LVS

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2009, for Las Vegas Sands Corp. (LVS). The Company operates integrated resort properties in Las Vegas (The Venetian, The Palazzo, Sands Expo Center), Macau (Sands Macao, The Venetian Macao, Four Seasons Macao), and is developing projects in Pennsylvania (Sands Bethlehem) and Singapore (Marina Bay Sands). The reporting period reflects the impact of the global economic downturn, leading to the suspension of several development projects and significant cost-cutting measures.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Net revenues increased 3.2% for the quarter but decreased 0.5% for the nine-month period compared to 2008. The decline in the nine-month period was driven by a $268.2 million decrease in revenues at The Venetian Macao, Sands Macao, and Las Vegas properties due to the global economic downturn. This was partially offset by new revenue from Sands Bethlehem (opened May 2009) and a full quarter of operations for Four Seasons Macao.
• Profitability: Operating income improved significantly in the quarter ($62.4 million vs. $28.2 million in 2008) due to cost-cutting, but the nine-month period resulted in an operating loss of $72.7 million compared to an operating income of $198.0 million in 2008. The nine-month loss was heavily impacted by a $151.2 million impairment charge.
• Impairment Losses: The Company recorded a $151.2 million impairment loss for the nine months ended September 30, 2009. This included $94.0 million related to reduced expected proceeds from the sale of The Shoppes at The Palazzo and $57.2 million related to the indefinite suspension of the Sands Expo Center expansion.
• Provision for Doubtful Accounts: Increased significantly to $71.0 million for the nine months (vs. $23.0 million in 2008), driven by increased credit advances to premium players in Macau and tenant difficulties in mall operations.
• Debt: Total debt increased to approximately $11.76 billion. The Company issued $600 million in exchangeable bonds in September 2009 and utilized proceeds from equity offerings to maintain leverage covenant compliance.

Guidance, Outlook, Risks, and Unusual Items

• Development Suspensions: Due to capital market conditions, the Company suspended construction on the St. Regis Residences (Las Vegas), portions of the Cotai Strip developments (Macau), and the Sands Bethlehem hotel/retail components. The Company expects to recommence these projects when economic conditions improve.
• Cost-Cutting Measures: Management expects to generate approximately $500 million in total annualized savings ($200 million in Las Vegas, $300 million in Macau) through payroll reductions and efficiency initiatives, fully implemented by the end of 2009.
• Liquidity and Covenants: The Company is actively managing leverage ratios to comply with U.S. and Macau credit facility covenants. As of September 30, 2009, the U.S. leverage ratio was 5.75x (limit 6.5x) and the Macau leverage ratio was 3.48x (limit 4.5x). The Company may need to sell a minority interest in Macau operations or delay preferred stock dividends to maintain compliance.
• Legal Contingencies:
  • Macau Ferry Litigation: A Macau court ruled the ferry agreement void; the Company is appealing. An adverse final ruling could disrupt ferry operations and result in impairment of $241.8 million in capitalized costs.
  • Settlements: The Company settled litigation regarding Macau operations for $42.5 million (recorded in corporate expense) and The Palazzo construction litigation for $10.6 million.
• Tax Position: The Company recorded a valuation allowance of $67.8 million on U.S. deferred tax assets due to cumulative losses, resulting in a high effective tax rate for the period.

Investor Verification Checklist

• Debt Covenant Compliance: Verify the Company's ability to maintain leverage ratios under U.S. and Macau credit facilities given the suspension of revenue-generating projects.
• Impairment Risks: Assess the potential for further impairment charges on suspended development projects (Cotai Strip, St. Regis Residences) if financing cannot be secured or economic conditions do not improve.
• Macau Ferry Operations: Monitor the outcome of the appeal regarding the ferry service agreement, as a loss could materially impact Macau visitor traffic and asset values.
• Financing for Singapore Project: Confirm the status of funding for Marina Bay Sands, which requires significant additional capital ($2.7 billion estimated) to complete by 2010.
• Preferred Stock Dividends: Review the Company's cash flow sufficiency to meet preferred stock dividend obligations, which totaled $71.3 million for the nine-month period.