Mastercard Incorporated — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2011. The interim financial statements are unaudited and were reviewed, not audited, by the independent accountant. Mastercard provides payment-network processing and related services; it does not issue cards or extend credit to cardholders.
Financial performance
- Second-quarter revenue: Net revenue was $1.667 billion, up 22.1% year over year. Operating income was $885 million, up 23.3%; net income was $608 million, up 32.8%. Diluted EPS rose to $4.76 from $3.49.
- First-half revenue and earnings: Net revenue was $3.168 billion, up 18.5%; operating income was $1.721 billion, up 21.4%; net income was $1.170 billion, up 28.2%. Diluted EPS was $9.05 versus $6.95.
- Margins and taxes: Operating margin was 53.1% in Q2 and 54.3% for the first half, compared with 52.6% and 53.0% in 2010. Effective tax rates declined to 31.8% and 32.3%, respectively, from 35.7% and 35.1%, primarily due to earnings mix and foreign-repatriation-related benefits.
- Business indicators: Q2 gross dollar volume rose 23.6% in U.S.-dollar terms (16.4% in local currency); processed transactions increased 17.4%. First-half growth was 19.5% in dollar volume (14.7% in local currency) and 14.3% in processed transactions. Currency translation and pricing changes contributed to reported revenue growth; higher customer and merchant rebates partly offset it.
- Cash flow and liquidity: First-half operating cash flow was $893 million, versus $438 million in 2010. Investing used $214 million, including the Access acquisition; financing used $1.083 billion, primarily for $1.041 billion of share repurchases and dividends. Cash and cash equivalents were $2.764 billion at June 30; cash plus current available-for-sale securities was approximately $3.6 billion. Equity was $5.481 billion.
- Debt and capital returns: The company had no borrowings under its $2.75 billion revolving facility and was in covenant compliance. It repaid $21 million of debt during the first half. The board authorized total repurchases of up to $2 billion; $1 billion was spent in the first half. Dividends paid were $39 million, and a further $0.15-per-share quarterly dividend was declared for payment in August.
Material changes and unusual items
- Mastercard acquired Access Prepaid Worldwide on April 15 for $481 million, with potential additional earn-out consideration of up to approximately $57 million. The acquisition added prepaid travel-card program management; it contributed to revenue growth and expenses. The company recorded $354 million of acquisition goodwill and $164 million of acquired intangible assets.
- The final $150 million quarterly payment under the American Express settlement was made in Q2. Litigation-settlement obligations declined from $302 million at year-end to $8 million at June 30.
- Reported earnings benefited from a lower effective tax rate and a smaller weighted-average share count. Operating expenses also rose, particularly general and administrative costs, including personnel, professional fees and acquisition-related costs.
- Available-for-sale auction-rate securities were valued at $81 million, with a $9 million unrealized loss. The market remained illiquid; management attributed the discount primarily to lack of liquidity and did not consider the loss other-than-temporary.
Outlook, commentary and risks
- No numerical earnings or revenue guidance was provided. Management cited continued opportunities from electronic-payment adoption and emphasized growth in core credit, debit, prepaid and processing services, geographic expansion, and e-commerce and mobile initiatives. It said liquidity and access to capital were sufficient for anticipated operating needs, commitments and litigation obligations.
- Management cautioned that interim results may not indicate full-year performance and highlighted uncertainty in economic recovery, consumer spending, cross-border travel, foreign exchange and customer activity. The filing identifies regulation, competition and pricing pressure, customer concentration or default, transaction-system disruption, data security, fraud, technology change and acquisition integration among key risks.
- Significant legal and regulatory exposure: U.S. merchant interchange-fee litigation remained unresolved; plaintiffs alleged damages in the tens of billions of dollars, and Mastercard said a reasonably possible loss could not be estimated. A trial was scheduled for September 2012, subject to change. Related agreements provide for sharing certain settlement or judgment costs. Interchange-fee scrutiny also continued in Europe and other jurisdictions. The filing warns adverse outcomes could affect business practices, customer economics, revenue and financial condition.
- The court approved the DOJ and state-attorney-general settlement concerning merchant steering rules on July 20, 2011, after quarter-end. Dodd-Frank debit-card and interchange rules were also identified as a material regulatory uncertainty.
- Settlement guarantees are a notable operational exposure: net uncollateralized MasterCard settlement exposure was $29.819 billion, including $399 million attributable to members deemed non-compliant or under review. Mastercard noted historically low losses from customer failures, but warned economic and political conditions could increase risk.
Important facts for investors to verify
- Progress, timing and financial impact of U.S. interchange litigation and the allocation of any settlement or judgment under sharing agreements.
- Developments in interchange regulation, including Dodd-Frank implementation and the outcome of Mastercard’s European proceedings.
- Whether transaction and local-currency volume growth continues, and how pricing changes, rebates and incentives affect net revenue.
- Access integration, contribution to results and the final earn-out determination.
- Buyback pace, remaining authorization and liquidity after acquisition spending, dividends and legal obligations.
- Recoverability and valuation assumptions for illiquid auction-rate securities, as well as trends in settlement exposure and customer collateral.