Las Vegas Sands Corp. — Q2 2015 Form 10-Q
Business context and reporting period. Unaudited results cover the three and six months ended June 30, 2015, compared with the same 2014 periods. The company operates integrated resorts in Macao, Singapore, Las Vegas and Bethlehem, Pennsylvania; it owns 70.1% of Sands China Ltd. (SCL), which operates most of its Macao properties.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net revenue | $2.921 billion | $3.624 billion | $5.933 billion | $7.635 billion |
| Operating income | $689 million | $961 million | $1.400 billion | $2.105 billion |
| Net income attributable to LVS | $469 million | $671 million | $981 million | $1.448 billion |
| Diluted EPS | $0.59 | $0.83 | $1.23 | $1.78 |
| Adjusted property EBITDA | $1.016 billion | $1.313 billion | $2.067 billion | $2.792 billion |
- Q2 operating margin was 23.6%, down from 26.5%; net income attributable to LVS was 16.1% of revenue, versus 18.5%. For the six-month period, operating margin was 23.6% versus 27.6%, and attributable net income margin was 16.5% versus 19.0%.
- Operating cash flow for the first half was $1.582 billion, down from $2.391 billion. Capital expenditures were $719 million, implying approximate operating cash flow less capex of $862 million, compared with $1.864 billion a year earlier.
- Cash and cash equivalents were $2.819 billion at June 30, down from $3.506 billion at year-end 2014; restricted cash was $7 million. Long-term debt was $9.818 billion, including $98 million current maturities. Available borrowing capacity under credit facilities was approximately $2.83 billion. Management said cash and operating cash flow should be sufficient to maintain covenant compliance.
- Cash dividends paid in the first half were $1.346 billion. The company declared $0.65 per share quarterly dividends in March and June and, in July, declared another $0.65 dividend for payment in September.
Material changes versus the prior period
- Q2 net revenue declined 19.4%; first-half revenue declined 22.3%. Casino revenue fell 23.6% in Q2 and 26.7% in the first half, principally reflecting weaker VIP rolling-chip demand in Macao and, to a lesser degree, Singapore.
- Macao adjusted property EBITDA fell 29.5% in Q2 and 37.0% in the first half. Marina Bay Sands EBITDA declined 13.1% and 8.7%, respectively. Sands Bethlehem was a relative positive, with EBITDA up 22.2% in Q2 and 17.5% in the first half. Las Vegas property EBITDA declined in both periods.
- Mall revenue increased 13.6% in Q2 and 15.3% in the first half, led by Macao rents. Room and food-and-beverage revenue declined in both comparison periods.
- Lower casino expenses partly offset weaker casino revenue, including lower Macao gaming taxes and junket commissions and cost controls. However, operating income and attributable earnings still fell materially.
- First-half capital spending increased to $719 million from $527 million, primarily reflecting Cotai development. Cash decreased by $688 million, including substantial dividends and development spending.
Outlook, risks and unusual items
- No formal earnings or revenue guidance is stated. Management expected the $0.65 quarterly dividend to continue through the remainder of 2015. The St. Regis phase at Sands Cotai Central was expected to open at the end of 2015, subject to government approval; its remaining cost was estimated at about $380 million. The Parisian Macao was anticipated to open in the second half of 2016, subject to approval, at an estimated total project cost of $2.7 billion.
- The company applied for an extension to complete The Parisian by its April 2016 land-concession deadline and said it could seek an extension for Sands Cotai Central if needed. Failure to obtain extensions could jeopardize the respective land concessions and put capitalized costs at risk. The Las Vegas condominium tower remained suspended; $178.6 million of costs had been capitalized, and a potential charge was possible if the project were abandoned or conditions did not improve.
- Debt is primarily variable-rate. Management estimated that a 100-basis-point rate change would alter annual interest cost by about $88 million. Covenant leverage ratios at June 30 were 1.0x for U.S., 1.3x for Macao and 2.2x for Singapore, below respective limits of 5.5x, 4.5x and 3.5x. A covenant default could lead to acceleration and cross-default consequences.
- Significant legal and regulatory matters include the Suen appeal involving a $101.6 million judgment (no reserve recorded because management did not consider loss probable or reasonably estimable); the Jacobs litigation, including an unresolved jurisdictional dispute and unspecified damages; and ongoing SEC/DOJ Foreign Corrupt Practices Act investigations. The company reported preliminary Audit Committee findings of likely books-and-records and internal-controls violations, while stating they did not require restatement and did not constitute a material weakness in financial reporting controls as of June 30.
- A cyberattack had compromised some customer and employee data at the Bethlehem facility; the company was cooperating with investigations and could not estimate any related loss. An AAEC claim in Macao sought approximately $376 million; the company disputed the claim and said potential loss could not be estimated. The separate $5 billion U.S. action was dismissed, with a sanctions matter pending at the filing date.
- Other principal risks include continued weakness in Macao VIP gaming, competition, regulatory and visa policies, credit collection, development execution and approvals, foreign exchange, cybersecurity, and reliance on a small number of major resort markets. The company does not hedge its foreign-currency exposure.
Important facts for investors to verify
- Whether Macao VIP demand and casino volumes stabilize, and whether subsequent results reflect improved or continuing weakness.
- Progress, remaining costs, approvals and opening schedules for the Parisian Macao and Sands Cotai Central, including land-concession extensions.
- Cash generation relative to capital spending, dividends and debt service; borrowing capacity, covenant headroom and variable-rate exposure.
- Developments in the Jacobs, Suen, AAEC and FCPA matters, and any updates on the cyberattack or related claims.
- Whether the declared dividend level remains supportable amid lower earnings and elevated development spending.