Business context and reporting period
Las Vegas Sands Corp. (LVS) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2014. Its integrated resort, casino, hotel, convention and mall operations span Macao, Singapore, Las Vegas and Bethlehem, Pennsylvania. LVS owns 70.1% of Sands China Ltd., which operates most of its Macao properties.
Financial performance and position
Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net revenue | $3,533 | $3,569 | $11,168 | $10,114 |
| Operating income | $971 | $915 | $3,077 | $2,522 |
| Net income | $860 | $809 | $2,710 | $2,185 |
| Net income attributable to LVS | $672 | $627 | $2,119 | $1,728 |
| Diluted EPS | $0.83 | $0.76 | $2.62 | $2.09 |
| Adjusted property EBITDA | $1,284 | $1,276 | $4,076 | $3,549 |
- Margins: Operating margin was 27.5% in both Q3 and the nine-month period, versus 25.6% and 24.9%, respectively, in 2013. LVS-attributable net margin was 19.0% for both 2014 periods, compared with 17.6% and 17.1%.
- Cash flow: Nine-month cash from operations was $3,617, up from $3,161. Capital expenditures were $793, up from $599; net investing cash use was $791. Financing used $3,277, including $1,986 of dividends and $1,439 of share repurchases. Cash and cash equivalents ended at $3,147, down from $3,600 at year-end 2013.
- Debt and liquidity: Total debt was approximately $9,939 at September 30, including $103 of current maturities, compared with $9,760 at year-end 2013. Cash less total debt was approximately $6,792. Current assets were $4,817 and current liabilities $2,619. The company reported approximately $2.0 billion of available borrowing capacity across its U.S., Macao and Singapore facilities, net of letters of credit.
- Shareholder returns: The company paid $0.50 per share each quarter in 2014 through September. In October, the board declared another $0.50 quarterly dividend and authorized an additional $2.0 billion repurchase program.
Material changes versus the prior comparable period
- Q3 net revenue declined 1.0%, while operating income rose 6.2% and LVS-attributable income rose 7.2%. Lower casino revenue—particularly reduced VIP Rolling Chip volume in Macao and Singapore—was partly offset by higher room and mall revenue and lower expenses. Q3 adjusted property EBITDA was up 0.6%.
- For the first nine months, net revenue rose 10.4%, operating income 22.0%, LVS-attributable income 22.6%, and adjusted property EBITDA 14.8%. Macao was the main growth driver, with net revenue up about $1.01 billion; non-VIP gaming and Sands Cotai Central growth helped offset weaker VIP demand.
- U.S. property adjusted EBITDA declined year over year for the nine-month period: Las Vegas was down 10.5% and Sands Bethlehem down 9.4%. Marina Bay Sands adjusted property EBITDA increased 7.0%.
- Cash fell during the period as higher operating cash generation was more than offset by capital spending, dividends and substantial repurchases. LVS repurchased 18.6 million shares for approximately $1.43 billion in the first nine months.
Outlook, management commentary, risks and unusual items
- Development: The Parisian Macao is expected to cost approximately $2.7 billion and is anticipated to open in part in late 2015; construction resumed after a June–August 2014 pause. The remaining Sands Cotai Central phase is expected to cost about $650 million. The company stated that cash and operating cash flow should be sufficient for covenant compliance, while noting it may arrange additional financing for Cotai development. No quantified earnings guidance is provided.
- Capital returns: Management said it intends to increase the quarterly dividend to $0.65 per share beginning in Q1 2015. This is an intention, not a guaranteed payment. The new $2.0 billion repurchase authorization expires in October 2016.
- Debt amendments and unusual expense: Macao and Singapore credit facilities were amended to extend maturities to 2020. The nine-month results include a $19.9 million loss on debt modification or early retirement. The 2014 Macao employee bonus program added $41 million of expense year to date.
- Development and concession risk: Failure to meet Macao land-concession deadlines, without extensions, could jeopardize operating rights and result in impairment charges against capitalized costs of $636.9 million for The Parisian and $4.35 billion for Sands Cotai Central. The Las Vegas condominium tower remains suspended; $178.6 million of costs were capitalized, and any potential charge is uncertain.
- Legal and regulatory contingencies: The company did not accrue for the $101.6 million Suen/Round Square judgment, stating that an adverse outcome was not probable and the loss was not reasonably estimable; an appeal was pending. Other disclosed matters include a $5.0 billion AAEC U.S. claim and a Macao claim of approximately $375 million, with outcomes not estimable. The SEC and DOJ FCPA investigations remained unresolved; management could not estimate any potential loss. The audit committee had reported preliminary findings of likely books-and-records and internal-control-provision violations, but concluded they did not require restatement and did not represent a material weakness as of September 30, 2014.
- Other risks: Macao smoking restrictions in casinos took effect October 6, 2014, allowing designated smoking areas subject to conditions; the company warned the measure could deter some customers. A February 2014 cyberattack compromised some customer and employee data at Sands Bethlehem; investigations continued and potential effects were not estimable. Management also cited gaming demand and VIP volume, credit collection, gaming regulation, construction approvals and deadlines, foreign exchange, leverage and covenant compliance as risks.
- Market exposure and controls: A 100-basis-point change in benchmark rates was estimated to change annual interest cost by approximately $88.1 million. Management reported disclosure controls effective at a reasonable assurance level and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether VIP gaming demand and casino volumes in Macao and Singapore stabilize, and how gaming win-rate volatility affects reported results.
- Progress, remaining funding needs, approvals and opening timing for The Parisian Macao and the Sands Cotai Central phase, including land-concession deadlines and extension risk.
- Debt balances, available revolver capacity, covenant headroom, floating-rate exposure and the cash actually accessible to the parent, given cash held by foreign subsidiaries and distribution restrictions.
- Whether the proposed $0.65 quarterly dividend increase and new repurchase authorization proceed, alongside substantial development spending and debt obligations.
- Developments and potential financial exposure in the Suen, Jacobs, AAEC, securities and derivative matters; the FCPA investigations; and the cyberattack response and any resulting claims.
- The effect of Macao casino smoking restrictions on visitation and revenue, and whether the reported operating trends persist beyond this interim period.