Business context and reporting period
Las Vegas Sands Corp. filed this unaudited Form 10-Q for the three months ended March 31, 2017. The company operates integrated casino resorts, hotels and retail malls in Macao, Singapore and the United States. The Parisian Macao, opened in September 2016, contributed its first full comparable quarter. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior date | Change |
|---|---|---|---|
| Net revenue | $3,106 | $2,717 | +14.3% |
| Operating income | $763 | $586 | +30.2% |
| Net income | $578 | $409 | +41.3% |
| Net income attributable to LVS | $480 | $320 | +50.0% |
| Diluted EPS | $0.60 | $0.40 | +$0.20 |
| Adjusted property EBITDA (non-GAAP) | $1,147 | $918 | +24.9% |
| Operating cash flow | $963 | $799 | +$164 |
| Capital expenditures | $202 | $343 | -$141 |
| Cash and cash equivalents at quarter end | $1,956 | $2,128 at Dec. 31, 2016 | -$172 |
| Total debt, including current maturities | $9,790 | $9,595 at Dec. 31, 2016 | +$195 |
Operating margin was approximately 24.6%, compared with 21.6% a year earlier; adjusted property EBITDA margin was approximately 36.9%, versus 33.8%. Interest expense, net, was $78 million, versus $69 million. The effective tax rate was 10.7%, compared with 13.3%. The company declared dividends of $0.73 per common share in Q1, versus $0.72 a year earlier.
Material changes versus the prior period
- Net revenue rose $389 million, principally reflecting $318 million from The Parisian Macao and a $95 million increase at Marina Bay Sands. Casino revenue grew 15.5%; rooms, food and beverage, and mall revenue also increased.
- Adjusted property EBITDA increased across Macao, Singapore and Las Vegas overall. Marina Bay Sands EBITDA rose 32.7%, supported chiefly by a higher Rolling Chip win percentage; Las Vegas Operating Properties rose 40.2%, helped by convention business and higher casino hold. Sands Cotai Central EBITDA declined 12.3%, amid lower Rolling Chip volume and casino revenue.
- Operating expenses increased 9.9% to $2,343 million. Depreciation and amortization rose 23.5%, primarily because of The Parisian Macao. Doubtful-account provision declined to $32 million from $45 million.
- Operating cash flow increased, while lower capital spending reduced investing cash outflow. Financing outflows included $886 million of dividends and $150 million of share repurchases; cash declined by $172 million during the quarter.
- Debt increased partly with $200 million of net borrowings under the Macao revolving facility. The company repaid $56 million of airplane financing.
Liquidity, debt and capital allocation
At March 31, 2017, the company reported $1.96 billion of unrestricted cash and $10 million of restricted cash, plus $3.30 billion of available borrowing capacity across its U.S., Macao and Singapore facilities. Approximately $1.34 billion of unrestricted cash was held by non-U.S. subsidiaries; the company said about $1.05 billion could be repatriated with minimal taxes. Management said cash, operating cash flow and available facilities were expected to support covenant compliance, working capital, capital spending, debt service and dividend commitments.
Management reported covenant leverage ratios of 0.6x for the U.S., 2.0x for Macao and 2.3x for Singapore, below respective limits of 5.5x, 4.0x and 3.5x. It stated the company was in compliance with debt covenants. In March, the U.S. term loans were refinanced/extended to March 2024, with lower loan margins and removal of specified revolving-loan prepayment requirements; a $5 million debt-modification loss was recorded. A hypothetical 100-basis-point rise in benchmark rates was estimated to increase annual interest cost by approximately $97 million.
The company repurchased 2.72 million shares for $150 million and had $1.41 billion remaining under its $1.56 billion authorization. Management expected the $0.73 quarterly dividend to continue through the remainder of 2017; this is an expectation, not a guarantee. A further quarterly dividend of $0.73 was declared in April for payment in June.
Outlook, risks and unusual items
- No specific revenue, earnings or EBITDA guidance was provided. Management cautioned that interim results are not necessarily indicative of full-year results.
- Casino results are exposed to short-term variation in win percentages. At Marina Bay Sands, the higher Rolling Chip win percentage materially supported Q1 results; actual outcomes may differ from expected or trailing win rates.
- Key stated risks include gaming regulation and licensing, dependence on Macao, Singapore and Las Vegas, competition, economic and consumer-spending changes, credit collection, currency and interest-rate movements, labor and construction constraints, and debt covenant or refinancing risks.
- Foreign currency transaction losses were $21 million and the company recorded a $15 million fair-value loss on Singapore forward contracts. Forward contracts had $427 million notional value and a $3 million liability fair value at quarter end.
- Significant legal matters include the Round Square dispute, remanded for a new damages trial, and an Asian American Entertainment claim for 3.0 billion patacas (approximately $375 million). The company said it had accrued only a nominal amount for litigation costs; outcomes and potential losses were not determinable for several matters. The securities class action received summary judgment for defendants, but plaintiffs appealed.
- The company adopted new share-based payment accounting in 2017, including a $2 million cumulative retained-earnings adjustment for forfeiture accounting. It also recognized deferred tax assets associated with $379 million of prior windfall tax benefits, with a full valuation allowance.
- The Macao gaming income-tax exemption was effective through the end of 2018. The company continued assessing the forthcoming revenue-recognition standard, which management expected to change the presentation of promotional allowances and complimentary revenues.
Important facts for investors to verify
- Whether Q1’s strong EBITDA growth, particularly at Marina Bay Sands, persists after normalizing for casino win-rate volatility.
- The Parisian Macao’s contribution to revenue and EBITDA relative to its ongoing operating costs and depreciation.
- Debt levels, facility availability, covenant headroom, variable-rate exposure and the cash accessibility of funds held outside the U.S.
- The sustainability of the $0.73 quarterly dividend and the pace of share repurchases relative to cash generation and investment needs.
- Developments and potential exposure in the Round Square, Asian American Entertainment and shareholder derivative proceedings.
- The impact of the new revenue-recognition standard and of deferred-tax valuation allowances on future reported results.