Mastercard Incorporated — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2011; comparisons are with the quarter and nine months ended September 30, 2010. Financial statements are unaudited. Mastercard operates a global payment network and related services business; it does not issue cards or extend credit to cardholders.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net revenue | $1.818 billion (+27.3%) | $1.428 billion | $4.986 billion (+21.6%) | $4.101 billion |
| Operating income | $1.002 billion (+30.9%) | $766 million | $2.723 billion (+24.7%) | $2.183 billion |
| Operating margin | 55.1% | 53.6% | 54.6% | 53.2% |
| Net income attributable to Mastercard | $717 million (+38.4%) | $518 million | $1.887 billion (+31.9%) | $1.431 billion |
| Diluted EPS | $5.63 (+42.9%) | $3.94 | $14.66 (+34.6%) | $10.89 |
| Operating cash flow | Nine months: $1.900 billion | Prior-year nine months: $1.027 billion |
- Growth reflected higher card spending and transaction counts. Local-currency volume rose 18.1% in Q3 and 16.0% year to date; processed transactions increased 20.5% and 16.5%, respectively. Currency translation added approximately 4 percentage points to Q3 revenue growth and 3 points to year-to-date growth.
- Q3 revenue growth included increases in domestic assessments (+25.5%), cross-border volume fees (+7.4%), transaction processing (+26.1%) and other revenue (+41.3%). Cross-border revenue growth was restrained by pricing changes.
- Operating expenses rose 23.1% in Q3 and 18.0% year to date, led by personnel, acquisition-related costs and higher depreciation and amortization. Lower effective tax rates also supported earnings: 30.5% in Q3 and 31.6% year to date, versus 32.3% and 34.2%.
Liquidity, capital and material changes
- At September 30, cash and cash equivalents were $3.753 billion; cash plus current available-for-sale securities was approximately $4.4 billion. Total equity was $5.982 billion, compared with $5.216 billion at year-end 2010.
- Current assets were $6.753 billion and current liabilities $3.105 billion. The company reported no borrowings under its $2.75 billion revolving credit facility and was in covenant compliance. It repaid $21 million of debt during the first half of 2011.
- Nine-month investing cash outflow was $55 million, including $460 million paid for the Access acquisition, partly offset by investment-security proceeds and maturities. Financing cash outflow was $1.171 billion, primarily reflecting $1.118 billion of share repurchases and dividends.
- Mastercard acquired Access Prepaid Worldwide’s prepaid card program management operations on April 15 for $481 million, with up to approximately $57 million of contingent consideration. The company reversed a previously recorded $9 million earn-out liability in Q3 and recognized the amount as other income after estimating the 2011 performance target would not be met.
- The American Express settlement’s final $150 million quarterly payment was made in Q2. Litigation-settlement obligations declined to $6 million from $302 million at December 31, 2010.
Outlook, risks and contingencies
- No quantitative financial guidance was provided. Management cited continued growth opportunities in electronic payments, core credit/debit/prepaid services, processing, and e-commerce and mobile payments. It stated that cash, operating cash generation, borrowing capacity and capital-market access should meet operating, investment, commitment and potential litigation needs.
- Management cautioned that results depend on consumer, business and government spending, economic conditions, cross-border travel, customer health, foreign exchange, competition and customer incentives. It noted uncertainty about the pace of global recovery.
- Interchange regulation and litigation remain major risks. Mastercard estimated that a lower-end negotiated settlement of the U.S. merchant interchange litigation could result in a $500 million loss for the entire matter, but said this was not a probable-loss estimate, recorded no accrual, and could not estimate exposure if the case is litigated. The company’s share depends on settlement scenario under judgment-sharing agreements.
- Debit-card and interchange provisions under the U.S. Dodd-Frank Act began taking effect October 1, 2011. The filing also describes extensive interchange reviews and proceedings in the U.S., Europe, Canada and other jurisdictions, with potential effects on pricing, business practices and revenue.
- New U.S. ATM surcharge class actions were filed in October 2011; claimed damages were not quantified, and no loss estimate or provision was recorded. The filing states that outcomes of various other legal and regulatory matters are uncertain and could materially affect results, cash flows or financial condition.
- Settlement guarantees are a significant contingent exposure: Mastercard-branded gross settlement exposure was $34.983 billion, with $31.303 billion net uncollateralized exposure; $443 million of the latter related to members deemed non-compliant or under review. Management reported historically low losses but noted economic and customer-default risks.
- Available-for-sale auction-rate securities had a $78 million fair value and remained illiquid. Management judged unrealized losses to be liquidity-related, not other-than-temporary, and expected to hold the securities until recovery or redemption.
Important facts for investors to verify
- Track transaction and local-currency volume growth, and assess how foreign exchange and pricing changes affect reported revenue.
- Monitor the U.S. interchange litigation, including class-certification and court decisions, mediation progress, the $500 million settlement scenario, and any future accruals.
- Assess the effects of Dodd-Frank and international interchange rules on debit economics, customer incentives, pricing and revenue.
- Review Access’s contribution to revenue and earnings, integration progress, and any change in the earn-out assessment.
- Follow settlement exposure, collateral adequacy, customer financial health, and the liquidity and valuation of auction-rate securities.
- Consider repurchase pace and remaining authorization: the $2 billion program had approximately $882 million available at September 30, 2011.