Mastercard Inc. 10-Q Summary: Quarter Ended September 30, 2007
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2007, for Mastercard Incorporated, a global payment solutions company. The company provides transaction processing and related services for credit, debit, electronic cash, and ATM payment card programs. The financial statements are unaudited but include all normal recurring adjustments.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2007 | Nine Months Ended Sep 30, 2007 |
|---|---|---|
| Net Revenues | $1,082.9 million | $2,994.9 million |
| Operating Income | $353.3 million | $936.1 million |
| Net Income | $314.5 million | $781.7 million |
| Diluted EPS | $2.31 | $5.73 |
| Cash and Cash Equivalents | $1,687.4 million (as of Sep 30, 2007) | |
| Total Assets | ||
| Total Liabilities | $2,957.6 million (as of Sep 30, 2007) | |
| Stockholders' Equity | $3,172.7 million (as of Sep 30, 2007) | |
| Operating Cash Flow (9 Months) | $717.7 million |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 20.1% for the quarter and 20.4% for the nine-month period compared to 2006. Growth was driven by increased transaction volumes and pricing adjustments, partially offset by higher rebates and incentives.
- Profitability Surge: Net income for the nine months ended September 30, 2007, was $781.7 million, a massive increase from $9.3 million in the same period in 2006. This improvement is largely due to the absence of a $395 million non-deductible charitable stock contribution to the MasterCard Foundation recorded in 2006.
- Operating Expenses: Total operating expenses decreased 10.6% for the nine-month period year-over-year, primarily due to the absence of the 2006 charitable contribution and litigation settlement charges. Excluding these "special items," operating expenses increased 9.1%.
- Other Income: Other income increased significantly due to a $107 million gain from the sale of 25% of the company's investment in Redecard S.A. and a $90 million settlement received for discontinuing sponsorship of the 2010 and 2014 World Cup soccer events.
Guidance, Outlook, and Risks
- Outlook: Management expects continued growth driven by the shift from paper-based to electronic payments. The company plans to expand in targeted geographies (Europe, Latin America, Asia/Pacific) and higher-growth segments like corporate and debit payments.
- Capital Allocation: The company repurchased $277 million of Class A common stock in the nine months ended September 30, 2007. Subsequent to the quarter-end, the Board authorized an additional $750 million repurchase program, bringing the total authorized to $1.25 billion.
- Liquidity: The company maintains a strong liquidity position with $3.3 billion in cash, cash equivalents, and available-for-sale securities. A $2.5 billion revolving credit facility was extended to April 2010 with no borrowings outstanding.
- Risks and Contingencies:
- Regulatory Scrutiny: Significant exposure to antitrust and regulatory proceedings regarding interchange fees in the U.S., European Union, UK, Poland, and New Zealand. Adverse outcomes could materially impact revenues.
- Litigation: Ongoing proceedings include the DOJ antitrust litigation, Discover and American Express private litigations, and currency conversion lawsuits. While reserves exist for certain matters, potential damages in others are unspecified and could be significant.
- Settlement Obligations: The company has future obligations of approximately $607 million related to the U.S. merchant lawsuit and other litigation settlements.
Investor Verification Checklist
- Verify the impact of the $395 million non-deductible stock donation in 2006 on the comparability of the 2007 effective tax rate (35.1% vs. 95.9% in 2006).
- Review the status of the Redecard S.A. investment, specifically the remaining 75% stake and the company's strategy for its disposition.
- Monitor the progress of interchange fee regulatory proceedings in the EU and UK, as these could force pricing changes affecting revenue.
- Confirm the execution of the expanded $1.25 billion share repurchase program authorized in October 2007.
- Assess the adequacy of reserves for the U.S. merchant lawsuit and other litigation settlements, totaling $494.6 million as of September 30, 2007.