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, 2015. The company operates integrated casino resorts in Macao, Singapore, Las Vegas and Bethlehem, Pennsylvania; it owns 70.1% of Sands China Ltd., which operates most of its Macao properties. Unless otherwise noted, dollar amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net revenue | $2.894B | $3.533B | $8.827B | $11.168B |
| Operating income | $739M | $971M | $2.139B | $3.077B |
| Net income | $618M | $860M | $1.811B | $2.710B |
| Net income attributable to LVS | $519M | $672M | $1.500B | $2.119B |
| Diluted EPS | $0.65 | $0.83 | $1.88 | $2.62 |
| Adjusted property EBITDA | $1.052B | $1.284B | $3.119B | $4.076B |
Q3 operating margin was 25.5% versus 27.5%; net margin was 21.4% versus 24.4%. For the nine-month period, operating margin was 24.2% versus 27.5%, and net margin was 20.5% versus 24.3%. Q3 and nine-month net revenue declined 18.1% and 21.0%, respectively, year over year. Casino revenue fell 22.6% in Q3 and 25.4% year to date; the principal cause was weaker Macao VIP demand and lower Rolling Chip volume. Macao adjusted property EBITDA fell 32.9% in Q3 and 35.7% year to date. Marina Bay Sands EBITDA increased 10.8% in Q3 but decreased 3.0% year to date. Sands Bethlehem EBITDA rose 25.7% in Q3 and 20.4% year to date; Las Vegas property EBITDA declined in both periods.
For the first nine months, operating cash flow was $2.440B, down from $3.617B. Capital expenditures were $1.113B, up from $793M; operating cash flow less capital expenditures was approximately $1.328B. Financing activities used $2.933B, including $2.174B of dividends. Cash and cash equivalents declined by $1.651B to $1.855B; restricted cash was $7.5M. At September 30, total debt carrying value was approximately $9.129B, including $95M current maturities. The company reported $3.30B of borrowing capacity under its U.S., Macao and Singapore facilities, net of letters of credit. Credit-facility leverage ratios were 0.8x for U.S., 1.4x for Macao and 2.1x for Singapore, below stated limits.
Material changes versus the prior comparable period
- The sharpest deterioration was in Macao, where lower VIP volume drove most of the consolidated revenue and EBITDA declines. The company also reported lower room occupancy and rates at several Macao properties.
- Cost reductions partly cushioned the revenue decline: nine-month operating expenses decreased 17.4%, including lower Macao casino taxes and junket commissions and cost-control measures. Expenses declined less than revenue, compressing margins.
- Capital spending increased, particularly for Macao projects. Debt decreased from $9.993B at year-end 2014 to $9.129B at September 30, 2015, while cash fell from $3.506B to $1.855B.
- Common dividends paid were $0.65 per share each quarter in 2015, versus $0.50 per quarter in 2014. The company repurchased $145M of shares in the first nine months of 2015, compared with $1.439B in the prior-year period.
Outlook, management commentary, risks and unusual items
- Management expected the St. Regis tower at Sands Cotai Central to open at the end of 2015, subject to Macao approval; remaining-phase completion cost was estimated at approximately $290M. The Parisian Macao was expected to open in the second half of 2016, subject to approval, with total project cost estimated at $2.7B.
- LVS had applied for an extension of The Parisian’s April 2016 land-concession completion deadline. If the deadline is not met and an extension is not granted, the company could lose the concession and incur a charge against up to $1.39B of capitalized costs. A similar potential concession risk applies to Sands Cotai Central’s December 2016 deadline and up to $4.80B of related capitalized costs.
- The Las Vegas condominium tower remained suspended; the company cited weak demand and said the cost impact was not determinable. Abandonment or continued adverse conditions could result in a charge against some of its $178.6M capitalized costs.
- Management said cash on hand and operating cash flow should be sufficient to maintain credit-covenant compliance; additional financing could be considered for Cotai development. Approximately $1.49B of cash was held by non-U.S. subsidiaries, and some funds are subject to restrictions on repatriation.
- In October 2015, the board declared a $0.65-per-share quarterly dividend payable December 31, 2015, and announced a 2016 dividend of $2.88 per share, or $0.72 quarterly. These are forward-looking distributions, not results for the reported period.
- Key risks include continued Macao weakness, reliance on a small number of geographic markets, gaming and credit-collection risks, construction costs and deadlines, regulatory approvals, currency and variable-rate debt exposure, and litigation. A 100-basis-point rate change was estimated to alter annual interest cost by about $82.2M.
- Material legal matters include the Jacobs litigation, with unspecified damages and outcome not estimable; the Suen appeal, for which no reserve was recorded because management did not consider loss probable or estimable; and ongoing SEC/DOJ inquiries relating to FCPA compliance. The Audit Committee reported preliminary findings of likely books-and-records and internal-controls violations, but management said these did not materially affect the financial statements, require restatement, or constitute a material weakness as of September 30, 2015. The company said the committee’s investigation was complete and it was cooperating with government investigations.
- The company also reported an ongoing assessment of a cyberattack that compromised certain customer and employee data at its Bethlehem facility; potential loss was not estimable. Separately, a U.S. government investigation concerning prior customers had been closed after the company paid $47.4M in 2013.
- The filing stated that disclosure controls were effective at a reasonable-assurance level and that there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Macao VIP demand and Rolling Chip volumes stabilized after the reported declines, and how gaming win-rate variability affected results.
- Actual opening timing, remaining costs and government approvals for the St. Regis tower and The Parisian; status of the Parisian and Sands Cotai Central land-concession extensions.
- Cash availability by subsidiary, future dividend capacity, debt maturities, covenant headroom and sensitivity to interest-rate or currency movements.
- Whether the announced 2016 dividend is sustainable given operating cash flow, capital spending and debt-service needs.
- Developments in the Jacobs, Suen and other litigation, SEC/DOJ FCPA inquiries, and any claims or costs resulting from the cyberattack.