Mastercard Incorporated — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010; financial statements are unaudited. Mastercard operates a global payments network and earns fees primarily from payment volume, cross-border activity, transaction processing and related services. The interim financial statements received a review, not an audit, from PwC.
Financial performance
| Metric | Q3 2010 | Q3 2009 | First nine months 2010 | First nine months 2009 |
|---|---|---|---|---|
| Net revenue | $1.428 billion | $1.364 billion | $4.101 billion | $3.800 billion |
| Operating income | $766 million | $673 million | $2.183 billion | $1.792 billion |
| Net income attributable to Mastercard | $518 million | $452 million | $1.431 billion | $1.169 billion |
| Diluted EPS | $3.94 | $3.45 | $10.89 | $8.92 |
| Operating margin | 53.6% | 49.4% | 53.2% | 47.2% |
| Cash from operations | — | $1.027 billion | $1.094 billion |
- Quarterly revenue grew 4.7% and net income attributable to Mastercard grew 14.6%; nine-month revenue rose 7.9% and attributable net income rose 22.5%.
- Gross dollar volume increased 7.8% in Q3 and 10.6% year to date on a U.S.-dollar-converted basis; on a local-currency basis, volume rose 8.5% in both periods. Processed transactions increased 0.6% in Q3 and 1.7% year to date.
- Cross-border volume fees grew 40.2% in Q3 and 37.9% year to date. Net pricing actions contributed approximately 7 and 6 percentage points, respectively, to net revenue growth. Higher rebates and incentives offset some gross revenue gains: rebates were 26.8% of gross revenue in Q3 versus 21.0% a year earlier.
- Operating expenses declined 4.1% in Q3 and 4.5% year to date, mainly from lower personnel and benefit costs following a 2009 resource realignment. Advertising and marketing expense increased.
- Foreign exchange reduced net revenue growth by 2.6 percentage points in Q3 and 0.5 points year to date. Management cited U.S. and U.K. debit portfolio losses as a reason transaction growth lagged 2009.
Balance sheet, liquidity and capital
- At September 30, cash and cash equivalents were $2.479 billion; restricted cash was $527 million, designated for the DataCash acquisition. Current available-for-sale securities were $836 million. Management reported $3.3 billion of cash, cash equivalents and current available-for-sale securities.
- Current assets were $6.233 billion and current liabilities $2.832 billion, compared with $5.003 billion and $3.167 billion at year-end 2009. Total equity was $4.851 billion, up from $3.512 billion.
- Debt carrying value was $21 million; Mastercard had no borrowings under its $2.0 billion revolving credit facility at quarter-end and was in compliance with its covenants. The facility was due to expire in April 2011, and the company intended to replace it.
- Operating cash flow was $1.027 billion; investing used $583 million, including the $527 million restricted-cash designation for DataCash; financing provided $36 million. Cash and cash equivalents ended the period at $2.479 billion.
- Cash dividends paid during the nine months were $59 million. The board authorized a repurchase program of up to $1 billion of Class A shares; no shares had been repurchased under it by September 30.
Material developments, outlook and risks
- DataCash acquisition: Announced in August and completed October 22, 2010, after the reporting date, for approximately £334 million (about $526 million). Management expects it to support e-commerce growth and expand the company’s payment gateway presence. Purchase-price allocation was not yet complete.
- Litigation: Litigation-settlement obligations totaled $444 million at September 30; $450 million of American Express settlement payments had been made during the first nine months. Three quarterly payments of up to $150 million each remained under that agreement.
- Regulatory exposure: Mastercard faces interchange-fee proceedings and investigations in the U.S. and several international markets. The U.S. merchant interchange litigation seeks treble damages and injunctive relief; plaintiffs’ expert reports alleged damages in the tens of billions, which the defendants disputed. A DOJ and state attorneys general proposed settlement concerning merchant steering rules was signed October 1, subject to court review. European interchange undertakings included weighted-average caps of 30 basis points for credit and 20 basis points for debit cross-border consumer fees.
- Management warned that adverse litigation or regulatory outcomes could materially affect results, cash flows and financial condition. Other risks include economic weakness and spending trends, foreign-exchange movements, customer financial distress and settlement defaults, and possible regulation under the U.S. Financial Reform Act, including debit and prepaid interchange limits.
- Management described liquidity and capital as strong and believed operating cash generation, borrowing capacity and capital access would meet expected needs. It gave no numerical earnings or revenue guidance. It noted continued uncertainty in the pace of economic recovery, while reporting encouraging volume trends in Asia/Pacific and Latin America and mixed U.S. indicators.
- Unusual items included a $6 million pension curtailment gain in Q3 following plan changes that phase out and eliminate future participant pay credits, and a reduction in reported interest expense as litigation-settlement balances were paid down.
Most important facts for investors to verify
- Whether growth in transaction volumes can improve from the low 2010 rates, particularly after U.S. and U.K. debit portfolio losses.
- Whether rising customer and merchant rebates continue to constrain net revenue growth and margins.
- DataCash’s post-closing contribution, integration costs and final purchase-price allocation.
- Developments and potential financial impact of U.S. and international interchange litigation and regulation, including the proposed U.S. settlement and European undertakings.
- Timing and amount of remaining American Express settlement payments, and any resulting effect on cash flow and liquidity.
- Execution of the $1 billion repurchase authorization and replacement of the revolving credit facility before its April 2011 expiration.