Mastercard Incorporated — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. The interim financial statements are unaudited; the independent accountant performed a review, not an audit. Mastercard operates a global payments network and earns fees primarily from payment volumes, transactions, and related services.
Financial performance
Amounts in millions of dollars, except per-share data and percentages.
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net revenue | $1,906 | $1,758 | +8% |
| Operating expenses | $799 | $758 | +6% |
| Operating income | $1,107 | $1,000 | +11% |
| Operating margin | 58.1% | 56.9% | +1.2 percentage points |
| Net income | $766 | $682 | +12% |
| Diluted EPS | $6.23 | $5.36 | +16% |
| Net cash from operating activities | $872 | $427 | +$445 |
| Net cash used in investing activities | $(107) | $(302) | |
| Net cash used in financing activities | $(783) | $(220) |
Revenue growth was driven by increased spending volume and transaction counts. Gross revenue rose 9% to $2,563 million; rebates and incentives, recorded as contra-revenue, increased 12% to $657 million. Volume-based and transaction-based revenue each grew 10%. Processed transactions and local-currency gross dollar volume both increased 12%. Diluted weighted-average shares fell 3% to 123 million, contributing to faster EPS growth than net income growth.
Operating expenses rose mainly due to higher personnel costs and depreciation and amortization. General and administrative expense increased 5% to $608 million, including a 9% rise in personnel expense; depreciation and amortization increased 14% to $62 million. The effective tax rate declined to 30.5% from 31.8%, primarily reflecting geographic earnings mix, the U.S. domestic production activities deduction, and discrete tax benefits.
Liquidity, capital and balance sheet
- At March 31, cash and cash equivalents were $1,984 million and available-for-sale investment securities were $3,036 million. Management reported $5,020 million of cash, cash equivalents and available-for-sale securities, excluding $724 million restricted for litigation settlement.
- Current assets were $8,783 million and current liabilities $4,414 million. Total liabilities were $5,053 million and equity was $6,756 million.
- Mastercard had no borrowings under its $3 billion five-year revolving credit facility, which expires in November 2017; it was in compliance with its covenants. The filing reports no off-balance-sheet debt other than lease arrangements and other commitments.
- Operating cash flow benefited from net income and collection of income tax receivables. Cash and cash equivalents decreased $68 million during the quarter to $1,984 million.
- The company repurchased 1.48 million Class A shares for $766 million, at an average $518.36 per share. A new $2 billion authorization became effective in March; $1,838 million remained available at quarter-end. The board declared a $0.60-per-share dividend payable in May.
- Cash, cash equivalents and available-for-sale securities held by foreign subsidiaries were $2.9 billion, or 57% of the total. Mastercard stated its intention to permanently reinvest undistributed foreign earnings and said repatriation could trigger U.S. tax.
Material changes and business trends
- Growth moderated versus the year-ago period: local-currency gross dollar volume growth was 12% versus 18%, and processed transaction growth was 12% versus 29%.
- U.S. gross dollar volume growth slowed to 4% from 14% (both in local currency). Cross-border gross dollar volume growth was 16% in U.S. dollars, versus 18% in the prior-year quarter.
- Regional growth was uneven. Local-currency volume grew 22% in Asia Pacific/Middle East/Africa and 15% in Latin America; Europe grew 13%, Canada 5%, and the United States 4%.
- Foreign currency translation reduced net revenue growth by approximately one percentage point. The U.S. generated approximately 39% of revenue, compared with 40% a year earlier.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management said it expects existing liquidity, cash-generation capacity, borrowing capacity and capital-market access to be sufficient for operating needs, capital expenditures, commitments and potential obligations.
- Management’s stated priorities include growing core credit, debit, prepaid, commercial and processing businesses; expanding acceptance and partnerships; and developing technology-led payment offerings, including e-commerce and mobile capabilities. It described global economic recovery as uncertain.
- Major risks include interchange-fee regulation and litigation, competition and pricing pressure, customer concentration, economic and currency fluctuations, cyberattacks and service disruptions, and settlement guarantees. The filing states that the five largest customers account for a significant portion of revenue.
- The U.S. merchant class settlement was estimated at $790 million pre-tax and paid in 2012; $724 million remained in the qualified settlement fund at quarter-end. Final court approval was still pending, with a hearing scheduled for September 2013. Required rule changes, including permitting certain merchant surcharging, were implemented in January 2013. A negative or terminated settlement could have a material adverse effect.
- Other significant proceedings include merchant interchange litigation in the United States and multiple jurisdictions, and European Commission proceedings concerning interregional interchange fees, central acquiring rules and other practices. Outcomes and potential liabilities were generally not estimable in the filing. The revised California consumer settlement received trial-court approval in April 2013, subject to appeal.
- Estimated gross settlement exposure was $38,077 million, with $4,565 million of collateral and $33,512 million net uncollateralized exposure. The company said settlement exposure is short-term and historically losses from customer failures have been low; future losses remain subject to economic and counterparty conditions.
- A hypothetical 10% adverse foreign-exchange move could produce an estimated $199 million fair-value loss on outstanding currency derivatives. The filing reported no material interest-rate or equity-price risk under its stated sensitivities.
Important facts for investors to verify
- Final approval, appeals, and implementation effects of the U.S. merchant and consumer settlements, including the remaining restricted funds and any required business-practice changes.
- Whether volume and transaction growth continue to moderate, particularly in the United States, and how rebates and incentives affect net revenue growth.
- Customer concentration and the size, collateralization, and potential liquidity implications of settlement guarantees.
- Foreign-currency exposure, including the derivative sensitivity and the tax implications of any change in the company’s foreign-earnings reinvestment plans.
- Capital allocation after the substantial quarterly repurchase and the commencement of the new authorization.