Mastercard Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. Mastercard operates a global payments network and related services; it does not issue cards or earn interchange fees. Its revenue comes mainly from transaction processing, assessments on payment volume, and other payment-related services.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net revenue | $14.950 billion | $12.497 billion |
| Operating income | $7.282 billion | $6.622 billion |
| Operating margin | 48.7% | 53.0% |
| Net income | $5.859 billion | $3.915 billion |
| Diluted EPS | $5.60 | $3.65 |
| Operating cash flow | $6.223 billion | $5.664 billion |
| Total debt, including current portion | $6.334 billion | $5.424 billion |
- Revenue grew 20% as reported and currency-neutral. Mastercard cited 17% growth in normalized switched transactions, 18% in normalized cross-border volume, and 14% in local-currency gross dollar volume.
- Operating expenses rose 31%, driven substantially by $1.128 billion in litigation provisions. Excluding special items, adjusted operating expenses rose 15% and adjusted operating margin increased to 56.2% from 54.4%.
- Adjusted net income was $6.792 billion and adjusted diluted EPS was $6.49; these are non-GAAP measures. Reported net income and EPS also reflect a lower effective tax rate of 18.7%, versus 40.0% in 2017, when U.S. tax reform added significant expense.
- Fourth-quarter net revenue was $3.807 billion, operating income $1.234 billion, and net income $899 million; diluted EPS was $0.87. The quarter included significant litigation charges.
- Cash, cash equivalents and investments totaled $8.4 billion; this excludes restricted litigation cash and customer security deposits. Current assets were $16.171 billion and current liabilities $11.593 billion.
- Operating cash flow increased to $6.223 billion. Investing activities used $506 million and financing activities used $4.966 billion, including $4.933 billion of share repurchases and $1.044 billion of dividends paid.
- Mastercard issued $1.0 billion of notes in 2018. It had no commercial-paper or revolving-credit-facility borrowings at year-end and $4.5 billion of unused committed revolving capacity. $500 million of debt was due in April 2019.
Material changes and unusual items
- FY2018 litigation provisions totaled $1.128 billion: $654 million for the European Commission matter, $237 million for U.S. merchant litigation and related opt-out cases, and $237 million for U.K. and Pan-European merchant settlements. Accrued litigation was $1.591 billion at year-end.
- Adoption of the new revenue standard contributed an estimated four percentage points to reported revenue growth. The standard also changed incentive and marketing-fund accounting; Mastercard reported a $248 million increase to 2018 net income from the standard’s impact.
- Reported operating margin declined 4.3 percentage points, despite higher revenue, reflecting higher expenses—especially litigation provisions. On an adjusted basis, operating margin improved.
- Mastercard repurchased 26.2 million shares for $4.933 billion during 2018. A new $6.5 billion repurchase authorization became effective in January 2019; the Board also raised the quarterly dividend to $0.33 per share.
Outlook, commentary and risks
The filing provides no specific quantitative earnings or revenue guidance. Management describes growth priorities as expanding core payments, shifting cash and checks to electronic payments, developing digital and real-time account-based payment capabilities, and growing value-added services. It states that available liquidity, operating cash generation, borrowing capacity and access to capital are expected to meet operating and other needs.
- Regulatory, litigation and interchange-fee developments could affect pricing, customer incentives, transaction volumes and business practices. The EC’s proposed interregional-fee settlement remained subject to market testing; the EC’s €571 million fine concerned a historic rule and did not require changes to current practices.
- The U.S. merchant damages-class settlement had preliminary court approval in January 2019, but final approval remained pending. Separate claims seeking changes to business practices were still being negotiated.
- Other key risks include intense competition and pricing pressure; disintermediation by account-based and digital payment providers; cyberattacks, fraud and service outages; dependence on financial-institution customers; foreign-exchange movements; and economic or geopolitical disruption.
- Mastercard guarantees settlement of many customer transactions. Estimated year-end gross settlement exposure was $49.666 billion, with $44.955 billion net of collateral; exposure is generally short-term, but customer failures could create losses or liquidity demands.
Important facts for investors to verify
- Track final approval and payment timing of the U.S. merchant damages settlement, remaining opt-out claims, Rules Relief claims, and European merchant proceedings.
- Separate underlying operating trends from the $1.128 billion litigation charge and the revenue-standard accounting effects when assessing year-over-year performance.
- Monitor whether strong payment-volume and cross-border growth continues, and how rebates and incentives, which rose 18%, affect net revenue and margins.
- Review the use of repurchases, dividend increases, and debt maturities against cash generation and settlement-liquidity needs.
- Assess the potential effects of interchange regulation, open-banking rules, privacy requirements, and security incidents on Mastercard’s business model and economics.