Mastercard Incorporated — Q2 2013 Form 10-Q
Business context and reporting period. Mastercard operates a global payments network and earns revenue primarily from payment-volume assessments, transaction processing and related services. This unaudited Form 10-Q covers the three and six months ended June 30, 2013; comparisons are with the corresponding 2012 periods. The interim financial statements received a limited review, not an audit.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Net revenue | $2.096 billion | $1.820 billion | $4.002 billion | $3.578 billion |
| Operating income | $1.228 billion | $974 million | $2.335 billion | $1.974 billion |
| Operating margin | 58.6% | 53.5% | 58.4% | 55.2% |
| Net income | $848 million | $700 million | $1.614 billion | $1.382 billion |
| Diluted EPS | $6.96 | $5.55 | $13.19 | $10.91 |
| Operating cash flow | Not stated separately for the quarter | $1.614 billion | $1.068 billion |
Q2 net revenue rose 15%, operating income 26%, net income 21% and diluted EPS 25% year over year. For the first half, the respective increases were 12%, 18%, 17% and 21%. Q2 and first-half processed transactions grew 11% and 12%; local-currency gross dollar volume rose 13% in both periods. Rebates and incentives were 24% of gross revenue in Q2 and 25% in the first half, versus 26% and 25% in 2012.
Operating expenses increased 2% in Q2 and 4% for the half, mainly reflecting higher general and administrative costs, including personnel expense. The effective tax rate rose to 31.2% in Q2 from 28.0%, and to 30.9% for the half from 30.0%; management attributed the comparison primarily to discrete tax benefits recognized in 2012.
At June 30, 2013, cash and cash equivalents were $2.348 billion, available-for-sale securities were $2.742 billion, and total assets were $12.021 billion. Cash, cash equivalents and available-for-sale securities totaled $5.1 billion, excluding $724 million restricted for litigation. The company also had a $3.0 billion undrawn revolving credit facility and no borrowings under it. Total liabilities were $4.992 billion; the filing does not present a separate conventional debt balance. First-half investing cash flow was positive $118 million and financing cash flow was negative $1.421 billion, principally reflecting $1.347 billion of share repurchases and $110 million of dividends.
Material changes, outlook and risks
- Growth was driven by higher card volume and transaction counts, pricing initiatives and other revenue growth. Cross-border volume fees rose 20% in Q2 and 17% for the half; transaction processing fees rose 9% in both periods.
- Operating margin improved year over year, while share repurchases reduced diluted weighted-average shares by 4% in Q2 and 3% for the half.
- The board authorized a new $2 billion repurchase program in February 2013. First-half repurchases totaled $1.347 billion; $1.257 billion remained authorized at June 30. Dividends paid in the first half totaled $110 million.
- No specific earnings or revenue guidance is provided. Management said existing liquidity, operating cash generation, borrowing capacity and capital-market access should be sufficient for expected operating needs, capital purchases, commitments and potential obligations. The company intends to continue quarterly dividends, subject to board discretion.
- U.S. merchant litigation: A $724 million litigation reserve and corresponding restricted cash remained at June 30. Final court approval of the merchant class settlement was pending, with a hearing scheduled for September 2013. Approximately 8,000 merchants, representing slightly more than 25% of relevant purchase volume, opted out. If the settlement were approved, Mastercard anticipated receiving approximately $165 million back from the settlement fund; separate claims by opt-out merchants and settlement objections remained potential exposures.
- Regulatory and legal exposure: Interchange fees and acceptance rules faced significant scrutiny in the United States, Europe and other jurisdictions. The EU proposed legislation on July 24, 2013, including interchange caps and restrictions on certain network rules; it was not yet enacted. Mastercard’s appeal of the EU decision on cross-border interchange fees remained pending. The Canadian Competition Tribunal dismissed the Competition Bureau’s application in Mastercard’s favor in July 2013, subject to appeal.
- Operating risks: The filing highlights economic and consumer-spending conditions, competition and customer concentration, foreign-exchange movements, cybersecurity and service disruption, settlement guarantees, and possible regulatory or litigation outcomes. Net revenue generated in the United States was about 40% of total revenue.
- Net settlement exposure under transaction guarantees was $34.511 billion after $4.386 billion of collateral at June 30. Management noted that actual loss experience had historically been low, but adverse customer, regional or global conditions could increase risk.
Most important facts for investors to verify
- Progress and final approval status of the U.S. merchant class settlement, opt-out claims, reserve adequacy and any expected settlement-fund return.
- Whether proposed or final EU rules, the pending EU appeal, or other interchange proceedings change fees, customer behavior, transaction volumes or Mastercard’s business practices.
- Whether volume and transaction growth, especially cross-border growth, can continue and offset competitive, economic and foreign-exchange pressures.
- Cash generation and liquidity after repurchases and dividends, including the accessibility and potential tax cost of foreign-held funds.
- Changes in settlement exposure, collateral coverage, customer concentration and cybersecurity or network-operability risks.