Mastercard Incorporated — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010. Unaudited interim financial statements; amounts below are in U.S. dollars. Mastercard operates a global payment network and provides transaction processing and related services; it generally does not issue cards or extend cardholder credit.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Net revenue | $1.365B | $1.280B | $2.673B | $2.436B |
| Operating income | $717M | $557M | $1.417B | $1.118B |
| Operating margin | 52.6% | 43.5% | 53.0% | 45.9% |
| Net income | $458M | $349M | $913M | $716M |
| Diluted EPS | $3.49 | $2.67 | $6.95 | $5.47 |
| Operating cash flow | Not provided separately for Q2 | $438M | $778M |
- Q2 net revenue rose 6.7%, operating income 28.8%, and net income 31.3%. For the first half, net revenue rose 9.7%, operating income 26.7%, and net income 27.5%.
- Q2 gross dollar volume rose 9.8% in U.S.-dollar terms and 8.5% in local currency; processed transactions increased just 0.1%. First-half processed transactions rose 2.3%.
- Cross-border volume fees increased 34.5% in Q2 and 36.6% in the first half. Rebates and incentives also rose: they were 25.3% of gross revenue in both 2010 periods, versus 21.2% for Q2 2009 and 21.8% for the first half of 2009.
- Operating expenses fell 10.4% in Q2 and 4.7% in the first half, primarily reflecting lower personnel costs after a 2009 resource realignment. The effective tax rate was 35.7% in Q2 and 35.1% for the first half, compared with 35.0% and 34.1%, respectively, in 2009.
Financial position and liquidity
- At June 30, 2010, cash and cash equivalents were $2.323B; cash plus current available-for-sale securities was approximately $3.2B. Current assets were $5.543B and current liabilities $2.818B.
- Total assets were $7.432B, total liabilities $3.307B, and equity $4.125B. Long-term debt was $19M; there were no borrowings under the $2.0B revolving credit facility.
- First-half operating cash flow was $438M, down from $778M. The company attributed 2010 cash generation primarily to operating income, partly offset by $300M of litigation-settlement payments and stock units withheld for taxes.
- Investing cash outflow was $20M, versus $88M in the first half of 2009; financing provided $59M, compared with a $165M outflow in 2009. The company paid $39M in dividends in the first half.
- Litigation settlement liabilities were $591M at June 30, down from $870M at year-end. The filing lists $610M of future settlement payments, including four remaining quarterly American Express settlement payments of up to $150M each.
Material changes, outlook, and risks
- Revenue growth reflected higher card spending, pricing actions, and transaction activity, but was partly offset by higher rebates and incentives. Management said pricing actions contributed approximately 4 percentage points to Q2 net revenue growth and 5 points to first-half growth.
- Processed-transaction growth was restrained by debit portfolio losses in the U.S. and U.K. Foreign exchange also affected results: the stronger U.S. dollar versus the euro reduced Q2 net revenue growth by 1.2 percentage points; the filing reports a 0.7-point favorable effect for the first half.
- Management described recovery as uncertain. It cited encouraging activity in Asia/Pacific and Latin America, but mixed U.S. indicators and continuing economic, foreign-exchange, customer-credit, and spending risks. It gave no specific numeric revenue or earnings guidance in the provided filing text.
- The Dodd-Frank Act, enacted in July 2010, provides for Federal Reserve regulation of debit and prepaid interchange fees and network arrangements. The filing says fee limits were scheduled to take effect July 21, 2011, with regulations due by April 21, 2011; the effect on Mastercard was not yet clear.
- Interchange fees faced significant U.S. litigation and regulatory scrutiny internationally. In the U.S. merchant interchange litigation, plaintiffs’ experts alleged damages in the tens of billions of dollars; the company disputed liability and damages. Other proceedings could result in fines, damages, changed business practices, or lower revenue. Management said outcomes and related liabilities were generally not estimable.
- Mastercard reported $134M of illiquid auction-rate securities, valued at a 15% discount to par using significant unobservable inputs. Management considered the unrealized loss liquidity-related, not other-than-temporary, and believed it could hold the securities until recovery or redemption.
- Other notable items: foreign-currency translation produced a $270M first-half other comprehensive loss; 7.5M Class B shares converted to Class A in June, and Class M shares were retired after Class B ownership fell below 15% of combined outstanding shares.
Most important facts for investors to verify
- Whether revenue and earnings growth persist as higher rebates, cross-border pricing, currency movements, and U.S./U.K. debit portfolio losses evolve.
- Developments in U.S. interchange litigation and the implementation and commercial impact of Dodd-Frank debit-fee and network rules.
- Timing and amount of remaining litigation payments, especially the American Express settlement, and the effect on operating cash flow and liquidity.
- Liquidity, valuation assumptions, and potential recovery of the illiquid auction-rate securities portfolio.
- Economic recovery, customer financial health, and settlement-guarantee exposures. The company reported $22.531B of net uncollateralized MasterCard settlement exposure, with $174M attributable to non-compliant or reviewed members.
The independent accountant performed a review of the interim statements, not an audit, and expressed no audit opinion.