LAS VEGAS SANDS CORP quarterly report, Q2 FY2018

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Las Vegas Sands Corp. (LVS) — Q2 2018 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2018. Financial statements are unaudited; amounts below are U.S. dollars unless stated otherwise.

Business context

LVS operates integrated resorts in Macao, Singapore, Las Vegas and Pennsylvania; its subsidiary Sands China Ltd. (SCL) is 70%-owned. On March 8, 2018, LVS agreed to sell Sands Bethlehem for an enterprise value of $1.30 billion, subject to regulatory review and other closing conditions.

Financial performance

  • Q2 revenue: $3.303 billion, up 6.2% year over year. Casino revenue was $2.346 billion; rooms $418 million; food and beverage $219 million; mall $164 million; and convention, retail and other $156 million.
  • Q2 earnings: Operating income was $797 million, down 2.4%; net income was $676 million; net income attributable to LVS was $556 million, or $0.70 per diluted share. Operating margin was approximately 24.1%, versus 26.3% a year earlier.
  • Six-month revenue and earnings: Revenue was $6.882 billion, up 11.4%; operating income was $1.955 billion, up 23.7%; net income attributable to LVS was $2.012 billion, or $2.55 per diluted share.
  • Adjusted property EBITDA, a non-GAAP measure: Q2 was $1.225 billion, up 1.4%; six-month total was $2.725 billion, up 15.7%. Q2 Macao EBITDA increased to $750 million, while Marina Bay Sands fell to $368 million.
  • Cash flow: Six-month operating cash flow was $2.504 billion, versus $2.109 billion. Capital expenditures were $416 million; net cash used in investing was $406 million. Cash, cash equivalents and restricted cash increased by $1.932 billion to $4.362 billion.
  • Debt and liquidity: Debt carrying value was approximately $11.323 billion, up from $9.640 billion at year-end 2017. Cash and cash equivalents were $4.350 billion, plus $12 million restricted cash. The company reported approximately $3.0 billion of borrowing capacity available across facilities, net of letters of credit, and said it expected cash and operating cash flow to support obligations and covenant compliance.
  • Margins and costs: Q2 operating expenses rose 9.3% to $2.506 billion, faster than revenue. Six-month operating margin was approximately 28.4%, versus 25.6% in 2017; reported results include significant tax and depreciation items noted below.
  • Shareholder returns: Six-month dividends paid were $1.804 billion and share repurchases were $175 million. The board declared a further $0.75-per-share quarterly dividend in July. The repurchase authorization was increased to $2.50 billion, with $1.95 billion remaining at June 30.

Material changes and notable items

  • Macao drove most revenue growth: Q2 Macao revenue rose 17.8%, principally from higher casino revenue. Singapore Q2 revenue declined $129 million, mainly reflecting lower casino revenue, including lower rolling-chip volume and win percentage at Marina Bay Sands. U.S. property results were mixed.
  • Q2 operating income declined despite revenue growth, reflecting softer Singapore results and a $105 million asset disposal/impairment loss. The six-month impairment loss was $110 million, primarily a $92 million write-off of costs for the tower adjacent to Four Seasons Hotel Macao.
  • A change in estimated useful lives of certain property and equipment reduced depreciation and amortization and increased operating income by $64 million in Q2 and $127 million in the first half. The six-month increase in LVS-attributable net income from this estimate change was $93 million, or $0.12 per share.
  • Six-month income tax benefit was $490 million, including a nonrecurring, noncash $670 million discrete benefit from reducing a valuation allowance on U.S. foreign tax credit assets. Without that benefit, management said the six-month effective tax rate would have been 10.0%; reported rate was negative 27.2%. Tax accounting estimates could change as U.S. tax reform guidance develops.
  • Debt facilities were amended: U.S. term loans were increased to $3.51 billion and extended to March 2025; the Singapore facility was refinanced at SGD 4.80 billion, with term and revolving maturities extended. Management reported covenant compliance. A hypothetical 100-basis-point increase in relevant benchmark rates would increase annual interest cost by about $115 million.

Outlook, projects and risks

  • No numerical full-year earnings or revenue guidance is provided in the supplied filing text. Management expects available cash, operating cash flow and facility capacity to fund working capital, debt obligations, dividends and planned capital expenditures.
  • The Londoner Macao renovation and expansion is expected to be completed in 2020; approximately 370 luxury suites are planned. Approximately 280 additional suites in the tower adjacent to Four Seasons Hotel Macao are expected in 2019. Timelines remain subject to change; the tower-related write-off is a notable project risk.
  • Management cites exposure to gaming volumes and chance-based win rates, competition, consumer spending and travel, regulation and licensing, junket relationships and gaming receivable collections, labor and construction constraints, interest and currency movements, cybersecurity, and litigation. Macao’s gaming income tax exemption was effective through the end of 2018.
  • In litigation, the Round Square damages retrial was scheduled to begin March 4, 2019; the company accrued only a nominal amount and says an adverse outcome could require an additional liability. In the Macao action, AAEC seeks approximately $371 million; management says it cannot determine the probability of outcome or reasonably possible loss. A separate U.S. action seeking $5.0 billion was dismissed in 2015. The Ninth Circuit affirmed summary judgment for LVS in a securities class action in May 2018.

Most important facts for investors to verify

  • How much of six-month profit growth reflects the $670 million tax benefit and lower depreciation from the useful-life estimate, rather than recurring operations.
  • Whether Macao’s growth can continue and whether Singapore’s weaker Q2 rolling-chip volume and win rate recover; casino results can fluctuate with gaming outcomes.
  • Debt balances, variable-rate exposure, available facility capacity and covenant headroom after the 2018 borrowings and amendments.
  • Status, final sale proceeds and closing conditions for the Sands Bethlehem transaction, and capital requirements and execution risks for Macao projects.
  • Developments in the Round Square and AAEC matters, including potential exposure not quantified by management.