Mastercard Incorporated — FY 2009 Form 10-K
Business context and reporting period. Mastercard operates a global payments network and provides transaction processing and related services to financial-institution customers. It does not issue cards or extend credit. This annual filing covers the year ended December 31, 2009; quarterly figures below refer to Q4 2009.
Financial performance and key metrics
| Metric | FY 2009 | FY 2008 |
|---|---|---|
| Net revenue | $5.099 billion (+2.1%) | $4.992 billion (+22.7% versus 2007) |
| Operating income (loss) | $2.260 billion; 44.3% margin | $(535) million; (10.7%) margin |
| Net income (loss) attributable to Mastercard | $1.463 billion | $(254) million |
| Diluted EPS | $11.16 | $(1.94) |
| Operating cash flow | $1.378 billion | $413 million |
| Cash and cash equivalents at year-end | $2.055 billion | $1.505 billion |
| Total assets / equity at year-end | $7.470 billion / $3.512 billion | $6.476 billion / $1.932 billion |
Management reported $2.9 billion of cash, cash equivalents and current available-for-sale securities at year-end. Current assets were $5.003 billion and current liabilities $3.167 billion. Long-term debt was $21.6 million; there was no short-term debt at year-end. A $2.5 billion committed revolving facility was undrawn and scheduled to decline to $2.0 billion in April 2010.
Mastercard processed 22.410 billion transactions, up 6.9%, while worldwide GDV was $2.454 trillion, down 3.3% in U.S. dollars but up 1.4% in local currencies. Q4 revenue was $1.298 billion, operating income $468 million, attributable net income $294 million and diluted EPS $2.24.
Changes versus comparable periods
- Revenue growth slowed to 2.1% from 22.7% in 2008. Transaction growth and pricing actions supported revenue, but weaker spending, lower average transaction size and currency translation weighed on results.
- Credit and charge GDV fell 8.8% worldwide in U.S. dollars; debit GDV rose 10.3%. U.S. credit and charge GDV fell 16.8%, while U.S. debit GDV grew 6.5%.
- Operating income rebounded from the 2008 loss, principally because 2008 included $2.483 billion of litigation-settlement expense; 2009 settlement expense was $6.7 million. Excluding litigation settlements, operating expenses declined 6.9% in 2009.
- Operating cash flow rose to $1.378 billion from $413 million. The 2009 figure included approximately $946 million of litigation-settlement payments; 2008 cash flow was affected by settlement accruals and payments.
- Rebates and incentives rose 10.1% to $1.618 billion, or 24.1% of gross revenue versus 22.7% in 2008. Transaction-processing fees grew 14.9%, while domestic assessments were nearly flat and cross-border volume fees declined 2.5%.
Outlook, commentary, risks and unusual items
- No specific numerical earnings or revenue guidance is provided. Management cited long-term opportunity from the shift toward electronic payments and emphasized expansion in debit, prepaid, commercial payments, targeted geographies, processing services and merchant acceptance.
- Management described the economic environment as pressuring consumer spending, cross-border travel, card issuance and customer marketing. It also identified currency fluctuations and continued pricing and incentive pressure as constraints on growth.
- Interchange is subject to significant litigation, regulatory investigations and proposed legislation across multiple jurisdictions. The filing describes the European Commission’s cross-border fee decision and Mastercard’s appeal; under its 2009 undertakings, weighted-average EEA cross-border interchange fees were capped at 30 basis points for credit and 20 basis points for debit while the appeal remained pending.
- U.S. merchant interchange litigation includes claims seeking treble damages and injunctive relief; plaintiffs alleged damages in the tens of billions, which Mastercard disputed. Outcomes and potential liabilities were not estimable in the filing. Six American Express settlement payments remained, totaling up to $900 million. The company reported $869.7 million of litigation-settlement liabilities at year-end.
- Mastercard guarantees settlement for certain network transactions. Estimated gross Mastercard-branded settlement exposure was $26.4 billion, offset by $2.8 billion collateral, leaving $23.6 billion net uncollateralized exposure. Management reported no settlement losses in recent years but warned that concurrent customer failures could exceed available resources.
- Auction-rate securities remained illiquid: $180 million fair value at year-end, with $31.8 million of unrealized losses. The company did not consider those losses other-than-temporary, based on its expectation it could hold the securities until recovery or redemption.
- Management cited customer concentration (the five largest customers generated 28% of net revenue), competition, data security and fraud, network disruption, regulatory change, and cross-border travel as material risks. Management and PwC concluded internal control over financial reporting was effective; PwC issued an unqualified opinion on the financial statements.
Important facts for investors to verify
- Track whether transaction growth converts into GDV and net-revenue growth, particularly as credit activity, cross-border volumes and foreign exchange rates change.
- Review developments in interchange litigation and regulation, including the EU appeal, U.S. merchant cases, and potential fines, damages or changes to network rules.
- Assess the timing and cash cost of remaining litigation settlements, including the American Express payments, against operating cash generation and liquidity.
- Monitor settlement exposure, collateral coverage and customer credit quality; gross exposure increased year over year and net uncollateralized exposure was $23.6 billion.
- Verify the liquidity and valuation of the auction-rate securities and whether Mastercard’s assumptions about recovery remain supportable.
- Separate recurring performance from unusual items: 2008’s large settlement charge drove the reported loss and makes the year-over-year earnings rebound unusually pronounced.