Mastercard Incorporated — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011. The interim financial statements are unaudited; PwC performed a review, not an audit. Mastercard provides payment-network, transaction-processing and related services and does not issue cards or extend credit to cardholders.
Financial results and liquidity
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Net revenue | $1.501 billion | $1.308 billion; up 14.8% |
| Operating expenses | $665 million | $608 million; up 9.4% |
| Operating income / margin | $836 million / 55.7% | $700 million / 53.5% |
| Net income | $562 million | $455 million; up 23.6% |
| Diluted EPS | $4.29 | $3.46; up 24.0% |
| Operating cash flow | $355 million | $95 million |
| Ending cash and cash equivalents | $2.954 billion | $3.067 billion at Dec. 31, 2010 |
Revenue growth reflected higher payment volume and transactions, pricing changes and foreign-exchange effects that were minimal overall. Gross dollar volume was $728 billion, up 15.2% on a U.S.-dollar-converted basis and 12.8% in local currency; processed transactions rose 11.1% to 5.971 billion. Pricing actions contributed about five percentage points to net revenue growth. Rebates and incentives, recorded as contra-revenue, rose 8.3% to $477 million.
Domestic assessments increased 23.2%, transaction-processing fees 15.8%, and cross-border volume fees 3.6%. Cross-border growth was held back by pricing changes, including a revised pricing structure implemented in October 2010. Other revenue decreased 1.7%. Operating expenses increased mainly because of personnel, professional fees and marketing; professional fees included acquisition and strategic-initiative costs.
Cash from operations benefited from net income but was partly offset by litigation payments and changes in customer settlement balances and accrued expenses. Investing activities provided $135 million, principally from investment-security maturities. Financing activities used $665 million, including $654 million of share repurchases and $20 million of dividends.
At March 31, current assets were $6.073 billion and current liabilities were $2.791 billion; total equity was $5.202 billion. Cash plus current available-for-sale securities totaled approximately $3.8 billion. Reported debt was $21 million. These figures exclude the separate litigation-settlement obligations and settlement guarantees described below.
Material changes and notable items
- Net income rose 23.6% and operating margin expanded 2.2 percentage points year over year, as revenue growth outpaced operating-expense growth.
- Mastercard repurchased 2.63 million shares for $654 million in Q1 at an average $248.51 per share. In April, the board increased the total repurchase authorization from $1 billion to $2 billion; approximately $1 billion had been repurchased by April 28.
- Current litigation-settlement obligations fell to $156 million from $302 million at year-end, largely after a $150 million American Express settlement payment. One quarterly payment of $150 million remained under that settlement at March 31.
- After quarter-end, on April 15, Mastercard completed its acquisition of Travelex’s prepaid card program management operations for approximately $481 million, with up to $57 million of additional contingent consideration. Purchase accounting was not yet complete.
- The effective tax rate declined to 32.8% from 34.6%, primarily due to geographic earnings mix and a benefit related to anticipated repatriation, partly offset by unrecognized tax benefits.
Outlook, risks and contingencies
No quantified revenue, earnings or other financial guidance was provided. Management cited continued opportunities from the shift to electronic payments, expansion of credit, debit, prepaid and processing services, and investment in e-commerce and mobile payments. It also said the pace of global recovery remained uncertain, with mixed U.S. indicators and stronger recent activity in Asia/Pacific and Latin America. Management believed operating cash generation, borrowing capacity and capital-market access would meet operating needs and settlement obligations; results may be seasonal and Q1 is not necessarily indicative of full-year performance.
Key exposures include U.S. and international interchange-fee regulation and litigation, including U.S. merchant proceedings seeking treble damages and injunctive relief. Plaintiffs’ expert reports alleged damages in the tens of billions of dollars; Mastercard said a reasonably possible loss could not be estimated. The filing also discusses European Commission interchange requirements, other country-level regulatory matters, and legal claims whose outcomes and potential losses are uncertain. An adverse outcome could materially affect results, cash flows or financial condition.
Other stated risks include Dodd-Frank debit and prepaid fee and routing provisions, competition and pricing pressure, customer consolidation or default, settlement guarantees, consumer spending and cross-border travel trends, foreign exchange, data security, processing disruptions, and acquisition integration. Mastercard reported gross settlement exposure of $30.358 billion, collateral of $3.528 billion and net uncollateralized Mastercard-branded exposure of $26.830 billion; $355 million related to members deemed non-compliant or under review. These are exposures under network rules, not reported debt. Management said historical losses from customer financial-institution failures had been low.
Mastercard held $93 million of illiquid auction-rate securities, valued at a 10% discount to par using Level 3 assumptions; management considered the unrealized loss not other-than-temporary. The company also had a $2.75 billion undrawn revolving credit facility and was in compliance with its covenants.
Investor verification priorities
- Assess whether transaction and volume growth can persist, and separate underlying growth from pricing changes, currency effects and the evolving rebate-and-incentive burden.
- Track the outcome and potential financial impact of interchange litigation and regulation, especially the U.S. merchant cases; the filing does not provide a clear estimate of possible loss.
- Verify the remaining American Express settlement payment timing and the effect of other legal obligations on cash flow.
- Review the Travelex acquisition’s final purchase accounting, integration costs and performance against its strategic rationale and contingent-consideration targets.
- Monitor repurchases, dividends and cash balances alongside the company’s settlement exposure, guarantees and liquidity needs.