Business context and reporting period
Mastercard Incorporated is a global payments technology company. This unaudited Form 10-Q covers the three and six months ended June 30, 2021; comparisons are with the pandemic-affected 2020 periods. Unless stated otherwise, financial amounts are in U.S. dollars.
Financial performance and position
| Metric | Q2 2021 | Q2 2020 | First half 2021 | First half 2020 |
|---|---|---|---|---|
| Net revenue | $4.528B (+36%) | $3.335B | $8.683B (+18%) | $7.344B |
| Operating income | $2.341B (+37%) | $1.707B | $4.538B (+16%) | $3.918B |
| Operating margin | 51.7% | 51.2% | 52.3% | 53.3% |
| Net income | $2.066B (+46%) | $1.420B | $3.894B (+25%) | $3.113B |
| Diluted EPS | $2.08 (+48%) | $1.41 | $3.91 (+27%) | $3.08 |
| Cash from operations | Not presented by quarter in the supplied filing text | $3.731B | $3.317B |
- Q2 adjusted net revenue growth was 31% currency-neutral; adjusted diluted EPS was $1.95, up 37% currency-neutral. These non-GAAP measures exclude equity-investment gains or losses and specified litigation items, among other adjustments.
- Q2 adjusted operating margin was 53.2%, versus 51.8%; first-half adjusted margin was 53.0%, versus 53.7%. First-half GAAP effective tax rate was 16.6%, compared with 15.4%.
- Q2 revenue growth reflected gross dollar volume growth of 33% and cross-border volume growth of 58%, both on a local-currency basis, and switched-transaction growth of 41%. Reopening and the comparison with Q2 2020’s initial pandemic shock materially affect these growth rates.
- First-half investing cash outflow was $4.702B, including $4.2B for business acquisitions; financing cash outflow was $2.801B. The company repurchased $3.1B of shares and paid $873M in dividends.
- At June 30, cash and cash equivalents were $6.216B and investments were $544M. Management reported $6.8B of cash, cash equivalents and investments, excluding $2.4B of restricted cash, plus an undrawn $6B revolving credit facility.
- Total debt was $13.9B, up from $12.7B at December 31, 2020. The company issued $1.3B of notes in March; $650M of debt was due in November 2021. No borrowings were outstanding under the commercial paper program or revolving facility.
Material changes and unusual items
- Revenue rebounded sharply year over year, with cross-border fees especially strong in Q2. Growth in rebates and incentives partly offset gross revenue growth: rebates and incentives increased 53% in Q2 and 27% in the first half.
- Operating expenses rose 34% in Q2 and 21% in the first half. Management cited higher personnel, advertising and marketing, and data-processing costs, as well as acquisition-related costs. Advertising and marketing expense increased 132% in Q2 as sponsored events resumed.
- Net gains on equity investments were $243M in Q2 and $337M in the first half, primarily from fair-value changes. They boosted GAAP earnings and are excluded from Mastercard’s adjusted results.
- Mastercard acquired the majority of Nets’ Corporate Services business and acquired Ekata for a combined $4.4B in cash consideration. Preliminary purchase accounting included $2.7B of goodwill and $1.9B of acquired intangible assets.
- Q2 included a $67M litigation provision, primarily related to U.K. merchant settlements and estimated legal fees. The company also repurchased 8.5 million shares in the first half for $3.1B.
Outlook, risks and contingencies
The filing provides no quantified financial guidance. Management said key growth rates continued to improve, but cautioned that the pandemic’s effect remains uncertain, including the potential impact of variants, renewed restrictions and the pace of vaccination and economic recovery.
- At June 30, accrued litigation was $906M. This included a $783M reserve for U.S. merchant damages-class and opt-out claims; Mastercard stated that this reserve is not an estimate of potential loss if the claims proceed to final litigation. A $586M restricted cash settlement fund related to the damages-class litigation was also reported.
- Unresolved U.K. and Pan-European merchant damages claims were approximately £1B. Other matters include a U.K. consumer collective action seeking more than £14B and U.S. ATM and EMV liability-shift litigation alleging aggregate damages exceeding $1B in each matter. Outcomes, potential damages and business-practice effects remain uncertain.
- Mastercard is cooperating with an FTC investigation into debit-routing compliance under the Durbin Amendment. The filing also describes regulatory, interchange, competition, cybersecurity, privacy, technology, foreign-exchange and settlement risks.
- Estimated net settlement exposure under Mastercard’s customer settlement guarantee was $52.6B after risk mitigation arrangements at June 30. The company says exposure is typically short-term and historical losses have been low, but future losses could differ.
- Management believes available liquidity, operating cash generation and access to capital are sufficient for anticipated needs, while warning that credit-market conditions and litigation outcomes could affect liquidity.
Investor verification priorities
- Assess how much of the sharp Q2 growth reflects recovery from the unusually weak 2020 comparison, particularly in cross-border activity, and monitor subsequent volume trends.
- Reconcile GAAP and adjusted earnings, focusing on the $337M first-half equity-investment gain and litigation adjustments.
- Review acquisition integration, final purchase-price allocations, and the contribution of Nets and Ekata to revenue and expenses.
- Track litigation developments, accrued reserves, restricted settlement cash and potential exposure beyond recorded provisions.
- Evaluate cash use, debt maturities, repurchases and dividends against ongoing investment needs and Mastercard’s settlement-guarantee exposure.