Mastercard Inc. 10-Q Summary: Period Ended September 30, 2003
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 2003, and the nine-month period ended on that date. Mastercard Inc. operates a global payment processing network, providing transaction processing, branding, and related services for credit, debit, ATM, and travelers' cheque programs. The company converted from a membership organization to a stock company in June 2002 and consolidated the results of Europay International S.A. (renamed MasterCard Europe) as of that date.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2003 | Nine Months Ended Sep 30, 2003 | Nine Months Ended Sep 30, 2002 |
|---|---|---|---|
| Revenue | $594.2 million | $1,663.3 million | $1,382.6 million |
| Operating Income (Loss) | $118.9 million | $(498.9) million | $257.6 million |
| Net Income (Loss) | $74.4 million | $(318.7) million | $167.9 million |
| Diluted EPS | $0.74 | $(3.19) | $2.06 |
| Cash and Equivalents | $414.6 million (Sep 30, 2003) | N/A | |
| Operating Cash Flow (9mo) | $190.4 million | $175.9 million | |
| Long-Term Debt | $229.5 million (Sep 30, 2003) | N/A |
Note: Figures are in millions unless otherwise noted. The nine-month net loss includes a significant non-cash charge related to a legal settlement.
Material Changes vs. Prior Period
- Revenue Growth: Revenue increased 10% for the quarter and 20% for the nine-month period compared to the prior year. Growth was driven by the acquisition of MasterCard Europe and a strengthening euro, alongside an 8% increase in Gross Dollar Volume (GDV).
- Legal Settlement Impact: The nine-month operating loss of $498.9 million was primarily driven by a $721 million pre-tax charge recorded in the first quarter for the settlement of the U.S. merchant lawsuit. This charge included the monetary settlement, compliance costs, and costs for "opt-out" merchants.
- Expense Increases: Operating expenses rose 92% year-over-year for the nine-month period, largely due to the lawsuit settlement and increased advertising and market development spending ($531 million vs. $399 million).
- Balance Sheet: Total assets increased to $2.85 billion from $2.26 billion at year-end 2002, reflecting the consolidation of a variable interest entity (Winghaven Trust) which added $154 million in municipal bonds and $149 million in long-term debt.
Guidance, Outlook, and Risks
Management Commentary: Management expects cash generated from operations and borrowing capacity to be sufficient to meet needs. The company is investing heavily in advertising to accelerate profitable growth. The effective tax rate for the nine months was 35.8%, but would have been 33.1% excluding the discrete tax impact of the lawsuit settlement.
Key Risks and Contingencies:
- U.S. Merchant Lawsuit: A settlement agreement requires payments of $125 million in 2003 and $100 million annually through 2012. It also mandates rule changes allowing merchants to reject debit cards, which could impact future debit volume.
- Antitrust Litigation: The U.S. Department of Justice (DOJ) antitrust case regarding the "Competitive Programs Policy" (CPP) was upheld by the Second Circuit Court of Appeals in September 2003. Mastercard has petitioned for a rehearing. The judgment requires Mastercard to repeal the CPP, potentially allowing issuers to switch to competing networks.
- Global Interchange Proceedings: Regulatory challenges to Multilateral Interchange Fees (MIF) are ongoing in the European Union, United Kingdom, and Australia. A negative outcome in these jurisdictions could significantly impact operations and revenue.
- Currency Conversion Litigation: A California court ruled Mastercard's currency conversion fee deceptive, ordering restitution. Mastercard intends to appeal. Similar class actions are pending in other states and federal court.
Investor Verification Checklist
- Settlement Finality: Verify the status of the District Court's final approval of the U.S. merchant lawsuit settlement and any potential appeals.
- Debit Volume Impact: Monitor transaction volumes to assess the impact of the new rule allowing merchants to reject debit cards and the DOJ ruling on the CPP.
- Regulatory Outcomes: Track decisions from the European Commission, UK Office of Fair Trading, and Australian Federal Court regarding interchange fees.
- Restitution Exposure: Review the outcome of the currency conversion fee restitution process in California and the status of related federal antitrust claims.
- Debt Covenants: Confirm continued compliance with the $1.2 billion revolving credit facility, which serves as liquidity for settlement failures.