| Notes to Financial Statements | |
| 6 Months Ended
Jun. 30, 2009
USD / shares
|
| Notes to Financial Statements [Abstract] | |
| Note 1. Summary of Significant Accounting Policies |
Note 1. Summary of Significant Accounting Policies
Organization MasterCard Incorporated and its consolidated subsidiaries, including MasterCard International Incorporated (MasterCard International) and MasterCard Europe sprl (MasterCard Europe) (together, MasterCard or the Company), provide payment solutions, including transaction processing and related services to customers principally in support of their credit, deposit access (debit), electronic cash and Automated Teller Machine (ATM) payment card programs, and travelers cheque programs. Our financial institution customers are generally either principal members (principal members) of MasterCard International, which participate directly in MasterCard Internationals business, or affiliate members of MasterCard International, which participate indirectly in MasterCard Internationals business through a principal member.
Consolidation and basis of presentation The consolidated financial statements include the accounts of MasterCard and its majority-owned and controlled entities, including the Companys variable interest entity. The Companys variable interest entity was established for the purpose of constructing the Companys global technology and operations center; it was not an operating entity and had no employees. In March 2009, the Company discontinued its use of the variable interest entity. See Note 12 (Consolidation of Variable Interest Entity) for further discussion. Intercompany transactions during the periods ended June30, 2009 and 2008 have been eliminated in consolidation. The Company follows accounting principles generally accepted in the United States of America (GAAP).
The balance sheet as of December31, 2008 was derived from the audited consolidated financial statements as of December31, 2008. The consolidated financial statements for the three and six months ended June30, 2009 and 2008 and as of June30, 2009 are unaudited, and in the opinion of management, include all normal recurring adjustments that are necessary to present fairly the results for interim periods. Due to seasonal fluctuations and other factors, the results of operations for the three and six months ended June30, 2009 are not necessarily indicative of the results to be expected for the full year.
The accompanying unaudited consolidated financial statements are presented in accordance with the U.S. Securities and Exchange Commission requirements of Quarterly Reports on Form 10-Q and, consequently, do not include all of the disclosures required by GAAP. Reference should be made to the MasterCard Incorporated Annual Report on Form 10-K for the year ended December31, 2008 for additional disclosures, including a summary of the Companys significant accounting policies.
In accordance with Statement of Financial Accounting Standards (SFAS) No.165, Subsequent Events (SFAS 165), issued in May 2009 by the Financial Accounting Standards Board (FASB), the Company has evaluated all subsequent events through July30, 2009 which is the date that the consolidated financial statements were issued.
Reclassification of prior period amounts and recent accounting pronouncements Certain prior period amounts have |
| Note 2. Earnings (Loss) Per Share |
Note 2. Earnings (Loss) Per Share
FSP EITF 03-6-1 became effective January1, 2009 with retrospective application. Under FSP EITF 03-6-1, unvested share-based payment awards which receive non-forfeitable dividend rights, or dividend equivalents, are considered participating securities and are required to be included in computing EPS under the two-class method.The Company declared non-forfeitable dividends on unvested restricted stock units and contingently issuable performance stock units (Unvested Units) which were granted prior to 2009. The Company has therefore calculated EPS under the two-class method pursuant to FSP EITF 03-6-1.
The components of basic and diluted EPS for common shares under the two-class method for the three months and six months ended June30 are as follows:
ThreeMonthsEndedJune30, SixMonthsEndedJune30,
2009 2008 2009 2008
Numerator:
Net income (loss) attributable to MasterCard $ 349,074 $ (746,653 ) $ 716,332 $ (299,775 )
Less: Net income (loss) allocated to Unvested Units 2,273 (5,863 ) 4,960 (2,162 )
Net income (loss) attributable to MasterCard allocated to common shares $ 346,801 $ (740,790 ) $ 711,372 $ (297,613 )
Denominator:
Basic EPS weighted average shares outstanding 129,743 130,073 129,689 130,750
Dilutive stock options and stock units 375 359
Diluted EPS weighted average shares outstanding 130,118 130,073 130,048 130,750
Earnings (Loss) per Share
Total Basic $ 2.67 $ (5.70 ) $ 5.49 $ (2.28 )
Total Diluted $ 2.67 $ (5.70 ) $ 5.47 $ (2.28 )
The calculation of diluted EPS for each of the three and six month periods ended June30, 2009 excluded approximately 288 stock options because the effect would be antidilutive. The calculation of diluted EPS for the six months ended June30, 2009 excluded approximately 1 restricted stock unit because the effect would be antidilutive. The calculation of diluted loss per share for each of the three and six month periods ended June30, 2008 excluded approximately 1,080 restricted stock units and 835 stock options because the effect would be antidilutive.
The following table compares EPS as originally reported and EPS under the two-class method, pursuant to FSP EITF 03-6-1, to quantify the impact of the new standard on EPS for the three and six months ended June30, 2008.
PeriodsendedJune30,2008
Threemonths Sixmonths
Basic - as originally reported $ (5.74 ) $ (2.29 )
Basic - pursuant to FSP EITF 03-6-1 (5.70 ) (2.28 )
Impact of FSP EITF 03-6-1 on basic EPS $ 0.04 $ 0.01
Diluted - as originally reported $ (5.74 ) $ (2.29 )
Diluted - pursuant to FSP EITF 03-6-1 (5.70 ) (2.28 )
Impact of FSP EITF 03-6-1 on dilute |
| Note 3. Non-Cash Investing and Financing Activities |
Note 3. Non-Cash Investing and Financing Activities
The following table includes non-cash investing and financing information for the six month periods ended June30:
2009 2008
Dividends declared but not yet paid $ 19,671 $ 19,684
Liabilities assumed related to investments in affiliates 8,750 4 20,432 3
Municipal bonds cancelled 154,000 1
Revenue bonds received (154,000 )2
Building and land assets recorded pursuant to capital lease (154,000 )2
Capital lease obligation 154,000 2
1
See Note 12 (Consolidation of Variable Interest Entity) for further details.
2
See Note 8 (Property, Plant, and Equipment) for further details.
3
Amount due in 2011.
4
Amounts to be extinguished in 2013 and 2016.
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| Note 4. Fair Value |
Note 4. Fair Value
Financial Instruments Recurring Measurements
Pursuant to the provisions of FSP FAS 107-1 and APB 28-1, the Company is disclosing the estimated fair values as of June30, 2009 of the financial instruments that are within the scope of SFAS 107, as well as the method(s) and significant assumptions used to estimate the fair value of those financial instruments. Futhermore, pursuant to the provisions of SFAS No.157, Fair Value Measurements (SFAS 157), the Company classifies its fair value measurements in a three-level hierarchy (the Valuation Hierarchy).
The distribution of the Companys financial instruments which are measured at fair value on a recurring basis within the Valuation Hierarchy, is as follows:
Quoted Prices in Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Fair Value at June30, 2009
Municipal bonds1 $ $ 497,736 $ $ 497,736
Taxable short-term bond funds 107,620 107,620
Auction rate securities 187,000 187,000
Foreign currency forward contracts (15,982 ) (15,982 )
Other 47 47
Total $ 107,667 $ 481,754 $ 187,000 $ 776,421
Quoted Prices in Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Fair Value at December31,2008
Municipal bonds1 $ $ 485,490 $ $ 485,490
Taxable short-term bond funds 102,588 102,588
Auction rate securities 191,760 191,760
Foreign currency forward contracts 33,731 33,731
Other 17 17
Total $ 102,605 $ 519,221 $ 191,760 $ 813,586
1
Available-for-sale municipal bonds are carried at fair value and are included in the above tables. However, held-to-maturity municipal bonds are carried at amortized cost and excluded from the above tables.
The fair value of the Companys available-for-sale municipal bonds are based on quoted prices for similar assets in active markets and are therefore included in level 2 of the Valuation Hierarchy.
The fair value of the Companys short-term bond funds are based on quoted prices and are therefore included in Level 1 of the Valuation Hierarchy.
The auction rate securities (ARS) investments have been classified within level 3 of the Valuation Hierarchy as their valuation requires substantial judgment and estimation of factors that are not currently observable in the market due to the lack of trading in the securities. This valuation may be revised in future periods as market conditions evolve. Pursuant to the provisions of FSP FAS 157-4, the Company has considered the lack of liquidity in the ARS market and the lack of comparable, orderly transactions when estimating the fair value of its ARS portfolio. Therefore, the Company continued to utilize the income approach, which included a discounted ca |
| Note 5. Investment Securities |
Note 5. Investment Securities
Amortized Costs and Fair Values Available-for-Sale Investment Securities:
The major categories of the Companys available-for-sale investment securities, for which unrealized gains and losses are recorded as a separate component of other comprehensive income (loss) on the consolidated statements of comprehensive income (loss), and their respective cost basis and fair values are as follows:
Amortized Cost Gross Unrealized Gain Gross Unrealized Loss1 Fair Value at June30, 2009
Municipal bonds $ 480,549 $ 17,826 $ (639 ) $ 497,736
Taxable short-term bond funds 104,367 3,253 107,620
Auction rate securities 233,750 (46,750 ) 187,000
Other 90 (43 ) 47
Total $ 818,756 $ 21,079 $ (47,432 ) $ 792,403
Amortized Cost Gross Unrealized Gain Gross Unrealized Loss1 Fair Value at December31,2008
Municipal bonds $ 473,746 $ 12,771 $ (1,027 ) $ 485,490
Taxable short-term bond funds 102,588 102,588
Auction rate securities 239,700 (47,940 ) 191,760
Other 127 (110 ) 17
Total $ 816,161 $ 12,771 $ (49,077 ) $ 779,855
1
The majority of the unrealized losses relate to ARS, which have been in an unrealized loss position longer than 12 months, but have not been deemed other-than-temporarily impaired.
The municipal bond portfolio is comprised of tax exempt bonds and is diversified across states and sectors. The portfolio has an average credit quality of double-A. Municipal bonds in a gross unrealized loss position are not considered other-than temporarily impaired due to their high credit quality.
The short-term bond funds invest in fixed income securities, including corporate bonds, mortgage-backed, and asset-backed securities.
The Company holds investments in ARS. Interest on these securities is exempt from U.S. federal income tax and the interest rate on the securities typically resets every 35 days. The securities are fully collateralized by student loans with guarantees, ranging from approximately 95% to 98% of principal and interest, by the U.S. government via the Department of Education.
Beginning on February11, 2008, the auction mechanism that normally provided liquidity to the ARS investments began to fail. Since mid-February 2008, all 44 investment positions in the Companys ARS investment portfolio have experienced failed auctions. The securities for which auctions have failed have continued to pay interest in accordance with the contractual terms of such instruments and will continue to accrue interest and be auctioned at each respective reset date until the auction succeeds, the issuer redeems the securities or they mature. As of June30, 2009, the ARS market remained illiquid but issuer call and redemption activity in the ARS student loan sector has occurred periodically since the auctions began to fail. During the three months ending June30, 20 |
| Note 6. Prepaid Expenses |
Note 6. Prepaid Expenses
Prepaid expenses consisted of the following:
June30, 2009 December31, 2008
Customer and merchant incentives $ 415,743 $ 397,563
Advertising 34,078 45,608
Income taxes 78,147
Data processing 36,166 24,455
Other 27,270 48,081
Total prepaid expenses 591,404 515,707
Prepaid expenses, current (284,647 ) (213,612 )
Prepaid expenses, long-term $ 306,757 $ 302,095
Prepaid customer and merchant incentives represent payments made to customers and merchants under business agreements. |
| Note 7. Other Assets |
Note 7. Other Assets
Other assets consisted of the following:
June30, 2009 December31, 2008
Customer and merchant incentives $ 95,636 $ 46,608
Cost and equity method investments 36,130 12,500
Cash surrender value of keyman life insurance 21,461 18,552
Other 28,254 21,356
Total other assets 181,481 99,016
Other assets, current (75,037 ) (32,619 )
Other assets, long-term $ 106,444 $ 66,397
Certain customer and merchant business agreements provided incentives upon entering into the agreement. As of June30, 2009 and December31, 2008, other assets included amounts to be paid for these incentives and the related liability was included in accrued expenses. Once the payment is made, the liability is relieved and the other asset is reclassified to a prepaid expense.
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| Note 8. Property, Plant and Equipment |
Note 8. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
June30, 2009 December31, 2008
Building and land $ 388,163 $ 216,670
Equipment 270,142 250,395
Furniture and fixtures 53,356 51,124
Leasehold improvements 53,024 66,878
764,685 585,067
Less accumulated depreciation and amortization (307,935 ) (278,269 )
$ 456,750 $ 306,798
Effective March1, 2009, MasterCard executed a new ten-year lease between MasterCard, as tenant, and the Missouri Development Finance Board (MDFB), as landlord, for MasterCards global technology and operations center located in OFallon, Missouri, called Winghaven (see Note 12 (Consolidation of Variable Interest Entity)). The lease includes a bargain purchase option and is thus classified as a capital lease. The building and land assets and capital lease obligation have been recorded at $154,000, which represents the lesser of the present value of the minimum lease payments and the fair value of the building and land assets. The Company received refunding revenue bonds issued by MDFB in the exact amount, $154,000, and with the same payment terms as the capital lease and which contain the legal right of setoff with the capital lease. The Company has netted its investment in the MDFB refunding revenue bonds and the corresponding capital lease obligation in the consolidated balance sheet. The related leasehold improvements for Winghaven will continue to be amortized over the economic life of the improvements.
As of June30, 2009 and December31, 2008, other capital leases of $33,609 and $46,794, respectively, were included in equipment. Accumulated amortization of these capital leases was $21,411 and $36,180 as of June30, 2009 and December31, 2008, respectively.
Depreciation expense for the above property, plant and equipment, including amortization for capital leases was $18,828 and $35,404 for the three and six months ended June30, 2009, respectively. Depreciation expense for the above property, plant and equipment, including amortization for capital leases was $14,723 and $28,608 for the three and six months ended June30, 2008, respectively. |
| Note 9. Accrued Expenses |
Note 9. Accrued Expenses
Accrued expenses consisted of the following:
June30, 2009 December31, 2008
Customer and merchant incentives $ 482,578 $ 526,722
Personnel costs 238,752 296,497
Taxes 80,929 20,685
Advertising 74,909 89,567
Other 78,110 98,590
Total accrued expenses $ 955,278 $ 1,032,061
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| Note 10. Pension Plans |
Note 10. Pension Plans
The Company maintains a non-contributory, qualified, defined benefit pension plan (the Qualified Plan) with a cash balance feature covering substantially all of its U.S. employees hired before July1, 2007. The Qualified Plan experienced a steep decline in the fair value of plan assets for the year ended December31, 2008, which resulted in a significant increase in the actuarial loss component of accumulated other comprehensive income as of December31, 2008. The increases in net periodic pension cost, shown below, for the three and six months ended June30, 2009 versus the same periods in 2008 were primarily due to the amortization of actuarial loss into pension expense. Additionally, the Company has an unfunded non-qualified supplemental executive retirement plan (the Non-qualified Plan) that provides certain key employees with supplemental retirement benefits in excess of limits imposed on qualified plans by U.S. tax laws. The term Pension Plans includes both the Qualified Plan and the Non-qualified Plan. The net periodic pension cost for the Pension Plans was as follows:
ThreeMonthsEndedJune30, SixMonthsEndedJune30,
2009 2008 2009 2008
Service cost $ 4,392 $ 4,995 $ 8,784 $ 9,990
Interest cost 3,381 3,410 6,762 6,819
Expected return on plan assets (3,121 ) (4,007 ) (6,242 ) (8,015 )
Amortization:
Actuarial loss 2,159 418 4,318 837
Prior service credit (571 ) (582 ) (1,142 ) (1,164 )
Net periodic pension cost $ 6,240 $ 4,234 $ 12,480 $ 8,467
The Company made voluntary contributions totaling $17,000 and $31,000 to the Qualified Plan during the three and six months ended June30, 2009, respectively. The Company continues to evaluate the Qualified Plans funded status and whether additional contributions will be made during 2009. No contributions were made to the Qualified Plan during the three or six months ended June30, 2008. |
| Note 11. Postemployment and Postretirement Benefits |
Note 11. Postemployment and Postretirement Benefits
The Company maintains a postretirement plan (the Postretirement Plan) providing health coverage and life insurance benefits for substantially all of its U.S. employees and retirees hired before July1, 2007. Net periodic postretirement benefit cost for the three and six months ended June30 was as follows:
ThreeMonthsEndedJune30, SixMonthsEndedJune30,
2009 2008 2009 2008
Service cost $ 434 $ 488 $ 868 $ 976
Interest cost 906 822 1,812 1,644
Amortization:
Actuarial (gain) (130 ) (259 )
Transition obligation 53 54 106 107
Net periodic postretirement benefit cost $ 1,393 $ 1,234 $ 2,786 $ 2,468
The Company does not make any contributions to its Postretirement Plan other than funding benefits payments.
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| Note 12. Consolidation of Variable Interest Entity |
Note 12. Consolidation of Variable Interest Entity
As discussed in Note 8 (Property, Plant and Equipment), the Company executed a new lease agreement for Winghaven, effective March1, 2009. In conjunction with entering into the new lease agreement, the Company terminated the original synthetic lease agreement for Winghaven, which included a ten-year term with MCI OFallon 1999 Trust (the Trust) as the lessor. The Trust, which was a variable interest entity, was established for a single discrete purpose, was not an operating entity, had a limited life and had no employees. The Trust had financed Winghaven through a combination of a third party equity investment in the amount of $4,620 and the issuance of 7.36 percent Series A Senior Secured Notes (the Secured Notes) with an aggregate principal amount of $149,380 and a maturity date of September1, 2009. MasterCard International executed a guarantee of 85.15 percent of the aggregate principal amount of the Secured Notes outstanding, for a total of $127,197. Additionally, upon the occurrence of specific events of default, MasterCard International guaranteed the repayment of the total outstanding principal and interest on the Secured Notes and agreed to take ownership of the facility. During 2004, MasterCard Incorporated became party to the guarantee and assumed certain covenant compliance obligations, including financial reporting and maintenance of a certain level of consolidated net worth. As the primary beneficiary of the Trust, the Company had consolidated the assets and liabilities of the Trust in its consolidated financial statements.
The original Winghaven lease agreement permitted MasterCard International to purchase the facility after August31, 2006, upon 180 days notice, and extend the lease structure. On August29, 2008, MasterCard International exercised its option to extend the lease agreement for one additional ten-year term and notified the equity investor and holders of the Secured Notes of its intent to repay the obligations issued through the Trust. The repayment of the aggregate outstanding principal and accrued interest on the Secured Notes and investor equity was effective March1, 2009 and the guarantee obligations of MasterCard International and MasterCard Incorporated were terminated. The aggregate principal amount and interest plus a make-whole amount repaid to the holders of Secured Notes and the equity investor was $164,572. The make-whole amount of $4,874 included in the repayment represented the discounted value of the remaining principal and interest on the Secured Notes, less the outstanding principal balance and an equity investor premium. As a result of the transaction, the $154,000 of short-term municipal bonds originally issued in 1999 were cancelled.
The Trust is no longer considered a variable interest entity and is no longer consolidated by the Company. During the period when the Trust was a consolidated entity within the three and six month periods ended June30, 2009 and 2008, its operations had no impact on net income. However, interest income and interest expense were increased by $6,773 in both the three and six month periods ended June30, 2009 and |
| Note 13. Share Based Payment and Other Benefits |
Note 13. Share Based Payment and Other Benefits
On March1, 2009, the Company granted approximately 239 restricted stock units, 155 stock options and 45 performance units under the MasterCard Incorporated 2006 Long-Term Incentive Plan (LTIP). The fair value of the restricted stock units and performance units, based on the closing price of the ClassA common stock, par value $.0001 per share, on the New York Stock Exchange on February27, 2009, the last business day prior to the date of grant, was $158.03. The fair value of the stock options estimated on the date of grant using a Black-Scholes option pricing model was $69.09. The restricted stock units and performance units will primarily vest on or about February29, 2012. The stock options vest ratably over four years and expire ten years from the date of grant. Compensation expense is recorded net of estimated forfeitures over the shorter of the vesting period or the date the individual becomes eligible to retire under the LTIP. The Company uses the straight-line method of attribution over the requisite service period for expensing equity awards.
With regard to the performance units granted on March1, 2009, whether or not the performance stock units will vest will be based upon MasterCard performance against a predetermined return on equity goal, with an average of return on equity over the three-year period commencing January1, 2009 yielding threshold, target or maximum performance, with a potential adjustment determined at the discretion of the MasterCard Human Resources and Compensation Committee using subjective quantitative and qualitative goals expected to be established at the beginning of each year in the performance period from 2009-2011. These goals are expected to include MasterCard performance against internal management metrics and external relative metrics. These performance units have been classified as equity awards, will be settled by delivering stock to the employees and contain service and performance conditions. Given that the performance terms are subjective and not fixed on the date of grant, the performance units will be remeasured at the end of each reporting period, at fair value, until the time the performance conditions are fixed and the ultimate number of shares to be issued is determined. Estimates are adjusted as appropriate. Compensation expense is calculated using the number of performance stock units expected to vest; multiplied by the period ending price of a share of MasterCards ClassA common stock; on the New York Stock Exchange; less previously recorded compensation expense. |
| Note 14. Stockholders Equity |
Note 14. Stockholders Equity
In February 2009, the Companys Board of Directors authorized the conversion and sale or transfer of up to 11,000 shares of Class B common stock into ClassA common stock. In May 2009, the Company implemented and completed a conversion program in which approximately 10,871 authorized shares of Class B common stock were converted into an equal number of ClassA common stock and subsequently sold or transferred to public investors.
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| Note 15. Commitments |
Note 15. Commitments
At June30, 2009, the Company had the following future minimum payments due under non-cancelable agreements:
Total Capital Leases Operating Leases Sponsorship, Licensing Other
Remainder of 2009 $ 190,078 $ 3,543 $ 14,833 $ 171,702
2010 195,167 4,945 21,952 168,270
2011 128,028 4,165 14,021 109,842
2012 95,118 3,096 11,066 80,956
2013 52,568 36,838 7,369 8,361
Thereafter 23,181 19,736 3,445
Total $ 684,140 $ 52,587 $ 88,977 $ 542,576
Included in the table above are capital leases with imputed interest expense of $7,981 and a net present value of minimum lease payments of $44,606. In addition, at June30, 2009, $52,236 of the future minimum payments in the table above for operating leases, sponsorship, licensing and other agreements was accrued. Consolidated rental expense for the Companys office space, which is recognized on a straight line basis over the life of the lease, was approximately $7,807 and $21,532 for the three and six months ended June30, 2009, respectively. Consolidated rental expense for the Companys office space, which is recognized on a straight line basis over the life of the lease, was approximately $10,369 and $20,335 for the three and six months ended June30, 2008, respectively. Consolidated lease expense for automobiles, computer equipment and office equipment was $2,311 and $4,168 for the three and six months ended June30, 2009, respectively. Consolidated lease expense for automobiles, computer equipment and office equipment was $2,660 and $5,148 for the three and six months ended June30, 2008, respectively. |
| Note 16. Obligations Under Litigation Settlements |
Note 16. Obligations Under Litigation Settlements
On June24, 2008, MasterCard entered into a settlement agreement (the American Express Settlement) with American Express Company (American Express) relating to the U.S. federal antitrust litigation between MasterCard and American Express. The American Express Settlement ended all existing litigation between MasterCard and American Express. Under the terms of the American Express Settlement, MasterCard is obligated to make 12 quarterly payments of up to $150,000 per quarter beginning in the third quarter of 2008. MasterCards maximum nominal payments will total $1,800,000. The amount of each quarterly payment is contingent on the performance of American Expresss U.S. Global Network Services business. The quarterly payments will be in an amount equal to 15% of American Expresss U.S. Global Network Services billings during the quarter, up to a maximum of $150,000 per quarter. If, however, the payment for any quarter is less than $150,000, the maximum payment for subsequent quarters will be increased by the difference between $150,000 and the lesser amount that was paid in any quarter in which there was a shortfall. MasterCard has assumed American Express will achieve these financial hurdles. MasterCard recorded the present value of $1,800,000, at a 5.75% discount rate, or $1,649,345 for the year ended December31, 2008 with respect to the American Express Settlement.
In 2003, MasterCard entered into a settlement agreement (the U.S. Merchant Lawsuit Settlement) with various U.S. merchants. Under the terms of the U.S. Merchant Lawsuit Settlement, the Company was required to pay $125,000 in 2003 and $100,000 annually each December from 2004 through 2012. In addition, in 2003, several other lawsuits were initiated by merchants who opted not to participate in the plaintiff class in the U.S. merchant lawsuit. The opt-out merchant lawsuits were not covered by the terms of the U.S. Merchant Lawsuit Settlement and all have been individually settled. On July1, 2009, MasterCard entered into an agreement (the Prepayment Agreement) with plantiffs of the U.S. Merchant Lawsuit Settlement whereby MasterCard will make a prepayment of its remaining $400,000 in payment obligations at a discounted amount of $335,000 on September30, 2009. The Company continues to classify the carrying value of its liability related to the U.S. Merchant Lawsuit Settlement as current and non-current liabilities according to the original payment terms, which were legally in effect as of June30, 2009, pending court approval and finalization of the Prepayment Agreement.
The Company recorded liabilities for certain litigation settlements in prior periods. Total liabilities for litigation settlements changed from December31, 2008, as follows:
Balance as of December31, 2008 $ 1,736,298
Interest accretion on American Express Settlement 36,359
Interest accretion on U.S. Merchant Lawsuit Settlement 13,606
Payments on American Express Settlement (300,000 )
Other payments, accruals and accretion, net (3,673 )
Balance as of June30, 2009 $ 1,482,590
See Not |
| Note 17. Income Taxes |
Note 17. Income Taxes
The effective income tax rates were 35.0% and 39.0% for the three months ended June30, 2009 and 2008, respectively, and 34.1% and 43.9% for the six months ended June30, 2009 and 2008, respectively. The difference in the effective tax rates for the periods is due to the effect of the charge for the American Express Settlement recorded in the three and six month periods ended June30, 2008, which resulted in a more favorable mix of pre-tax income (loss) for the three and six month periods ended June30, 2008 as compared to the three and six month periods ended June30, 2009.
During the three and six months ended June30, 2009, the Companys unrecognized tax benefits related to tax positions taken in the current period increased by $6,200 and $17,500, respectively, all of which would affect the Companys effective tax rate, if recognized. |
| Note 18. Legal and Regulatory Proceedings |
Note 18. Legal and Regulatory Proceedings
MasterCard is a party to legal and regulatory proceedings with respect to a variety of matters in the ordinary course of business. Some of these proceedings involve complex claims that are subject to substantial uncertainties and unascertainable damages. Therefore, the probability of loss and an estimation of damages are not possible to ascertain at present. Accordingly, except as discussed below, MasterCard has not established reserves for any of these proceedings. MasterCard has recorded liabilities for certain legal proceedings which have been settled through contractual agreements. Except as described below, MasterCard does not believe that any legal or regulatory proceedings to which it is a party would have a material impact on its results of operations, financial position, or cash flows. Although MasterCard believes that it has strong defenses for the litigations and regulatory proceedings described below, it could in the future incur judgments or fines, enter into settlements of claims or be required to change its business practices in ways that could have a material adverse effect on its results of operations, financial position or cash flows. Notwithstanding MasterCards belief, in the event it were found liable in a large class-action lawsuit or on the basis of a claim entitling the plaintiff to treble damages or under which it were jointly and severally liable, charges it may be required to record could be significant and could materially and adversely affect its results of operations, cash flow and financial condition, or, in certain circumstances, even cause MasterCard to become insolvent. Moreover, an adverse outcome in a regulatory proceeding could result in fines and/or lead to the filing of civil damage claims and possibly result in damage awards in amounts that could be significant and could materially and adversely affect the Companys results of operations, cash flows and financial condition.
Department of Justice Antitrust Litigation and Related Private Litigations
In October 1998, the U.S. Department of Justice (DOJ) filed suit against MasterCard International, Visa U.S.A., Inc. and Visa International Corp. in the U.S. District Court for the Southern District of New York alleging that both MasterCards and Visas governance structure and policies violated U.S. federal antitrust laws. First, the DOJ claimed that dual governance the situation where a financial institution has a representative on the Board of Directors of MasterCard or Visa while a portion of its card portfolio is issued under the brand of the other associationwas anti-competitive and acted to limit innovation within the payment card industry. Second, the DOJ challenged MasterCards Competitive Programs Policy (CPP) and a Visa bylaw provision that prohibited financial institutions participating in the respective associations from issuing competing proprietary payment cards (such as American Express or Discover). The DOJ alleged that MasterCards CPP and Visas bylaw provision acted to restrain competition.
On October9, 2001, District Court Judge Barbara Jones issued an opinion upholding the legality and pro- |
| Note 19. Settlement, Travelers Cheque and Other Risk Management |
Note 19. Settlement, Travelers Cheque and Other Risk Management
MasterCard Internationals rules generally guarantee the payment of certain MasterCard, Cirrus and Maestro branded transactions between its principal members. The term and amount of the guarantees are unlimited. Settlement risk is the exposure to members under MasterCard Internationals rules (Settlement Exposure), due to the difference in timing between the payment transaction date and subsequent settlement. Settlement Exposure is estimated using the average daily card charges during the quarter multiplied by the estimated number of days to settle. The Company has global risk management policies and procedures, which include risk standards, to provide a framework for managing the Companys settlement risk. Member-reported transaction data and the transaction clearing data underlying the settlement risk calculation may be revised in subsequent reporting periods.
In the event that MasterCard International effects a payment on behalf of a failed member, MasterCard International may seek an assignment of the underlying receivables. Subject to approval by the Board of Directors, members may be charged for the amount of any settlement loss incurred during the ordinary activities of the Company.
MasterCard requires certain members that are not in compliance with the Companys risk standards in effect at the time of review to post collateral, typically in the form of letters of credit and bank guarantees. This requirement is based on management review of the individual risk circumstances for each member that is out of compliance. In addition to these amounts, MasterCard holds collateral to cover variability and future growth in member programs. The Company also holds collateral to pay merchants in the event of merchant bank/acquirer failure. Although it is not contractually obligated under MasterCard Internationals rules to effect such payments, the Company may elect to do so to protect brand integrity. MasterCard monitors its credit risk portfolio on a regular basis and the adequacy of collateral on hand. Additionally, from time to time, the Company reviews its risk management methodology and standards. As such, the amounts of estimated settlement risk are revised as necessary.
Estimated Settlement Exposure, and the portion of the Companys uncollateralized Settlement Exposure for MasterCard-branded transactions that relates to members that are deemed not to be in compliance with, or that are under review in connection with, the Companys risk management standards, were as follows:
June30, 2009 December31, 2008
MasterCard-branded transactions:
Gross Settlement Exposure $ 23,462,978 $ 21,179,044
Collateral held for Settlement Exposure (2,793,069 ) (1,813,171 )
Net uncollateralized Settlement Exposure $ 20,669,909 $ 19,365,873
Uncollateralized Settlement Exposure attributable to non-compliant members $ 166,838 $ 56,795
Cirrus and Maestro transactions:
Gross Settlement Exposure $ 3,193,465 $ 3,236,175
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| Note 20. Foreign Exchange Risk Management |
Note 20. Foreign Exchange Risk Management
The Company enters into foreign currency forward contracts to manage risk associated with anticipated receipts and disbursements which are either transacted in a non-functional currency or valued based on a currency other than its functional currencies. The Company also enters into foreign currency forward contracts to offset possible changes in value due to foreign exchange fluctuations of assets and liabilities denominated in foreign currencies. The objective of this activity is to reduce the Companys exposure to transaction gains and losses resulting from fluctuations of foreign currencies against its functional currencies. On January1, 2009, the Company adopted SFAS 161. The adoption of SFAS 161 had no financial impact on the Companys consolidated financial statements; SFAS 161 required additional financial statement disclosures. The Company has applied the requirements of SFAS 161 on a prospective basis. Accordingly, disclosures related to interim periods prior to the date of adoption have not been presented.
The Company does not designate foreign currency forward contracts as hedging instruments pursuant to FASB Statement No.133, Accounting for Derivative Instruments and Hedging Activities. The Company records the change in the estimated fair value of the outstanding forward contacts at the end of the reporting period to its consolidated balance sheet and consolidated statement of operations.
At June30, 2009, all contracts to purchase and sell foreign currency had been entered into with customers of MasterCard International. MasterCards outstanding forward contracts are classified by functional currency as summarized below:
U.S.Dollar Functional Currency
June30, 2009 December31, 2008
Notional EstimatedFair Value1 Notional EstimatedFair Value1
Commitments to purchase foreign currency $ 33,297 $ 200 $ 292,538 $ 21,913 1
Commitments to sell foreign currency 246,826 (13,431 ) 154,187 12,227 1
Balance Sheet Location:
Accounts Receivable $ 333 $ 34,227
Other Current Liabilities (13,564 ) (87 )
Euro Functional Currency
June 30, 2009 December 31, 2008
Notional Estimated Fair Value1 Notional Estimated Fair Value1
Commitments to purchase foreign currency $ 88,753 $ (2,378 ) $ $
Commitments to sell foreign currency 65,916 (373 ) 66,405 (409 )1
Balance Sheet Location:
Accounts Receivable $ 389 $ 290
Other Current Liabilities (3,140 ) (699 )
Amount and Location of Gain (Loss) Recognized in Income
ThreeMonths EndedJune30, SixMonths EndedJune30,
Derivatives Not Designated As Hedging Instruments
ForeignCurrencyForwardContracts
General and administrative $ (17,759 ) $ (21,747 )
Revenues (923 ) 3,289
Total $ (18,682 ) $ (18,458 )
1
Amounts represent g |
