Mastercard Incorporated — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Unaudited consolidated results; dollar amounts are U.S. dollars.
Business context
Mastercard operates a global payments technology network connecting consumers, financial institutions, merchants, governments and other organizations. Revenue is generated principally from domestic assessments, cross-border volume fees, transaction processing and other payment-related services.
Financial performance and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net revenue | $3.889 billion | $3.580 billion | +9%; +13% currency-neutral |
| Operating income | $2.213 billion | $1.825 billion | +21% |
| Operating margin | 56.9% | 51.0% | +6.0 percentage points |
| Net income | $1.862 billion | $1.492 billion | +25% |
| Diluted EPS | $1.80 | $1.41 | +28% |
| Operating cash flow | $1.312 billion | $1.035 billion | +$277 million |
Gross revenue grew 11%; rebates and incentives, which reduce revenue, rose 17% to $1.743 billion, partly offsetting growth. Switched transactions increased 17%, cross-border volume grew 13% in local currency, and gross dollar volume grew 12% in local currency. Adjusted diluted EPS increased 19% (24% currency-neutral), and adjusted net income increased 16% (21% currency-neutral); these are non-GAAP measures.
Operating expenses were $1.676 billion, down 5% as reported, largely reflecting the absence of $117 million in Q1 2018 litigation provisions. Excluding special items, expenses rose 2% (5% currency-neutral), reflecting strategic investment. The effective tax rate was 15.5%, versus 17.3%, primarily due to final transition-tax regulations and share-based payment tax benefits.
At March 31, cash, cash equivalents and investments totaled $7.2 billion, excluding $1.7 billion of restricted cash and equivalents. Mastercard also had $4.5 billion of unused committed credit capacity and no borrowings under its commercial paper program or revolving facility. Total debt was $6.3 billion; $500 million of notes classified as current matured and were paid in April. Q1 investing cash flow was $213 million and financing cash flow was negative $2.223 billion. Cash, cash equivalents and restricted cash combined decreased $752 million during the quarter.
Mastercard repurchased 8.7 million shares for $1.824 billion and paid $340 million in dividends. The board declared a further quarterly dividend of $0.33 per share, payable in May 2019. Management stated that liquidity, operating cash generation, borrowing capacity and access to capital were sufficient for anticipated operating and other needs.
Material changes and unusual items
- Revenue growth reflected higher transaction activity and card spending; rebates and incentives increased faster than revenue, due mainly to new and renewed agreements and higher volumes.
- GAAP earnings benefited from the absence of prior-year litigation expense and a lower tax rate. Q1 2019 included a $30 million tax benefit; adjusted results exclude this item. Q1 2018 adjusted results excluded $117 million of litigation provisions.
- Mastercard adopted the new lease accounting standard on January 1, 2019. At March 31 it reported $369 million of operating lease right-of-use assets and $406 million of operating lease liabilities. Additional leases not yet commenced were expected to create about $279 million of assets and liabilities.
- During Q1, Mastercard entered into agreements to acquire businesses for approximately $975 million, including contingent consideration; closings were expected in 2019 subject to approvals and other conditions.
- After quarter-end, Mastercard invested approximately $340 million in marketable equity investments.
Outlook, risks and contingencies
The filing provides no specific financial guidance. Management cited continued investment in digital infrastructure, safety and security platforms, data analytics and geographic expansion. Forward-looking outcomes remain subject to risks including regulation and litigation over interchange and acceptance practices, competition and pricing pressure, technology change, cybersecurity and service disruptions, customer relationships, foreign exchange and global economic conditions.
Legal matters are significant. The company had accrued $1.575 billion for litigation at March 31, including $916 million for U.S. merchant class and opt-out matters. Final approval of the U.S. damages-class settlement was pending, with a hearing scheduled for November 2019; separate rules-relief negotiations continued. In Europe, the European Commission imposed a €571 million fine (about $641 million at quarter-end) concerning a historic central acquiring rule; Mastercard paid it in April 2019. The company recorded a $654 million charge in 2018 for this matter. Merchant interchange claims in the U.K. and Europe and other proceedings remain pending, and outcomes may require payments or business-practice changes.
Mastercard guarantees settlement of many network transactions. Estimated net uncollateralized settlement exposure was $43.672 billion at March 31, generally for short-term exposure. The filing notes that historical losses have been low but are not necessarily indicative of future losses. A hypothetical 10% adverse currency-rate change could cause a $134 million fair-value loss on outstanding foreign currency derivatives; a 100-basis-point adverse interest-rate change was not expected to materially affect investments.
Important facts for investors to verify
- Progress and final approval of U.S. merchant settlements, including opt-outs, rules-relief claims and the adequacy of the $916 million related reserve.
- Cash payment and accounting treatment of the €571 million European Commission fine, and developments in remaining U.K. and pan-European interchange litigation.
- Whether revenue and transaction growth can continue to offset rising rebates and incentives, and the cost of strategic investment.
- Completion, purchase-price adjustments and integration of the announced acquisitions, as well as the performance and valuation effects of the post-quarter $340 million equity investments.
- Liquidity and capital allocation following substantial share repurchases and the April repayment of $500 million of debt; monitor settlement exposure and legal obligations alongside reported cash balances.