LAS VEGAS SANDS CORP annual report, FY2017

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Las Vegas Sands Corp. — FY2017 Form 10-K

Reporting period: Fiscal year ended December 31, 2017; fourth-quarter figures are included where noted. The company operates integrated resorts in Macao, Singapore, Las Vegas and Bethlehem, Pennsylvania, and owns 70.1% of Sands China Ltd. (SCL). Its business combines gaming with hotels, retail, dining, entertainment and conventions.

Financial performance and liquidity

  • Revenue: Net revenue was $12.882 billion, up 12.9% from $11.410 billion. Casino revenue rose 14.7% to $10.058 billion. Growth was led by The Parisian Macao, open for a full year in 2017, and Marina Bay Sands.
  • Profit: Operating income was $3.462 billion, up 38.9%; operating margin was approximately 26.9%, versus 21.8% in 2016. Net income attributable to LVS was $2.806 billion, or $3.54 per diluted share, compared with $1.670 billion, or $2.10 per share. Results included a $526 million noncash tax benefit from U.S. tax reform and a $112 million reduction in depreciation expense from revised asset lives.
  • Fourth quarter: Net revenue was $3.436 billion; operating income was $1.027 billion; net income attributable to LVS was $1.211 billion; diluted EPS was $1.53. The quarter included the $526 million noncash tax benefit.
  • Segment performance: Adjusted property EBITDA, a non-GAAP measure, increased 18.6% to $4.900 billion. Marina Bay Sands contributed $1.755 billion, up 26.3%; Macao operations contributed $2.607 billion, up 16.2%; U.S. operations contributed $538 million, up 8.2%. The Parisian Macao’s EBITDA was $412 million, versus $114 million in its partial opening year.
  • Cash flow: Operating cash flow was $4.543 billion, up from $4.044 billion. Capital expenditures were $837 million, yielding operating cash flow less capital expenditures of approximately $3.706 billion. Cash and cash equivalents ended the year at $2.419 billion.
  • Debt and liquidity: Debt carrying value was approximately $9.640 billion, including $296 million of current maturities; balance-sheet long-term debt excluding current maturities was $9.344 billion. The company reported $3.51 billion of available borrowing capacity under its U.S., Macao and Singapore facilities, net of letters of credit. Reported leverage ratios were below facility limits: U.S. 0.5x, Macao 1.7x and Singapore 1.8x.
  • Debt service and distributions: Net interest expense was $327 million, versus $274 million. A 100-basis-point increase in applicable variable interest rates would raise annual interest cost by approximately $98 million. Cash dividends paid were $2.943 billion and share repurchases were $375 million. Management expected the $0.75 quarterly dividend declared in January 2018 to continue through the remainder of 2018, subject to Board review.

Material changes versus 2016

  • Revenue and operating income rebounded, supported by the full-year contribution of The Parisian Macao and stronger casino results at Marina Bay Sands. Marina Bay Sands’ casino revenue increased 16.5%, including higher Rolling Chip volume and win percentage.
  • Macao results improved overall, though performance varied by property: Sands Cotai Central casino revenue declined 3.0%, Sands Macao declined 7.2%, and The Venetian Macao increased 3.3%. Marina Bay Sands room revenue fell 4.8% as occupancy declined.
  • Operating expenses increased 5.6%, less than revenue growth. Doubtful-account provisions fell to $96 million from $173 million, primarily reflecting collections of previously reserved balances and improved credit quality. Pre-opening costs fell to $9 million from $130 million, largely because The Parisian had opened in 2016.
  • Capital expenditures declined to $837 million from $1.398 billion as construction spending on The Parisian decreased. Operating cash flow increased, while cash rose by $291 million after investment and financing outflows.
  • Other expense was $94 million, compared with $31 million of other income in 2016, mainly reflecting $83 million of foreign-currency transaction losses. The effective tax rate was negative 6.8%, versus 10.6%, primarily due to U.S. tax reform.

Outlook, risks and unusual items

  • Development: The company planned to renovate, expand and rebrand Sands Cotai Central as The Londoner Macao, with work expected to begin in 2018 and completion expected in 2020. It also expected to build out 295 additional suites at the Four Seasons tower by 2019. The Las Vegas condominium project remained suspended; $122 million of capitalized costs could be impaired if the project is abandoned or conditions do not improve.
  • Licenses and taxes: The Macao gaming subconcession expires June 26, 2022; the Macao government may redeem it with notice beginning December 26, 2017. The Macao gaming-income tax exemption and dividend-tax arrangement expire at the end of 2018; extensions were requested, but not assured. Marina Bay Sands’ casino license expires in April 2019 and is renewable subject to requirements.
  • Market and operating risks: Results depend on discretionary travel and spending, gaming outcomes and collection of unsecured gaming credit. Risks include competition and new capacity in Macao, restrictions on mainland China travel and currency movement, junket-operator exposure, foreign exchange and interest-rate changes, extensive gaming regulation, labor availability, and natural disasters or travel disruptions. The company also disclosed a prior cybersecurity attack and continuing cyber risks.
  • Debt and capital allocation: Debt covenants and subsidiary restrictions may limit distributions to the parent. Significant principal maturities fall in 2019–2022, including approximately $2.38 billion in 2020 and $2.28 billion in 2022. Management stated available cash, operating cash flow and borrowing capacity were expected to support operations, planned spending, debt obligations and dividend commitments.
  • Legal and compliance matters: The filing describes unresolved litigation, including the Roundsquare matter, where a new damages-trial date was pending, and the Macao AAEC claim seeking approximately $373 million; management could not estimate the probability or range of loss for the AAEC matter. The DOJ non-prosecution agreement and SEC settlement related to FCPA inquiries include reporting obligations through January 2020 and June 2018, respectively. Management said ordinary-course litigation was not expected to have a material effect, but outcomes could differ from estimates.
  • Accounting and audit: Revised useful-life estimates increased 2017 operating income by $112 million and LVS-attributable net income by $72 million. The company’s financial statements received an unqualified audit opinion, and the auditor concluded internal control over financial reporting was effective as of year-end.

Investor verification points

  • Separate recurring operating improvement from the $526 million tax benefit and the $112 million depreciation-estimate benefit when evaluating earnings and EPS.
  • Check whether Macao’s tax arrangements are extended beyond 2018 and whether the 2022 subconcession is extended or otherwise resolved.
  • Assess refinancing and repayment plans for the substantial 2019–2022 maturities, variable-rate exposure and any restrictions on subsidiary distributions.
  • Monitor the execution, cost and operating disruption of The Londoner Macao and the Four Seasons suite expansion, as well as the suspended Las Vegas condominium project.
  • Review gaming-credit collectability, junket exposure, property-level trends and gaming win-rate variability; reported casino results can be affected by chance.
  • Track developments in the disclosed litigation and FCPA compliance obligations, and confirm the status of the declared dividend and capital-return program.