Las Vegas Sands Corp. — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012. Unaudited consolidated results; monetary amounts below are U.S. dollars. The company operates integrated resorts in Macao, Singapore, Las Vegas and Bethlehem, Pennsylvania, and owns 70.3% of Sands China Ltd.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net revenue | $2.582bn | $2.345bn | $5.345bn | $4.457bn |
| Operating income | $397.7m | $608.1m | $1.105bn | $1.094bn |
| Net income attributable to LVS | $240.6m | $410.6m | $739.5m | $700.0m |
| Diluted EPS | $0.29 | $0.45 | $0.90 | $0.73 |
| Adjusted property EBITDA | $844.7m | $901.6m | $1.911bn | $1.647bn |
- Revenue increased 10.1% in Q2 and 19.9% for the half year. Q2 operating margin fell to 15.4% from 25.9%; net margin declined to 11.1% from 20.9%. First-half operating margin was 20.7% versus 24.5%, and net margin was 16.2% versus 19.2%.
- Q2 adjusted property EBITDA fell 6.3% year over year, while first-half EBITDA rose 16.0%. Q2 performance was mixed: Macao EBITDA increased 10.6%, including the new Sands Cotai Central contribution, but Marina Bay Sands declined 18.5% and Las Vegas operations declined 30.7%. First-half EBITDA improved across all three regions.
- Cash from operations was $1.418bn for the first half, versus $1.082bn a year earlier. Capital expenditures were $735.5m, implying operating cash flow less capital expenditures of approximately $682.8m. Cash and equivalents declined to $3.522bn from $3.903bn at year-end; restricted cash totaled about $7.6m.
- Debt carrying value was $9.374bn, including current maturities; cash less debt was approximately negative $5.85bn. Total liabilities were $12.230bn and equity was $10.187bn. The company reported $1.41bn of available borrowing capacity under its U.S., Macao and Singapore facilities.
- Net cash used in financing was $1.078bn, including $767.6m of dividends paid and substantial debt repayments. A $525m warrant exercise by the principal stockholder’s family provided financing proceeds. Quarterly common dividends of $0.25 per share were paid in March and June; a further $0.25 dividend was declared for September.
Material changes versus comparable periods
- Q2 revenue growth was led by Sands Cotai Central, which opened phase I in April and generated $265.6m of net revenue, and by a $145.4m increase at Four Seasons Macao. These gains were partly offset by lower revenue at The Venetian Macao, Sands Macao and Marina Bay Sands.
- Despite higher Q2 revenue, operating expenses rose 25.7%, faster than revenue. Key increases included casino costs, doubtful-account provision ($58.4m versus $23.5m), pre-opening costs ($43.5m versus $18.2m), and a $100.8m impairment charge.
- First-half net income attributable to LVS increased 5.7%, although consolidated net income rose only 1.4%. First-half casino revenue grew 22.9%; operating expenses grew 26.1%.
- Interest expense, net, decreased to $64.5m in Q2 and $129.2m for the half year, primarily reflecting lower average interest rates. The weighted average rate was 3.0% in Q2 and 3.1% for the half year, versus 4.0% and 4.1%, respectively, in 2011.
Outlook, commentary, risks and unusual items
- No consolidated earnings guidance is provided. Management said cash, operating cash flow and facility availability should be sufficient for developments under construction and covenant compliance.
- Sands Cotai Central phase I opened in April. Phase IIA, including up to 2,500 Sheraton rooms and additional facilities, was scheduled for Q3 2012; phase IIB, with another 1,500 rooms, was projected for Q1 2013. Estimated remaining cost for phases I and II was approximately $950m. Phase III was estimated at $450m, with construction dependent on demand and market conditions.
- The new Singapore credit facility, signed in June, totals SGD 5.1bn (about $4.02bn at period-end exchange rates); $3.63bn was drawn to refinance the previous facility. The new term facility matures in 2018 and has quarterly principal payments beginning in 2014. Debt covenant limits tighten over time. Reported U.S. and Macao leverage ratios were 1.3x and 1.9x, compared with respective limits of 5.5x and 4.5x.
- Interest-rate exposure is material: management estimated that a 100-basis-point rate change would alter annual interest cost by about $94.1m. Foreign-currency exposure also remains; the company does not hedge foreign currencies.
- Unusual charges included a $100.7m write-off of costs for Cotai parcels 7 and 8 after the company withdrew its appeal over the rejected land-concession application, and a $42.9m first-half impairment after terminating the ZAiA show. The company also recorded $19.2m of first-half debt modification/early-retirement losses, primarily related to the Singapore refinancing.
- Development risks include Macao government approvals and completion deadlines. The parcel 3 deadline was extended to April 2016 in July 2012; Sands Cotai Central’s stated deadline was May 2014. Failure to obtain further extensions could put land concessions and related capitalized costs at risk. The Las Vegas condominium project remains suspended, with $178.8m of capitalized costs.
- Macao gaming operations benefit from a tax exemption through 2013; an additional five-year exemption was requested in July 2012, but approval is uncertain. Other risks include gaming volatility, higher credit losses, leverage and covenant compliance, funding and construction costs, regulatory changes, and litigation. The filing describes SEC and DOJ FCPA investigations and several lawsuits; management could not estimate the probability or range of loss for significant matters. A Macao claim by Asian American Entertainment seeks approximately $375.5m.
- The company stated that disclosure controls were effective at a reasonable-assurance level and that there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether Sands Cotai Central’s planned openings, completion schedule and remaining project costs are achieved.
- Quarterly casino win rates and credit-loss provisions, particularly at Marina Bay Sands, given their effects on earnings and cash collection.
- Debt covenant headroom, facility availability, refinancing terms and sensitivity to higher interest rates.
- Progress on Macao land-concession deadlines and the requested tax exemption extension.
- Developments and potential financial exposure from the FCPA inquiries, the Macao claim and other material litigation.