Business context and reporting period
Mastercard Incorporated’s Form 10-K covers the fiscal year ended December 31, 2012. Mastercard operates a global payments network and earns fees from transaction processing, payment volumes and related services; it does not issue cards or earn interchange fees. The filing also reports fourth-quarter results.
Financial performance and position
- FY 2012 revenue: Net revenue was $7.391 billion, up 10% from $6.714 billion in 2011. Gross dollar volume (GDV) rose 15% in local currency (12% in U.S. dollars), and processed transactions increased 25% to 34.2 billion. Rebates and incentives increased 22% to $2.709 billion, or 27% of gross revenue.
- Profit and margins: Operating income was $3.937 billion, up 45%; operating margin was 53.3%, versus 40.4%. Net income attributable to Mastercard was $2.759 billion, up 45%, and diluted EPS was $21.94, up 48%. The 2012 and 2011 results included litigation provisions of $20 million and $770 million, respectively; excluding those provisions, operating expenses were $3.434 billion in 2012 and $3.231 billion in 2011, with respective operating margins of 46.5% and 48.1%.
- Fourth quarter: 2012 net revenue was $1.895 billion, operating income $899 million, net income attributable to Mastercard $605 million and diluted EPS $4.86. In Q4 2011, the company recorded a $770 million merchant-litigation charge; operating loss was $10 million, net income attributable to Mastercard was $19 million and diluted EPS was $0.15.
- Cash flow and liquidity: Operating cash flow was $2.948 billion, compared with $2.684 billion in 2011. Investing activities used $2.839 billion and financing activities used $1.798 billion. At year-end, cash and cash equivalents were $2.052 billion and available-for-sale securities were $2.951 billion; together these totaled $5.003 billion, excluding $726 million restricted for litigation settlement. Current assets were $9.357 billion and current liabilities $4.906 billion.
- Debt and capital returns: Mastercard had no borrowings under its $3 billion, five-year revolving credit facility and reported no long-term debt at year-end. It repurchased $1.748 billion of shares in 2012 and paid $132 million in dividends. The annual dividend paid was $1.05 per share; the board later declared a $0.60 quarterly dividend payable in May 2013.
Material changes versus prior period
- Revenue growth slowed to 10% from 21% in 2011, while transaction growth accelerated to 25% from 18%. The company attributed revenue growth mainly to higher activity and transactions; pricing actions contributed about 3 percentage points to 2012 growth.
- Reported operating expenses fell 14%, principally because the 2011 litigation provision did not recur at comparable scale. Excluding those provisions, expenses increased 6% in 2012, reflecting higher personnel, technology and other costs.
- Foreign-exchange movements reduced 2012 net-income growth by approximately 7 percentage points, according to management.
- Cash and cash equivalents declined from $3.734 billion to $2.052 billion, while investment securities increased. Cash use included share repurchases, dividends, investment purchases and the litigation-settlement escrow deposit.
Outlook, risks and unusual items
The filing gives no numerical revenue or earnings guidance. Management said existing cash, operating cash generation, borrowing capacity and capital-market access were expected to meet operating, investment and liquidity needs. It highlighted continued expansion of electronic payments, acceptance, digital and mobile services, chip technology and new payment solutions as strategic priorities, while noting uncertainty in global economic recovery.
- U.S. merchant litigation: Mastercard recorded a total $790 million pretax settlement provision, paid $64 million for individual merchant plaintiffs and placed $726 million in a qualified settlement fund. The class settlement had preliminary court approval, with final approval still pending; settlement funds could be returned in specified circumstances if the agreement is not finalized. In January 2013, Mastercard modified its U.S. no-surcharge rules to permit credit-card surcharges subject to limitations.
- Regulatory exposure: Interchange fees and acceptance rules faced litigation and regulatory scrutiny in the U.S., Europe, Canada and other markets. Mastercard was appealing the EU General Court’s 2012 decision upholding the European Commission’s cross-border interchange decision. Outcomes and potential damages or fines in many proceedings were not estimable from the filing.
- Settlement guarantees: Gross settlement exposure was approximately $37.8 billion at year-end, against $3.8 billion of collateral, leaving approximately $34.0 billion uncollateralized. The guarantee’s term and amount are unlimited, although exposure is generally short-lived. Exposure to Greece, Italy, Portugal and Spain was under 5% of total gross settlement exposure.
- Other risks: Key risks include customer concentration (the five largest customers represented 24% of 2012 revenue), competitive pricing and rising incentives, economic and cross-border travel weakness, foreign exchange, cyberattacks and service disruption, data breaches, and changing privacy and payments regulation.
Important facts for investors to verify
- Final court approval and implementation of the U.S. merchant class settlement, including any opt-outs, returned escrow funds and surcharge effects.
- Developments in interchange-fee regulation and litigation, particularly the EU appeal and proceedings in the U.S. and Canada.
- Whether strong transaction growth translates into net revenue and earnings growth after customer rebates, incentives, pricing pressure and currency effects.
- Settlement exposure, collateral coverage and customer credit quality, especially under stressed market conditions.
- Cash availability and capital allocation, including share repurchases, dividends and the portion of cash held by foreign subsidiaries that management intends to reinvest abroad.