Mastercard Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. Mastercard operates a global payments technology network connecting consumers, financial institutions, merchants, businesses and governments.
Financial results
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net revenue | $4.009 billion | $3.889 billion | +3% reported; +5% currency-neutral |
| Operating income | $2.211 billion | $2.213 billion | Approximately flat |
| Operating margin | 55.2% | 56.9% | Down 1.8 percentage points |
| Net income | $1.693 billion | $1.862 billion | Down 9% |
| Diluted EPS | $1.68 | $1.80 | Down 7% |
| Operating cash flow | $1.859 billion | $1.312 billion | Up $547 million |
Transaction processing revenue rose 14%, other revenue 26%, and domestic assessments 5%; cross-border volume fees fell 4%. Gross dollar volume grew 8% in local currency, switched transactions rose 13%, and cross-border volume declined 1% in local currency. Rebates and incentives increased 24%, partly offsetting gross revenue growth.
General and administrative expense increased 9%, while advertising and marketing expense declined 20%. The GAAP results included a $174 million net loss on equity investments, primarily unrealized fair-value adjustments, versus a $5 million gain a year earlier. Excluding equity-investment impacts and specified special items, adjusted net income was $1.844 billion, up 1% (3% currency-neutral), and adjusted diluted EPS was $1.83, up 3% (6% currency-neutral). These are non-GAAP measures.
Balance sheet, liquidity and capital
- At March 31, cash and cash equivalents were $10.207 billion; cash, cash equivalents and investments totaled $10.7 billion, excluding $2.1 billion of restricted cash and equivalents.
- Current assets were $18.123 billion and current liabilities $9.712 billion. Total liabilities were $25.150 billion.
- Long-term debt was $12.466 billion, up from $8.527 billion at December 31, 2019. In March, Mastercard issued $4 billion of senior notes due 2027, 2030 and 2050; net proceeds were $3.959 billion. No borrowings were outstanding under its $6 billion commercial paper program or revolving credit facility.
- Operating cash flow was $1.859 billion; investing activities used $507 million and financing activities provided $2.100 billion. The financing inflow principally reflected the new debt, partly offset by repurchases and dividends.
- The company repurchased 4.7 million shares for $1.383 billion and paid $403 million in dividends. It temporarily suspended 2020 share repurchases during the quarter to preserve financial flexibility amid COVID-19 uncertainty.
Material changes, outlook and risks
- Management said COVID-19 began affecting performance in February and had a more significant impact in March, as travel restrictions and stay-at-home measures weakened economic activity and changed consumer and commercial behavior. The pandemic’s duration and full financial impact were uncertain and expected to affect future periods.
- No quantified financial guidance is provided in the supplied filing text. Management stated that cash, operating cash generation and capital-market access were sufficient for anticipated operating needs and obligations, while warning that credit-market conditions, the pandemic and legal outcomes could affect liquidity.
- Mastercard expected to complete its acquisition of most of Nets Denmark’s Corporate Services business in Q3 2020, subject to regulatory approval and customary closing conditions. The stated purchase price was approximately €2.85 billion, subject to adjustments.
- Key contingencies include U.S. merchant interchange litigation, opt-out merchant claims and unresolved rules-relief claims; U.K. and pan-European interchange disputes; ATM surcharge litigation; and other proceedings. The company accrued $852 million for the U.S. Damages Class and opt-out merchant matters and held $587 million in restricted cash for the Damages Class settlement. Potential ultimate exposure in several matters was not estimable.
- Mastercard guarantees settlement between customers. Estimated gross settlement exposure was $50.631 billion, with $4.437 billion of collateral and $46.194 billion net uncollateralized exposure; the exposure is typically short term. Other risks include economic contraction, cross-border spending declines, regulation, competition, cybersecurity and foreign exchange movements.
- Unusual items included a $175 million cash payment to settle interest-rate locks associated with the new debt issuance; the $150 million after-tax loss was recorded in other comprehensive income and is to be amortized into interest expense over the notes’ terms.
Important facts for investors to verify
- How the pandemic affected transaction volumes and revenue after March 31, particularly cross-border activity and customer incentives.
- Whether litigation reserves and settlement assumptions remain adequate as appeals, opt-outs and negotiations progress.
- The use of debt proceeds, debt-service implications and any change in available liquidity or settlement exposure.
- Progress, regulatory status, timing and final terms of the Nets acquisition.
- Whether and when share repurchases resume, and how capital returns compare with pandemic-related liquidity needs.