Mastercard Incorporated — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing; it does not provide a complete standalone fourth-quarter income statement. The company operates a global, multi-rail payments network and related services. COVID-19 materially affected spending and travel-related activity.
Financial and operating metrics
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net revenue | $15.301 billion | $16.883 billion | Down 9% GAAP; down 8% currency-neutral |
| Operating income | $8.081 billion | $9.664 billion | Down 16% |
| Operating margin | 52.8% | 57.2% | Down 4.4 percentage points |
| Net income | $6.411 billion | $8.118 billion | Down 21% |
| Diluted EPS | $6.37 | $7.94 | Down 20% |
| Operating cash flow | $7.224 billion | $8.183 billion | Down $959 million |
| Gross dollar volume | $6.3 trillion | — | Flat in local currency |
| Cross-border volume | — | — | Down 29% in local currency |
| Switched transactions | 90.1 billion | — | Up 3% |
Adjusted, currency-neutral net revenue declined 8%; adjusted net income was $6.463 billion, down 17%; adjusted diluted EPS was $6.43, down 16%. These are non-GAAP measures and exclude specified investment gains or losses and special items.
- Revenue mix: Domestic assessments were $6.656 billion, down 2%; cross-border fees were $3.512 billion, down 37%; transaction processing was $8.731 billion, up 3%; and other revenue was $4.717 billion, up 14%. Rebates and incentives, a reduction to gross revenue, rose 3% to $8.315 billion.
- Costs and tax: GAAP operating expenses were nearly unchanged at $7.220 billion. Advertising and marketing expense fell 30%, while general and administrative expense rose 3%. The effective tax rate was 17.4%, versus 16.6% in 2019.
- Liquidity and debt: Cash, cash equivalents and investments totaled $10.6 billion at year-end, excluding restricted cash; the company also had an unused $6.0 billion revolving credit facility. Total debt was $12.7 billion, including $649 million current, and no commercial-paper or facility borrowings were outstanding.
- Capital returns and investment: Mastercard repurchased 14.3 million shares for $4.5 billion and paid $1.6 billion in dividends. It completed acquisitions for approximately $1.1 billion, including Finicity, and issued $4.0 billion of debt principal.
Material changes versus FY2019
- Revenue and earnings weakened principally because pandemic-related travel restrictions sharply reduced cross-border activity. Cross-border volume fell 45% in Q2 and 29% in Q4 year over year; full-year cross-border volume declined 29%.
- Gross dollar volume recovered from its second-quarter decline and was flat for the year in local currency. Switched-transaction growth was 3% for the year, after a second-quarter decline.
- Other revenue growth and higher transaction processing revenue partially offset the cross-border decline. Other revenue included acquisition-related growth.
- Net cash from operations fell by about $1.0 billion. Financing cash use was lower than in 2019, reflecting lower share repurchases and higher debt proceeds.
- Debt outstanding increased from $8.5 billion to $12.7 billion following the March 2020 issuance of $4.0 billion principal amount of notes.
Outlook, risks, contingencies and unusual items
- Outlook: The filing gives no quantified revenue, earnings or margin guidance. Management said the pandemic’s duration and economic effects remained uncertain; second-half volume improvement was noted, but cross-border activity remained depressed.
- Strategy and commentary: Mastercard highlighted accelerating e-commerce and contactless adoption, continued investment in digital payments, real-time account-based payments and value-added services, and expansion of financial inclusion. It expected the Nets Corporate Services acquisition, subject to closing conditions, in early 2021.
- COVID-19 and operating risks: Results remain exposed to the pandemic and global economic conditions, particularly travel and cross-border spending. Other key risks include intense competition and pricing pressure, regulation of interchange and network fees, customer concentration, cyberattacks and service outages, privacy and data rules, currency movements, and settlement guarantees.
- Litigation: Accrued litigation was $842 million at year-end, including a $783 million reserve for U.S. merchant class and opt-out cases. The company also faces ongoing U.K. and Pan-European merchant claims and other litigation. Some potential losses cannot be estimated from the filing. A confidential U.K. prepaid-card matter resulted in a $45 million charge in 2020; the filing says it concerns historic conduct and has no prospective business impact.
- Other unusual items: FY2020 included $73 million of litigation provisions. Net gains on equity investments were $30 million, compared with $167 million in 2019. Interest expense rose to $380 million from $224 million, partly due to debt issuance.
- Controls and audit: Management and the auditor concluded internal control over financial reporting was effective as of December 31, 2020. The auditor identified rebate-and-incentive estimates as a critical audit matter, reflecting significant management judgment.
Important facts for investors to verify
- Whether cross-border volumes recover and how travel conditions affect revenue and margins.
- How the $8.315 billion in rebates and incentives, based partly on estimated customer performance, develops versus actual customer results.
- Potential outcomes and cash requirements from U.S. merchant litigation, European merchant claims and other legal or regulatory matters.
- Debt maturity and refinancing needs, including the $650 million due in 2021, and the company’s capacity to sustain dividends and repurchases.
- Acquisition integration and returns, including Finicity and the pending Nets transaction.
- Exposure to its five largest customers, which generated approximately 22% of FY2020 net revenue, and to settlement guarantees, with $46.3 billion of net uncollateralized settlement exposure at year-end.