Mastercard Incorporated — FY2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010. The filing also reports fourth-quarter results. This is an annual report, not a standalone quarterly filing. Amounts are in U.S. dollars unless noted.
Business context
Mastercard operates a global payment network and provides transaction processing and related services to financial institutions and other customers. It does not issue cards, extend credit to cardholders, or earn interchange fees. Revenue primarily comes from assessments on branded-card activity, transaction processing fees, and other payment-related services, net of customer and merchant rebates and incentives.
In 2010, Mastercard processed 23.1 billion transactions, up 2.9%. Worldwide Mastercard-branded gross dollar volume (GDV) was $2.727 trillion, up 10.7% in U.S. dollars and 9.1% in local currency. These GDV figures exclude Maestro and Cirrus and include some activity not processed by Mastercard.
Financial performance
| Metric | FY2010 | FY2009 | Change |
|---|---|---|---|
| Net revenue | $5.539 billion | $5.099 billion | +8.6% |
| Operating income | $2.752 billion | $2.260 billion | +21.8% |
| Operating margin | 49.7% | 44.3% | +5.4 percentage points |
| Net income attributable to Mastercard | $1.846 billion | $1.463 billion | +26.2% |
| Diluted EPS | $14.05 | $11.16 | +25.9% |
| Cash provided by operations | $1.697 billion | $1.378 billion | +23.1% |
Net pricing actions contributed approximately 5 percentage points to 2010 net revenue growth. Rebates and incentives rose 24.8% to $2.019 billion and increased from 24.1% to 26.7% of gross revenue. Operating expenses declined 1.8% to $2.787 billion; general and administrative costs fell, while advertising and marketing expense increased.
Fourth quarter: Net revenue was $1.438 billion versus $1.299 billion in Q4 2009; operating income was $569 million versus $469 million; net income attributable to Mastercard was $415 million versus $295 million; diluted EPS was $3.16 versus $2.24. Q4 operating margin was approximately 39.6%, compared with 36.1% a year earlier.
Liquidity, debt and capital
At December 31, 2010, cash and cash equivalents were $3.067 billion, current available-for-sale securities were $831 million, and equity was $5.216 billion. Management described liquidity and capital positions as strong and said operating cash generation, borrowing capacity and capital-market access were sufficient for operating needs and litigation settlements. The company reported $1.697 billion of operating cash flow.
There were no borrowings under the $2.75 billion revolving credit facility at year-end; it expires in November 2013. The balance sheet reported no long-term debt and $20 million of current debt obligations. Long- and current-term litigation settlement liabilities totaled $302 million. The filing also identifies $118 million at amortized cost of auction-rate securities whose market remained illiquid.
Material changes and unusual items
- Results improved from 2009: net revenue growth accelerated from 2.1% to 8.6%, while operating margin rose to 49.7%. Processed-transaction growth slowed, however, from 6.9% to 2.9%, principally due to debit portfolio losses in the U.S. and U.K.
- Cross-border volume fees increased 27.7%, supported by 15.2% local-currency cross-border volume growth and pricing changes. Domestic assessments increased 10.9%.
- 2010 results included only $5 million of litigation-settlement expense, compared with $2.483 billion in 2008. The 2008 comparison is heavily affected by major Discover and American Express settlements; the 2009 and 2010 earnings comparisons should not be read without considering this unusual history.
- Mastercard acquired DataCash in October 2010 for $534 million, expanding its e-commerce gateway and payment services. It agreed to acquire Travelex’s prepaid program management operations for approximately $458 million, plus up to $55 million contingent consideration; closing was expected in the first half of 2011.
- The company authorized a $1 billion share repurchase plan in September 2010 but repurchased no shares under it during 2010. By February 16, 2011, approximately 0.3 million shares had been repurchased for about $75 million.
Outlook, risks and contingencies
The filing provides no specific quantified earnings or revenue guidance. Management emphasized long-term growth in electronic payments, expansion of credit, debit and prepaid offerings, broader acceptance, and investment in e-commerce, mobile payments and processing capabilities. Mastercard said recovery and spending trends remained uncertain, though it had seen several quarters of strong volume growth in Asia/Pacific and Latin America and mixed indicators in the U.S.
- Regulation and interchange: The 2010 U.S. Dodd-Frank Act provides for Federal Reserve regulation of debit and prepaid interchange and requires multiple unaffiliated debit networks and merchant routing choice. Proposed Federal Reserve interchange limits were below then-current issuer fees; final effects were uncertain. Mastercard warned that lower interchange could indirectly pressure volumes, customer participation, network fees and pricing.
- Litigation: Approximately 50 U.S. merchant cases challenged interchange fees and network rules under antitrust laws, seeking treble damages and injunctive relief. The company said outcomes and potential liabilities could not be estimated. February 2011 judgment-sharing agreements allocated certain potential settlement or judgment costs with Visa and banks; under specified settlement scenarios Mastercard would bear 12% or 36% of the monetary amount. A DOJ/state attorneys general proposed settlement on merchant steering rules awaited court approval.
- Other proceedings and settlements: European and national regulatory challenges to interchange remained pending, as did appeals related to currency-conversion settlements. Two American Express settlement payments of $150 million each remained due in the first half of 2011. The company said adverse legal or regulatory outcomes could require fines, damages, business-practice changes or additional reserves.
- Settlement exposure: Estimated gross Mastercard-branded settlement exposure was $28.5 billion at year-end, offset by $3.0 billion collateral, leaving $25.5 billion net uncollateralized exposure. Exposure for non-compliant members was $273 million. Mastercard warned that concurrent customer failures could exceed available resources; the revolving facility is available in part for settlement liquidity.
- Business risks: Key risks include intense competition and pricing pressure, customer concentration (the five largest customers generated 28% of 2010 net revenue), banking consolidation, weaker consumer spending or cross-border travel, foreign-exchange movements, fraud and data breaches, processing outages, and execution or integration risks from acquisitions.
Important facts for investors to verify
- Whether debit-interchange and network-routing regulations ultimately reduce Mastercard’s revenue opportunities or alter customer and merchant behavior.
- Progress and potential exposure in U.S. merchant interchange litigation, including the impact of the 2011 sharing agreements and the status of the DOJ settlement.
- Whether 2010 revenue and margin growth is sustainable given slower processed-transaction growth and rising rebates and incentives.
- Travelex acquisition completion, purchase economics and integration; also the returns from the DataCash acquisition.
- Liquidity available after litigation payments and acquisitions, including the status and recoverability of illiquid auction-rate securities and the scale of settlement guarantees.