Mastercard Incorporated — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2012. Financial statements are unaudited. Mastercard operates a global payments network and earns fees primarily from payment volumes, transaction processing, and related services.
Financial performance
- Third quarter: Net revenue was $1.918 billion, up 5% year over year; operating income was $1.064 billion, up 6%; net income attributable to Mastercard was $772 million, up 8%; diluted EPS was $6.17, up 10%.
- First nine months: Net revenue was $5.496 billion, up 10%; operating income was $3.038 billion, up 12%; net income attributable to Mastercard was $2.154 billion, up 14%; diluted EPS was $17.07, up 16%.
- Margins and taxes: Operating margin was 55.5% for the quarter and 55.3% year to date, versus 55.1% and 54.6%, respectively, in 2011. Effective tax rates declined to 27.6% for the quarter and 29.1% year to date, from 30.5% and 31.6%.
- Business volumes: Processed transactions increased 24% in the quarter and 27% year to date. Local-currency volume growth was 14% and 16%, respectively. U.S.-dollar-converted gross dollar volume rose 9% and 11%.
- Cash flow: Nine-month operating cash flow was $2.082 billion, versus $1.900 billion in 2011. Investing used $1.612 billion, largely reflecting purchases of investment securities; financing used $1.151 billion, mainly share repurchases and dividends. Cash and cash equivalents ended the period at $3.045 billion.
- Liquidity and capital: Cash, cash equivalents and current available-for-sale securities totaled approximately $5.6 billion. Current assets were $9.072 billion and current liabilities were $4.548 billion. Mastercard reported no borrowings under its $2.75 billion revolving credit facility. Total liabilities were $5.196 billion and equity was $6.924 billion.
Changes versus prior period
- Revenue growth reflected higher payment volumes and transaction counts, pricing actions, and growth in processing and other services. Foreign-currency translation reduced revenue growth by approximately 5 percentage points in the quarter and 4 points year to date.
- Rebates and incentives rose 20% in the quarter and 22% year to date, to $677 million and $1.927 billion, respectively; they represented 26% of net revenue in both 2012 periods, compared with 24% in 2011.
- Operating expenses increased 5% in the quarter and 9% year to date, principally from higher general and administrative costs. Advertising and marketing expense declined 12% and 8%, respectively.
- Share repurchases reduced weighted-average shares by approximately 2% year over year. Mastercard repurchased about 2.8 million shares for approximately $1.1 billion during the first nine months and had $1.2 billion remaining under its new $1.5 billion authorization at September 30.
Outlook, risks and unusual items
- Management cited growth across regions but said the pace of global economic recovery remained uncertain. It did not provide numerical earnings or revenue guidance in the supplied filing text.
- The U.S. merchant litigation settlement was a major item: Mastercard had accrued $790 million pretax, including a $20 million charge in the second quarter of 2012. On October 19, 2012, after quarter-end, the parties signed definitive settlement agreements; the class settlement remained subject to court approval. Proposed terms include an eight-month, 10-basis-point reduction in default credit interchange fees and changes permitting certain merchant surcharges.
- Interchange-fee regulation and litigation remain material risks across the United States, Europe, Canada, and other markets. The European Union General Court upheld the European Commission’s cross-border interchange decision; Mastercard appealed in August 2012 and stated it intended to continue complying with the interim terms. Outcomes could affect fees, customer activity, or result in fines and damages.
- Other principal risks include economic weakness and reduced consumer spending, foreign-exchange volatility, competition and pricing pressure, customer or settlement failures, cybersecurity and processing disruptions, and changes in regulation. Gross settlement exposure was $35.603 billion, with $4.042 billion of collateral and net uncollateralized exposure of $31.561 billion.
- A hypothetical 10% adverse currency-rate change could produce an estimated $209 million fair-value loss on outstanding foreign-exchange derivatives, excluding offsets from related monetary assets and liabilities. Management said existing liquidity and capital resources were adequate for operating needs and potential litigation obligations.
Key investor verification points
- Confirm court approval, final terms, timing, and total financial and operational effects of the U.S. merchant settlements.
- Track interchange-fee litigation and regulatory developments, particularly the EU appeal and U.S. surcharge-rule changes.
- Assess whether transaction and volume growth can offset higher rebates and incentives, currency headwinds, and changes in transaction mix.
- Monitor settlement exposure, collateral coverage, cash and investment liquidity, and share repurchases relative to litigation and operating needs.
- Review the full 10-K and referenced risk-factor disclosures for details not included in this interim filing summary.