Mastercard Incorporated — Q3 2013 Form 10-Q
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2013, compared with the same periods in 2012. Mastercard operates a global payments network and earns fees primarily from payment volumes, transaction processing and related services; it does not issue cards or extend credit to cardholders.
Financial results and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net revenue | $2.218bn | $1.918bn | $6.220bn | $5.496bn |
| Operating income | $1.248bn | $1.064bn | $3.583bn | $3.038bn |
| Operating margin | 56.3% | 55.5% | 57.6% | 55.3% |
| Net income | $879m | $772m | $2.493bn | $2.154bn |
| Diluted EPS | $7.27 | $6.17 | $20.46 | $17.07 |
For Q3, revenue rose 16%, operating income 17%, net income 14% and diluted EPS 18% year over year. For the nine months, those increases were 13%, 18%, 16% and 20%, respectively. Revenue growth was supported by card spending and transaction growth; Q3 processed transactions increased 16% and local-currency gross dollar volume increased 15%. The diluted weighted-average share count fell about 3% in both comparison periods.
Operating expenses increased 14% in Q3 and 7% year to date, mainly from general and administrative costs, including personnel. Advertising and marketing expense also increased. No litigation-settlement provision was recorded in 2013; the 2012 nine-month comparison included a $20m charge.
Operating cash flow for the nine months was $2.936bn, versus $2.082bn in 2012. Investing activities provided $235m, compared with $1.612bn used in 2012; financing activities used $1.837bn, primarily for share repurchases and dividends. Cash and cash equivalents were $3.413bn at September 30, 2013. Cash, cash equivalents and available-for-sale securities totaled approximately $6.0bn, excluding $727m of restricted litigation-settlement cash. Current assets were $10.559bn and current liabilities $5.420bn. Total liabilities were $6.062bn; the company had no borrowings under its $3bn revolving credit facility and reported $3bn unused capacity.
Changes, outlook and risks
- Revenue gains reflected higher volumes and transactions; cross-border volume fees increased 21% in Q3 and 18% year to date. Rebates and incentives were 24% of gross revenue in both 2013 periods, versus 25% in 2012.
- Mastercard repurchased $1.692bn of shares in the first nine months and paid $182m in dividends. The board declared a $0.60-per-share quarterly dividend payable in November 2013. The company had $912m remaining under its then-current repurchase authorization at September 30.
- Management said existing liquidity, cash generation, borrowing capacity and capital-market access were sufficient for anticipated operating needs and commitments. The filing provides no specific revenue or earnings guidance; interim results are not necessarily indicative of full-year results.
- The U.S. merchant class settlement remained subject to final court approval after a September 2013 hearing. About 8,000 merchants opted out, representing slightly more than 25% of relevant purchase volume. If approved, Mastercard expected approximately $165m returned from the settlement fund. Opt-out litigation and potential settlement failure remain material uncertainties.
- Other material exposure includes interchange-fee litigation and regulation across jurisdictions. In the U.S., a court ruling that could require significantly lower debit interchange fees was stayed pending appeal, with a decision expected in 2014. Mastercard also cited competition, customer concentration, economic and currency conditions, settlement guarantees, cybersecurity and operational disruption as risks. Its estimated net uncollateralized settlement exposure was $35.641bn.
Important facts for investors to verify
- Final court approval and potential termination or modification of the U.S. merchant settlement, including the recovery of restricted cash and developments in opt-out cases.
- Outcomes of U.S. debit-interchange appeals and European and other regulatory proceedings, and any effect on fees, transaction volumes or customer economics.
- Sustainability of volume and transaction growth, particularly cross-border activity, alongside customer incentives and rising operating costs.
- Capital returns and liquidity, including continued repurchases, the dividend, and Mastercard’s ability to manage settlement guarantees under adverse economic conditions.
Financial statements are unaudited; the independent accountant performed a review, not an audit.