficient financing, or failure to meet land-concession deadlines could cause impairment losses, forfeiture of investments or land rights, and termination of hotel-management agreements.
- Other significant risks include substantial leverage and covenant compliance, variable interest rates, reliance on a limited number of markets, gaming regulation and competition, customer credit losses, and travel or economic disruptions. Management’s liquidity assessment is forward-looking and depends on operating performance, financing availability and covenant compliance.
Contingencies and unusual items
- A Nevada jury judgment of $58.6 million in the Richard Suen matter was under appeal. The company recorded no reserve, stating loss was not probable or reasonably estimable; its disclosed possible-loss range was zero to the judgment amount.
- Two securities class actions were consolidated; the company said the outcome could not then be determined. A former SCL chief executive also filed a contract and wrongful-discharge action in October 2010; the outcome was not yet determinable.
- China’s foreign-exchange regulator issued a preliminary penalty decision of about RMB 10.8 million (approximately $1.6 million) against a company subsidiary; the company did not expect a material impact.
- The final purchase price for The Shoppes at The Palazzo remained unresolved with GGP. The company said it could record a future loss depending on the agreed price and related calculations.
- The IRS proposed assessments for 2005–2008; the company disputed several items and sought an appeals conference. It said reserves were adequate, while noting tax authorities could propose different adjustments.
- After quarter-end, preferred-stock warrant exercises produced $185.8 million in cash and 30.96 million common shares. Common shares outstanding were 684.7 million as of November 4, 2010.
Key investor verification points
- Confirm the sustainability and cash conversion of Macau and Marina Bay Sands growth, including casino win rates and customer receivables.
- Track liquidity, covenant headroom, maturities, variable-rate exposure and the availability of additional development financing.
- Verify construction progress, labor quotas, opening schedules, remaining costs and land-concession or management-contract deadlines for major projects.
- Monitor the Palazzo mall final-price determination, litigation and tax matters, and any resulting charges or cash obligations.
- Assess dilution and capital structure implications of warrant exercises and other potentially dilutive securities.