MA

Mastercard Inc. Q2 2008 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2008. Mastercard Inc. operates as a global payment solutions company, providing transaction processing and related services for credit, debit, and electronic cash programs. The company's financial results for this period were significantly impacted by a major legal settlement.

Key Financial Metrics

Note: Operating expenses include a one-time litigation settlement charge of $1,649.3 million.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 25.0% for the quarter and 27.0% year-to-date compared to 2007, driven by increased transaction volumes, pricing increases, and favorable foreign currency fluctuations (Euro and Brazilian Real).
• Profitability Decline: The company reported a net loss of $746.7 million for the quarter, compared to net income of $252.3 million in the same period in 2007. This reversal is almost entirely attributable to the American Express Settlement charge of $1.649 billion recorded in the second quarter.
• Operating Expenses: Total operating expenses surged 240.6% quarter-over-quarter due to the litigation charge. Excluding this charge, operating expenses increased only 14.6%.
• Other Income: Other income decreased significantly compared to 2007, primarily due to the absence of a $90 million gain from a World Cup sponsorship settlement recognized in the prior year, partially offset by an $86 million gain from the sale of Redecard S.A. shares.

Guidance, Outlook, and Risks

• American Express Settlement: On June 24, 2008, Mastercard settled U.S. federal antitrust litigation with American Express. The company is obligated to make 12 quarterly payments of up to $150 million each (totaling up to $1.8 billion nominal), contingent on American Express's U.S. Global Network Services billings. Payments begin in Q3 2008.
• Liquidity and Capital: Management maintains a strong liquidity position with approximately $2.5 billion in cash, cash equivalents, and current available-for-sale securities. The company completed a $1.25 billion share repurchase program in June 2008.
• Investment Portfolio: Due to the failure of the auction mechanism for Auction Rate Securities (ARS), the company reclassified $249 million of ARS from short-term to long-term investments and recorded a temporary impairment of 10% within other comprehensive income.
• Regulatory Risks: The company faces ongoing scrutiny regarding interchange fees globally, including a European Commission decision requiring the repeal of default cross-border interchange fees in the EEA by June 21, 2008. Mastercard has filed an application to annul this decision.
• Outlook: Management expects cash generated from operations and borrowing capacity to be sufficient to meet future obligations, including litigation settlements. No specific forward-looking financial guidance was provided in this filing.

Investor Verification Checklist

• Settlement Terms: Verify the specific performance hurdles for American Express that determine the quarterly payment amounts under the settlement agreement.
• ARS Liquidity: Monitor the status of the $224.2 million in Auction Rate Securities classified as Level 3 assets and the potential for further impairment or liquidity restoration.
• European Compliance: Track the outcome of Mastercard's appeal against the European Commission's decision on interchange fees and any potential fines for non-compliance.
• Recurring Costs: Distinguish between the one-time $1.649 billion charge and the ongoing accretion of interest expense (estimated at $44 million in 2008) related to the settlement.
• Share Repurchases: Confirm the completion of the $1.25 billion repurchase program and the current status of any new authorization for buybacks.