MA

Mastercard Inc. Q1 2009 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2009. Mastercard Inc. operates as a global payment solutions provider, processing transactions for credit, debit, and electronic cash programs. The company reported a strong liquidity position despite a challenging global economic environment characterized by credit market distress and equity volatility.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net revenues decreased 2.2% year-over-year. This was primarily driven by unfavorable foreign currency exchange impacts (U.S. dollar strengthening against the euro and Brazilian real) and higher rebates/incentives, partially offset by pricing increases and higher transaction volumes.
• Expense Reduction: Total operating expenses decreased 10.8% to $595 million. Advertising and marketing expenses dropped significantly by 35.4% ($64 million) due to cost containment initiatives. General and administrative expenses decreased 3.0%.
• Profitability: Despite lower revenues, operating income increased 8.9% due to the disproportionate reduction in operating expenses. However, Net Income declined 17.8% largely due to a sharp drop in "Other Income."
• Other Income Volatility: Total other income swung from a $173 million gain in Q1 2008 to an $11 million expense in Q1 2009. This was caused by the absence of an $86 million gain from the sale of RedeCard S.A. shares in 2008 and increased interest accretion on litigation settlements.
• Debt Reduction: The company paid down $149 million in short-term debt related to the termination of a variable interest entity (Winghaven lease) in March 2009.

Outlook, Risks, and Contingencies

• Regulatory Proceedings: Significant ongoing litigation and regulatory reviews exist globally regarding interchange fees. Notably, the European Commission decision requires Mastercard to repeal certain pricing changes and adopt new fee methodologies by July 1, 2009. The company has provided undertakings to the Commission to avoid fines.
• Litigation Settlements: Mastercard has substantial obligations under the American Express Settlement (up to $1.8 billion nominal payments over 3 years) and the U.S. Merchant Lawsuit Settlement. As of March 31, 2009, total liabilities for litigation settlements were approximately $1.61 billion.
• Settlement Risk: Gross settlement exposure for MasterCard-branded transactions was $19.7 billion, with $17.7 billion uncollateralized. While historically low losses have been experienced, the ongoing financial crisis increases the risk of member defaults.
• Investment Portfolio: The company holds $191 million in Auction Rate Securities (ARS). Due to market illiquidity, these are valued at a 20% discount to par, with the impairment recorded in other comprehensive income. Management intends to hold these until recovery.
• Guidance: The filing does not provide specific numerical guidance for the full year 2009. Management expects continued pressure from foreign exchange rates and economic conditions but anticipates growth from pricing and transaction volume over the longer term.

Investor Verification Checklist

• Verify the impact of the European Commission's interim agreement on Q2 2009 revenues, specifically the repeal of pricing changes implemented in October 2008.
• Monitor the status of the $191 million Auction Rate Securities (ARS) portfolio for potential other-than-temporary impairment charges if liquidity does not improve.
• Track the quarterly cash outflows related to the American Express Settlement ($150 million per quarter maximum) and its impact on liquidity.
• Assess the exposure to non-compliant members regarding settlement risk, which increased to $268 million in Q1 2009 from $57 million in Q4 2008.
• Review the reclassification of cardholder-related enhancement expenses from advertising to general and administrative expenses to ensure accurate year-over-year expense comparisons.