Las Vegas Sands Corp. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; unaudited. The company operates integrated casino resorts in Macao, Singapore, Las Vegas and Pennsylvania, and owned 70.1% of Sands China Ltd. at period-end.
Key financial results
Amounts in millions of U.S. dollars except per-share data. Comparisons are with the corresponding 2013 period.
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net revenue | $3,624 | $3,243 | $7,635 | $6,546 |
| Operating income | $961 | $781 | $2,105 | $1,607 |
| Net income | $853 | $672 | $1,850 | $1,376 |
| Net income attributable to LVS | $671 | $530 | $1,448 | $1,102 |
| Diluted EPS | $0.83 | $0.64 | $1.78 | $1.33 |
| Adjusted property EBITDA | $1,313 | $1,107 | $2,792 | $2,274 |
Net revenue rose 11.8% in Q2 and 16.6% in the first half; LVS-attributable net income increased 26.7% and 31.4%, respectively. Operating margin improved to 26.5% from 24.1% in Q2 and to 27.6% from 24.6% in the first half. Adjusted property EBITDA is a company-defined non-GAAP measure.
Cash flow, debt and liquidity
- First-half operating cash flow was $2.391 billion, up from $2.024 billion. Capital expenditures were $526.8 million, including $431.2 million for Macao construction and development.
- Cash and cash equivalents were $3.293 billion at June 30, down from $3.600 billion at year-end 2013; restricted cash was $6.3 million. Cash declined $307.7 million during the first half.
- Total debt carrying value was approximately $10.379 billion, including $435.8 million of current maturities and $9.943 billion of long-term debt, versus approximately $9.760 billion at year-end. The company reported $1.65 billion of available borrowing capacity across its credit facilities, net of letters of credit.
- Reported U.S., Macao and Singapore leverage ratios were 1.2x, 1.0x and 2.6x, respectively, below applicable limits of 5.5x, 4.5x and 3.5x. The company said cash on hand and operating cash flow should be sufficient for covenant compliance. About $2.68 billion of cash was held by non-U.S. subsidiaries; the company estimated $2.20 billion could be repatriated with minimal tax.
- First-half financing outflows included $1.586 billion of dividends and $1.139 billion of share repurchases. The regular quarterly dividend was $0.50 per share; management expected that level to continue quarterly through the rest of 2014. A further $748 million was paid down on the U.S. revolver after quarter-end.
Performance changes and management commentary
- Macao drove the improvement: first-half Macao net revenue increased about $1.01 billion year over year and segment Adjusted Property EBITDA rose 35.7%. Sands Cotai Central EBITDA increased 85.2%; The Venetian Macao increased 23.0%.
- Marina Bay Sands first-half EBITDA increased 13.4%. By contrast, Las Vegas Operating Properties EBITDA declined 17.4% and Sands Bethlehem declined 14.2%, reflecting weaker casino revenue.
- Growth in Macao casino revenue was led by higher non-rolling-chip drop at The Venetian Macao and Sands Cotai Central. Management cautioned that short-term casino win percentages vary with gaming outcomes. Macao casino expenses also rose, including the 39% gross-win tax on increased gaming revenue; a new employee bonus program added $29 million of expense in the first half.
- First-half interest expense was $140.7 million, versus $137.2 million. The weighted-average interest rate was 2.7%. Debt refinancing in March generated an $18.0 million loss on modification or early retirement of debt.
Outlook, projects and material risks
- The Parisian Macao was expected to open in late 2015, at an estimated total cost of $2.7 billion. Construction stopped in June pending government approvals, which management said were scheduled for October 2014; the company was considering full or phased opening options. The St. Regis phase at Sands Cotai Central had an estimated $700 million remaining cost.
- The company warned that failure to meet Macao land-concession completion deadlines, absent extensions, could jeopardize the concessions and lead to impairment charges against capitalized costs: $565.9 million for The Parisian and $4.28 billion for Sands Cotai Central. The Las Vegas Condo Tower remained suspended; $178.6 million was capitalized, with a possible charge if conditions do not improve or the project is abandoned.
- Macao casino smoking restrictions were scheduled to take effect October 6, 2014, allowing designated smoking areas subject to conditions. Management said the restrictions could deter some customers and adversely affect results; the magnitude was not clear.
- Major unresolved matters included the SEC and DOJ Foreign Corrupt Practices Act investigations, for which management could not estimate outcome or loss; litigation involving former Sands China CEO Steven Jacobs; securities and derivative suits; and an Asian American Entertainment claim, including a $5 billion U.S. action filed in July 2014. The company reported no reserve for the Suen/Round Square judgment, citing its appeal and its view that loss was not probable or estimable.
- A February 2014 cyberattack compromised certain customer and employee data at Sands Bethlehem and may have affected other data. Investigations were ongoing and potential loss could not be estimated. The company also disclosed tax examination risk, including a Singapore review of Marina Bay Sands tax years 2010–2012.
- Market risks include variable-rate debt: management estimated that a 100-basis-point rate change would change annual interest cost by about $91.5 million. The company did not hedge foreign-currency exposure; a 1% change in the U.S. dollar/pataca rate was estimated to produce a $13.7 million transaction gain or loss.
Important facts for investors to verify
- Progress on Parisian Macao approvals, construction resumption, opening schedule and project cost, as well as land-concession deadline extensions.
- Whether Macao revenue and EBITDA momentum persists, and how gaming volume, win-rate volatility and the new smoking restrictions affect performance.
- Debt balances, post-quarter revolver repayment, facility availability, covenant headroom and the sustainability of dividends and repurchases.
- Developments and potential financial exposure in the FCPA investigations, litigation and cyberattack matters; the filing does not provide clear loss estimates for these contingencies.
- Whether the suspended Las Vegas Condo Tower proceeds, and whether any impairment is recorded against its capitalized costs.