Las Vegas Sands Corp. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. The company operates integrated resorts in Macao, Singapore, Las Vegas and Pennsylvania. Unless noted otherwise, amounts are in U.S. dollars; financial statement amounts below are in millions.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net revenue | $3,372 | $3,161 | $10,254 | $9,337 |
| Operating income | $922 | $855 | $2,877 | $2,436 |
| Net income | $699 | $684 | $2,991 | $1,902 |
| Net income attributable to LVS | $571 | $569 | $2,583 | $1,596 |
| Diluted EPS | $0.73 | $0.72 | $3.27 | $2.01 |
| Adjusted property EBITDA (non-GAAP) | $1,282 | $1,209 | $4,007 | $3,565 |
- Revenue increased 6.7% in Q3 and 9.8% year to date. Operating income rose 7.8% and 18.1%, respectively. Derived operating margins were approximately 27.3% in Q3 2018 versus 27.1% in Q3 2017, and 28.1% year to date versus 26.1%.
- Macao was the principal growth driver: revenue rose 13.1% in Q3 and 15.9% year to date. Q3 Macao adjusted property EBITDA increased 15.8%. Marina Bay Sands revenue fell 2.9% in Q3, primarily reflecting lower casino revenue; Sands Bethlehem adjusted property EBITDA declined 17.5%.
- Q3 casino revenue rose 6.3%; rooms rose 7.4%, mall 6.3%, and convention, retail and other 18.7%. Nine-month casino revenue grew 10.3%, rooms 10.9%, and food and beverage 7.2%.
- Nine-month net income included a $670 million non-cash discrete tax benefit from releasing a valuation allowance on certain U.S. foreign tax credit assets. Excluding that benefit, management reported an effective tax rate of 10.2%; the reported rate was negative 15.8%. Q3 net income attributable to LVS was nearly flat year over year despite higher revenue and operating income.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $3.40 billion, compared with $3.22 billion in 2017. Capital expenditures were $623 million, versus $592 million; investing cash outflow was $610 million.
- Cash, cash equivalents and restricted cash totaled $4.785 billion at September 30, 2018, up from $2.430 billion at year-end 2017. The company reported $4.772 billion of unrestricted cash and $13 million restricted cash.
- Total debt carrying value was approximately $11.98 billion, including $111 million of current maturities, versus $9.64 billion at year-end 2017. Nine-month interest expense was $308 million, up from $240 million. Reported average interest rate for the nine-month period rose to 3.7% from 3.1%.
- Financing included $5.50 billion of Sands China senior notes issued in August, plus amendments and additional borrowing under the U.S. credit facility. Proceeds from the notes repaid the outstanding 2016 VML facility borrowings; the early retirement generated a $52 million loss, with another $3 million debt-modification loss reported.
- Management said approximately $3.50 billion of borrowing capacity remained across U.S., Macao and Singapore facilities, net of letters of credit, and believed cash and operating cash flow would support covenants, working capital, planned capital expenditure, debt obligations and dividends. Management reported covenant compliance; facility leverage ratios were below their stated limits.
- Nine-month financing cash outflow was $445 million, including $2.395 billion of dividends paid and $475 million of share repurchases, partly offset by net debt proceeds. The company declared a further $0.75 quarterly dividend for December 2018 and announced a 2019 annual dividend of $3.08 per share ($0.77 quarterly). Repurchase authorization remaining at September 30 was $2.10 billion.
Material changes, outlook and risks
- Management attributed growth mainly to stronger Macao gaming activity and room performance. Q3 results also reflected lower Marina Bay Sands rolling-chip volume and reduced casino revenue at Sands Bethlehem and Las Vegas. Gaming win percentages can vary materially over short periods.
- Management expects approximately $2.2 billion in total costs for Macao development projects: The Londoner Macao, including about 370 St. Regis Tower Suites, is planned for phased completion during 2020–2021; the approximately 290-suite Four Seasons Tower Suites project is expected in Q1 2020. Costs and completion dates may change. The Four Seasons project incurred a $94 million write-off in the first nine months, primarily related to the project.
- The company agreed to sell Sands Bethlehem for a $1.30 billion enterprise value; closing remained subject to regulatory review and other conditions.
- VML received an extension of its Macao gaming-profit tax exemption through June 26, 2022, but had not secured a related replacement agreement for the annual payment arrangement. The filing provides no company earnings guidance.
- Key disclosed risks include reliance on Macao, Singapore and Las Vegas for cash flow; gaming and consumer demand variability; regulatory and license requirements; debt, interest-rate and currency exposure; credit collection and junket relationships; construction costs and execution; travel disruptions; and litigation. The company reported a $7 million liability fair value for interest-rate swaps hedging $5.50 billion of notes.
- In the Roundsquare litigation, a damages trial was scheduled to begin in March 2019; the company had accrued only a nominal amount and said an adverse outcome could require an additional liability. In the separate AAEC Macao action, management said it could not determine the probability of outcome or reasonably possible loss.
Investor verification priorities
- Assess how much of year-to-date earnings growth depends on the one-time $670 million tax benefit and the $127 million depreciation reduction from revised useful lives.
- Monitor Macao gaming volumes and win rates, Marina Bay Sands rolling-chip activity, and weaker U.S. property results; distinguish volume trends from short-term gaming luck.
- Review debt maturities, refinancing terms, interest costs, covenant headroom and the availability of cash held by non-U.S. subsidiaries.
- Track the $2.2 billion Macao project budget, construction phasing, room closures and further impairments; confirm progress and closing conditions for the Sands Bethlehem sale.
- Verify dividend and buyback sustainability against capital spending and debt service, and follow developments in the Roundsquare and AAEC matters and the Macao tax-payment arrangement.