Las Vegas Sands Corp. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with Q1 2017 unless stated otherwise. The company operates integrated resorts in Macao, Singapore, Las Vegas and Pennsylvania. Financial statements are unaudited.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net revenue | $3.579 billion | $3.067 billion | +16.7% |
| Operating income | $1.158 billion | $764 million | +51.6% |
| Operating margin | 32.4% | 24.9% | +7.5 percentage points |
| Adjusted property EBITDA (non-GAAP) | $1.500 billion | $1.148 billion | +30.7% |
| Net income | $1.616 billion | $579 million | +179.1% |
| Net income attributable to LVS | $1.456 billion | $481 million | +202.7% |
| Diluted EPS | $1.84 | $0.61 | — |
| Operating cash flow | $1.397 billion | $963 million | +$434 million |
| Capital expenditures | $238 million | $202 million | +$36 million |
| Cash, cash equivalents and restricted cash, March 31 | $2.640 billion | $1.966 billion | Year-over-year |
Operating income rose faster than revenue as results improved across Macao, Singapore and Las Vegas, and depreciation declined. The calculated operating margin increased to 32.4% from 24.9%. Adjusted property EBITDA is a non-GAAP measure and is not a substitute for operating income or operating cash flow.
Revenue growth was led by casino revenue, up 20.5% to $2.599 billion. Macao revenue was $2.160 billion (+16.8%) and Marina Bay Sands revenue was $872 million (+26.4%). U.S. revenue was $611 million (+4.6%); Sands Bethlehem revenue declined to $134 million from $139 million. Casino results reflect both gaming volume and win-rate variability.
Cash flow from operations less capital expenditures was $1.159 billion in Q1 2018, compared with $761 million in Q1 2017 (calculated from reported amounts). The company paid $902 million in dividends, repurchased $75 million of shares and made $274 million of debt repayments; it also borrowed $249 million. Cash and restricted cash increased $210 million during the quarter.
At March 31, 2018, balance-sheet debt was $9.652 billion, including $144 million of current maturities; long-term debt was $9.508 billion. Unrestricted cash was $2.628 billion. The company reported $3.51 billion of available borrowing capacity across its U.S., Macao and Singapore facilities and said it expected cash, operating cash flow and available facilities to support liquidity needs and covenant compliance. Management reported compliance with debt covenants; facility leverage ratios were below their respective limits.
Material changes, unusual items and outlook
- Tax benefit: Q1 net income included a nonrecurring, non-cash $670 million tax benefit related to U.S. tax reform and the reassessment of valuation allowances on foreign tax credit assets. Without it, the effective tax rate would have been 9.5%, rather than the reported negative 54.6%. The company cautioned that tax-reform estimates could be adjusted as guidance and interpretations evolve.
- Depreciation estimate: Changes in estimated useful lives of certain property and equipment reduced Q1 depreciation and amortization by $64 million and increased net income by $46 million, or $0.06 per diluted share.
- Gaming and foreign exchange: Marina Bay Sands benefited from a higher Rolling Chip win percentage; Macao gains were primarily associated with higher Non-Rolling Chip drop. Such win percentages can vary materially in shorter periods. Foreign-currency transaction losses were $26 million, primarily related to Singapore-dollar intercompany debt.
- Debt amendments: The U.S. term-loan maturity was extended to March 2025 and its applicable margin reduced. Singapore facilities were amended and maturities extended to 2024 for term loans and 2023 for revolving loans; the Singapore leverage covenant was set at a maximum of 4.0x through maturity.
- Capital returns: The quarterly dividend was $0.75 per share, versus $0.73 a year earlier. In April, the board declared another $0.75 dividend, payable June 28, 2018. The company had $1.11 billion remaining under its share-repurchase authorization, which expires in November 2018.
- Projects and asset sale: The planned Londoner Macao renovation, expansion and rebranding was expected to complete in 2020; approximately 280 suites beside the Four Seasons Hotel Macao were expected to complete in 2019. The company agreed to sell Sands Bethlehem for $1.30 billion enterprise value, subject to regulatory review and other closing conditions. No sale completion was reported in this filing.
- Guidance: The filing provides no quantified company-wide revenue, earnings or cash-flow guidance. Management describes liquidity as sufficient for operating needs, planned and committed capital spending, debt obligations and dividend commitments.
Risks and contingencies
The company identified exposure to variable interest rates and foreign currencies: a hypothetical 100-basis-point change in relevant benchmark rates was estimated to change annual interest cost by about $98 million. It also cited risks involving gaming regulation and licenses, competition, travel and discretionary spending, credit collections, reliance on Macao, Singapore and Las Vegas, construction and labor, currency movements, cybersecurity and litigation. Management said there were no material changes to the risk factors in its 2017 Form 10-K.
Significant disclosed litigation includes the Round Square matter, with a damages trial scheduled for March 2019; the company had accrued only a nominal amount and said an additional liability could be required if its assumptions change. The AAEC Macao action seeks approximately $371 million, but management said the outcome and reasonably possible loss could not currently be determined. A U.S. securities class-action appeal had oral argument in April 2018. Other claims are described in the notes; management stated that ordinary-course litigation was not expected to have a material effect, while noting outcomes may differ from estimates.
The company adopted the new revenue-recognition standard on a full retrospective basis from January 1, 2018. Changes included presenting certain commissions and loyalty-program costs as reductions to casino revenue. For Q1 2017, adoption reduced both revenue and operating expenses by $39 million and $40 million, respectively, and increased operating income by $1 million; the cumulative opening retained-earnings adjustment was an $8 million decrease.
Important facts for investors to verify
- How much of reported earnings growth is attributable to the one-time $670 million tax benefit and the $46 million net-income benefit from the depreciation estimate change.
- Whether strong Macao and Marina Bay Sands gaming results persist when win rates normalize, and how underlying gaming volumes develop.
- Completion, proceeds and timing of the proposed Sands Bethlehem sale, including regulatory approval and any resulting effect on reported results.
- Debt refinancing terms, variable-rate exposure, covenant headroom, and the sustainability of dividends and repurchases relative to cash flow and capital spending.
- Developments in the Round Square and AAEC litigation and any changes to the company’s loss estimates or accruals.