Mastercard Incorporated — Q3 2014 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2014. The interim financial statements are unaudited; PwC performed a review, not an audit. Mastercard operates a global payments network and provides transaction processing and related services.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net revenue | $2.503bn (+13%) | $2.218bn | $7.057bn (+13%) | $6.220bn |
| Operating income | $1.420bn (+14%) | $1.248bn | $4.088bn (+14%) | $3.583bn |
| Operating margin | 56.7% | 56.3% | 57.9% | 57.6% |
| Net income | $1.015bn (+15%) | $879m | $2.816bn (+13%) | $2.493bn |
| Diluted EPS | $0.87 (+19%) | $0.73 | $2.40 (+17%) | $2.05 |
| Operating cash flow | Not presented for quarter | $2.682bn | $2.936bn |
- Q3 gross dollar volume grew 12% in local currency and processed transactions grew 10%; nine-month growth was 13% and 12%, respectively. Cross-border volume increased 15% in Q3.
- Q3 operating expenses rose 12% to $1.083bn; nine-month expenses rose 13% to $2.969bn. Higher general and administrative and depreciation and amortization costs were principal drivers. Acquisitions contributed to both revenue and expense growth.
- At September 30, cash and cash equivalents were $4.462bn and available-for-sale securities were $1.857bn. The company reported $6.3bn of combined cash, cash equivalents and available-for-sale securities, excluding restricted litigation cash, plus an unused $3bn revolving credit facility.
- Long-term debt was $1.494bn, versus none at December 31, 2013, following a March issuance of $1.5bn in notes due 2019 and 2024. Current assets were $10.956bn and current liabilities $5.849bn.
- Cash used for share repurchases was $3.231bn in the first nine months; dividends paid were $388m. The company repurchased 42.4m shares during the period.
Changes and management commentary
- Revenue growth reflected higher activity, transactions, other payment-related services and acquisitions, partly offset by rebates and incentives, which increased 19% in Q3 and 16% for the nine-month period.
- Lower diluted weighted-average shares, down 4% in both comparison periods, contributed to EPS growth.
- Five businesses were acquired during the first nine months for total cash consideration of $389m. Management said their impact on pro forma results was not material.
- Foreign currency translation reduced comprehensive income; the nine-month foreign currency translation adjustment was a loss of $262m. A hypothetical 10% adverse currency move could cause an estimated $193m fair-value loss on outstanding foreign exchange derivatives.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management said existing liquidity, cash generation, borrowing capacity and capital-market access should be sufficient for operating needs, capital purchases, commitments and potential obligations.
- U.S. merchant interchange litigation remains significant. Accrued litigation was $789m at September 30, including reserves for the class settlement and filed and anticipated opt-out cases. The class settlement was appealed; the company stated it could not estimate the potential liability if opt-out cases were litigated to a final outcome. Restricted cash for the settlement fund was $540m.
- In September 2014, the EU Court of Justice rejected Mastercard’s appeal of the European Commission’s 2007 decision on cross-border interchange fees. The filing notes increased potential for further regulatory actions and private damages claims. UK retailer claims reportedly exceeded $2bn, although full damages were not quantified.
- Other material risk areas include interchange regulation and litigation in multiple jurisdictions, competition and pricing pressure, customer concentration, economic and currency conditions, settlement guarantees, cybersecurity and service disruptions. Estimated net uncollateralized settlement exposure was $38.283bn; collateral held was $3.544bn.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Progress and potential financial exposure from U.S. opt-out merchant litigation and appeals of the class settlement; compare the $789m accrual with subsequent developments.
- Implications of the EU Court of Justice decision and any resulting interchange regulation, investigations or private claims.
- Sustainability of transaction and volume growth, and the effect of higher customer rebates, incentives and operating costs on margins.
- Cash generation after substantial repurchases and dividends, and the company’s use of the remaining repurchase authorization.
- Acquisition performance, foreign exchange exposure and the ability to manage settlement risk and cybersecurity threats.