Mastercard Incorporated — FY 2013 Form 10-K
Reporting period: Year ended December 31, 2013. This is an annual filing, not a standalone fourth-quarter report. Amounts are U.S. dollars unless noted; share and per-share figures reflect the January 2014 ten-for-one stock split.
Business context
Mastercard operates a global payments network, processing transactions and providing related payment products and services. It does not issue cards, extend credit to cardholders, set merchant discount rates, or earn interchange fees. Revenue is driven mainly by payment volume, transaction counts, and related services. The company reported one operating segment.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 | Change |
|---|---|---|---|
| Net revenue | $8.346 billion | $7.391 billion | +13% |
| Operating income | $4.503 billion | $3.937 billion | +14% |
| Operating margin | 54.0% | 53.3% | +0.7 percentage point |
| Net income | $3.116 billion | $2.759 billion | +13% |
| Diluted EPS | $2.56 | $2.19 | +17% |
| Operating cash flow | $4.135 billion | $2.948 billion | +40% |
- Revenue growth reflected higher payment volume and transaction counts. Local-currency gross dollar volume rose 14%; processed transactions rose 13%, compared with 25% growth in 2012.
- Cross-border volume fees increased 19% to $2.793 billion; domestic assessments rose 9% to $3.805 billion; transaction-processing fees rose 11% to $3.359 billion. Rebates and incentives were $2.942 billion, or 26% of gross revenue.
- Operating expenses increased 11% to $3.843 billion, including a $95 million litigation provision. Excluding litigation provisions, expenses increased 9%, mainly from higher personnel and other operating costs.
- Cash, cash equivalents, and available-for-sale securities totaled $6.3 billion at year-end, excluding $723 million of restricted litigation cash. The company also had an undrawn $3 billion revolving credit facility and reported no borrowings under it.
- Current assets were $10.950 billion and current liabilities $6.032 billion. Total liabilities were $6.747 billion; $35 million of debt was included in current liabilities. No material long-term debt balance was reported.
- Net cash used in investing activities was $4 million, while financing activities used $2.629 billion, principally for $2.443 billion of share repurchases and $255 million of dividends.
Changes versus the prior period and unusual items
- Net revenue growth accelerated from 10% in 2012 to 13% in 2013, while transaction growth slowed from 25% to 13%.
- The 2012 comparison was affected by a $770 million U.S. merchant-litigation provision recorded in 2011. Litigation provisions were $95 million in 2013 and $20 million in 2012; accordingly, the large improvement in reported expenses from 2011 should not be read as an equivalent improvement in underlying costs.
- The company repurchased 40.9 million shares for $2.443 billion during 2013. A new $3.5 billion repurchase authorization was approved in December; purchases under it began in January 2014.
- The Board declared a quarterly dividend of $0.11 per share in December 2013, payable in February 2014, and declared the same quarterly amount in February 2014.
- Foreign exchange translation reduced reported volume growth relative to local-currency growth: GDV rose 12% in U.S.-dollar terms versus 14% locally. Management estimated currency movements increased 2013 net income by about one percentage point versus 2012.
Outlook, management commentary, and risks
- The filing provides no quantified revenue, earnings, or cash-flow guidance. Management said existing cash and investments, operating cash generation, borrowing capacity, and capital-market access were expected to meet operating and other liquidity needs.
- Management emphasized growth through core payment products, digital and mobile payments, expanded acceptance, financial inclusion, and value-added services. It also highlighted continued investment in technology, security, and marketing.
- Interchange regulation and litigation are central risks. The U.S. merchant settlement received final court approval in December 2013 but faced appeals; merchants representing slightly more than 25% of relevant Mastercard and Visa purchase volume opted out, and separate claims were being pursued. The company recorded $95 million of additional expense in 2013; its year-end accrued litigation balance was $886 million, including a $68 million timing-related amount with a corresponding customer receivable.
- In Europe, Mastercard’s appeal of the European Commission’s cross-border interchange decision remained pending; an Advocate General recommended rejecting the appeal in January 2014. The filing also describes proposed EU interchange regulation and U.S. debit-interchange litigation; the U.S. rules remained in effect pending appeal at year-end.
- Settlement guarantees are a significant contingent exposure: gross settlement exposure was approximately $40.657 billion, collateral held was $3.167 billion, and net uncollateralized exposure was $37.490 billion. Management warned that simultaneous customer failures could exceed available resources.
- Other material risks include competitive and pricing pressure, reliance on financial-institution customers, cross-border travel and consumer-spending trends, foreign-exchange movements, cyberattacks and service disruptions, data breaches, and changing privacy and payments regulation.
- PwC issued an unqualified opinion on the financial statements and internal controls. Management and the auditor concluded internal control over financial reporting was effective as of December 31, 2013.
Investor verification points
- Review the status and potential financial exposure of merchant opt-out litigation, appeals of the U.S. settlement, and pending interchange proceedings in the U.S. and Europe.
- Assess whether continued volume growth can offset higher customer incentives, competitive pricing pressure, and slowing transaction growth.
- Evaluate settlement-guarantee exposure against collateral, available liquidity, and the $3 billion revolver, particularly under simultaneous customer stress.
- Check the sustainability of earnings growth after accounting for litigation provisions, repurchases, tax incentives, and foreign-currency effects.
- Confirm the cash-flow and balance-sheet treatment of restricted litigation funds, customer incentive commitments, and future repurchases and dividends.