Mastercard Incorporated — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This is an annual filing, not a standalone fourth-quarter report; selected Q4 results are noted below. Amounts are in U.S. dollars unless stated otherwise.
Business context
Mastercard operates a global payment network and provides transaction processing and related services. It earns fees based largely on card spending volume, transaction counts, and other services; it does not issue cards, extend cardholder credit, or earn interchange fees. Its brands include Mastercard, Maestro, and Cirrus.
Financial and operating performance
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net revenue | $6.714 billion | $5.539 billion |
| Operating income | $2.713 billion | $2.752 billion |
| Operating margin | 40.4%; 51.9% excluding the litigation provision | 49.7% |
| Net income attributable to Mastercard | $1.906 billion | $1.846 billion |
| Diluted EPS | $14.85 | $14.05 |
| Operating cash flow | $2.684 billion | $1.697 billion |
| Cash and cash equivalents | $3.734 billion | $3.067 billion |
| Current available-for-sale securities | $1.215 billion | $831 million |
| Long-term debt | None reported | None reported |
Net revenue grew 21.2%, reflecting higher spending volume and transaction counts, acquisitions (about 3 percentage points of growth), favorable currency translation (about 2 points), and pricing effects. GDV rose 16.1% in local currency and 19.3% in U.S. dollars to $3.249 trillion; processed transactions increased 18.3% to 27.265 billion. Rebates and incentives were $2.221 billion, or 24.9% of gross revenue, versus 26.7% in 2010.
Operating expenses rose 43.6%, primarily due to a $770 million U.S. merchant-litigation provision. Excluding that item, operating expenses increased 16.0%. Net income attributable to Mastercard increased 3.3%, while diluted EPS increased 5.7%.
Q4: Net revenue was $1.728 billion, operating loss was $10 million, and net income attributable to Mastercard was $19 million. The quarter included the $770 million pre-tax litigation provision; Q4 2010 reported revenue of $1.438 billion, operating income of $569 million, and attributable net income of $415 million.
Liquidity, capital, and material changes
- Cash, cash equivalents, and current available-for-sale securities totaled approximately $4.9 billion at year-end, up from $3.9 billion in 2010. Current assets were $7.741 billion and current liabilities $4.217 billion.
- Mastercard had no borrowings under its $2.75 billion unsecured revolving credit facility, extended through November 2014; availability is scheduled to decline to $2.35 billion in the final year. The company reported compliance with facility covenants.
- Investing cash outflow was $748 million, including acquisitions and network investment; financing cash outflow was $1.215 billion, mainly share repurchases and dividends. Mastercard repurchased about 4.4 million shares for $1.1 billion during 2011.
- Access Prepaid Worldwide was acquired in April 2011 for $481 million, with contingent consideration of up to about $57 million; its performance did not qualify for the earn-out. The acquisition and the 2010 DataCash acquisition expanded prepaid and e-commerce services.
- The 2011 effective tax rate was 30.6%, compared with 33.0% in 2010. The filing cites geographic earnings mix and the tax benefit associated with the litigation provision; Singapore tax incentives reduced 2011 tax expense by $44 million.
Outlook, commentary, risks, and unusual items
The filing provides no quantified revenue or earnings guidance. Management said it believed existing cash, operating cash generation, borrowing capacity, and capital-market access were adequate for operating needs, commitments, capital expenditures, and potential litigation obligations. It also noted that global recovery and the business environment remained uncertain, while spending and volume trends in several regions had been encouraging.
- Merchant litigation: The $770 million pre-tax charge, or $495 million after tax, was management’s estimate of the financial portion of a potential settlement based on mediation progress—not an estimate of exposure if the cases proceed to trial. The amount and outcome remained uncertain.
- Regulation and interchange: U.S. Federal Reserve rules effective October 2011 capped covered debit and prepaid interchange at 21 cents plus five basis points, with a possible one-cent fraud-prevention adjustment for eligible issuers. Broader litigation and regulatory challenges to interchange, network rules, and merchant practices remained active across multiple jurisdictions.
- Settlement guarantees: Gross settlement exposure was approximately $39.1 billion across Mastercard, Maestro, and Cirrus transactions. Mastercard-branded collateral was about $3.5 billion; net uncollateralized Mastercard-branded exposure was approximately $31.1 billion. The settlement guarantee is unlimited in term and amount, though exposure is typically short-term.
- Other principal risks: Customer concentration (the five largest customers generated 26% of revenue), competitive pricing and incentive pressure, cross-border travel and consumer-spending sensitivity, foreign exchange, customer failures, cybersecurity and service disruptions, and potential regulatory costs.
- Fourth-quarter results typically face higher customer and merchant incentives and marketing expenses due to renewals and holiday activity. Mastercard reported effective disclosure controls and effective internal control over financial reporting; the independent auditor gave an unqualified opinion.
Most important facts for investors to verify
- Whether mediation results in a U.S. merchant-litigation settlement, and how final terms compare with the $770 million provision.
- Subsequent developments in U.S. debit-routing and interchange rules and major non-U.S. interchange proceedings.
- Whether transaction and GDV growth persists after separating organic growth, acquisition contributions, pricing, incentives, and foreign exchange.
- Changes in settlement exposure, collateral coverage, customer financial health, and liquidity-facility availability.
- Whether customer and merchant incentives, operating costs, and share repurchases remain consistent with sustainable earnings and cash generation.