Las Vegas Sands Corp. — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; the filing also reports fourth-quarter results. Las Vegas Sands operates integrated resorts in Macao, Singapore, Las Vegas and Bethlehem, Pennsylvania. The Parisian Macao opened on September 13, 2016. Amounts below are U.S. dollars unless otherwise noted.
Financial performance and liquidity
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Net revenue | $11.410 billion | $11.688 billion | -2.4% |
| Operating income | $2.493 billion | $2.841 billion | -12.2% |
| Operating margin | 21.8% | 24.3% | -2.5 percentage points |
| Net income | $2.016 billion | $2.386 billion | -15.5% |
| Net income attributable to LVS | $1.670 billion | $1.966 billion | -15.1% |
| Diluted EPS | $2.10 | $2.47 | -$0.37 |
| Adjusted property EBITDA (non-GAAP) | $4.130 billion | $4.170 billion | -1.0% |
| Cash from operating activities | $4.043 billion | $3.450 billion | +$593 million |
| Capital expenditures | $1.398 billion | $1.529 billion | -$131 million |
Casino revenue fell 3.4% to $8.771 billion, while room revenue rose 3.9% to $1.527 billion and mall revenue rose 4.8% to $591 million. The filing attributes lower gaming revenue primarily to weaker VIP Rolling Chip activity in Macao and Marina Bay Sands. Adjusted property EBITDA is a supplemental non-GAAP measure and does not reflect capital expenditures, dividends, interest or debt repayments.
Net cash used in investing activities was $1.442 billion; net cash used in financing activities was $2.630 billion. Cash and cash equivalents ended the year at $2.128 billion, down $51 million. Current assets were $3.098 billion and current liabilities were $2.806 billion. Long-term debt was $9.428 billion, net of discounts and financing costs; reported debt including current maturities was $9.595 billion on the balance sheet and scheduled debt maturities totaled $9.703 billion before related costs. The company had $3.46 billion available under its credit facilities, net of letters of credit.
Year-end leverage ratios under the credit agreements were 0.8x for U.S. operations, 2.0x for Macao and 2.4x for Singapore, below their respective covenant ceilings. Management reported covenant compliance and believed cash, operating cash flow and borrowing availability would support liquidity needs, planned and committed capital expenditures, debt obligations and dividend commitments. A hypothetical 100-basis-point increase in relevant benchmark rates would increase annual interest cost by approximately $97 million.
Material changes and fourth-quarter results
- Annual net revenue declined $278 million. Macao operations and Marina Bay Sands decreased by $168 million and $153 million, respectively, partly offset by growth in Las Vegas.
- Macao casino revenue excluding the Parisian fell $522 million; Marina Bay Sands casino revenue declined $152 million. The Parisian contributed $359 million of casino revenue and $114 million of adjusted property EBITDA during its partial-year operation.
- Marina Bay Sands adjusted property EBITDA declined 7.8% to $1.389 billion. Macao adjusted property EBITDA increased slightly to $2.244 billion, while U.S. adjusted property EBITDA rose 12.7% to $497 million, including growth at the Las Vegas properties and Sands Bethlehem.
- FY2016 operating expenses included $130 million of pre-opening costs, primarily for the Parisian; a $79 million non-recurring corporate expense; and $79 million of asset disposal or impairment losses, mainly including a $49 million Las Vegas Condo Tower write-off. Higher depreciation and amortization also weighed on earnings.
- Fourth-quarter net revenue was $3.075 billion, versus $2.862 billion in Q4 2015. Operating income was $669 million versus $702 million; net income was $607 million versus $575 million; and net income attributable to LVS was $509 million versus $466 million.
Outlook, risks and contingencies
- No quantified company-wide revenue or earnings guidance is provided. Management expects the Parisian to ramp up and expresses confidence in Macao’s long-term growth, while noting softer recent gaming demand and increased competition.
- The company completed structural work on the Four Seasons and St. Regis apart-hotel towers and intended to monetize the units, subject to Macao government approval. The Las Vegas Condo Tower remained suspended; management could not determine the project’s final cost, and up to $123 million of capitalized costs was at risk of further charge if conditions did not improve or the project were abandoned.
- The company expected its quarterly common dividend to remain $0.73 per share through the remainder of 2017, subject to board review. It paid $2.88 per share in 2016 and authorized a new $1.56 billion share repurchase program, with no repurchases made during 2016.
- Macao’s gaming subconcession expires June 26, 2022; the government may begin redeeming it with notice from December 26, 2017. Failure to extend it could result in transfer of casino premises and gaming equipment without compensation. Macao gaming-tax exemption and the related dividend-tax substitution agreement expire at the end of 2018.
- Key risks include dependence on Macao, Singapore and Las Vegas; travel restrictions and economic conditions in mainland China; VIP and junket activity, gaming-credit collections and chance-based win volatility; competition and regulatory changes; foreign exchange and variable-rate debt exposure; and the ability to refinance significant maturities, including approximately $4.37 billion scheduled in 2020.
- The SEC and DOJ FCPA inquiries were resolved through a $9 million SEC civil penalty and a January 2017 DOJ non-prosecution agreement requiring a $7 million penalty and compliance obligations. The SEC also required an independent compliance consultant for two years.
- Significant litigation includes the Suen matter, in which liability was affirmed but damages remanded for a new trial, and an approximately $376 million Macao claim by Asian American Entertainment Corporation. Management said it could not estimate the probability or reasonably possible loss for certain other derivative matters.
Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor concluded internal controls were effective as of year-end.
Important facts for investors to verify
- Whether the Parisian’s operating ramp offsets continued softness in Macao VIP play and the decline in Marina Bay Sands gaming revenue.
- Cash conversion and sustainability of operating cash flow, given the $593 million year-over-year improvement was attributed primarily to working-capital changes.
- Debt refinancing and maturity plans, covenant headroom, variable-rate exposure and whether the dividend level remains supportable alongside capital spending.
- Progress and approval requirements for monetizing the apart-hotel towers, and the carrying value and future plans for the suspended Las Vegas Condo Tower.
- Renewal or other resolution of Macao gaming and tax arrangements, and developments in the outstanding litigation and FCPA compliance obligations.