Mastercard Incorporated — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Financial statements are unaudited; the independent accountant performed a review, not an audit. Mastercard operates a global payments network and earns revenue primarily from transaction processing and fees linked to card activity.
Financial results
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net revenue | $1.758 billion | $1.501 billion | +17% |
| Operating expenses | $758 million | $665 million | +14% |
| Operating income | $1.000 billion | $836 million | +20% |
| Operating margin | 56.9% | 55.7% | +1.2 percentage points |
| Net income attributable to Mastercard | $682 million | $562 million | +21% |
| Diluted EPS | $5.36 | $4.29 | +25% |
| Cash provided by operating activities | $427 million | $355 million | +$72 million |
Consolidated net income was $681 million in Q1 2012; the $682 million attributable to Mastercard reflects a $1 million loss attributable to non-controlling interests. Revenue growth reflected higher transaction volumes and activity, pricing actions (about 3 percentage points of net revenue growth), and Access Prepaid acquisition revenue. Foreign currency translation reduced revenue growth by about 2 percentage points. Processed transactions rose 29%, and gross dollar volume rose 18% in local currency (16% on a U.S.-dollar-converted basis).
Cash and cash equivalents were $3.684 billion at March 31, 2012, and current available-for-sale securities were $1.457 billion. Current assets were $8.113 billion and current liabilities $4.092 billion. Total liabilities were $4.752 billion; the filing reports no borrowings under the $2.75 billion revolving credit facility. Cash declined $50 million during the quarter to $3.684 billion. Investing activities used $302 million, while financing activities used $220 million, including $248 million of share repurchases.
Material changes and capital returns
- Net revenue increased 17%; gross revenue grew 19%, partly offset by rebates and incentives, which rose 24% to $589 million. Incentives were 25% of gross revenue versus 24% a year earlier.
- General and administrative expense rose 17%, principally from personnel and other operating costs; depreciation and amortization increased 30%, including acquisition-related amortization and software investment. Advertising and marketing expense declined 3%.
- The effective tax rate declined to 31.8% from 32.8%, primarily due to a more favorable geographic mix of earnings.
- Mastercard repurchased approximately 0.7 million shares for $248 million, at an average $379.68 per share. It declared a quarterly dividend of $0.30 per share, up from $0.15 historically.
Outlook, risks, and unusual items
No quantified revenue or earnings guidance is provided. Management reported growth across all regions but said the pace of global economic recovery and the business environment remained uncertain. It expects existing cash, cash generation, borrowing capacity, and capital-market access to meet operating, investment, commitment, and potential litigation needs.
- Merchant interchange litigation: The company recorded a $770 million pre-tax charge in Q4 2011, reflected as accrued litigation at March 31, 2012. This is management’s estimate of the financial portion of a potential settlement, not an estimate of trial loss; the amount may change. A U.S. trial was scheduled for September 2012, subject to court developments.
- Regulatory and legal exposure: Interchange-fee and payment-rule challenges span the United States, Europe, Canada, and other jurisdictions. Outcomes and potential liabilities generally could not be estimated; the filing warns that adverse decisions could materially affect revenue, growth, costs, and business practices. The EU court was expected to announce a judgment on Mastercard’s appeal on May 24, 2012.
- Settlement guarantees: Gross settlement exposure was $39.0 billion, with $4.229 billion collateral and $34.771 billion net uncollateralized exposure. Management notes heightened risks from economic and sovereign-debt conditions, while reporting historically low losses from customer failures.
- Foreign exchange: A hypothetical 10% adverse currency move could cause an estimated $140 million fair-value loss on outstanding currency derivatives. Derivative gains and losses are recognized currently in earnings because the contracts are not designated as accounting hedges.
- Other risks include economic weakness and spending trends, pricing and competition, customer concentration or loss, technology and cybersecurity disruption, regulation, and currency volatility. The filing notes Q1 results may not indicate full-year performance because of seasonality and other factors.
Key facts for investors to verify
- How transaction and local-currency volume growth develop, and whether pricing and rebates continue to support net revenue growth.
- Progress and accounting treatment of the U.S. merchant litigation, including whether the $770 million accrual proves adequate and whether a settlement is reached.
- Results of the EU interchange appeal and developments in other regulatory or private proceedings.
- Settlement exposure, collateral coverage, and any customer or counterparty failures.
- Cash generation and capital returns alongside investment needs; confirm the $2.75 billion credit facility remains undrawn and covenant-compliant.