Mastercard Incorporated — Q1 2015 Form 10-Q
Business context and reporting period. The filing covers the unaudited three months ended March 31, 2015, compared with the three months ended March 31, 2014; balance-sheet comparisons are with December 31, 2014. Mastercard operates a global payments network and provides transaction processing and related services. It does not issue cards or extend credit to cardholders.
Financial results
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net revenue | $2.230 billion | $2.172 billion | +3% |
| Operating expenses | $879 million | $887 million | -1% |
| Operating income | $1.351 billion | $1.285 billion | +5% |
| Operating margin | 60.6% | 59.2% | +1.4 percentage points |
| Net income | $1.020 billion | $870 million | +17% |
| Diluted EPS | $0.89 | $0.73 | +22% |
| Operating cash flow | $911 million | $568 million | +$343 million |
- Gross revenue rose 7% to $3.111 billion, while rebates and incentives increased 19% to $881 million, limiting net revenue growth. Transaction processing fees increased 7%, cross-border volume fees 4%, domestic assessments 3%, and other revenue 22%.
- Processed transactions increased 12%; branded gross dollar volume increased 12% in local currencies but 2% when converted to U.S. dollars. Foreign currency translation reduced net revenue growth by 5 percentage points and net income growth by 7 percentage points, according to management.
- The effective tax rate declined to 23.9% from 32.0%, reflecting foreign tax credits, a larger repatriation benefit, and a more favorable mix of taxable earnings. Management attributed net income growth to higher revenue and the lower tax rate, partly offset by foreign exchange and acquisitions.
- At March 31, cash and cash equivalents were $4.207 billion; available-for-sale investments were $1.589 billion. Management reported $5.9 billion of cash, cash equivalents, time deposits, and investments, excluding $540 million of restricted litigation cash. The $3 billion revolving credit facility was unused.
- Long-term debt was $1.495 billion. Current assets were $10.348 billion and current liabilities were $5.937 billion. Total equity was $6.334 billion, down from $6.824 billion at year-end, including a substantial foreign-currency translation loss.
- Net cash decreased $930 million during the quarter. Financing used $1.100 billion, including $947 million of share repurchases and $184 million of dividends; investing used $519 million, primarily reflecting net purchases of investment securities.
Material changes and notable items
- Operating expenses declined despite higher depreciation and amortization, which rose 18% to $87 million, mainly due to acquired software. General and administrative expense benefited from foreign-exchange derivative gains and balance-sheet remeasurement.
- Foreign currency translation produced a $375 million quarterly loss in other comprehensive income, primarily driven by euro devaluation. The euro and Brazilian real each devalued 18% and 17%, respectively, against the U.S. dollar versus the comparable period.
- Mastercard repurchased approximately 11.0 million shares for $947 million at an average $86.32 per share. The quarterly dividend was $0.16 per share.
- On April 23, 2015, after quarter-end, Mastercard agreed to acquire a data analytics business for $600 million, subject to customary adjustments and closing conditions; the company expected closing in Q2 2015.
- The 2014 comparative revenue and expense presentation was revised to reclassify $5 million of customer incentives from general and administrative expense to contra-revenue; net income was unchanged.
Outlook, risks, and contingencies
- No specific revenue, earnings, or other numerical guidance is provided. Management said existing liquidity, operating cash generation, borrowing capacity, and capital-market access should be sufficient for operating needs, capital spending, commitments, and potential obligations.
- The company’s $731 million accrued litigation liability primarily relates to U.S. merchant interchange litigation, including opt-out merchants. The class settlement was approved but appealed; Mastercard also reported separate opt-out cases and settlements. The company said potential liability if opt-out matters proceed to final litigation cannot be estimated.
- Other material legal and regulatory exposure includes interchange-related proceedings in Canada and Europe. Adverse outcomes could require payments or changes to business practices and could materially affect results, financial position, or cash flows.
- Mastercard guarantees settlement between issuers and acquirers. At March 31, estimated gross settlement exposure was $37.257 billion, collateral held was $3.517 billion, and net uncollateralized exposure was $33.740 billion. Exposure is generally short-term, but economic or financial-institution distress could increase losses.
- A hypothetical 10% adverse currency move could produce an estimated $94 million fair-value loss on outstanding foreign-currency derivatives. Management said a 100-basis-point adverse interest-rate move would not materially affect financial assets or liabilities.
- Key stated risks include regulation and litigation over interchange and acceptance rules, competition, customer concentration, economic and political conditions, declining cross-border activity, currency movements, cyber and processing-system disruptions, fraud, and settlement guarantees.
Important facts for investors to verify
- How much revenue growth and earnings growth persist after adjusting for currency effects, acquisitions, and the lower effective tax rate.
- Whether merchant litigation appeals, opt-out settlements, or other interchange proceedings change the $731 million reserve or create additional exposure.
- Whether settlement exposure, collateral coverage, or customer financial health changes materially.
- The closing, final purchase price, and expected financial contribution of the $600 million data analytics acquisition.
- Cash available for U.S. needs given the $2.8 billion held by foreign subsidiaries that Mastercard intended to permanently reinvest abroad, and the pace of future repurchases and dividends.