Mastercard Incorporated — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Unaudited interim results; the filing cautions that interim performance is not necessarily indicative of full-year results. Mastercard operates a global payments network and related services; it does not issue cards or extend credit to cardholders.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net revenue | $2.390B | $2.368B | $4.620B | $4.540B |
| Operating income | $1.251B | $1.383B | $2.602B | $2.668B |
| Operating margin | 52.4% | 58.4% | 56.3% | 58.8% |
| Net income | $921M | $931M | $1.941B | $1.801B |
| Diluted EPS | $0.81 | $0.80 | $1.69 | $1.53 |
| Operating cash flow | Not reported separately | Not reported separately | $1.732B | $1.297B |
Q2 net revenue grew 1%; gross revenue rose 6%, but rebates and incentives increased 21% to $940M. Revenue categories included transaction processing fees of $1.051B (+6%), domestic assessments of $1.028B (+2%), cross-border volume fees of $777M (+3%), and other revenue of $474M (+21%). Processed transactions increased 13% in both the quarter and half-year. Gross dollar volume grew 13% and 12%, respectively, in local currency, versus 1% and 2% when converted to U.S. dollars.
Q2 reported net income declined 1%; excluding the $61M pretax UK merchant litigation settlement provision ($44M after tax, or $0.04 per diluted share), adjusted net income was $965M, up 4%, and adjusted diluted EPS was $0.85. For the first half, reported net income rose 8%; adjusted net income was $1.985B, up 10%, and adjusted diluted EPS was $1.73. Adjusted operating margin was 54.9% in Q2 and 57.7% for the first half. These are company-presented non-GAAP measures.
Cash and cash equivalents were $3.361B at June 30, down from $5.137B at year-end. Cash, cash equivalents, time deposits and available-for-sale securities totaled $5.1B, excluding restricted litigation cash; the company also had an unused $3.0B revolving credit facility. Long-term debt was $1.495B. Current assets were $10.217B and current liabilities $6.476B. Six-month investing cash outflow was $1.222B and financing cash outflow was $2.116B. The company repurchased $1.795B of stock and paid $367M in dividends during the half-year.
Material changes and management commentary
- Revenue growth was restrained by a 6-percentage-point adverse foreign-currency translation impact; acquisitions contributed 2 percentage points to net revenue growth. The stronger U.S. dollar also reduced reported volume growth.
- Operating expenses rose 15% in Q2 and 8% in the first half. Excluding the UK litigation provision, adjusted expenses increased 9% and 4%, mainly reflecting acquisition-related general and administrative costs; currency translation partly offset increases.
- Effective tax rates fell to 25.7% in Q2 and 24.8% for the first half, from 32.2% and 32.1%. Management attributed the reduction to repatriation benefits, foreign tax credits and a more favorable earnings mix.
- Operating cash flow increased by $435M year over year for the first half. Investing outflows increased primarily due to short-term investments and acquisitions; financing outflows reflected dividends and repurchases, among other items.
- Mastercard acquired two businesses for $609M cash in the first half; preliminary goodwill recorded for these acquisitions was $466M. Management cited growth, diversification and building capabilities—including digital payments, security and value-added services—as strategic priorities.
Outlook, risks and contingencies
The filing provides no specific numerical revenue, earnings or margin guidance. Management said existing liquidity, cash generation, borrowing capacity and capital-market access should be sufficient for operating needs, capital spending, commitments and potential obligations. It intends to continue quarterly dividends, subject to board discretion, and may continue repurchases depending on business needs, price and market conditions.
- Litigation: The company carried a $722M reserve for U.S. merchant litigation and filed or anticipated opt-out cases. The class settlement remained subject to appeals; more than 30 opt-out complaints had been filed. The company said its opt-out reserve is not an estimate of the ultimate loss if those cases proceed to judgment.
- Regulatory and legal exposure: In July 2015, the European Commission issued a Statement of Objections concerning interregional interchange fees and central acquiring rules; potential fines could be substantial, though the filing says Mastercard would not expect fines if it agreed to changes addressing the Commission’s concerns. UK retailer claims collectively asserted damages exceeding $2B; Mastercard settled with one merchant for $61M in June 2015.
- Settlement guarantees: At June 30, gross settlement exposure was $39.351B, collateral was $3.478B, and net uncollateralized exposure was $35.873B. Exposure is generally short-term, but could rise in adverse economic or financial conditions. The company reported historically low losses from financial institution failures.
- Currency and other risks: A hypothetical 10% adverse currency move could result in an estimated $86M fair-value loss on outstanding currency derivatives. Management also highlighted economic and political uncertainty, customer concentration, competition, regulation, cybersecurity and processing disruptions, and interchange-related litigation.
- Controls and review: Management concluded disclosure controls were effective and reported no material second-quarter change in internal control over financial reporting. The independent accountant performed a review of interim statements, not an audit.
Key facts for investors to verify
- Whether strong local-currency transaction and volume growth can translate into reported revenue growth despite foreign-exchange effects and rising rebates and incentives.
- How acquisition-related costs and acquired-business contributions develop, and whether reported and adjusted margins stabilize.
- Developments in U.S. merchant litigation, opt-out cases, settlement appeals, and European and UK interchange proceedings, including any change to the $722M reserve.
- Whether settlement exposure, customer credit conditions and available liquidity remain manageable, particularly given the $35.873B net uncollateralized settlement exposure.
- The sustainability of the lower effective tax rate and the implications of permanently reinvested foreign earnings and pending tax examinations.
- Cash use for acquisitions, dividends and repurchases, including remaining authorization under the share repurchase program.