Business context and reporting period
Mastercard Incorporated’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2012. Mastercard operates a global payments network and provides payment-related services; it earns fees primarily from transaction volume, processed transactions and other services, and does not issue cards or extend credit to cardholders.
Financial performance and liquidity
| Metric | Three months ended June 30, 2012 | Six months ended June 30, 2012 |
|---|---|---|
| Net revenue | $1.820 billion; up 9% | $3.578 billion; up 13% |
| Operating income | $974 million; up 10% | $1.974 billion; up 15% |
| Net income attributable to Mastercard | $700 million; up 15% | $1.382 billion; up 18% |
| Diluted EPS | $5.55; up 17% | $10.91; up 21% |
| Operating margin | 53.5%, versus 53.1% | 55.2%, versus 54.3% |
Comparisons are with the corresponding 2011 periods. Six-month operating cash flow was $1.068 billion, versus $893 million; investing cash outflow was $690 million and financing cash outflow was $922 million. Cash and cash equivalents were $3.153 billion at June 30, down from $3.734 billion at year-end. Mastercard reported $5.0 billion of cash, cash equivalents and current available-for-sale securities, compared with $4.9 billion at year-end.
Total assets were $11.240 billion, total liabilities $4.964 billion and equity $6.276 billion. Mastercard had no borrowings under its $2.75 billion revolving credit facility. It stated that cash, operating cash generation, borrowing capacity and access to capital were sufficient for anticipated operating, investment, commitment and potential litigation needs. No numerical profit or revenue guidance was provided.
Material changes and operating drivers
- Processed transactions rose 29% in both the quarter and six-month period. Volume increased 15% and 17%, respectively, in local currency; U.S.-dollar-converted gross dollar volume grew 9% and 13%.
- Growth reflected higher transaction volumes, pricing actions and new processing business, partially offset by foreign-currency translation, which reduced net revenue growth by approximately 4 percentage points for the quarter and 3 points year to date.
- Rebates and incentives increased 24% in both periods; they equaled 27% of gross revenue in the quarter and 26% year to date, versus 24% in the comparable 2011 periods.
- Operating expenses rose 8% in the quarter and 11% year to date, led by higher general and administrative costs. Advertising and marketing costs declined. The effective tax rate fell to 28.0% for the quarter and 30.0% year to date, mainly due to tax benefits and a more favorable geographic earnings mix.
- Mastercard repurchased approximately 2.3 million shares for $919 million in the first half and authorized a new $1.5 billion repurchase program after completing its prior $2 billion program. The quarterly dividend was increased to $0.30 per share from $0.15.
Outlook, litigation and principal risks
Management reported growth across regions but said the pace of global economic recovery remained uncertain. The company identified consumer spending, migration from cash and checks to electronic payments, and growth in its share of electronic payments as key business drivers. It also highlighted foreign-exchange movements, competition, customer and merchant activity, technology and security risks, and regulatory scrutiny of payment practices.
On July 13, 2012, after quarter-end, Mastercard entered into a memorandum of understanding to settle U.S. merchant class litigation and separately agreed in principle to settle individual merchant claims. Its estimated financial share was $790 million pre-tax, including a $20 million charge recorded in the second quarter and a $770 million charge recorded in 2011. The proposed class settlement also included an eight-month reduction in default credit interchange fees and a rule change allowing certain merchant surcharging of Mastercard credit cards. The settlement remained subject to completion of terms and court and other approvals; proposed business-rule changes were expected after preliminary approval, likely in early 2013. Mastercard warned that surcharging could reduce card use and transaction volumes.
Other material legal and regulatory uncertainties include interchange-fee proceedings in the United States, Canada and Europe. In May 2012, the EU General Court upheld the European Commission’s 2007 decision concerning cross-border interchange fees; Mastercard said it intended to appeal. The filing said adverse outcomes in these matters could affect revenue, growth, cash flow or financial condition. At June 30, estimated gross settlement exposure was $40.171 billion, offset by $4.087 billion of collateral, leaving $36.084 billion of net uncollateralized exposure; the company described the exposure as short-term and subject to risk-management procedures. A hypothetical 10% adverse currency move could produce an estimated $129 million fair-value loss on outstanding foreign-currency derivatives.
Important facts for investors to verify
- Whether the U.S. merchant settlement terms were completed and received required court approval, and the final cash and operating impacts.
- Whether settlement-related rule changes led merchants to surcharge and affected card usage, transaction volume or revenue.
- Developments in the EU appeal and other interchange litigation or regulatory proceedings, including potential effects on fees and business practices.
- Whether transaction growth and revenue gains persist as rebates and incentives rise, and how foreign exchange affects reported growth.
- Cash availability, share repurchases and dividends relative to settlement obligations and Mastercard’s settlement-guarantee exposure.