Mastercard Incorporated — FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; filed February 15, 2017. The filing reports full-year results and unaudited quarterly data, including the quarter ended December 31, 2016.
Business context
Mastercard operates a global payments network, switching transactions and selling related payment products and services. It generally does not issue cards, extend credit to cardholders, or receive interchange fees. Revenue primarily comes from volume-based assessments, transaction processing, and other payment-related services, net of customer and merchant rebates and incentives.
Financial performance and liquidity
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Net revenue | $10.776 billion | $9.667 billion | +11% |
| Operating income | $5.761 billion | $5.078 billion | +13% |
| Operating margin | 53.5% | 52.5% | +1.0 percentage point |
| Net income | $4.059 billion | $3.808 billion | +7% |
| Diluted EPS | $3.69 | $3.35 | +10% |
| Operating cash flow | $4.484 billion | $4.043 billion | +$441 million |
Adjusted, non-GAAP operating margin was 54.5% in 2016 versus 54.0% in 2015; adjusted diluted EPS was $3.77 versus $3.43. These measures exclude specified litigation provisions and, for 2015, a pension-plan settlement charge. The effective tax rate rose to 28.1% from 23.2%, principally because 2015 benefited from tax settlements and foreign tax credits.
Fourth quarter: Net revenue was $2.756 billion versus $2.517 billion in Q4 2015; operating income was $1.363 billion versus $1.107 billion; net income was $933 million versus $890 million; diluted EPS was $0.86 versus $0.79.
Volume and revenue drivers: Switched transactions grew 16%, cross-border volume 12%, and Mastercard-branded gross dollar volume 9% in local currency (11% adjusted for the EU regulation change). Transaction-processing revenue rose 18% and other revenue 22%. Rebates and incentives increased 20%, partially offsetting gross revenue growth; they totaled $4.777 billion, or about 31% of gross revenue.
Liquidity and debt: Cash, cash equivalents and investments were $8.3 billion at year-end, excluding restricted cash and customer security deposits. Current assets were $13.228 billion and current liabilities $7.206 billion. Debt principal outstanding was $5.239 billion ($5.180 billion carrying value), up from $3.299 billion principal in 2015; Mastercard issued $2 billion of notes in November. It had no commercial-paper or revolver borrowings and reported $3.75 billion of committed revolving capacity. Management said available liquidity and cash-generation capacity were sufficient for expected operating needs and obligations.
Investing cash outflow was $1.167 billion and financing cash outflow $2.293 billion. The company repurchased 36.9 million shares for $3.511 billion and paid $837 million in dividends during 2016. Equity declined to $5.684 billion from $6.062 billion.
Material changes and developments
- Revenue growth accelerated from 2% in 2015 to 11% in 2016; reported operating margin and earnings also increased. Foreign currency reduced 2016 net revenue growth by approximately 1 percentage point, while local-currency GDV growth exceeded reported U.S.-dollar growth.
- Operating expenses rose 9% (10% excluding special items), reflecting personnel investment, higher data-processing costs, and comparison with favorable foreign-exchange gains in 2015. Litigation provisions were $117 million in 2016 versus $61 million in 2015.
- Mastercard agreed to acquire a 92.4% controlling interest in VocaLink for approximately £700 million (about $860 million at year-end exchange rates), with a potential earn-out of up to £169 million. Closing was expected by mid-2017, subject to approvals and other conditions.
- The company expanded digital payment, tokenization and security offerings and introduced machine-learning fraud/approval tools. It also implemented the EU requirement to separate scheme and switching activities in June 2016.
Outlook, risks and contingencies
The filing provides no quantified financial guidance. Management described growth opportunities in digital payments, value-added services, financial inclusion and expansion into additional payment flows, while cautioning that economic recovery and the business environment remained uncertain.
- Regulation and litigation: Interchange-fee caps, regulatory scrutiny and merchant acceptance rules could pressure volumes, pricing, incentives and compliance costs. The U.S. appeals court vacated approval of the merchant class settlement and remanded the case; Mastercard had accrued $705 million for the class and opt-out merchant matters. Total accrued litigation was $722 million. The EU Commission’s interchange investigation and UK merchant claims remained material matters; the filing says possible outcomes in several proceedings cannot be reliably estimated.
- Settlement exposure: Gross settlement exposure was $37.2 billion, offset by $3.7 billion of collateral, leaving $33.5 billion net uncollateralized exposure. Mastercard’s guarantee is unlimited in amount, though exposure typically lasts only a few days; multiple customer failures could strain liquidity or cause unrecoverable losses.
- Other principal risks: intense competition and pricing pressure, customer concentration (the five largest customers generated about 23% of revenue), disintermediation, cyberattacks or service outages, foreign-exchange movements, economic or political disruption, and privacy/data-protection requirements. Approximately 62% of revenue was generated outside the U.S.
- Future obligations totaled $8.816 billion, including $5.239 billion of debt principal and $1.576 billion of sponsorship, licensing and other commitments. This excludes the $722 million litigation provision because payment timing was not fixed and determinable; contingent future customer incentives are also excluded.
Important facts for investors to verify
- Track developments in the U.S. merchant litigation, the adequacy and timing of the $722 million litigation accrual, and outcomes of EU and UK interchange proceedings.
- Confirm VocaLink’s regulatory approval, closing, purchase economics and integration progress.
- Monitor rebate and incentive growth against revenue and transaction growth, along with customer concentration and pricing terms.
- Assess settlement exposure, collateral coverage, liquidity availability and debt-service obligations under adverse customer or market conditions.
- Review the effects of foreign exchange, the higher 2016 tax rate and evolving privacy regulations on reported growth and cash generation.