Mastercard Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; unaudited. Comparisons are with the corresponding 2020 periods unless stated otherwise. Mastercard operates a global payments technology network connecting consumers, financial institutions, merchants, governments and businesses.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net revenue | $4.985B (+30%) | $3.837B | $13.668B (+22%) | $11.181B |
| Operating income | $2.717B (+29%) | $2.105B | $7.255B (+20%) | $6.023B |
| Operating margin | 54.5% | 54.9% | 53.1% | 53.9% |
| Net income | $2.414B (+59%) | $1.513B | $6.308B (+36%) | $4.626B |
| Diluted EPS | $2.44 (+62%) | $1.51 | $6.35 (+38%) | $4.59 |
| Operating cash flow | Not separately stated for the quarter | Not separately stated | $6.274B | $4.971B |
Currency-neutral net revenue growth was 29% in Q3 and 20% for the nine-month period. Adjusted, currency-neutral diluted EPS growth was 48% and 25%, respectively; these are non-GAAP measures. Q3 and nine-month GAAP results included net equity-investment gains of $197 million and $534 million. Excluding those gains and other specified items, adjusted net income was $2.341 billion in Q3 and $6.018 billion for nine months.
Business drivers and changes
- Q3 local-currency gross dollar volume grew 20%, cross-border volume 52%, and switched transactions 25%. For the nine months, growth was 20%, 25% and 24%, respectively.
- Q3 cross-border fees rose 61% and other revenue rose 37%; nine-month increases were 24% and 33%. Other-revenue growth reflected Cyber & Intelligence, Data & Services, and acquisitions.
- Rebates and incentives, recorded as a reduction to revenue, increased 35% in Q3 and 30% for nine months, reflecting higher volumes and transactions and new or renewed deals.
- Operating expenses grew 31% in Q3 and 24% for nine months. Adjusted currency-neutral expense growth was 23% and 19%; management cited acquisitions, personnel, marketing and data-processing costs.
- Mastercard acquired most of Nets’ Corporate Services business and acquired Ekata for total acquisition consideration of approximately $4.4 billion. The acquisitions increased goodwill and intangible assets; purchase accounting remained preliminary.
Cash, debt and capital
- At September 30, cash and cash equivalents were $6.406 billion; investments were $510 million. Management reported $6.9 billion of cash, cash equivalents and investments, excluding $2.4 billion of restricted cash and equivalents.
- Total debt was $13.9 billion, versus $12.7 billion at December 31, 2020. Mastercard issued $1.3 billion of notes in March. It repaid the $650 million notes due November 2021 in October, after the reporting date.
- The company reported $6.0 billion of unused revolving credit capacity and no borrowings under its credit facility or commercial paper program at quarter-end.
- Nine-month investing cash use was $4.834 billion, mainly reflecting acquisitions; financing cash use was $4.938 billion, including $4.628 billion of share repurchases and $1.307 billion of dividends. Cash, cash equivalents and restricted cash totaled $8.841 billion at September 30, down from $12.419 billion at year-end.
- Mastercard repurchased 12.8 million shares for $4.6 billion during the first nine months; $5.2 billion remained authorized at quarter-end. The quarterly dividend was $0.44 per share.
Outlook, risks and unusual items
- Outlook: The filing provides no specific financial guidance. Management said growth rates had increased as the company compared against the initial pandemic effects, while warning that COVID-19, variants, vaccination progress and government measures made the duration and impact of the pandemic uncertain.
- Tax and other items: A lower effective tax rate benefited earnings: 14.3% in Q3 versus 21.0%, and 15.7% for nine months versus 17.3%. Management attributed the decrease mainly to U.S. tax benefits and foreign tax credits. Q3 included an $88 million pre-tax charge related to an anticipated foreign indirect-tax resolution and $27 million of litigation charges; nine-month litigation provisions were $94 million.
- Litigation: Accrued litigation was $838 million, including a $783 million reserve for U.S. merchant damages and opt-out matters; $586 million was held in a restricted settlement fund. Merchant interchange, surcharge, ATM, liability-shift and other proceedings remain active. In the UK, approximately £1 billion of merchant damages claims remained unresolved, and a consumer collective action was certified with a narrowed class and alleged damages exceeding £14 billion. These claims are not equivalent to recorded liabilities; the filing says potential outcomes or losses may be difficult to estimate.
- Settlement guarantees: Net settlement exposure was $49.913 billion after $7.447 billion of risk mitigation arrangements, compared with $46.339 billion at year-end. Exposure is generally short term, but Mastercard cautions historical losses may not predict future losses.
- Other risks: The filing identifies regulatory and legal uncertainty, interchange pricing and acceptance practices, competition, cybersecurity and service disruptions, customer and settlement risk, currency movements, and global economic conditions. Management stated liquidity was adequate for expected operating and other needs, but noted that credit-market conditions and litigation outcomes could affect liquidity.
Important facts for investors to verify
- How much reported earnings growth reflects payment-volume recovery versus equity-investment gains, tax benefits, acquisitions and other adjustments.
- Whether cross-border volumes and international travel-related activity continue to recover, and how pandemic developments affect that trajectory.
- The progress and possible financial impact of U.S. and European merchant, consumer, ATM and other legal or regulatory proceedings, including the adequacy of reserves.
- Acquisition integration, final purchase-price allocations, and the returns expected from Nets and Ekata relative to their cost and added debt.
- Cash generation and capital allocation after acquisitions, repurchases, dividends and the October repayment of the $650 million notes.