Business context and reporting period
Las Vegas Sands Corp. (LVS) filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The company operates integrated resort and casino properties in Macao, Singapore, Las Vegas and Bethlehem, Pennsylvania; it owns 70.1% of Sands China Ltd. Results are not necessarily indicative of full-year performance.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net revenue | $2.650bn | $2.921bn | $5.366bn | $5.933bn |
| Operating income | $519m | $689m | $1.104bn | $1.400bn |
| Net income | $394m | $581m | $803m | $1.193bn |
| Net income attributable to LVS | $328m | $469m | $648m | $981m |
| Diluted EPS | $0.41 | $0.59 | $0.82 | $1.23 |
| Adjusted property EBITDA (non-GAAP) | $955m | $1.016bn | $1.873bn | $2.067bn |
Q2 operating margin was 19.6% versus 23.6% a year earlier; net margin was 14.9% versus 19.9%. For the first half, operating margin was 20.6% versus 23.6%, and net margin was 15.0% versus 20.1%.
First-half operating cash flow was $1.787bn, compared with $1.582bn. Capital expenditures were $706m, including $516m for The Parisian Macao; cash flow from operations less capital expenditures was approximately $1.081bn. Cash and cash equivalents were $2.225bn at June 30, 2016, up from $2.179bn at year-end 2015.
Total debt was approximately $10.274bn, compared with $9.344bn at December 31, 2015; cash less total debt implies net debt of about $8.049bn. The company reported $2.17bn of available borrowing capacity across credit facilities, net of letters of credit. Current maturities were $212m. First-half cash dividends paid were $1.765bn. The quarterly common dividend was $0.72 per share; the board declared another $0.72 dividend for payment in September.
Material changes versus the prior comparable period
- Q2 net revenue fell 9.3%, operating income 24.8%, LVS-attributable income 30.1%, and adjusted property EBITDA 6.0% year over year. First-half declines were 9.6%, 21.1%, 33.9%, and 9.4%, respectively.
- Casino revenue was the principal pressure: down 12.4% in both Q2 and the first half. Macao revenue weakness reflected lower VIP rolling-chip volume and, at several properties, lower win rates; Singapore casino revenue also declined.
- First-half Macao adjusted property EBITDA fell 8.2% and Marina Bay Sands fell 18.8%. U.S. adjusted property EBITDA increased 22.1%, with growth at both Las Vegas Operating Properties and Sands Bethlehem.
- Non-gaming results were mixed. First-half mall revenue rose 4.3%, food and beverage rose 2.0%, while rooms were nearly flat. Las Vegas room revenue and operating performance improved.
- Corporate expense rose $79m in the first half, primarily due to nonrecurring legal costs. Pre-opening expense more than doubled to $42m, mainly related to The Parisian Macao.
- First-half income tax expense increased to $118m from $102m; the effective tax rate rose to 12.8% from 7.9%, partly due to earnings mix and a valuation allowance recorded in Q1. Other expense was $55m versus $15m of other income in the prior-year period, primarily reflecting foreign-exchange effects.
Outlook, risks and unusual items
- The Parisian Macao was expected to open in September 2016, subject to government approval. Expected total development cost was approximately $2.9bn; $2.21bn was capitalized at June 30. Management expected the $0.72 quarterly dividend to continue through the remainder of 2016; no broader quantified earnings guidance is provided in the filing.
- The company disclosed that missing Macao land-concession completion deadlines, absent further extensions, could threaten the right to operate Sands Cotai Central or The Parisian and expose capitalized costs of $4.89bn and $2.21bn, respectively. Current stated completion deadlines were December 2016 and January 2017.
- A Macao credit-facility amendment was agreed in June, subject to closing conditions including government approval. It contemplated extending specified term loans to May 2022 and adding $1.0bn of term-loan commitments. The company stated that cash, operating cash flow and available facilities should support covenants, working capital, development, debt obligations and dividends.
- Leverage ratios under U.S., Macao and Singapore facilities were 0.9x, 2.1x and 2.5x, respectively, below stated maximums of 5.5x, 4.0x and 3.5x. A covenant breach could trigger default and potential acceleration; debt is predominantly variable-rate, and a 100-basis-point rate move was estimated to change annual interest cost by about $102m.
- The Las Vegas Condo Tower remained suspended; $179m of costs were capitalized, and management said any impairment exposure was not determinable with certainty.
- In the Suen litigation, the Nevada Supreme Court ordered a new trial on damages; LVS said the loss could not be reasonably estimated and had recorded no reserve. The company paid a $2m Nevada gaming-regulator fine related to the SEC FCPA settlement and said remaining government inquiries continued, with outcomes and potential losses not estimable. A separate former-CEO Jacobs matter was settled confidentially.
- Other disclosed risks include gaming demand and win-rate volatility, collection of gaming receivables, foreign exchange, regulation and license renewal, development execution, cybersecurity and litigation. A 10% adverse U.S. dollar/SGD move was estimated to increase unrealized forward-contract losses by approximately $48m.
Important facts for investors to verify
- Whether Macao and Singapore gaming volumes, particularly VIP rolling-chip activity, stabilize and whether reported win rates normalize.
- The Parisian’s opening timing, final project cost, approvals and compliance with land-concession deadlines.
- Completion and approval of the Macao credit-facility amendment, debt maturities, available borrowing capacity and covenant headroom.
- Sustainability of the $0.72 quarterly dividend alongside substantial development spending and debt service.
- Developments in the Suen damages retrial, remaining government inquiries, securities litigation and any resulting financial exposure.
- Foreign-exchange and interest-rate sensitivity, and any changes to the company’s reported liquidity or risk disclosures.