Las Vegas Sands Corp. — Q3 2011 Form 10-Q
Business context and period. The company operates integrated casino resorts in Las Vegas and Pennsylvania, Macau, and Singapore; it owns 70.3% of Sands China Ltd. Results cover the three and nine months ended September 30, 2011, compared with the corresponding 2010 periods. Financial statements are unaudited.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net revenue | $2.409B | $1.909B | $6.866B | $4.838B |
| Operating income | $632.6M | $383.3M | $1.727B | $691.9M |
| Net income | $505.2M | $268.8M | $1.359B | $395.2M |
| Net income attributable to LVS | $424.9M | $214.5M | $1.125B | $273.9M |
| Diluted EPS | $0.44 | $0.21 | $1.17 | $0.17 |
| Adjusted property EBITDA | $924.1M | $645.2M | $2.572B | $1.490B |
- Net revenue increased 26.2% in Q3 and 41.9% year to date; operating income rose 65.0% and 149.5%, respectively. LVS-attributable net income increased 98.1% in Q3 and 310.7% year to date.
- Operating margin was 26.3% in Q3 versus 20.1% a year earlier, and 25.1% year to date versus 14.3%. Net margin was 21.0% and 19.8%, respectively, versus 14.1% and 8.2%.
- Marina Bay Sands was the largest growth contributor as it ramped up after opening in 2010. Q3 revenue there was $792.4M and adjusted property EBITDA was $413.9M; year-to-date figures were $2.115B and $1.104B. Macau and U.S. properties also grew overall, although Las Vegas casino revenue declined 16.6% year to date.
- For the nine months, operating cash flow was $1.929B, capital expenditures were $1.088B, and investing cash outflow was $492.1M. Operating cash flow less capital expenditures was approximately $841.6M, versus negative $442.3M in 2010.
- At September 30, cash and cash equivalents were $3.952B, with restricted cash of $219.9M. Total debt was $9.739B, including $457.3M of current maturities; cash less total debt implies approximately $5.788B of net debt before considering restrictions on cash availability. Total assets were $21.965B and total equity $9.125B.
- Available borrowing capacity under U.S., Macau, and Singapore facilities was reported as approximately $1.80B. Management reported leverage ratios of 4.0x for U.S., 1.3x for relevant Macau operations, and 2.5x for Singapore, within respective limits of 6.0x, 3.0x, and 5.5x.
Material changes versus comparable periods
- Marina Bay Sands’ progressive opening drove much of the revenue and EBITDA growth; Q3 property EBITDA increased 71.3% year over year.
- Macau year-to-date adjusted property EBITDA rose 29.7%; U.S. adjusted property EBITDA rose 19.2%. Sands Bethlehem benefited from table games and its hotel opening; Las Vegas operating properties had more modest year-to-date EBITDA growth.
- Operating expenses rose 16.5% in Q3 and 24.0% year to date, slower than revenue growth. Higher costs reflected Marina Bay Sands’ ramp-up and Macau gaming taxes. Year-to-date doubtful-account provision increased to $92.5M from $73.0M, mainly due to Marina Bay Sands.
- Net interest expense declined to $214.9M from $231.9M for the nine months, despite higher interest cost, as more interest was capitalized. Weighted-average debt was lower, while the average interest rate increased to 4.1% from 3.7%.
- Year-to-date capital expenditures fell to $1.088B from $1.650B, principally because Marina Bay Sands construction spending was lower; spending on Macau development projects increased.
Outlook, risks, contingencies, and unusual items
- The company expected to draw the full $3.2B term portion of a new $3.7B Macau credit facility by November 29, 2011, to refinance VML and VOL debt and fund Sands Cotai Central. Management expected lower interest expense and extended Macau debt maturities to 2016; it also expected a roughly $21.5M refinancing charge in Q4.
- The board approved redemption of all outstanding preferred shares on November 15, 2011. The company expected to pay approximately $783.4M and record a roughly $98.5M redemption premium in Q4. These are post-quarter expected cash and earnings effects.
- Sands Cotai Central phase I was expected to open at the end of Q1 2012; phase IIA in Q3 2012 and phase IIB in Q1 2013. Estimated cost to complete phases I and II was about $1.6B. Sands Bethlehem retail was expected to begin opening in November 2011, with its event center planned for Q2 2012. These are management estimates and schedules.
- Management stated available cash, operating cash flow, and facility capacity were expected to fund projects then under construction and support covenant compliance. It cautioned that additional financing would be needed for remaining Cotai developments and might not be available. Several development projects are suspended or deferred; delay, approval, financing, or demand problems could result in impairment charges or contract penalties.
- Macau parcels 7 and 8 lacked an approved land concession, with an appeal pending; $100.7M of related capitalized costs was at risk of partial or full impairment. Failure to meet or extend land-concession deadlines could also jeopardize parcel 3 and Sands Cotai Central investments. Starwood could terminate its Sands Cotai Central management agreement over delays; the company was negotiating revised timelines.
- The company was awaiting a Singapore Tourism Board audit of Marina Bay Sands’ development-agreement requirements. If the requirements and final opening deadline were not met, the board could draw on a SGD 192.6M security deposit.
- Significant legal and regulatory matters included SEC and DOJ investigations concerning FCPA compliance, an SFC investigation of Sands China, shareholder and securities litigation, and the Suen case remanded for a new trial. Management could not determine the probability or reasonably possible loss for several matters.
- Key financial risks include substantial variable-rate debt, covenant and cross-default exposure, foreign-exchange movements, gaming revenue volatility, credit losses, regulatory and land approvals, and reliance on Las Vegas, Macau, and Singapore. A 100-basis-point rate change was estimated to affect annual interest cost by about $94.5M. Macau’s gaming-profit tax exemption was due to expire at the end of 2013.
Important facts for investors to verify
- Whether the $3.7B Macau facility funded as expected, the resulting refinancing terms, and the actual Q4 debt-modification charge.
- Completion and opening milestones, remaining cost, and funding for Sands Cotai Central and other active projects.
- Preferred-share redemption cash payment and premium, and the resulting share count and dilution effects from warrant exercises.
- Cash availability by subsidiary and jurisdiction, covenant headroom, debt maturities, and sensitivity to interest rates and currency movements.
- Developments in Macau land-concession appeals and deadlines, the Singapore audit, hotel-management agreements, and legal and regulatory investigations.
- Whether operating trends persist independently of Marina Bay Sands’ ramp-up and gaming win-rate fluctuations; adjusted property EBITDA is a non-GAAP operating measure.