UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20152018
Or
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| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-32877
Mastercard Incorporated
(Exact name of registrant as specified in its charter)
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| Delaware | 13-4172551 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) |
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| 2000 Purchase Street | 10577 |
| Purchase, NY | (Zip Code) |
| (Address of principal executive offices) | |
(914) 249-2000
(Registrant’s telephone number, including area code)
Title of each Class Name of each exchange on which registered
Class A common stock, par value $0.0001 per share New York Stock Exchange
Securities registered pursuant to Section 12(g): Class B common stock, par value $0.0001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):
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| Large accelerated filer | | x | | Accelerated filer | | o |
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| Non-accelerated filer | | o (do not check if a smaller reporting company) | | Smaller reporting company | | o |
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| | | | Emerging growth company | | o |
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| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act. | | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of the registrant’sregistrant’s Class A common stock, par value $0.0001 per share, held by non-affiliates (using the New York Stock Exchange closing price as of June 30, 2015,29, 2018, the last business day of the registrant’sregistrant’s most recently completed second fiscal quarter) was approximately $103.7$179.5 billion. There is currently no established public trading market for the registrant’sregistrant’s Class B common stock, par value $0.0001 per share. As of February 4, 2016,8, 2019, there were 1,089,482,2181,014,237,644 shares outstanding of the registrant’s Class A common stock, par value $0.0001 per share and 21,256,53011,671,404 shares outstanding of the registrant’s Class B common stock, par value $0.0001 per share.
Portions of the registrant’sregistrant’s definitive proxy statement for the 20162019 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.
MASTERCARD INCORPORATED
FISCAL YEAR 20152018 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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In this Report on Form 10-K (“Report”), references to the “Company,” “MasterCard,“Mastercard,” “we,” “us” or “our” refer to the MasterCard brand generally, and to the business conducted by MasterCardMastercard Incorporated and its consolidated subsidiaries, including our operating subsidiary, MasterCardMastercard International Incorporated.Incorporated, and to the Mastercard brand.
Forward-Looking Statements
This Report contains forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts may be forward-looking statements. When used in this Report, the words “believe”, “expect”, “could”, “may”, “would”, “will”, “trend” and similar words are intended to identify forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements that relate to the Company’s future prospects, developments and business strategies.
Many factors and uncertainties relating to our operations and business environment, all of which are difficult to predict and many of which are outside of our control, influence whether any forward-looking statements can or will be achieved. Any one of those factors could cause our actual results to differ materially from those expressed or implied in writing in any forward-looking statements made by MasterCardMastercard or on its behalf, including, but not limited to, the following factors:
regulation directly related to the payments system-related legalindustry (including regulatory, legislative and regulatory challenges (includinglitigation activity with respect to interchange fees,rates, surcharging and the extension of current regulatory activity to additional jurisdictions or products);
the impact of preferential or protective government actions;actions
regulation of privacy, data protection, security and security;the digital economy
regulation that directly or indirectly applies to which we are subjectus based on our participation in the global payments industry;industry (including anti-money laundering, counter terrorist financing, economic sanctions and anti-corruption; account-based payment systems; issuer practice regulation; and regulation of internet and digital transactions)
the impact of changes in tax laws, as well as regulations and interpretations of such laws or challenges to our tax positions
potential or incurred liability and limitations on business related to any litigation or litigation settlements
the impact of competition in the global payments industry (including disintermediation and pricing pressure);
the challenges relating to rapid technological developments and changes;changes
the challenges relating to operating a real-time account-based payment system and to working with new customers and end users
the impact of information security failures,incidents, account data breaches, fraudulent activity or service disruptions on our business;
issues related to our relationships with our financial institution customers (including loss of substantial business from significant customers, competitor relationships with our customers and banking industry consolidation);
the impact of our relationships with other stakeholders, including issuers and acquirers, merchants and governments;governments
exposure to loss or illiquidity due to settlement guarantees andour role as guarantor, as well as other significant third-party obligations;contractual obligations
the impact of global economic, political, financial and politicalsocietal events and conditions including global financial market activity, declines in cross-border activity; negative trends in consumer spending and the effect of adverse currency fluctuation;
reputational impact, including impact related to brand perception account data breaches
the inability to attract, hire and fraudulent activity;retain a highly qualified and diverse workforce, or maintain our corporate culture
issues related to acquisition integration, strategic investments and entry into new businesses;
potential or incurred liability and limitations on business resulting from litigation; andbusinesses
issues related to our Class A common stock and corporate governance structure.structure
Please see “Risk Factors” in Part I, Item 1A for a complete discussion of these risk factors in Part I, Item 1A - Risk Factors.factors. We caution you that the important factors referenced above may not contain all of the factors that are important to you. Our forward-looking statements speak only as of the date of this Report or as of the date they are made, and we undertake no obligation to update our forward-looking statements.
PART I
ITEM 1. BUSINESS
Overview
MasterCardMastercard is a technology company in the global payments industry that connects consumers, financial institutions, merchants, governments, digital partners, businesses and businessesother organizations worldwide, enabling them to use electronic forms of payment instead of cash and checks. As the operator of what we believe is the world’s fastest payments network, we facilitate the processing of payment transactions,
including authorization, clearing and settlement, and deliver related products and services. We make payments easier and more efficient by creating a wide range of payment solutions and services using our family of well-known brands, including MasterCard®Mastercard®, Maestro® and Cirrus®. We are a multi-rail network. Through our core global payments processing network, we facilitate the switching (authorization, clearing and settlement) of payment transactions and deliver related products and services. With additional payment capabilities that include real-time account-based payments (including automated clearing house (“ACH”) transactions), we offer customers one partner to turn to for their payment needs for both domestic and cross-border transactions across multiple payment flows.We also provide value-added offerings such as safety and security products, information and analytics services, consulting, loyalty and reward programs information services and consulting.issuer and acquirer processing. Our network ispayment solutions are designed to ensure safety and security for the global payments system.
A typical transaction on our core network involves four participants in addition to us: cardholder (an individualaccount holder (a consumer who holds a card or uses another device enabled for payment), merchant, issuer (the cardholder’saccount holder’s financial institution), merchant and acquirer (the merchant’s financial institution). We do not issue cards, extend credit, determine or receive revenue from interest rates or other fees charged to cardholdersaccount holders by issuers, or establish the rates charged by acquirers in connection with merchants’ acceptance of our branded cards.products. In most cases, cardholderaccount holder relationships belong to, and are managed by, our financial institution customers.
We generate revenue by chargingrevenues from assessing our customers based on the gross dollar volume (“GDV”) of activity on the products that carry our brands, from the fees we charge to issuers and acquirersour customers for providing transaction processingswitching and from other payment-related products and services, as well as by assessing these customers based primarily onservices.
Our Performance
The following are our key financial and operational results for 2018:
1Non-GAAP results excludes the dollar volumeimpact of activity, Special Items and/or gross dollar volume (“GDV”), onforeign currency. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Results Overview” in Part II, Item 7 for the cardsreconciliation to the most direct comparable GAAP financial measures.
2 Adjusted to normalize for the effects of differing switching days between periods.
3 Adjusted for the deconsolidation of our Venezuelan subsidiaries in 2017. See “Management’s Discussion and other devices that carry our brands.Analysis of Financial Condition and Results of Operations - Financial Results- Revenue” in Part II, Item 7.
Our Strategy
We grow, diversify and build our business through a combination of organic growth and strategic investments. Our ability to grow our business is influenced by personal consumption expenditure (“PCE”) growth, driving cash and check transactions toward electronic forms of payment, increasing our share in electronic payments and providing value-added products and services. We achieveIn addition, growing our strategy by growing, diversifyingbusiness includes supplementing our core network with enhanced payment capabilities to capture new payment flows, such as business to business (“B2B”), person to person (“P2P”), business to consumer (“B2C”) and buildinggovernment payments, through a combination of product offerings and expanded solutions for our business.customers.
Grow. We focus on growing our core businessesbusiness globally, including growing our consumer credit, debit, prepaid and commercial products and solutions, andas well as increasing the number of payment transactions we process.switch. We also look to take advantage of the opportunities presented by the evolving ways people interact and transact in the growing digital economy. This includes expanding merchant access to electronic payments through new technologies in an effort to deliver a better consumer experience, while creating greater efficiencies and security.
Diversify. We look to diversify our business by focusing on:by:
diversifying our customer base in new and existing markets by working with partners such asnew customers, including governments, merchants, largefinancial technology companies, digital companies and other technology companies,players, mobile providers and other businesses;corporate businesses
encouraging use ofscaling our productscapabilities and solutionsbusiness into new geographies, including growing acceptance in areas that provide new opportunities formarkets with limited electronic payments such as transit and person-to-person transfers;
driving acceptance at small business merchants, including those who have not historically accepted electronic payments; andtoday
broadening financial inclusion for the unbanked and underbanked.underbanked
Build. We build our business by:
taking advantage of the opportunities presented by the evolving ways consumers interactcreating and transactacquiring differentiated products to provide unique, innovative solutions that we bring to market to support new payment flows, such as physicalreal-time account-based payment, Mastercard B2B Hub™ and digital payments converge; andMastercard Send™ platforms
using ourproviding services across data analytics, consulting, managed services, safety and security, productsloyalty and solutions, data analytics and loyalty solutions to add value.
We grow, diversify and build our business through a combination of organic growth and strategic investments, including acquisitions.processing
Strategic Partners. We work with a variety of stakeholders. We provide financial institutions with solutions to help them increase revenue and increaseby driving preference for their MasterCard-brandedMastercard-branded products. We help merchants, financial institutions and other organizations by delivering data-driven insights and other services tothat help them grow and create bettersimple and secure purchase experiences for consumers across physical and digital channels.customer experiences. We partner with large digital companies and other technology companies such as digital players and mobile providers and telecommunication companies to support theirdeliver digital payment solutions withpowered by our technology, expertise and security protocols. We help national and local governments drive increased financial inclusion and efficiency, reduce costs, increase transparency to reduce crime and corruption and advance social programs. For consumers, we provide better,faster, safer and more convenient ways to pay.pay and transfer funds.
Talent and Culture. Our success is driven by the skills, experience, integrity and mindset of the talent we hire. We attract and retain top talent from diverse backgrounds and industries by building a world-class culture based on decency, respect and inclusion in which people have opportunities to do purpose-driven work that impacts customers, communities and co-workers on a global scale. The diversity and skill sets of our people underpin everything we do.
Recent Business and Legal/Regulatory Developments
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| Digital Payments. Technology is increasingly changing the way people get information, interact with each other, shop and make purchases. As a result of these changes, digital commerce is growing significantly. In this digital environment, consumers continue to seek a seamless experience where their payment is simple, secure and familiar. These consumer demands are driving us to think and act differently. Our teams are innovating to create solutions that meet the needs of our consumers and merchants, and applying emerging technologies to maximize our opportunities from those needs. In 2018, we: |
supported the development and implementation of EMVCo’s global standards for a simple and unified digital experience for consumers, issuers and merchants in the form of a common checkout button. This button is designed to provide consumers the same convenience and security in a digital environment that they have launchedwhen shopping and extended productspaying in a store, make it easier for merchants to implement secure digital payments and platformsprovide issuers with improved fraud detection and prevention capability.
announced plans to enable token services on all cards, removing the primary account number from the transaction flow. Enabling these services will help make the payment process simpler, more seamless and more secure, while supporting our merchant partners in their card on file activities.
reinforced our support for contactless payments across all markets, including in Europe, where we are working with issuers, acquirers and merchants to ensure availability and support of contactless payments across the continent by 2020.
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| New payment flows. In order to help grow our business and offer more electronic payment options to consumers, businesses and governments, Mastercard has developed and enhanced solutions beyond the principal switching capabilities available on our core network. We believe this will allow us to capture more payment flows, including B2B, P2P, B2C and government disbursements. In 2018, we:
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advanced business development efforts around the world with our real-time account-based payments capabilities that take advantagewe acquired with Vocalink in 2017. These efforts include the launch of a real-time payment service in the growingU.S. in conjunction with The Clearing House that enables consumers and businesses to send and receive immediate payments.
combined our proprietary Mastercard Send assets with Vocalink strategic partnerships to enable financial institutions, financial technology companies (or fintechs), digital economy (includingcustomers and other businesses to send real-time payments to U.K. bank accounts. Mastercard Send will connect to Faster Payments, enabling a variety of use cases such as P2P payments and B2C disbursements. This effort is part of our continued expansion of Mastercard Send’s capabilities, connecting more people, businesses and governments to facilitate the Internettransfer of Things), where consumers are increasingly using technology to interact with merchants. Among our recent developments:funds quickly and securely both domestically and cross-border.
In 2015, we expanded the availabilityreach of MasterPass™, our global digitalVocalink’s Pay by Bank application in the United Kingdom, enabling real-time payments ecosystem. It provides an easydirectly from a consumer’s bank account using a mobile banking app, with real-time clearing and secure way to shop by storing payment information in one convenient and secure place and enabling consumers to access that information to makewithout the need for a payment with a simple click or touch.card.
We are using our digital technologies and security protocols to develop solutions to make shopping and selling experiences on mobile devices (such as smartphones) simpler, faster and safer for both consumers and merchants. In 2015, we continued to enhance the suite of digital token services we offer through our MasterCard Digital Enablement Service (MDES). We also launched the MDES Express program, a commercial framework that provides financial institutionsinvest in and digital participants (including large digital companies, merchants and other companies) the ability to quickly scale digital payment offerings to consumers, allowing connected devices to be used as a safe and secure way to pay for everyday shopping.
In 2015, we launched MasterCard Send™, a service that facilitates the delivery of funds via financial institutions from business to consumer and from consumers to consumers quickly and securely.
Safety and Security.Ourtest proprietary permission-based Blockchain, with an initial focus on the cross-border B2B payments space.
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| Safety and Security. As new technologies and cyber-security threats evolve, including organized cyber-crime and nation state attacks, there is a growing need to protect the security and resilience of the payments ecosystem for every stakeholder. It is critical to protect all transactional and personal data that is stored, processed or transmitted regardless of the device or channel used to make a purchase, while at the same time continuing to improve the payment experience for all stakeholders. We focus on security across networks, and it is embedded in our policies, products, systems and analytics to prevent fraud. In 2018, we: |
implemented EMVCo’s 3D Secure 2.0 specification as part of a new solution (launched with issuer and merchant partners globally) that supports app-based authentication, integration with digital wallets and browser-based e-commerce. This is embedded in our products, our systemscomplemented by biometrics, machine learning and our network,artificial intelligence solutions, alongside incremental transaction data, to help merchants seamlessly verify a consumer’s identity. At the same time, the solution reduces friction during the checkout process, as well as reduces fraud while increasing payment approvals.
continued to extend our analyticsinvestments in Artificial Intelligence (“AI”) by:
Ø introducing AI Express, a new accelerated technology implementation service to prevent fraud:help issuers, acquirers and merchants develop AI models to solve priority problems, including anti-money laundering, fraud, risk management and cybersecurity.
We continue to lead the migration to EMV®Ø scaling Decision Intelligence™, the global standard for chipour fraud scoring technology, to bring its fraud prevention benefitsscore billions of transactions in real time every day while increasing approvals and reducing false declines.
piloted biometric cards in multiple markets, placing fingerprint readers directly onto a card to our U.S. customers, consumers and merchants. In October 2015, we implemented a new liability hierarchy, making the issuer or merchant with the lowest level of security responsible for the financial impact of any fraudulent transactions they are involved with processing.
In 2015, we worked with customers to extend to consumers globally the benefit of “zero liability”, or no responsibility for counterfeit or lost card losses, in the event of fraud.
In 2015, we launched MasterCard Identity Check™, a suite of technology solutions that leverage biometrics to help authenticate a consumer’s identity.cardholder’s identity (as an alternative to a PIN or signature) using existing chip and contactless acceptance terminals.
Financial Inclusion. We are focusedmodified our rules so that signatures will no longer be required on addressing financial inclusion, reaching people without accesseither cards or receipts and merchants no longer need to an electronic account that allows themcapture or compare a signature at the point of sale, helping to storeprovide a faster checkout and use money. In 2015, we worked with governments across several geographies to develop and roll out electronic payments solutions and social payment distribution mechanisms.
Acquisitions and Investments. In 2015, we acquired two new businesses focused on expanding our footprint and enhancing critical capabilities, including in the area of data analytics with the acquisition of Applied Predictive Technologies.
Legal and Regulatory. We operate in a dynamic and rapidly evolving legal and regulatory environment, with heightened regulatory and legislative scrutiny and other legal challenges, particularly with respect to interchange fees (as discussed below under “Our Operations and Network”). Recent developments include:more advanced authentication methods.
European Union - In 2015, the European Commission issued a statement of objections related to our interchange fees and central acquiring rules within the European Economic Area. The statement of objections preliminarily concludes that these practices have anticompetitive effects, and the European Commission has indicated it intends to seek fines if it confirms these conclusions. We would not expect the EC to impose fines if we agree to business practice changes that address the EC’s concerns. Also in 2015, the European Union adopted legislation regulating electronic payments issued and acquired within the European Economic Area, including:
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| Inclusive Growth. We are dedicated to increasing the opportunity for individuals and micro and small merchants to achieve financial security and greater prosperity, with the benefits of economic growth shared among all segments of society. Together with our partners, we are more than two-thirds of the way toward an important initial step towards that goal by providing access to 500 million people previously excluded from financial services by 2020. We also help communities build the ecosystems that support usage. In 2018, we worked with governments and private sector partners across several geographies to develop and roll out electronic payments solutions, social payment distribution mechanisms and digital identity solutions. We organized a global network of cities to help city leaders address the challenges of urbanization and co-develop solutions to improve life for residents and visitors and promote economic growth. We also deployed our services, partnerships and technologies to develop platforms that help small business owners accept electronic payments, manage their records, access market information, build a financial footprint and use digital communications channels to receive training and business advice.
In 2018, we made an initial $100 million contribution to the Mastercard Impact Fund (formerly referred to as Mastercard’s Center for Inclusive Growth Fund), a non-profit charitable organization. This contribution is part of a $500 million commitment to support initiatives that focus on inclusive growth, such as financial inclusion, economic development, the future of work and data science for social impact.
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| Legal and Regulatory. We operate in a dynamic and rapidly evolving legal and regulatory environment, with heightened regulatory and legislative scrutiny, expansion of local regulatory schemes and other legal challenges, particularly with respect to interchange fees (as discussed below under “Our Operations and Network”). These challenges create both risks and opportunities for our industry. Our recent legal and regulatory developments include:
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Payments Regulation
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| Ø | a cap on consumer creditIn December 2018, we announced the anticipated resolution of an investigation by the European Commission (“EC”) related to the interregional interchange rates we set and debitour central acquiring rule within the European Economic Area (the “EEA”). With respect to interregional interchange fees, the proposed settlement included changes to those fees that, if accepted by the EC following market testing, would avoid prolonged litigation and gain certainty concerning our business practices. With respect to our historic central acquiring rule, the EC issued a negative decision in January 2019. The EC’s negative decision covers a period of 30 basis pointstime of less than two years before the rule’s modification in 2015. The decision does not require any modification of our current business practices but includes a fine of €571 million. We recorded a charge of $654 million in the fourth quarter of 2018 in relation to this matter. See Note 20 (Legal and 20 basis points, respectively (a significant reductionRegulatory Proceedings) to the consolidated financial statements included in fees to financial institutions), with the ability of EU member states to impose more restrictive domestic debit interchange levels;Part II, Item 8 for further discussion. |
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| Ø | restrictions on our “honor all cards” rule with respectSeveral jurisdictions have implemented payments regulation or initiated payments reviews in 2018. In the U.K., the Payment Systems Regulator (the “PSR”) published draft terms of reference for a formal review of card-acquiring services provided by Mastercard, Visa and other card scheme operators that could lead to products with different levelsfuture regulation. The European Commission expects to issue proposals in 2020 to revise the E.U. Interchange Fee Regulation. In Australia, the Productivity Commission released a report recommending, among other things, that regulators ban interchange fees by the end of interchange;2019 and consider regulating merchant service fees. In Brazil, the Central Bank implemented a weighted average and cap for domestic debit interchange. |
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| Ø | a prohibition of surcharging by merchants for products that are subjectJurisdictions around the globe continue to regulated interchange rates;implement or consider open banking initiatives. Initiatives such as the EEA’s revised Payment Services Directive (commonly referred to as “PSD2”) which went into effect in 2018, require financial institutions to provide third-party payment processors access to consumer payment accounts, as well as requiring additional verification information from consumers to complete transactions. Other jurisdictions considering open banking initiatives include Australia, Canada, Hong Kong, Japan, Singapore and the United States. |
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| Ø | The U.K. Treasury has extended the prohibition of rules that preventU.K. payment systems oversight to include our Vocalink business due to its role as a consumer from requesting a “co-badged” card (thatpayment service provider. |
Privacy and Data Protection
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| Ø | In 2018, the European Union General Data Protection Regulation (the “GDPR”) became effective. The GDPR is a creditdata protection regulation that has increased our compliance burden for collecting, using and processing personal and sensitive data of EEA residents. We have reviewed our products, services and processes involving EEA personal data to ensure privacy and data protection requirements are embedded into their design. We have also launched online data portals to allow EEA residents to request a copy of their personal data, and to ask for their data to be updated, corrected or debit card on which an issuer has putdeleted as appropriate. In addition, we have taken steps to assist our customers with their compliance efforts. As part of our implementation approach, we co-founded with IBM a competing brand);data trust called Truata to provide anonymization and analytics services in a GDPR-compliant manner. |
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| Ø | Some jurisdictions are currently considering adopting “data localization” requirements, which mandate the separationcollection, processing, and/or storage of branddata within their borders, including India, Kenya and processing in terms of accounting, organization and decision making.Vietnam. |
RussiaLitigation - - EffectiveIn September 2018, we entered into an amended class settlement agreement with the merchant damages class plaintiffs to settle their monetary damages claims in 2015,a U.S. antitrust litigation that was brought against Mastercard, Visa and a number of financial institutions. Visa and the Russian government amended its National Payments Systems lawsfinancial institutions are also parties to require all payment systemsthe agreement, which is subject to process domestic transactions through a government-owned payment switch. As a result, all MasterCard domestic transactions in Russia are now processed bycourt approval. In addition to the monetary amounts that system instead of MasterCard.constituted the financial settlement under the original agreement, the agreement requires an additional
China - In 2015, People’s Bankpayment from the defendants. We took a charge during 2018 to reflect our share of China shared preliminary regulations related to international networks’ ability to process domestic payments in China. The regulations, whichthis payment. Under the agreement, Mastercard and its customer financial institutions will receive a release of all damages claims that were alleged, or could require a capital commitment and on-soil provisions for switching, data processing and acceptance, are expected to be finalized in 2016. While we await the final regulations, we continue to execute against our plans to have the infrastructure and technology ready in China to switch domestic Chinese transactionsbeen alleged by the end of 2016. In the meantime, we are working to expand issuancemerchant class members concerning our interchange and fee structure and merchant acceptance in the market.
Data Privacy - In 2015, the European Court of Justice invalidated the EU-U.S. Safe Harbor treaty that had permitted the transfer of personal data between the European Union and the United States. We have adopted an alternative method of data transfer compliancerules. This release covers all retrospective claims, as a result of this ruling. The situation has not yet been fully resolved and we continue to monitor any other potential requirements that may result, up to and including the need to establish a data processing center in Europe.
Capital Structure. In 2015, we completed several key capital structure effortswell as part of our capital planning, including entering into a $3.75 billion credit facility (replacing our previous facility), launching a commercial paper program and completing a euro-denominated bond issuance of 1.65 billion euros.
See Part I, Item 1Aprospective claims for a more detailed discussionperiod of our legalfive years after the resolution of all appeals relating to court approval of the agreement. In January 2019, the district court issued an order granting preliminary approval of the settlement. The agreement does not relate to the merchants' claims seeking changes to business practices. Separate settlement negotiations for those claims are ongoing. See Note 20 (Legal and regulatory developments and risks.Regulatory Proceedings) to the consolidated financial statements included in Part II, Item 8 for further discussion.
Our Business
Our Operations and Network
We operate the MasterCard Network, oura unique and proprietary global payments network, our core network, that links issuers and acquirers around the globe to facilitate the processingswitching of transactions, permitting MasterCard cardholdersaccount holders to use their cards and other payment devicesa Mastercard product at millions of merchantsacceptance locations worldwide. Our core network facilitates an efficient and secure means for merchants to receivereceiving payments, as well asa convenient, quick and secure payment method for consumers to access their funds and a channel for businesses to receive insight through information that is accepted worldwide.derived from our network. We processauthorize, clear and settle transactions through our core network for our issuer customers in more than 150 currencies and in more than 210 countries and territories.
Typical Transaction. With a typical transaction involving four participants in addition to us, ourOur core network supports what is often referred to as a “four-party” payments network. The following diagram depicts a typical transaction on our core network, and our role in that transaction:
In a typical transaction, a cardholderan account holder purchases goods or services from a merchant using a card or otherone of our payment device.products. After the transaction is authorized by the issuer, the issuer pays the acquirer an amount equal to the value of the transaction, minus the interchange fee (described below), and then posts the transaction to the cardholder’saccount holder’s account. The acquirer pays the amount of the purchase, net of a discount (referred to as the “merchant discount” rate, as further described below)rate), to the merchant.
Interchange Fees.Interchange fees reflect the value merchants receive from accepting our products and play a key role in balancing the costs consumers and merchants pay.incur. We do not earn revenues from interchange fees. Generally, interchange fees are collected from acquirers and paid to issuers to reimburse the issuers for a portion of the costs incurred. These costs are incurred by themissuers in providing services that benefit all participants in the system, including acquirers and merchants.merchants, whose participation in the network enables increased sales to their existing and new customers, efficiencies in the delivery of existing and new products, guaranteed payments and improved experience for their customers. We or(or, alternatively, financial institutionsinstitutions) establish “default interchange fees” that apply when there are no other established settlement terms in place between an issuer and an acquirer. We administer the collection and remittance of interchange fees through the settlement process.
Additional Four-Party System Fees. The “merchantmerchant discount rate”rate is established by the acquirer to cover its costs of both participating in the four-party system and providing services to merchants. The rate takes into consideration the amount of the interchange fee which the acquirer generally pays to the issuer. Additionally, acquirers may charge merchants processing and related fees in addition to the merchant discount rate, and issuers may also charge cardholdersaccount holders fees for the transaction, including, for example, fees for extending revolving credit.
Our Network Architecture and Information Security. The MasterCard Network features a globally integrated structure that provides scale for our issuers, enabling them to expand into regional and global markets. It features an intelligent architecture that enables the network to adapt to the needs of each transaction by blending two distinct processing structures:
a distributed (peer-to-peer) processing structure for transactions that require fast, reliable processing to ensure they are processed close to where the transaction occurred; and
a centralized (hub-and-spoke) processing structure for transactions that require value-added processing, such as real-time access to transaction data for fraud scoring or rewards at the point-of-sale, to ensure advanced processing products and services are applied to the transaction.
Our network’s architecture enables us to connect all parties regardless of where or how the transaction is occurring. It has 24-hour a day availability and world-class response time. The network incorporates multiple layers of protection, both for continuity
purposes and to address information security challenges. We engage in multiple efforts to mitigate such challenges, including regularly testing our systems to address potential vulnerabilities.
Participation Standards. We establish, apply and enforce standards surrounding participation in the MasterCard payments system. We grant licenses that provide issuers, acquirers and other customers that meet specified criteria with certain rights, including access to the network and usage of cards and payment devices carrying our brands. As a condition of our licenses, issuers, acquirers and other customers agree to comply with our standards surrounding participation and brand usage and acceptance. We monitor areas of risk exposure and enforce our standards to combat fraudulent, illegal and brand-damaging activity. Issuers, acquirers and other customers are also required to report instances of fraud to us in a timely manner so that we can monitor trends and initiate action when appropriate.
Customer Risk Management.We guarantee the settlement of many of the transactions between our issuers and acquirers to ensure the integrity of our network. We refer to this as our settlement exposure. We do not, however, guarantee payments to merchants by their acquirer, or the availability of unspent prepaid cardholder account balances. As a guarantor of certain obligations of principal customers, we are exposed to customer credit risk arising from the potential financial failure of any principal customers of MasterCard, Maestro and Cirrus, and affiliate debit licensees. Principal customers participate directly in MasterCard programs and are responsible for the settlement and other activities of their sponsored affiliate customers. To minimize the contingent risk to MasterCard of a failure of a customer to meet its settlement obligations, we monitor the financial health of, economic and political operating environments of, and compliance with our standards by our customers. We employ various strategies to mitigate these risks.
Transaction Processing
SwitchingSwitched Transactions
Authorization, Clearing and Settlement. Through the MasterCard Network,our core network, we enable the routing of a transaction to the issuer for its approval, facilitate the exchange of financial transaction information between issuers and acquirers after a successfully conducted transaction, and help to settle the transaction by facilitating the determination and exchange of funds between parties via settlement banks chosen by us and our customers.
Cross-Border and Domestic.The MasterCard NetworkOur core network switches transactions throughout the world when the merchantacquirer country and issuer country are different (cross-border transactions)(“cross-border transactions”), providing cardholdersaccount holders with the ability to use, and merchants to accept, MasterCard cardsour products and other payment devicesservices across country borders. We also provide domestic (or intra-country)switched transaction switching services to customers in every region ofwhere the world, which allow issuers to facilitate payment transactions between cardholdersacquirer country and merchants within a particular country.the issuer country are the same (“domestic transactions”). We switch approximatelymore than half of all transactions using MasterCardfor Mastercard and Maestro-branded cards, including mostnearly all cross-border transactions. We switch the majority of MasterCardMastercard and Maestro-branded domestic transactions in the United States, United Kingdom, Canada, Brazil and a select number of other countries. Outside of these countries, most domestic transactions on our products are switched without our involvement.
Other Processing.Core Network Architecture. We extendOur core network features a globally integrated structure that provides scale for our processing capabilities in the payments value chain in various regionsissuers, enabling them to expand into regional and across the globeglobal markets. It is based largely on a distributed (peer-to-peer) architecture with an expanded suiteintelligent edge that enables the network to adapt to the needs of offerings, including:each transaction. Our core network accomplishes this by performing intelligent routing and applying multiple value-added services (such as fraud scoring or rewards at the point of sale) to appropriate transactions in real time. Our core network’s architecture enables us to connect all parties regardless of where or how the transaction is occurring. It has 24-hour a day availability and world-class response time.
IssuerReal-time Account-based Payment Systems. Augmenting our core network, we now offer real-time account-based payment capabilities through our acquisition of Vocalink, which enables payments between bank accounts in near real-time in countries in which it has been deployed.
Payments System Security. Our payment solutions and acquirer solutionsproducts are designed to ensure safety and security for the global payments system. The core network and additional platforms incorporate multiple layers of protection, both for continuity purposes and to provide mediumbest-in-class security protection. We engage in many efforts to large customersmitigate information security challenges, including maintaining an information security program, a business continuity program and insurance coverage, as well as regularly testing our systems to address potential vulnerabilities.
As part of our multi-layered approach to protect the global payments system, we also work with a complete processing solutionissuers, acquirers, merchants, governments and payments industry associations to help them create differentiateddevelop and put in place standards (e.g., EMV) for safe and secure transactions.
Digital Payments. Our networks support and enable our digital payment platforms, products and servicessolutions, reflecting the growing digital economy where consumers are increasingly seeking to use their payment accounts to pay when, where and allow quick deploymenthow they want.
Customer Risk.We guarantee the settlement of many of the transactions from issuers to acquirers to ensure the integrity of our core network. We refer to the amount of this guarantee as our settlement exposure. We do not, however, guarantee payments portfolios across banking channels.to merchants by their acquirers, or the availability of unspent prepaid account holder account balances.
Payment gateways that offer a single interface to provide e-commerce merchants with the ability to process secure paymentsOur Products and offer value-added solutions, including outsourced electronic payments, fraud prevention and alternative payment options.
Mobile gateways that facilitate transaction routing and prepaid processing for mobile-initiated transactions for our customers.
Programs and SolutionsServices
We provide a wide variety of integrated products and solutionsservices that support payment products that customers can offer to their cardholders.account holders. These servicesofferings facilitate transactions on the MasterCard Networkour core network among cardholders,account holders, merchants, financial institutions, businesses, governments and governmentsother organizations in markets globally. The following chart provides GDV and number of cards featuring our brands in 2015 for select programs and solutions:
|
| | | | | | | | | | | | |
| | Year Ended December 31, 2015 | | As of December 31, 2015 |
| | GDV in billions | | % of Total GDV | | Cards in millions | | Percentage Increase from December 31, 2014 |
MasterCard Branded Programs 1 | | | | | | | |
| Consumer Credit | $ | 2,077 |
| | 46 | % | | 739 |
| | 4 | % |
| Commercial Credit | 374 |
| | 8 | % | | 41 |
| | 8 | % |
| Debit and Prepaid | 2,112 |
| | 46 | % | | 783 |
| | 19 | % |
1 Excludes Maestro and Cirrus cards and volume generated by those cards.
Core Products
Consumer Credit and Charge.Credit. We offer a number of programs that enable issuers to provide consumers with cardscredit that allow them to defer payment. These programs are designed to meet the needs of our customers around the world and address standard, premium and affluent consumer segments.
Debit. We support a range of payment products and solutions that allow our customers to provide consumers with convenient access to funds in deposit and other accounts. Our debit and deposit access programs can be used to make purchases and to obtain cash in bank branches, at ATMs and, in some cases, at the point of sale. Our branded debit programs consist of MasterCardMastercard (including standard, premium and affluent offerings), Maestro (the only PIN-based solution that operates globally) and Cirrus (our primary global cash access solution).
Prepaid. Prepaid programs involve a balance that is funded prior to use and can be accessed via a card or otherone of our payment device.products. We offer prepaid payment programs using any of our brands, which we support with processing products and services. Segments on which we focus include government programs such as Social Security payments, unemployment benefits and others; commercial programs such as payroll, health savings accounts, employee benefits and others; and consumer reloadable programs for individualsconsumers without formal banking relationships and non-traditional users of electronic payments.
We also provide prepaid program management services, primarily outside of the United States, that manage and enable switching and issuer processing for consumer and commercial prepaid travel cards for business partners such as financial institutions, retailers, telecommunications companies, travel agents, foreign exchange bureaus, colleges and universities, airlines and governments.
Commercial. We offer commercial payment products and solutions that help large corporations, mid-sizedmidsize companies, small businesses and government entitiesentities. Our solutions streamline their procurement and payment processes, manage information and expenses (such as travel and entertainment) and reduce administrative costs. Our card offerings include travel, small business (debit and platforms include premium, travel,credit), purchasing and fleet cards. Our SmartData platform provides expense management and reporting capabilities. Our Mastercard In Control™ platform generates virtual account numbers which provide businesses with enhanced controls, more security and better data.
The following chart provides GDV and number of cards featuring our brands in 2018 for select programs and solutions: |
| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2018 | | As of December 31, 2018 |
| | GDV | | Cards |
| | (in billions) | | Growth (Local) | | % of Total GDV | | (in millions) | | Percentage Increase from December 31, 2017 |
Mastercard Branded Programs1,2 | | | | | | | | | |
| Consumer Credit | $ | 2,520 |
| | 11 | % | | 43 | % | | 824 |
| | 8 | % |
| Consumer Debit and Prepaid | 2,724 |
| | 17 | % | | 46 | % | | 1,126 |
| | 15 | % |
| Commercial Credit and Debit | 657 |
| | 13 | % | | 11 | % | | 73 |
| | 11 | % |
1 Excludes Maestro and Cirrus cards and programs; our SmartData tool that provides information reporting and expense management capabilities; and credit and debit programs targeted for small businesses.volume generated by those cards.
2 Prepaid includes both consumer and commercial prepaid.
Additional Platforms. In addition to the switching capabilities of our core network, we offer additional platforms with payment capabilities that extend to new payment flows:
We offer commercial payment products and solutions, such as the Mastercard B2B Hub, which enables small and midsized businesses to optimize their invoice and payment processes.
With Vocalink, we offer real-time account-based payments for ACH transactions. This platform enables payments between bank accounts in real-time and provides enhanced data and messaging capabilities, making them particularly well-suited for B2B and bill payment flows.
Value-Added Products and Services
We provide additional integrated products and services to our customers and stakeholders, including financial institutions, retailers and governments that enhance the value proposition of our products and solutions.
Safety and Security. We offer integrated products and services to prevent, detect and respond to fraud and cyber-attacks and to ensure the safety of transactions made using Mastercard products. We do this using a multi-layered safety and security strategy:
The “Prevent” layer protects infrastructure, devices and data from attacks. We have continued to grow global usage of EMV chip and contactless security technology, helping to reduce fraud. Greater usage of this technology has increased
the number of EMV cards issued and the transaction volume on EMV cards. While this technology is prevalent in Europe, the U.S. market has been adopting this technology in recent years.
The “Identify” layer allows us to help banks and merchants verify genuine consumers during the payment process. Examples of solutions under this layer include Mastercard Identity Check™, a fingerprint, face and iris scanning biometric technology to verify online purchases on mobile devices, and our recently launched Biometric Card which has a fingerprint scanner built in to the card and is compatible with existing EMV payment terminals.
The “Detect” layer spots fraudulent behavior and cyber-attacks and takes action to stop these activities once detected. Examples of our capabilities under this layer include our Early Detection System, Decision Intelligence and Safety Net™ services and technologies.
The “Experience” layer improves the security experience for our stakeholders in areas from the speed of transactions, enhancing approvals for online and card-on-file payments, to the ability to differentiate legitimate consumers from fraudulent ones. Our offerings in this space include Mastercard In Control, for consumer alerts and controls and our suite of digital token services available through our Mastercard Digital Enablement Service (“MDES”).
We have also worked with our financial institution customers to provide products to consumers globally with increased confidence through the benefit of “zero liability”, or no responsibility for counterfeit or lost card losses in the event of fraud.
Loyalty and Rewards. We have built a scalable rewards platform that enables financial institutions to provide consumers with a variety of benefits and services, such as personalized offers and rewards, access to a global airline lounge network, concierge services, insurance services, emergency card replacement, emergency cash advances and a 24-hour account holder service center. For merchants, we provide campaigns with targeted offers and rewards, management services for publishing offers, and accelerated points programs for co-brand and rewards program members.
Processing. We extend our processing capabilities in the payments value chain in various regions and across the globe with an expanded suite of offerings, including:
Issuer solutions designed to provide customers with a complete processing solution to help them create differentiated products and services and allow quick deployment of payments portfolios across banking channels.
Payment Innovationsgateways that offer a single interface to provide e-commerce merchants with the ability to process secure online and in-app payments and offer value-added solutions, including outsourced electronic payments, fraud prevention and alternative payment options.
Mobile gateways that facilitate transaction routing and processing for mobile-initiated transactions.
Analytics Insights and Consulting. The continued adoption of mobile devices has resulted in the ongoing convergence of the physicalWe provide proprietary analysis, data-driven consulting and digital worlds, where consumersmarketing services solutions to help clients optimize, streamline and grow their businesses, as well as deliver value to consumers.
Our capabilities incorporate payments expertise and analytical and executional skills to create end-to-end solutions which are increasingly seekingdelivered via platforms embedded in our customers’ day-to-day operations. By observing patterns of payments behavior based on billions of transactions switched globally, we leverage anonymized and aggregated information and a consultative approach to use their payment accountshelp our customers make better business decisions. Our executional skills such as marketing, digital implementation and staff augmentation allow us to pay when, whereassist clients implement actions based on these insights.
Increasingly, we have been helping financial institutions, retailers and how they want. governments innovate. Drawing on rapid prototyping methodologies from our global innovation and development arm, Mastercard Labs, we offer “Launchpad,” a five day app prototyping workshop. Through our Applied Predictive Technology business, a software as a service platform, we can help our customers conduct disciplined business experiments for in-market tests.
Digital Enablement
Leveraging our global innovations capability, we are developing platforms, productswork to digitize payment services across all channels and solutions that take advantage of this convergence and give us the opportunity to lead the transition to digital payments. We do this in a number of ways, including:devices:
Creating Better Shopping and Selling Experiences.Delivering better digital experiences everywhere. We are focused on offering digitalusing our technologies and security protocols to develop solutions such as our MasterPass digital payments ecosystem and MasterCard Digital Enablement Service (MDES) suite, and other products to make digital shopping and selling experiences, such as on smartphones and other connected devices, simpler, faster and safer for both consumers and merchants. We also offer products that make it easier for merchants to accept payments and expand their customer base and are developing products and practices to facilitate acceptance
via mobile devices. The successful implementation of our loyalty and reward programs is an important part of enabling these digital purchasing experiences.
Securing more transactions. We are leveraging tokenization, biometrics and machine learning technologies in our push to secure every transaction. These efforts include driving EMV-level security and benefits through all our payment channels.
Engaging with New Partners. We enable consumers to securely use their smartphones to make digital payments through numerous active partnerships with mobile leadersDigitizing personal and large digital companies around the world. Through our Open API Services, developers can innovate and create applications using financial and data services offered through the MasterCard Developer Zone.
Facilitating Money Transfers and Personal Payments.business payments. We provide money transfer and global remittance solutions tothat enable our customers to facilitateoffer consumers sendingthe ability to send and receivingreceive money quickly and securely domestically and around the world. We continue to enhanceThese solutions allow our personal payments platforms, providing financial institutions connected to our network with additional opportunities for their customers to send funds domesticallyaddress new payment flows from any funding source, such as cash, card, bank account or mobile money account, to any destination globally, securely and globally.in real time.
We also focus on developingSimplifying access to, and integration of, our digital assets. Our Mastercard Developer platform makes it easy for customers and partners to leverage our many digital assets and services. By providing a single access point with tools and capabilities to find what we believe are some of the best-in-class Application Program Interfaces (“APIs”) across a broad range of Mastercard services, we enable easy integration of our services into new and existing solutions.
Identifying and experimenting with future of paymentstechnologies, start-ups and delivering additional consumer shopping safety and convenience through MasterCardtrends. Through Mastercard Labs, our global innovation and development arm. Our efforts include incubating various ideasarm, we continue to bring customers and hosting thought-leadership eventspartners access to spur the next generation of innovative payment products.thought leadership, innovation methodologies, new technologies and relevant early-stage fintech players.
Safety and SecurityBrand
We offer products and services to prevent, detect and respond to fraud and to ensure the safety of transactions made on MasterCard products. We work with issuers, merchants and governments to help develop standards for safe and secure transactions for the global payments system. We have worked with our financial institution customers to provide products to consumers globally with increased confidence through the benefit of “zero liability”, or no responsibility for counterfeit or lost card losses in the event of fraud.
Our productsfamily of well-known brands includes Mastercard, Maestro and solutions include:
internet authentication/verification solutions that leverage biometrics;
services assisting customers, merchants and third-party service providers in protecting against attacks and subsequent account data compromises; and
fraud detection and management products and services.
We have been leading the development of industry standards, working with many payments industry associations to ensure that payment security standards are put in place as part of our multi-layered approach to protect the global payments system. These efforts include evolving a roadmap for the migration to EMV and developing an industry-open standard for tokenization, which helps protect sensitive cardholder information for digital transactions by generating unique credentials to an identified and verified individual that may be used for a specific transaction. As of December 31, 2015, nearly 50% of all U.S.-issued MasterCard consumer credit and debit cards featured EMV technology and many merchants are turning on the chip capabilities in their terminals.
Value-Added Solutions
MasterCard Advisors. MasterCard Advisors is our global professional services group that provides proprietary analysis, data-driven consulting and marketing services solutions to help clients optimize, streamline and grow their businesses, as well as deliver value to consumers. With analyses based on billions of transactions processed globally, we leverage anonymized and aggregated information and a consultative approach to help financial institutions, merchants, media companies, governments and other organizations grow their businesses or otherwise achieve efficiencies.
Our information services group provides a suite of data analytics and products (including reports, benchmarks, models and insights) that enable our customers to make better business decisions. Our consulting services group combines professional problem-solving skills with payments expertise to provide solutions that address the challenges and opportunities of clients with respect to payments. The managed services group provides solutions to enable data-driven acquisition of accounts, activation of portfolios, conversion of cards, marketing promotions activities and other customer management services.
Loyalty and Rewards Solutions. We provide a scalable rewards platform that enables issuers to provide consumers with a variety of benefits and services, such as personalized offers and rewards, access to a global airline lounge network, global and local concierge services, individual insurance coverages, emergency card replacement, emergency cash advance services and a 24-hour cardholder service center. For merchants, we provide targeted offers and rewards campaigns and management services for publishing offers, as well as opportunities for holders of co-brand or loyalty cards and rewards program members to obtain reward points faster. We support these services with program management capabilities.
Marketing
Cirrus. We manage and promote our brands through advertising, promotions and sponsorships, as well as digital, mobile and social media initiatives, in order to increase consumerpeople’s preference for our brands and usage of our products. We sponsor a variety of sporting, entertainment and charity-related marketing properties to align with consumer segments important to us and our
customers. Our advertising plays an important role in building brand visibility, usage and overall preference among cardholdersaccount holders globally. Our “Priceless®” advertising campaign, which has run in 5352 languages in 112120 countries worldwide, promotes MasterCardMastercard usage benefits and acceptance, markets MasterCardMastercard payment products and solutions and provides MasterCardMastercard with a consistent, recognizable message that supports our brand around the globe. We have extended Priceless to create experiences through three platforms to drive brand preference - Priceless Cities® provides cardholders across all of our regions with access to special experiences and offers in various cities, Priceless Causes® provides cardholders with opportunities to support philanthropic causes, and Priceless Surprises® provides cardholders with unexpected and unique surprises.
Our Revenue Sources
We generate revenues byprimarily from assessing our customers primarily based on GDV on the cards and other devicesproducts that carry our brands, and from the fees we charge to our customers for providing transaction processing and from other payment-related products and services. Our net revenues are classified into five categories: domestic assessment fees,assessments, cross-border volume fees, transaction processing, fees, other revenues and rebates and incentives (contra-revenue).
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Revenues”Revenue” in Part II, Item 7 for more detail about our revenue, GDV, processed transactions and processed transactions.our other payment-related products and services.
Intellectual Property
We own a number of valuable trademarks that are essential to our business, including MasterCard,Mastercard, Maestro and Cirrus, through one or more affiliates. We also own numerous other trademarks covering various brands, programs and services offered by MasterCardus to support our payment programs. Trademark and service mark registrations are generally valid indefinitely as long as they are used and/or properly maintained. Through license agreements with our customers, we authorize the use of our trademarks on a royalty-free basis in connection with our customers’ issuing and merchant acquiring businesses. In addition, we own a number of patents and patent applications relating to paymentspayment solutions, transaction processing, smart cards, contactless, mobile, electronic commerce,biometrics, AI, security systems, blockchain and other matters, many of which are important to our business operations. Patents are of varying duration depending on the jurisdiction and filing date.
Competition
We compete in the global payments industry against all forms of payment including:
cash and checks;checks
card-based payments, including credit, charge, debit, ATM and prepaid products, as well as limited-use products such as private label;label
contactless, mobile and e-commerce payments, as well as cryptocurrency; andcryptocurrency
other electronic payments, including ACH payments, wire transfers, electronic benefits transfers and bill payments and automated clearing house payments (ACH).
We face a number of competitors both within and outside of the global payments industry:
Cash, Check and CheckLegacy ACH. Cash and checkchecks continue to represent one of the most widely used forms of payment, constituting approximately 85%payment. However, an even larger share of the world’s retail payment transactions.payments on a U.S. dollar volume basis are made via legacy, or “slow,” ACH platforms.
General Purpose Payment Networks. We compete worldwide with payment networks such as Visa, American Express, JCB, China UnionPay and Discover, among others. Among global networks, Visa has significantly greater volumeSome competitors have more market share than we do. Outside of the United States, networks such as JCBdo in Japan and UnionPaycertain jurisdictions. Some also have different business models that may provide an advantage in China have leading positions in their domestic markets. In the case of UnionPay, it operates the sole domestic payment switch in China.pricing, regulatory compliance burdens or otherwise. In addition, several governments are promoting, or considering promoting, local networks for domestic processing.switching. See our risk factors“Risk Factors” in Part I, Item 1A for a more detailed discussion of the risks related to payments system regulation and government actions that may prevent us from competing effectively for a more detailed discussion.effectively.
Debit.Debit and Local Networks. We compete with ATM and point-of-sale debit networks in various countries, such as Interlink®, Plus® and Visa Electron® (owned by Visa Inc.), Star® (owned by First Data Corporation), NYCE® (owned by FIS) and Pulse® (owned by Discover) in the United States; Interac in Canada; EFTPOS in Australia; and Bankserv in South Africa.countries. In addition, in many countries outside of the United States, local debit brands serve as the main domestic brands, while our brands are used mostly to enable cross-border transactions which typically represent(typically representing a small portion of overall transaction volume. Jurisdictionsvolume). Certain jurisdictions have also created domestic card schemes that are focused mostly on debit and driven by nationalism (including RuPay in India and(e.g., MIR in Russia).
Three-Party Payments Networks. Our competitors include operators of proprietary three-party payments networks, such as American Express and Discover, which have direct acquiring relationships with merchants and direct issuing relationships with account holders. These competitors have certain competitive advantages over four-party payments systems such as ours. Among other things, these networks do not require formal interchange fees to balance payment system costs between the issuing and acquiring sides of their business, even though they have the ability to internally transfer costs in a manner similar to interchange fees. As a result, to date, operators of three-party payments networks have avoided some of the regulatory and litigation challenges we face.
Competition for Customer Business. We compete intensely with other payments networkscompanies for customer business. Globally, financial institutions typically issue both MasterCardMastercard and Visa-branded payment products, and we compete with Visa for business on the basis of individual portfolios or programs. In addition, a number of our customers issue American Express and/or Discover-branded payment cards in a manner consistent with a four-party system. We continue to face intense competitive pressure on the prices we charge our issuers and acquirers, and we seek to enter into business agreements with them through which we offer incentives and other support to issue and promote our payment products. We also compete for non-financial institution partners, such as merchants, governments and telecommunication companies.mobile providers.
Third-Party Processors.Real-time Account-based Payment Systems. WeThrough Vocalink, we face competition and potential displacementin the real-time account-based payment space from transaction processors throughout the world,other companies that provide these payment solutions. In addition, real-time account-based payments face competition from other payment methods, such as First Data Corporationcash and Total System Services, Inc., which are seeking to enhance their networks that link issuers directly with point-of-sale devices forchecks, cards, electronic, mobile and e-commerce payment transaction authorizationplatforms, cryptocurrencies and processing services.other payments networks.
Alternative Payments Systems and New Entrants. As the global payments industry becomes more complex, we may face increasing competition from alternative payment systems and emerging payment providers. Many of these providers have developed payments systems focused on online activity in e-commerce and mobile channels; however, they either have or may expandchannels (in some cases, expanding to other channels. These competitorschannels), and may process payments using in-house account transfers, real-time account-based payment networks or global or local networks. Examples include digital wallet providers (such as Paytm, PayPal, Alipay and Amazon), mobile operator services, mobile phone-based money transfer and microfinancing services (such as mPesa), handset manufacturers and cryptocurrencies. We compete withIn some circumstances, these providers in some circumstances, but in some cases they may alsocan be our customersa partner or partner with us.customer, as well as a competitor.
Value-Added Solutions.Products and Services. We face competition from companies that provide alternatives to our value-added solutions,products and services, including information services and consulting firms that provide consulting services and insights to financial institutions, as well as companies that compete against us as providers of loyalty and program management solutions. In addition, our integrated products and services offerings face competition and potential displacement from transaction processors throughout the world, which are seeking to enhance their networks that link issuers directly with point-of-sale devices for payment transaction authorization and processing services. Regulatory initiatives could also lead to increased competition in this space.
Our competitive advantages include:include our:
our globally recognized brands;brands
our highly adaptable global acceptance network that we believe is the world’s fastest;built over 50 years which can reach a variety of parties enabling payments
global payments network with world-class operating performance
expertise in real-time account-based payments through our Vocalink business
adoption of innovative products and digital solutions;solutions
our MasterPass global digital payments ecosystem;
the safety and security solutions embedded in our network;networks
our MasterCard Advisors groupanalytics insights and consulting services dedicated solely to the payments industry; andindustry
our ability to serve a broad array of participants in global payments due to our expanded on-soil presence in individual markets and a heightened focus on working with governments.governments
Government Regulation
General. Government regulation impacts key aspects of our business. We are subject to regulations that affect the payments industry in the many countries in which our cardsintegrated products and payment devicesservices are used. See “Risk Factors” in Part I, Item 1A for more detail and examples.
Payments Oversight. Several central banks or similar regulatory bodies around the world have increased, or are seeking to increase, their formal oversight of the electronic payments industry. Actions by these organizations could influence other organizations around the world to adopt or consider adopting similar oversight. As a result, Mastercard could be subject to new regulation, supervisions and examination requirements. For example, in the U.K., the Bank of England has expanded its oversight of systemically important payment systems to include service providers, as well. Also, in the EEA, the implementation of PSD2 will require financial institutions to provide third party payment processors access to consumer payment accounts, which may enable these processors to route transactions away from Mastercard products by offering certain services directly to people who currently use our products. PSD2 will also require a new standard for authentication of transactions, which necessitates additional verification information from consumers to complete transactions. This may increase the number of transactions that consumers abandon if we are unable to ensure a frictionless authentication experience under the new standards.
Interchange Fees.Interchange fees associated with four-party payments systems like ours are being reviewed or challenged in various jurisdictions around the world via legislation to regulate interchange fees, competition-related regulatory proceedings, central bank regulation and litigation. Examples include statutes in the United States that cap debit interchange for certain regulated activities and European Union legislation capping consumer credit and debit interchange fees on payments issued and acquired within the EEA. For more detail, see our risk factors in “Risk Factors-Payments System Legal and Regulatory Challenges”Factors-Regulations Related to Our Participation in the Payments Industry” in Part I, Item 1A. Also see Note 1820 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part II, Item 8.
Payments SystemPreferential or Protective Government Actions. Some governments have taken action to provide resources, preferential treatment or other protection to selected domestic payments and processing providers, as well as to create their own national providers. For example, governments in some countries mandate switching of domestic payments either entirely in that country or by only domestic companies. In China, we are currently excluded from domestic switching and are seeking market access, which is uncertain and subject to a number of factors, including receiving regulatory approval. We are in active discussions to explore different solutions.
Payment Systems Regulation.Regulators in several countries around the world either have, or are seeking to establish, authority to regulate certain aspects of the paymentspayment systems in their countries. Such authority could resulthas resulted in regulation of various aspects of our business. In the European Union, legislation requires us to separate our scheme activities (brand, products, franchise and licensing) from our switched transactions and other processing in terms of how we go to market, make decisions and organize our structure. Additionally, several jurisdictions have created or granted authority to create new regulatory bodies that either have or would have the authority to regulate payment systems, including the United Kingdom’s PSR (Vocalink and Mastercard are both participants in the payments system and are therefore subject to the PSR’s duties and powers), India (which has also
designated us as a payments system subject to regulation), the National Bank of Belgium and regulators in Brazil, Hong Kong, Mexico and Russia.
Anti-Money Laundering, Counter Terrorist Financing, Economic Sanctions and Anti-Corruption. We are subject to anti-money laundering (“AML”) and counter terrorist financing (“CTF”) laws and regulations globally, including the U.S. Bank Secrecy Act and the USA PATRIOT Act, as well as the various economic sanctions programs, including those imposed and administered by the U.S. Office of Foreign Assets Control (“OFAC”). We have implemented a comprehensive AML/CTF program, comprised of policies, procedures and internal controls, including the designation of a compliance officer, which is designed to prevent our payment network from being used to facilitate money laundering and other illicit activity and to address these legal and regulatory requirements and assist in managing money laundering and terrorist financing risks. The economic sanctions programs administered by OFAC restrict financial transactions and other dealings with certain countries and geographies (specifically Crimea, Cuba, Iran, North Korea and Syria) and with persons and entities included in OFAC sanctions lists including its list of Specially Designated Nationals and Blocked Persons (the “SDN List”). We take measures to prevent transactions that do not comply with OFAC and other applicable sanctions, including establishing a risk-based compliance program that has policies, procedures and controls designed to prevent us from having unlawful business dealings with prohibited countries, regions, individuals or entities. As part of this program, we obligate issuers and acquirers to comply with their local sanctions obligations and the U.S. sanctions programs, including requiring the screening of account holders and merchants, respectively, against OFAC sanctions lists (including the SDN List). Iran, Sudan and Syria have been identified by the U.S. State Department as terrorist-sponsoring states, and we have no offices, subsidiaries or affiliated entities located in any of these countries or geographies and do not license entities domiciled there. We are also subject to anti-corruption laws and regulations globally, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, which, among other things, generally prohibit giving or offering payments or anything of value for the purpose of improperly influencing a business decision or to gain an unfair business advantage. We have implemented policies, procedures and internal controls to proactively manage corruption risk.
Financial Sector Oversight. We are or may be subject to regulations related to our role in the financial industry and our relationship with our financial institution customers. For example, certainIn addition, we are or may be subject to regulation by a number of our operations are periodically reviewed by the U.S. Federal Financial Institutions Examination Council under itsagencies charged with oversight of, among other things, consumer protection, financial and banking matters. The regulators have supervisory and independent examination authority to examine financial institutions’ technology service providers.
Preferential or Protective Government Actions. Some governments have taken actions to provide resources, preferential treatment or other protection to selected domestic payments and processing providers, as well as create their own national providers.enforcement authority that we may be subject to because of the services we provide to financial institutions that issue and acquire our products.
No-Surcharge Rules.Issuer Practice Legislation and Regulation.Our customers are subject to numerous regulations and investigations applicable to banks and other financial institutions in their capacity as issuers and otherwise, impacting us as a consequence. Such regulations and investigations have been related to payment card add-on products, campus cards, bank overdraft practices, fees issuers charge to account holders and the transparency of terms and conditions. Additionally, regulations such as PSD2 in the EEA require financial institutions to provide third-party payment-processors access to consumer payment accounts, enabling them to provide payment initiation and account information services directly to consumers.
Regulation of Internet and Digital Transactions. We have historically implemented policies in certain regions that prohibit merchants from charging higher prices to consumers who pay using MasterCard products instead of other means. Authorities in severalVarious jurisdictions have actedenacted or have proposed regulation related to end or limit the application of these no-surcharge rules (or indicated interestinternet transactions. The legislation applies to payments system participants, including us and our U.S. customers, and is implemented through a federal regulation. We may also be impacted by evolving laws surrounding gambling, including fantasy sports. Certain jurisdictions are also considering regulatory initiatives in doing so), including in Australiadigital-related areas that could impact us, such as cyber-security and Canada. Additionally, pursuant to the terms of settlement of the U.S. merchant class litigation, we have modified our no-surcharge rules to permit U.S. merchants to surcharge credit cards, subject to certain limitations.copyright and trademark infringement.
Privacy, Data Protection and Information Security.Aspects of our operations or business are subject to increasingly complex privacy and data protection laws in the United States, the European Union and elsewhere.elsewhere around the world. For example, in the United States, we and our customers are respectively subject to Federal Trade Commission and federal banking agency information safeguarding requirements under the Gramm-Leach-Bliley Act that require the maintenance of a written, comprehensive information security program. In the European Union, we are subject to the GDPR, which requires a comprehensive privacy and data protection program to protect the personal and sensitive data of EEA residents. A number of regulators and policymakers around the globe are using the GDPR as a reference to adopt new or updated privacy and data protection laws, including in the U.S. (California), Argentina, Brazil, Chile, India, Indonesia and Kenya. Some jurisdictions are currently considering adopting “data localization” requirements, which mandate the collection, processing, and/or storage of data within their borders, including India, Kenya and Vietnam. Due to constant changes to the nature of data and the use of emerging technologies such as artificial intelligence, regulations in this area are constantly evolving with regulatory and legislative authorities aroundin numerous parts of the world are considering numerous legislative and regulatoryadopting proposals concerning privacy and data protection.to protect information. In addition, the interpretation and application of these privacy and data protection laws in the United States, Europe and elsewhere are often uncertain and in a state of flux. This includes the recent ruling by the European Court of Justice that invalidated the EU-U.S. Safe Harbor treaty and the newly announced EU-U.S. Privacy Shield.
Anti-Money Laundering.MasterCard is subject to anti-money laundering (“AML”) laws and regulations, including the USA PATRIOT Act. We have implemented a comprehensive AML program designed to prevent our payment network from being used to facilitate money laundering and other illicit activity. Our AML compliance program is comprised of policies, procedures and internal controls, including the designation of a compliance officer, and is designed to address these legal and regulatory requirements and assist in managing money laundering and terrorist financing risks.
Economic Sanctions. We are subject to regulations imposed by the U.S. Office of Foreign Assets Control (“OFAC”) restricting financial transactions and other dealings with Crimea, Cuba, Iran, North Korea, Syria and Sudan and with persons and entities included in OFAC’s list of Specially Designated Nationals and Blocked Persons (the “SDN List”). Iran, Syria and Sudan have been identified by the U.S. State Department as terrorist-sponsoring states. We have no offices, subsidiaries or affiliated entities located in these countries or in the Crimea region and do not license financial institutions domiciled there. We have established a risk-based compliance program that includes policies, procedures and controls that are designed to prevent us from having business dealings with prohibited countries, regions, individuals or entities. This includes obligating issuers and acquirers to screen cardholders and merchants, respectively, against the SDN list.
Consumer Financial Protection Bureau. The Consumer Financial Protection Bureau has significant authority to regulate consumer financial products in the United States, including consumer credit, deposit, payment and similar products.
Central Bank Oversight. Several central banks or similar regulatory bodies around the world that have increased, or are seeking to increase, their formal oversight of the electronic payments industry are in some cases considering designating them as “systemically important payment systems” or “critical infrastructure.” This includes the Financial Stability Oversight Council (“FSOC”) in the United States. Such systems will be subject to new regulation, supervision and examination requirements. To date, MasterCard has not been designated “systemically important.”
Issuer Practice Regulation.Our customers are subject to numerous regulations and investigations applicable to banks and other financial institutions in their capacity as issuers and otherwise, impacting MasterCard as a consequence. Such regulations and investigations have been related to campus cards, bank overdraft practices, fees issuers charge to cardholders and transparency of terms and conditions.
Regulation of Internet and Digital Transactions. Various jurisdictions have enacted or have proposed regulation related to internet transactions. For example, under the Unlawful Internet Gambling Enforcement Act in the United States, payment transactions must be coded and blockedflux, thus requiring constant monitoring for certain types of Internet gambling transactions. The legislation applies to payments system participants, including MasterCard and our U.S. customers, and is implemented through a federal regulation. We may also be impacted by evolving laws surrounding gambling, including fantasy sports. Jurisdictions are also considering regulatory initiatives in digital-related areas that could impact us, such as cyber-security, copyright and trademark infringement and privacy.compliance.
Additional Regulatory Developments. Various regulatory agencies also continue to examine a wide variety of issues that could impact us, including evolving laws surrounding marijuana, prepaid payroll cards, virtual currencies, payment card add-on products, identity theft, account management guidelines, privacy, disclosure rules, security and marketing that would impact our customers directly.
Seasonality
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Seasonality” in Part II, Item 7.
Financial Information About Geographic Areas
See Note 21 (Segment Reporting) to the consolidated financial statements included in Part II, Item 8 for certain geographic financial information.We do not experience meaningful seasonality.
Employees
As of December 31, 2015,2018, we employed approximately 11,30014,800 persons, of whichwhom approximately 6,2008,800 were employed outside of the United States.
Additional Information
MasterCardMastercard Incorporated was incorporated as a Delaware corporation in May 2001. We conduct our business principally through MasterCard Incorporated’sour principal operating subsidiary, MasterCardMastercard International Incorporated, (“MasterCard International”), a Delaware non-stock (or membership) corporation that was formed in November 1966. For more information about our capital structure, including our Class A common stock (our voting stock) and Class B common stock (our non-voting stock), see Note 1315 (Stockholders’ Equity) to the consolidated financial statements included in Part II, Item 8.
Website and SEC Reports
The Company’sOur internet address is www.mastercard.com. From time to time, we may use our corporate website as a channel of distribution of material company information. Financial and other material information is routinely posted and accessible on the investor relations section of our corporate website. In addition, you may automatically receive e-mail alerts and other information about MasterCard by enrolling your e-mail address by visiting “E-MailYou can also visit “Investor Alerts” in the investor relations section of our corporate website.to enroll your email address to automatically receive email alerts and other information about Mastercard.
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available for review, without charge, for review on the investor relations section of our corporate website as soon as reasonably practicable after they are filed with, or furnished to, the U.S. Securities and Exchange Commission.Commission (the “SEC”). The information contained on our corporate website is not incorporated by reference into this Report. Our filings are also available electronically from the SEC at www.sec.gov.
ITEM 1A. RISK FACTORS
Payments Systems Legal and Regulatory Challenges
Payments Industry Regulation
Global legal, regulatory and legislative focus onactivity directly related to the payments industry may have a material adverse impact on our overall business and results of operationsoperations.
Interchange fees are generally the largest component of the costs that acquirers charge merchants in connection with the acceptance of payment cards. Although we do not earn revenues from interchange fees, they are a factor on which we compete with other payment providers and therefore an important determinant of the volume of transactions we see on our cards. We have historically set default interchange fees in the United States and certain other countries. In some jurisdictions, however, interchange fees and related practices are subject to regulatory activity and litigation that have limited our ability to establish default rates. Regulators and legislative bodies in a number of countries, as well as merchants, are seeking to reduce these fees through legislation, competition-related regulatory proceedings, central bank regulation and/or litigation.
More broadly, regulators in several jurisdictions increasingly have been leveraging, or seeking to establish, the authorityseek to regulate certain aspects of payments systems such as ours.ours, or establish or expand their authority to do so. Many jurisdictions have enacted such regulations. These regulations have established, and could further result in,expand, obligations or restrictions with respect to not only interchange fees but also the types of products and services that we may offer to financial institutions for consumers, the countries in which our cardsintegrated products and other payment devicesservices may be used, the way we structure and operate our business and the types of cardholdersconsumers and merchants who can obtain or accept our cards. products or services. New regulations and oversight could also relate to our clearing and settlement activities (including risk management policies and procedures, collateral requirements, participant default policies and procedures, the ability to complete timely switching of financial transactions, and capital and financial resource requirements). In addition, several central banks or similar regulatory bodies around the worldhave increased, or are seeking to increase, their formal oversight of the electronic payments industry and, in some cases, are considering designating certain payments networks as “systemically important payment systems” or “critical infrastructure.”
These obligations, designations and restrictions may further expand and could be further increasedconflict with each other as more jurisdictions impose oversight of payment systems.
ExamplesSome enacted regulations require financial institutions to provide third party payment processors access to consumer payment accounts. This may enable these third party payment processors to route transactions away from Mastercard products by offering account information or payment initiation services directly to people who currently use our products. This may also allow these processors to commoditize the data that are included in the transactions. New authentication standards have been enacted requiring additional verification information from consumers to complete transactions. This may increase the number of activity relatedtransactions that consumers abandon if we are unable to interchange feesensure a frictionless authentication experience. An increase in the rate of abandoned transactions could adversely impact our volumes or other operational metrics.
Increased regulation and oversight of payment systems may result in costly compliance burdens or otherwise increase our costs. Such laws or compliance burdens could result in issuers and acquirers being less willing to participate in our payments systems include:
The European Union adopted legislationsystem, reduce the benefits offered in 2015 regulating electronic payments issuedconnection with the use of our products (making our products less desirable to consumers), reduce the volume of domestic and acquired within the European Economic Area, including caps on consumer creditcross-border transactions or other operational metrics, disintermediate us, impact our profitability and debit interchange feeslimit our ability to innovate or offer differentiated products and the separationservices, all of brandwhich could materially and processing. See “Business-Recent Businessadversely impact our financial performance. Regulators could also require us to obtain prior approval for changes to its system rules, procedures or operations, or could require customization with regard to such changes, which could impact market participant risk and Legal/Regulatory Developments”therefore risk to us. Such regulatory changes could lead to new or different criteria for participation in Part I, Item 1 for more details.
The European Commission issued a Statement of Objections in July 2015 relatedand access to our interregional interchange feespayments system by financial institutions or other customers. Moreover, failure to comply with the laws and central acquiring rules within the European Economic Area.
Legislation regulating the levelregulations to which we are subject could result in fines, sanctions, civil damages or other penalties, which could materially and adversely affect our overall business and results of domestic interchange fees has been enacted, or is being considered, in many jurisdictions. These jurisdictions include Australia, where the Reserve Bank of Australia has proposed further reductions to debit interchange,operations, as well as have an impact on our brand and reputation.
Increased regulatory, legislative and litigation activity with respect to interchange fee capsrates could have an adverse impact on commercialour business.
Interchange rates are a significant component of the costs that merchants pay in connection with the acceptance of our products. Although we do not earn revenues from interchange, interchange rates can impact the volume of transactions we see on our payment products. If interchange rates are too high, merchants may stop accepting our products or route debit transactions away from our network. If interchange rates are too low, issuers may stop promoting our integrated products and cross-border transactions.services, eliminate or reduce loyalty rewards programs or other account holder benefits (e.g., free checking or low interest rates on balances), or charge fees to account holders (e.g., annual fees or late payment fees).
Several jurisdictionsGovernments and merchant groups in a number of countries have createdimplemented or granted authority to create new regulatory bodies that either have or would have the authority to regulate payment systems, including the United Kingdom and India (which have designated us as a payments system subject to regulation), as well as Brazil, Mexico and Russia.
Additionally, merchants are seeking to reduce interchange feesrate reductions through legislation, competition law, central bank regulation and impact acceptance rules through litigation. Such litigation includes individual and/or class action suits filed by merchants against MasterCard, VisaSee “Government Regulation” and our customers in the United States and Canada, as well as claims filed by retailers against MasterCard in the United Kingdom and other European jusrisdictions. See Note 1820 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part II, Item 8 for more details regarding litigation, proceedings and inquiries related to interchange fees.details.
If issuers cannot collect or we are forced to reduce interchange fees,rates, issuers willmay be unable to use interchange fees to recoup a portion of the costs incurred for their services. This could reduce the number of financial institutionsless willing to participate in our four-party payments system, or may reduce the benefits offered in connection with the use of our products, reducing the attractiveness of our products to consumers. In particular, potential changes to interregional interchange fees as a result of the proposed resolution of the European Commission’s investigation could impact our cross-border transaction activity disproportionately versus competitors that are not subject to similar reductions. These and other impacts could lower overall transaction volumes, and/or make proprietary three-party networks or other forms of payment more attractive. Issuers could alsoreduce the benefits associated with our products or choose to charge higher fees to consumers to attempt to recoup a portion of the costs incurred for their services, thereby making our card programs less desirable to consumers and reducing our transaction volumes and profitability.services. In addition, issuers could attemptseek to decrease the expense of their card and other payment programs by seeking a reduction in the fees that we charge to them.them, particularly if regulation has a disproportionate impact on us as compared to our competitors in terms of the fees we can charge. This could also result inmake our products less innovationdesirable to consumers, reduce the volume of transactions and fewer product offerings. our profitability, and limit our ability to innovate or offer differentiated products.
We are devoting substantial management and financial resources to the defense ofdefending our right to establish interchange feesrates in regulatory proceedings, litigation and legislative activity. The potential outcome of any legislative, regulatory or litigation actionof these activities could have a more positive or negative impact on MasterCardus relative to itsour competitors. If we are ultimately unsuccessful in defending our defense ofability to establish interchange fees,rates, any suchresulting legislation, regulation and/or litigation may have a material adverse impact on our overall business and results of operations. In addition, regulatory proceedings and litigation could result (and in MasterCardsome cases has resulted) in us being fined and/or having to pay civil damages.
Additionally, increased focus by jurisdictions on regulating payment systems may result in costly compliance burdens and/or may otherwise increase our costs,damages, the amount of which could materially and adversely impact our financial performance. Moreover, failurebe material.
Current regulatory activity could be extended to comply with the laws and regulations discussed above to which we are subject could result in fines, sanctionsadditional jurisdictions or other penalties,products, which could materially and adversely affect our overall business and results of operations,operations.
Regulators around the world increasingly replicate other regulators’ approaches with regard to the regulation of payments and other industries. Consequently, regulation in any one country, state or region may influence regulatory approaches in other countries, states or regions. Similarly, new laws and regulations within a country, state or region involving one product may lead to regulation of similar or related products. For example, regulations affecting debit transactions could lead to regulation of other products (such as well ascredit).
As a result, the risks to our business created by any one new law or regulation are magnified by the potential it has to be replicated in other jurisdictions or involve other products within any particular jurisdiction. These include matters like interchange rates, potential direct regulation of our network fees and pricing, network standards and network exclusivity and routing agreements. Conversely, if widely varying regulations come into existence worldwide, we may have an impact ondifficulty adjusting our reputation. In orderproducts, services, fees and other important aspects of our business to successfully compete in such an environment, wemeet the varying requirements. Either of these outcomes could materially and adversely affect our customers would each need to adjust our strategies accordingly.overall business and results of operations.
Limitations on our ability to restrict merchant surcharging could materially and adversely impact our results of operations.
We have historically implemented policies, referred to as no-surcharge rules, in certain regions,jurisdictions, including the United States, that prohibit merchants from charging higher prices to consumers who pay using MasterCardour products instead of other means. Authorities in several jurisdictions have acted to end or limit the application of these no-surcharge rules (or indicated interest in doing so). Additionally, pursuant to the terms of settlement of the U.S. merchant class litigation, we have modified our no-surcharge rules to permit U.S. merchants to surcharge credit cards, subject to certain limitations. It is possible that over time merchants in some or all merchant categories in these jurisdictions may choose to surcharge as permitted by the rule change. This could result in consumers viewing our products less favorably and/or using alternative means of payment instead of electronic products, which could result in a decrease in our overall transaction volumes, and which in turn could materially and adversely impact our results of operations.
Current regulatory activity could be extended to additional jurisdictions or products, which could materially and adversely affect our overall business and results of operations.
Regulators around the world increasingly look at each other’s approaches to the regulation of the payments and other industries. In some areas, such as interchange fees, we believe that regulators are increasingly cooperating on their approaches. Consequently, a development in any one country, state or region may influence regulatory approaches in other countries, states or regions. For example, a decision in Europe related to interchange fees could increase the possibility of additional competition authorities in European member states opening interchange fee proceedings. Similarly, new laws and regulations in a country, state or region involving one product may cause lawmakers there to extend the regulations to another product. For example, regulations affecting debit transactions could lead to regulation of other products (such as credit).
As a result, the risks created by any one new law or regulation are magnified by the potential they have to be replicated in other jurisdictions or involving other products, affecting our business. These include matters like interchange rates, network standards and network exclusivity and routing agreements. Conversely, if widely varying regulations come into existence worldwide, we may have difficulty adjusting our products, services, fees and other important aspects of our business, with the same effect. Either of these outcomes could materially and adversely affect our overall business and results of operations.
Preferential or Protective Government Actions
Preferential and protective government actions related to domestic payment services could adversely affect our ability to maintain or increase our revenues.
Governments in some countries such as China, Russia and India, have acted, or in the future may act, to provide resources, preferential treatment or other protection to selected national payment and processingswitching providers, or have created, or may in the future create, their own national provider. This action may displace us from, prevent us from entering into, or substantially restrict us from participating in, particular geographies, and may prevent us from competing effectively against those providers. For example:
Governments in some countries are considering, or may consider, regulatory requirements that mandate processingswitching of domestic payments either entirely in that country or by only domestic companies. In particular, Russia has amended its National Payments Systems laws
Some jurisdictions are considering requirements to require all payment systemscollect, process and/or store data within their borders, as well as prohibitions on the transfer of data abroad, leading to process domestic transactions through a government-owned payment switch. As a result, all MasterCard domestic transactionstechnological and operational implications.
Geopolitical events and resulting OFAC sanctions, adverse trade policies or other types of government actions could lead jurisdictions affected by those sanctions to take actions in Russia are now processed byresponse that system instead of by MasterCard.could adversely affect our business.
Regional groups of countries such as the Gulf Cooperation Countries in the Middle East and a number of countries in South East Asia, are considering, or may consider, efforts to restrict our participation in the processingswitching of regional transactions.
Such developments would prevent and in Russia have prevented, us from utilizing our global processingswitching capabilities for domestic or regional customers. Our efforts to effect change in, or work with, these countries may not succeed. This could adversely affect our ability to maintain or increase our revenues and extend our global brand.
Privacy, Data Protection and Security
Regulation of privacy, data protection, security and securitythe digital economy could increase our costs, as well as negatively impact our growth.
We are subject to increasingly complex regulations related to privacy, data protection and information security in the jurisdictions in which we do business. These regulations could result in negative impacts to our business. As we continue to develop integrated
products and services to meet the needs of a changing marketplace, as well as acquire new companies, we may expand our information profile through the collection of additional data from additional sources and across multiple channels. This expansion could amplify the impact of these regulations on our business. Regulation of privacy and data protection and information security mayoften times require monitoring of and changes to our data practices in regard to the collection, use, disclosure, storage, transfer and/or security of personal and sensitive information. In addition, due to the European Court of Justice’s recent invalidation of the Safe Harbor treaty, we may beWe are also subject to enhanced compliance and operational requirements in the European Union.Union, and policymakers around the globe are using these requirements as a reference to adopt new or updated privacy laws that could result in similar or stricter requirements in other jurisdictions. Some jurisdictions are also considering requirements to collect, process and/or store data within their borders, as well as prohibitions on the transfer of data abroad, leading to technological and operational implications. Other jurisdictions are considering adopting sector-specific regulations for the payments industry, including forced data sharing requirements or additional verification requirements that overlap or conflict with, or diverge from, general privacy rules. Failure to comply with these laws, regulations and requirements could result in fines, sanctions or other penalties, which could materially and adversely affect our results of operations and overall business, as well as have an impact on our reputation.
New requirements or reinterpretations of existing requirements in these areas, either fromor the development of new regulations or laws or any additions or changes (as well asregulatory schemes related to the mannerdigital economy in which they could be interpreted or applied)general, may also increase our costs and could impact the products and services we offer and other aspects of our business, such as fraud monitoring, the development of information-based products and solutions and technology operations. In addition, these requirements may increase the costs to our customers of issuing payment products, which may, in turn, decrease the number of our cards and other payment devicesproducts that they issue. Moreover, due to recent account data compromise events at large, U.S.-based retailers,and privacy abuses by other companies, as well as the disclosure of the monitoring activities by certain governmental agencies in combination with the use of artificial intelligence and new technologies, there has been heightened legislative and regulatory scrutiny around the world that could lead to further regulation and requirements.requirements and/or future enforcement. Those developments have also raised public attention on companies’ data practices and have changed consumer and societal expectations for enhanced privacy and data protection. Any of these developments could materially and adversely affect our overall business and results of operations.
Regulation Relatedour integrated products and services or increase our compliance costs. Criminals are using increasingly sophisticated methods to Our Participationcapture consumer account information to engage in illegal activities such as counterfeiting or other fraud. As outsourcing and specialization become common in the Payments Industrypayments industry, there are more third parties involved in processing transactions using our payment products. While we are taking measures to make card and digital payments more secure, increased fraud levels involving our integrated products and services, or misconduct or negligence by third parties switching or otherwise servicing our integrated products and services, could lead to regulatory intervention, such as enhanced security requirements, as well as damage to our reputation.
Other Regulation
Regulations affectingthat directly or indirectly apply to Mastercard as a result of our participation in the global payments industry may materially and adversely affect our overall business and results of operations.
We are subject to regulations that affect the payments industry in the many jurisdictions in which our cardsintegrated products and other devicesservices are used. In particular, manyMany of our customers are also subject to regulations applicable to banks and other financial institutions and, consequently, we arethat, at times, affected by such regulations.consequently affect us. Regulation of the payments industry, including regulations applicable to us and our customers, has increased significantly in the last several years. See “Business-Government“Business - Government Regulation” in Part I, Item 1 for a detailed description of such regulation and related legislation. Examples include:
Anti-Money Laundering, andCounter Terrorist Financing, Economic Sanctions and Anti-Corruption - We are subject to AML and CTF laws and regulations globally, including the U.S. Bank Secrecy Act and the USA PatriotPATRIOT Act, in the United States, as well as the various economic sanctions programs, including those imposed and administered by OFAC. The economic sanctions programs administered by OFAC including restrictions onrestrict financial transactions and other dealings with certain countries and geographies (specifically Crimea, Cuba, Iran, North Korea and Syria) and with persons and entities included onin OFAC sanctions lists (includingincluding the SDN List).List. Iran, Sudan and Syria have been identified by the U.S. State Department as terrorist-sponsoring states. We have policies, proceduresare also subject to anti-corruption laws and controls designedregulations globally, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, which, among other things, generally prohibit giving or offering payments or anything of value for the purpose of improperly influencing a business decision or to complygain an unfair business advantage. A violation and subsequent judgment or settlement against us, or those with applicable AML and OFAC sanctions requirements. We take measures to prevent transactions that do not comply with OFAC sanctions, including obligating our customers to screen cardholders and merchants against OFAC sanctions lists. However, despite these measures, it is possible that such transactionswhom we may be processed through our payments system. Activity such as money laundering or terrorist financing involving our cardsassociated, under these laws could result in an enforcement action, and our reputation may suffer duesubject us to our customer’s association with those countries, persons or entities or the existence of any such transaction. Any enforcement action or reputational damage could reduce the use and acceptance of our productssubstantial monetary penalties, damages, and/or increase our costs, and thereby have a material adverse impact on our business.significant reputational impact.
Account-based Payment Systems – In addition, geopolitical events and resulting OFAC sanctions could lead jurisdictions affected by those sanctionsthe U.K., the Treasury has expanded the Bank of England’s oversight of certain payment system providers that are systemically important to take actions in response that could adversely affect our business. For example, in response to the global sanctions imposed asU.K.’s payment network. As a result of the Ukraine conflict, the Russian government amended its National Payments Systems laws requiring all payment systems to process domestic transactions through a government-owned payment switch. There is a risk that in the future other jurisdictions (or their sympathizers) may take similar or other actions in response to sanctions that could negatively impact us.
Consumer Financial Protection Bureau (“CFPB”)- In the United States, the CFPB could regulate consumer financial products, including amending existing requirements or imposing new ones. The CFPB also has supervisory and independent examination authority as well as enforcement authority over certain financial institutions, their service providers,and other entities, which could include us due to our processing of credit, debit and prepaid transactions. It is not clear whether and/or to what extent the CFPB will regulate broaderthese changes, aspects of payment card networks.
Increased Central Bank Oversight - Several central banks or similar regulatory bodies around the world that have increased, orour Vocalink business are seeking to increase, their formal oversight of the electronic payments industry are in some cases considering designating them as “systemically important payment systems” or “critical infrastructure.” If MasterCard were designated “systemically important” in a particular jurisdiction, it would benow subject to new regulations relating to itsthe U.K. payment clearingsystem oversight regime and settlement activities, which could address areas such as risk management policies and procedures; collateral requirements; participant default policies and procedures;are directly overseen by the ability to complete timely clearing and settlementBank of financial transactions; and capital and financial resource requirements. Also, MasterCard could be required to obtain prior approval for changes to its system rules, procedures or operations that could materially affect the level of risk presented by that payments system.England.
Issuer Practice Legislation and Regulation - Our financial institution customers are subject to numerous regulations, which impact us as a consequence. ExistingIn addition, certain regulations (such as PSD2 in the EEA) may disintermediate issuers. If our customers are disintermediated in their business, we could face diminished demand for our integrated products and services. In addition, existing or new regulations in these or other areas may diminish the attractiveness of our products to our customers.
Regulation of Internet and Digital Transactions - Proposed legislation in various jurisdictions relating to Internet gambling and other digital areas such as cyber-security and copyright and trademark infringement and privacy could impose additional compliance burdens on us and/or our customers, including requiring us or our customers to monitor, filter, restrict, or otherwise oversee various categories of payment card transactions.
Increased regulatory focus on us, such as in connection with the matters discussed above, may result in costly compliance burdens and/or may otherwise increase our costs. Similarly, increased regulatory focus on our customers may cause such customers to reduce the volume of transactions processed through our systems.systems, or may otherwise impact the competitiveness of our products. Actions by regulators could influence other organizations around the world to enact or consider adopting similar measures, amplifying any potential compliance burden. Finally, failure to comply with the laws and regulations discussed above to which we are subject could result in fines, sanctions or other penalties. Each may individually or collectively materially and adversely affect our financial performance and/or our overall business and results of operations, as well as have an impact on our reputation.
We could be subject to adverse changes in tax laws, regulations and interpretations or challenges to our tax positions.
18
TableWe are subject to tax laws and regulations of Contentsthe U.S. federal, state and local governments as well as various non-U.S. jurisdictions. Potential changes in existing tax laws, including future regulatory guidance, may impact our effective tax rate and tax payments. There can be no assurance that changes in tax laws or regulations, both within the U.S. and the other jurisdictions in which we operate, will not materially and adversely affect our effective tax rate, tax payments, financial condition and results of operations. Similarly, changes in tax laws and regulations that impact our customers and counterparties or the economy generally may also impact our financial condition and results of operations.In addition, tax laws and regulations are complex and subject to varying interpretations, and any significant failure to comply with applicable tax laws and regulations in all relevant jurisdictions could give rise to substantial penalties and liabilities. Any changes in enacted tax laws, rules or regulatory or judicial interpretations; any adverse outcome in connection with tax audits in any jurisdiction; or any change in the pronouncements relating to accounting for income taxes could materially and adversely impact our effective tax rate, tax payments, financial condition and results of operations.
Litigation
Liabilities we may incur or limitations on our business related to any litigation or litigation settlements could materially and adversely affect our results of operations.
We are a defendant on a number of civil litigations and regulatory proceedings and investigations, including among others, those alleging violations of competition and antitrust law and those involving intellectual property claims. See Note 20 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part II, Item 8 for more details regarding the allegations contained in these complaints and the status of these proceedings. In the event we are found liable in any material litigations or proceedings, particularly in the event we may be found liable in a large class-action lawsuit or on the basis of an antitrust claim entitling the plaintiff to treble damages or under which we were jointly and severally liable, we could be subject to significant damages, which could have a material adverse impact on our overall business and results of operations.
Certain limitations have been placed on our business in recent years because of litigation and litigation settlements, such as changes to our no-surcharge rule in the United States. Any future limitations on our business resulting from litigation or litigation settlements could impact our relationships with our customers, including reducing the volume of business that we do with them, which may materially and adversely affect our overall business and results of operations.
Business and Operations
Competition and Technology
Substantial and increasingly intense competition worldwide in the global payments industry may materially and adversely affect our overall business and results of operations.
The global payments industry is highly competitive. Our payment programs compete against all forms of payment, including cash and checks; electronic, mobile and e-commerce payment platforms; cryptocurrencies; ACH payment services; and other payments networks, which can have several competitive impacts on our business:
Within the global general purpose payments industry, we face substantial and increasingly intense competition worldwide from systems such as Visa, American Express, Discover, UnionPay, JCB and PayPal among others.
In certain jurisdictions, including the United States, Visa has greater volume, scale and market share than we do, which may provide significant competitive advantages. Visa has also announced its purchase of Visa Europe, which will create a global company that may provide Visa with additional competitive advantages.
Some of our traditional competitors, as well as alternative payment service providers, may have substantially greater financial and other resources than we have, may offer a wider range of programs and services than we offer or may use more effective advertising and marketing strategies to achieve broader brand recognition or merchant acceptance than we have.
Our ability to compete may also be affected by the outcomes of litigation, competition-related regulatory proceedings, central bank activity and legislative activity.
Certain of our competitors including American Express, Discover, private-label card networks and certain alternative payments systems, operate three-party payments systems with direct connections to both merchants and consumers. Theseconsumers and these competitors may derive competitive advantages from their business models:
Operators of three-party payments systems tend to have greater control over consumer and merchant customer service than operators of four-party payments systems such as ours, in which we must typically rely on our issuing and acquiring financial institution customers. Our inability to control end-to-end processing may put us at a competitive disadvantage by limiting our ability to introduce value-added programs and services that are dependent upon us processing the underlying transactions.
Even when competitors operate programs that utilize a four-party system, these competitors have generally not attracted the same level of regulatory or legislative scrutiny of their pricing and business practices as have operators of four-party payments systems such as ours.
models. If we continue to attract more regulatory scrutiny than these competitors because we operate a four-party system, or we are regulated because of the system we operate in a way in which our competitors are not, we could lose business to these competitors. See “Business-Competition” in Part I, Item 1.
If we are not able to differentiate ourselves from our competitors, drive value for our customers and/or effectively align our resources with our goals and objectives, we may not be able to compete effectively against these threats. Our competitors may also more effectively introduce their own innovative programs and services that adversely impact our growth. We also compete against new entrants that have developed alternative payments systems, e-commerce payments systems and payments systems for mobile devices, as well as physical store locations. A number of these new entrants rely principally on the Internet to support their services and may enjoy lower costs than we do, which could put us at a competitive disadvantage. Our failure to compete effectively against any of the foregoing competitive threats could materially and adversely affect our overall business and results of operations.
Disintermediation from stakeholders both within and outside of the payments value chain could harm our business.
As the payments industry continues to develop and change, we face disintermediation and related risks, including:
Parties that process our transactions in certain countries may try to eliminate our position as an intermediary in the payment process. For example, merchants could processswitch (and in some cases are processing)switching) transactions directly with issuers. Additionally, processors could process transactions directly between issuers and acquirers. Large scale consolidation within processors could result in these processors developing bilateral agreements or in some cases processingswitching the entire transaction on their own network, thereby disintermediating us.
LargeAlthough we partner with technology companies (such as digital companiesplayers and other technology companiesmobile providers) that leverage our technology, platforms and networknetworks to deliver their products, they could develop platforms or networks that disintermediate us from digital payments and impact our ability to compete as physicalin the digital economy. This risk is heightened when we have relationships with these entities where we share Mastercard data. While we share this data in a controlled manner subject to applicable anonymization and digital payments converge.privacy and data protection standards, without proper oversight we could inadvertently share too much data which could give the partner a competitive advantage.
Competitors, customers, large digital and other technology companies, governments and other industry participants may develop products that compete with or replace value-added products and services we currently provide to support our switched transaction switching and payment offerings. These products could replace our own processingswitching and payments offerings or could force us to change our pricing or practices for these offerings. In addition, governments that develop national payment platforms may promote their platforms in such a way that could put us at a competitive disadvantage in those markets.
Participants in the payments industry may merge, create joint ventures or form other business combinations that may strengthen their existing business services or create new payment products and services that compete with our services.
Our failure to compete effectively against any of the foregoing competitive threats could materially and adversely affect our overall business and results of operations.
Continued intense pricing pressure may materially and adversely affect our overall business and results of operations.
In order to increase transaction volumes, enter new markets and expand our MasterCard-brandedMastercard-branded cards and enabled payment devices,products and services, we seek to enter into business agreements with customers through which we offer incentives, pricing discounts and other support that promote our products. In order to stay competitive, we may have to increase the amount of these incentives and pricing discounts. Over the past several years, we have experienced continued pricing pressure. The demand from our customers for better pricing arrangements and greater rebates and incentives moderates our growth. We may not be able to continue our expansion strategy to processswitch additional transaction volumes or to provide additional services to our customers at levels sufficient to compensate for such lower fees or increased costs in the future, which could materially and adversely affect our overall business and results of operations. In addition, increased pressure on prices increases the importance of cost containment and productivity initiatives in areas other than those relating to customer incentives. We may not succeed in these efforts.
In the future, we may not be able to enter into agreements with our customers onif they require terms that we consider favorable,are unable or unwilling to offer, and we may be required to modify existing agreements in order to maintain relationships and to compete with others in the industry. Some of our competitors are larger and have greater financial resources than we do and accordingly may be able to charge lower prices to our customers. In addition, to the extent that we offer discounts or incentives under such agreements, we will need to further increase transaction volumes or the amount of services provided thereunder in order to benefit incrementally from such agreements and to increase revenue and profit, and we may not be successful in doing so, particularly in the current regulatory environment. Our customers also may implement cost reduction initiatives that reduce or eliminate payment product marketing or increase requests for greater incentives or greater cost stability. These factors could have a material adverse impact on our overall business and results of operations.
Technology
Rapid and significant technological developments and changes could negatively impact our overall business and results of operations or limit our future growth.
The payments industry is subject to rapid and significant technological changes, which can impact our business in several ways:
Technological changes, including continuing developments of technologies in the areas of smart cards and devices, contactless and mobile payments, e-commerce, and cryptocurrency and block chain technology, machine learning and AI, could result in new technologies that may be superior to, or render obsolete, the technologies we currently use in our programs and services. Moreover, these changes could result in new and innovative payment methods and programsproducts that could place us at a competitive disadvantage and that could reduce the use of MasterCardour products.
We rely in part on third parties, including some of our competitors and potential competitors, for the development of and access to new technologies. The inability of these companies to keep pace with technological developments, or the acquisition of these companies by competitors, could negatively impact MasterCardour offerings.
Our ability to develop and adopt new services and technologies may be inhibited by industry-wide solutions and standards (such as those related to EMV, tokenization or other safety and security technologies), and by resistance from customers or merchants to such changes.
Our ability to develop evolving systems and products may be inhibited by any difficulty we may experience in attracting and retaining technology experts.
Our ability to adopt these technologies can also be inhibited by intellectual property rights of third parties. We have received, and we may in the future receive, notices or inquiries from patent holders (for example, other operating companies or non-practicing entities) suggesting that we may be infringing certain patents or that we need to license the use of their patents to avoid infringement. Such notices may, among other things, threaten litigation against us or our customers or demand significant license fees.
Our ability to develop new technologies and reflect technological changes in our payments offerings will require resources, which may result in additional expenses.
We work with largetechnology companies (such as digital companiesplayers and other technology companiesmobile providers) that use our technology to enhance payment safety and security and to deliver their payment-related products and services quickly and efficiently to consumers. Our inability to keep pace technologically could negatively impact the willingness of these customers to work with us, and could encourage them to use their own technology and compete against us.
We cannot predict the effect of technological changes on our business, and our future success will depend, in part, on our ability to anticipate, develop or adapt to technological changes and evolving industry standards. Failure to keep pace with these technological developments or otherwise bring to market products that reflect these technologies could lead to a decline in the use of our products, which could have a material adverse impact on our overall business and results of operations.
Operating a real-time account-based payment network presents risks that could materially affect our business.
Our acquisition of Vocalink in 2017 added real-time account-based payment technology to the suite of capabilities we offer. While expansion into this space presents business opportunities, there are also regulatory and operational risks associated with administering a real-time account-based payment network.
British regulators have designated this platform to be “critical national infrastructure” and regulators in other countries may in the future expand their regulatory oversight of real-time account-based payment systems in similar ways. In addition, any prolonged service outage on this network could result in quickly escalating impacts, including potential intervention by the Bank of England and significant reputational risk to Vocalink and us. For a discussion of the regulatory risks related to our real-time account-based payment platform, see our risk factor in “Risk Factors - Payments Industry Regulation” in this Part I, Item 1A. Furthermore, the complexity of this payment technology requires careful management to address security vulnerabilities that are different from those faced on our core network. Operational difficulties, such as the temporary unavailability of our services or products, or security breaches on our real-time account-based payment network could cause a loss of business for these products and services, result in potential liability for us and adversely affect our reputation.
Working with new customers and end users as we expand our integrated products and services can present operational challenges, be costly and result in reputational damage if the new products or services do not perform as intended.
The payments markets in which we compete are characterized by rapid technological change, new product introductions, evolving industry standards and changing customer and consumer needs. In order to remain competitive and meet the needs of the payments market, we are continually involved in diversifying our integrated products and services. These efforts carry the risks associated with any diversification initiative, including cost overruns, delays in delivery and performance problems. These projects also carry risks associated with working with different types of customers, for example organizations such as corporations that are not financial institutions and non-governmental organizations (“NGOs”), and end users than those we have traditionally worked with. These differences may present new operational challenges in the development and implementation of our new products or services.
Our failure to render these integrated products and services could make our other integrated products and services less desirable to customers, or put us at a competitive disadvantage. In addition, if there is a delay in the implementation of our products or services or if our products or services do not perform as anticipated, we could face additional regulatory scrutiny, fines, sanctions or other penalties, which could materially and adversely affect our overall business and results of operations, as well as negatively impact our brand and reputation.
Information Security and Service Disruptions
Information security failuresincidents or breachesaccount data compromise events could disrupt our business, damage our reputation, increase our costs and cause losses.
Information security risks for payments and technology companies such as MasterCardours have significantly increased in recent years in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties. These threats may derive from fraud or malice on the part of our employees or third parties, or may result from human error or accidental technological failure. These threats include cyber-attacks such as computer viruses, malicious code, phishing attacks or information security breaches.breaches and could lead to the misappropriation of consumer account and other information and identity theft.
Our operations rely on the secure processing, transmission and storage of confidential, proprietary and other information in our computer systems and networks. Our customers and other parties in the payments value chain, as well as our cardholders,account holders, rely on our digital technologies, computer and email systems, software and networks to conduct their operations. In addition, to access our
integrated products and services, our customers and cardholdersaccount holders increasingly use personal smartphones, tablet PCs and other mobile devices that may be beyond our control. We, like other financial technology organizations, routinely are subject to cyber-threats and our technologies, systems and networks have been subject to attempted cyber-attacks. Because of our position in the payments value chain, we believe that we are likely to continue to be a target of such threats and attacks. Additionally, geopolitical events and resulting government activity could also lead to information security threats and attacks by affected jurisdictions and their sympathizers.
To date, we have not experienced any material impact relating to cyber-attacks or other information security breaches. However, if onefuture attacks or more of these events occurs, itbreaches could lead to security breaches of the networks, systems or devices that our customers use to access our integrated products and services, which in turn could result in the unauthorized disclosure, release, gathering, monitoring, misuse, loss or destruction of confidential, proprietary and other information (including account data information) or data security compromises. Such eventsattacks or breaches could also cause service interruptions, malfunctions or other failures in the physical infrastructure or operations systems that support our businesses and customers (such as the lack of availability of our value-added systems)services), as well as the operations of our customers or other third parties. Any actual attacksIn addition, they could lead to damage to our reputation with our customers and other parties and the market, additional costs to MasterCardus (such as repairing systems, adding new personnel or protection technologies or compliance costs), regulatory penalties, financial losses to both us and our customers and partners and the loss of customers and business opportunities. If such attacks are not detected immediately, their effect could be compounded.
We maintain an information security program, a business continuity program and insurance coverage (each reviewed by our Board of Directors and its Audit Committee), and our processing systems incorporate multiple levels of protection, in order to address or otherwise mitigate these risks. We also periodically test our systems to discover and address any potential vulnerabilities. Despite thesevarious mitigation efforts that we undertake, there can be no assurance that we will be immune to these risks and not suffer material breaches and resulting losses in the future.future, or that our insurance coverage would be sufficient to cover all losses. Our risk and exposure to these matters remain heightened because of, among other things, the evolving nature of these threats, theour prominent size and scale of MasterCard and our role in the global payments and technology industries, our plans to continue to implement our digital and mobile channel strategies and develop additional remote connectivity solutions to serve our customers and cardholdersaccount holders when and how they want to be served, our global presence, our extensive use of third-
partythird-party vendors and future joint venture and merger and acquisition opportunities. As a result, information security and the continued development and enhancement of our controls, processes and practices designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority for us. As cyber-threats continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and remediate any information security vulnerabilities. Any of the risks described above could materially adversely affect our overall business and results of operations.
In addition to information security risks for our systems, we also routinely encounter account data compromise events involving merchants and third-party payment processors that process, store or transmit payment transaction data, which affect millions of Mastercard, Visa, Discover, American Express and other types of account holders. Further events of this type may subject us to reputational damage and/or lawsuits involving payment products carrying our brands. Damage to our reputation or that of our brands resulting from an account data breach of either our systems or the systems of our customers, merchants and other third parties could decrease the use and acceptance of our integrated products and services. Such events could also slow or reverse the trend toward electronic payments. In addition to reputational concerns, the cumulative impact of multiple account data compromise events could increase the impact of the fraud resulting from such events by, among other things, making it more difficult to identify consumers. Moreover, while most of the lawsuits resulting from account data breaches do not involve direct claims against us and while we have releases from many issuers and acquirers, we could still face damage claims, which, if upheld, could materially and adversely affect our results of operations. Such events could have a material adverse impact on our transaction volumes, results of operations and prospects for future growth, or increase our costs by leading to additional regulatory burdens being imposed on us.
Service disruptions that cause us to be unable to process transactions or service our customers could materially affect our overall business and results of operations.
Our transaction processingswitching systems and other offerings may experience interruptions as a result of a disaster, including, but not limited to, technology malfunctions, fire, weather events, power outages, telecommunications disruptions, terrorism, workplace violence, accidents or other catastrophic events. Our visibility in the global payments industry may also put us at greater risk of attack by terrorists, activists, or hackers who intend to disrupt our facilities and/or systems. A disaster that occurs at, or in the vicinity of, our primary and/or back-up facilities in any global location could interrupt our services. Although we maintain a business continuity program to analyze risk, assess potential impacts, and develop effective response strategies, we cannot ensure that our business would be immune to these risks.
Additionally, we rely on third-party service providers for the timely transmission of information across our global data network. Inadequate infrastructure in lesser-developed markets could also result in service disruptions, which could impact our ability to do business in those markets. If one of our service providers fails to provide the communications capacity or services we require, as a result of natural disaster, operational disruptions, terrorism, hacking or any other reason, the failure could interrupt our services. BecauseAlthough we maintain a business continuity program to analyze risk, assess potential impacts, and develop effective response strategies, we cannot ensure that our business would be immune to these risks, because of the intrinsic importance of our processingswitching systems to our business, any interruption or
degradation could adversely affect the perception of the reliability of products carrying our brands and materially reduceadversely affect our overall business and our results of operations.
Financial Institution Customers and Other Stakeholder Relationships
Losing a significant portion of business from one or more of our largest financial institution customers could lead to significant revenue decreases in the longer term, which could have a material adverse impact on our business and our results of operations.
Most of our financial institution customer relationships are not exclusive and may be terminated by our customers. Our customers can reassess their commitments to us at any time in the future and/or develop their own competitive services. Accordingly, our business agreements with these customers may not reduce the risk inherent in our business that customers may terminate their relationships with us in favor of relationships with our competitors, or for other reasons, or might not meet their contractual obligations to us.
In addition, a significant portion of our revenue is concentrated among our five largest financial institution customers. Loss of business from any of our large customers could have a material adverse impact on our overall business and results of operations.
Exclusive/near exclusive relationships certain customers have with our competitors may have a material adverse impact on our business.
Certain customers have exclusive, or nearly-exclusive, relationships with our competitors to issue payment products, and these relationships may make it difficult or cost-prohibitive for us to do significant amounts of business with them to increase our revenues. In addition, these customers may be more successful and may grow faster than the customers that primarily issue our cards,payment products, which could put us at a competitive disadvantage. Furthermore, we earn substantial revenue from customers with nearly-exclusive relationships with our competitors. Such relationships could provide advantages to the customers to shift business from us to the competitors with which they are principally aligned. A significant loss of our existing revenue or transaction volumes from these customers could have a material adverse impact on our business.
Consolidation in the banking industry could materially and adversely affect our overall business and results of operations.
The banking industry has undergone substantial, accelerated consolidation in the past. Consolidations have included customers with a substantial MasterCardMastercard portfolio being acquired by institutions with a strong relationship with a competitor. If significant consolidation among customers were to continue, it could result in the substantial loss of business for us, which could have a material adverse impact on our business and prospects. In addition, one or more of our customers could seek to merge with, or acquire, one of our competitors, and any such transaction could also have a material adverse impact on our overall business. Consolidation could also produce a smaller number of large customers, which could increase their bargaining power and lead to lower prices and/or more favorable terms for our customers. These developments could materially and adversely affect our results of operations.
Stakeholders
Our failureour issuing and acquiring customers and, in many jurisdictions, their ability to maintaineffectively manage or help manage our relationships with issuers and acquirers may materially and adversely affect our business.brands.
While we work directly with many stakeholders in the payments system, including merchants, governments and large digital companies and other technology companies, we are, and will continue to be, significantly dependent on our relationships with our issuers and acquirers and their furtherrespective relationships with cardholdersaccount holders and merchants to support our programs and services. Furthermore, we depend on our issuing partners and acquirers to continue to innovate to maintain competitiveness in the market. We do not issue cards or other payment devices, extend credit to cardholdersaccount holders or determine the interest rates or other fees charged to cardholders using our products.account holders. Each issuer determines these and most other competitive payment program features. In addition, we do not establish the discount rate that merchants are charged for acceptance, which is the responsibility of our acquiring customers. As a result, our business significantly depends on the continued success and competitiveness of our issuing and acquiring customers and the strength of our relationships with them. In turn, our customers’ success depends on a variety of factors over which we have little or no influence.influence, including economic conditions in global financial markets or their disintermediation by competitors or emerging technologies, as well as regulation. If our customers become financially unstable, we may lose revenue or we may be exposed to settlement risk. See our risk factor in “Risk Factors - Settlement Risk”and Third-Party Obligations” in this Part I, Item 1A with respect to how we guarantee certain third-party obligations for further discussion.
With the exception of the United States and a select number of other jurisdictions, most in-country (as opposed to cross-border) transactions conducted using MasterCard,Mastercard, Maestro and Cirrus cards are authorized, cleared and settled by our customers or other processors. Because we do not provide domestic processingswitching services in these countries and do not, as described above, have direct relationships with cardholders,account holders, we depend on our close working relationships with our customers to effectively
manage our brands, and the perception of our payments system, among consumers in these countries. We also rely on these customers to help manage our brands and perception among regulators and merchants in these countries, alongside our own relationships with them. From time to time, our customers may take actions that we do not believe to be in the best interests of our payments system overall, which may materially and adversely impact our business. If our customers’ actions cause significant negative perception of the global payments industry or our brands, cardholders may reduce the usage of our programs, which could reduce our revenues and negatively impact our results of operations.
Merchants’ continued focus on acceptance costs may lead to additional litigation and regulatory proceedings and increase our incentive program costs, which could materially and adversely affect our profitability.
Merchants are an important constituencyconstituents in our payments system. We rely on both our relationships with them, as well as their relationships with our issuer and acquirer customers, to continue to expand the acceptance of our cardsintegrated products and payment devices.services. We also work with merchants to help them enable new sales channels, create better purchase experiences, improve efficiencies, increase revenues and fight fraud. In the retail industry, there is a set of larger merchants with increasingly global scope and influence. We believe that these merchants are having a significant impact on all participants in the global payments industry, including MasterCard.Mastercard. Some large merchants have supported the legal, regulatory and legislative challenges to interchange fees that MasterCardMastercard has been defending, including the U.S. merchant litigations. See our risk factor in “Risk Factors – Risks Related to Our Participation in the Payments Industry” in this Part I, Item 1A with respect to payments industry regulation, including interchange fees. The continued focus of merchants on the costs of accepting various forms of payment, including in connection with the growth of digital payments, may lead to additional litigation and regulatory proceedings.
MerchantsCertain larger merchants are also able to negotiate incentives from us and pricing concessions from our issuer and acquirer customers as a condition to accepting our products. We also make payments to certain merchants to incentivize them to create co-branded payment cards and devices.programs with us. As merchants consolidate and become even larger, we may have to increase the amount of incentives that we provide to certain merchants, which could materially and adversely affect our results of operations. Competitive and regulatory pressures on pricing could make it difficult to offset the costs of these incentives. Additionally, if the rate of merchant acceptance growth slows our business could suffer.
Our work with governments exposes us to unique risks that could have a material impact on our business and results of operations.
As we increase our work with national, state and local governments, both indirectly through financial institutions and with them directly as our customers, we may face various risks inherent in associating or contracting directly with governments. These risks include, but are not limited to, the following:
Governmental entities typically fund projects through appropriated monies. Changes in governmental priorities or other political developments, including disruptions in governmental operations, could impact approved funding and result in changes in the scope, or lead to the termination of, the arrangements or contracts we or financial institutions enter into with respect to our payment products and services.
Our work with governments subjects us to U.S. and international anti-corruption laws, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act. A violation and subsequent judgment or settlement under these laws could subject us to substantial monetary penalties and damages and have a significant reputational impact.
Working or contracting with governments, either directly or via our financial institution customers, can subject us to heightened reputational risks, including extensive scrutiny and publicity, as well as a potential association with the policies of a government as a result of a business arrangement with that government. Any negative publicity or negative association with a government entity, regardless of its accuracy, may adversely affect our reputation.
Settlement and Third-Party Obligation RiskObligations
Our role as guarantor, exposesas well as other contractual obligations, expose us to risk of loss or illiquidity.
AsWe are a guarantor of certain third-party obligations, including those of principal customers and affiliate debit licensees,certain of our customers. In this capacity, we are exposed to credit and liquidity risk of loss or illiquidity:
from these customers and certain service providers. We may incur obligationssignificant losses in connection with transaction settlements if an issuer or acquirera customer fails to fund its daily settlement obligations due to technical problems, liquidity shortfalls, insolvency or other reasons.
If a principal customer or affiliate debit licensee of MasterCard is unable to fulfill its settlement obligations to other customers, we may bear the loss.
Although we are not obligated to do so, we may elect to keep merchants whole if an acquirer defaults on its merchant payment obligations, or to keep prepaid cardholders whole if an issuer defaults on its obligation to safeguard unspent prepaid funds.
Our gross settlement exposure for our brands was approximately $40 billion as of December 31, 2015.
While we believe that we have sufficient liquidity to cover a settlement failure by our largest customer on its peak day (including the availability of our revolving credit facility), are able to seek assignment of underlying receivables from a failed customer and may charge customers for settlement incurred during MasterCard’s ordinary course activities, the term and amount of our guarantee of obligations to principal customers is unlimited. As a result:
Concurrent settlement failures of more than one of our larger customers or of several of our smaller customers either on a given day or over a condensed period of time may exceed our available resources and could materially and adversely affect our overall business and liquidity.
Even if we have sufficient liquidity to cover a settlement failure, we may not be able to recover the cost of such a payment and may therefore be exposed to significant losses, which could materially and adversely affect our results of operations.
These conditions subject us to increased riskWe have significant contractual indemnification obligations with certain customers. Should an event occur that we may have to perform under our settlement guarantees. For more information on our settlement exposure and risk assessment and mitigation practices, see Note 19 (Settlement and Other Risk Management) to the consolidated financial statements included in Part II, Item 8.
Separately, MasterCard also provides guarantees to certain customers and other companies indemnifying them from losses stemming from our failure to perform with respect to our products and services or the failure of third parties to perform. Any significant indemnification obligation which we owe to anytriggers these obligations, such customers or other companiesan event could materially and adversely affect our overall business and resultsresult of operations.
Global Economic and Political Environment
Global economic, political, financial market activityand societal events or conditions could result in a material and adverse impact on our overall business and results of operations.
Adverse economic trends (including distress in financial markets, turmoil in specific economies around the world and additional government intervention) have impacted the environmentkey countries in which we operate. The condition of the economic environmentoperate may accelerate the timing of or increase the impact of risks toadversely affect our financial performance. Such impact may include, but is not limited to, the following:
Our customers may
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Ø | restrict credit lines to cardholders or limitCustomers mitigating their economic exposure by limiting the issuance of new cards to mitigate increasing cardholder defaults, |
Table of Contentsnew Mastercard products and requesting greater incentive or greater cost stability from us. | |
Ø | implement cost reduction initiatives that reduce or eliminate payment card marketing or increase requests for greater incentives or greater cost stability, and |
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Ø | default on their settlement obligations, including as a result of sovereign defaults, causing a liquidity crisis for our other customers. |
ConsumerConsumers and businesses lowering spending, can be negatively impacted bywhich could impact cross-border travel patterns (on which a significant portion of our revenues is dependent).
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Ø | declining economies, foreign currency fluctuations and the pace of economic recovery, which can change cross-border travel patterns, on which a significant portion of our revenues is dependent, and |
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Ø | low levels of consumer and business confidence typically associated with recessionary environments and those markets experiencing relatively high unemployment. |
Government intervention including(including the effect of laws, regulations and/or government investments on or in our customers,financial institution customers), as well as uncertainty due to changing political regimes in executive, legislative and/or judicial branches of government, that may have potential negative effects on our business and our relationships with customers or otherwise alter their strategic direction away from our products.
Tightening of credit availability that could impact the ability of participating financial institutions to lend to us under the terms of our credit facility.
Any of these developments could have a material adverse impact on our overall business and results of operations.
A decline in cross-border activity could adversely affect our results of operations.
We processAdditionally, we switch substantially all cross-border transactions using MasterCard,Mastercard, Maestro and Cirrus-branded cards and generate a significant amount of revenue from cross-border volume fees and transaction switching fees.fees related to switched transactions. Revenue from processingswitching cross-border and currency conversion transactions for our customers fluctuates with the levels and destinations of cross-border travel and our customers’ need for transactions to be converted into their base currency. Cross-border activity may be adversely affected by world geopolitical, economic, weather and other conditions. These include the threat of terrorism and outbreaks of flu, viruses and other diseases. Anydiseases, as well as major environmental events. The uncertainty that could result from such decline inevents could decrease cross-border activity. Additionally, any regulation of interregional interchange fees could also negatively impact our cross-border activity. In each case, decreased cross-border activity could adversely affectdecrease the revenue we receive.
Any of these developments could have a material adverse impact on our overall business and results of operations.
Negative trends in consumer spending could negatively impact our results of operations.
The global payments industry depends heavily upon the overall level of consumer, business and government spending. General economic conditions (such as unemployment, housing and changes in interest rates) and other political conditions (such as devaluation of currencies and government restrictions on consumer spending) in key countries in which we operate may adversely affect our financial performance by reducing the number or average purchase amount of transactions involving our payment cards and devices. Also, as we are headquartered in the United States, a negative perception of the United States could impact the perception of our company, which could adversely affect our business.
Adverse currency fluctuations and foreign exchange controls could negatively impact our results of operations.
During 2015,2018, approximately 61%67% of our revenue was generated from activities outside the United States. This revenue (and the related expense) could be transacted in a non-functional currency or valued based on a currency other than the functional currency of the entity generating the revenues. Resulting exchange gains and losses are included in our net income. Our risk management activities provide protection with respect to adverse changes in the value of only a limited number of currencies and are based on estimates of exposures to these currencies.
In addition, some of the revenue we generate outside the United States is subject to unpredictable currency fluctuations (including devaluationsincluding devaluation of currencies)currencies where the values of other currencies change relative to the U.S. dollar. If the U.S. dollar strengthens compared to currencies in which we generate revenue, this revenue may be translated at a materially lower amount than expected. Furthermore, we may become subject to exchange control regulations that might restrict or prohibit the conversion of our other revenue currencies into U.S. dollars.dollars, such as what we have experienced in Venezuela.
The occurrence of currency fluctuations or exchange controls could have a material adverse impact on our results of operations.
The United Kingdom’s proposed withdrawal from the European Union could harm our business and financial results.
25
TableIn June 2016, voters in the United Kingdom approved the withdrawal of Contentsthe U.K. from the E.U. (commonly referred to as “Brexit”). The U.K. government triggered Article 50 of the Lisbon Treaty on March 29, 2017, which commenced the official E.U. withdrawal process. Uncertainty over the terms of the U.K.’s departure from the E.U. could cause political and economic uncertainty in the U.K. and the rest of Europe, which could harm our business and financial results.Brexit could lead to legal uncertainty and potentially divergent national laws and regulations in the U.K. and E.U. We, as well as our clients who have significant operations in the U.K., may incur additional costs and expenses as we adapt to potentially divergent regulatory frameworks from the rest of the E.U. We may also face additional complexity with regard to immigration and travel rights for our employees located in the U.K. and the E.U. These factors may impact our ability to operate in the E.U. and U.K. seamlessly. Any of these effects of Brexit, among others, could harm our business and financial results.
Brand and Reputational Impact
BrandNegative brand perception may materially and adversely affect our overall business.
Our brands and their attributes are key assets of our business. The ability to attract consumers to our branded products and retain them depends upon the external perception of us and our industry. Our business may be affected by actions taken by our customers, merchants or other organizations that impact the perception of our brands.brands or the payments industry in general. From time to time, our customers may take actions that we do not believe to be in the best interests of our brands, such as creditor practices that may be viewed as “predatory”. Additionally, large digital companies and other technology companies who are our customers use our network to build their own acceptance brands, which could cause consumer confusion and decrease the value of our brand. Moreover, adverse developments with respect to our industry or the industries of our customers may also, by association, impair our reputation, or result in greater regulatory or legislative scrutiny. We have also been pursuing the use of social media channels at an increasingly rapid pace. Under some circumstances, our use of social media, or the use of social media by others as a channel for criticism or other purposes, could also cause rapid, widespread reputational harm to our brands.brands by disseminating rapidly and globally actual or perceived damaging information about us, our products or merchants or other end users who utilize our products. Also, as we are headquartered in the United States, a negative perception of the United States could impact the perception of our company, which could adversely affect our business. Such perception and damage to our reputation could have a material and adverse effect to our overall business.
Account data breachesLack of visibility of our brand in our products and services, or in the products and services of our partners who use our technology, may materially and adversely affect our business.
As more players enter the global payments system, the layers between our brand and consumers and merchants increase. In order to compete with other powerful consumer brands that are also becoming part of the consumer payment experience, we often partner with those brands on payment solutions. These brands include large digital companies and other technology companies who are our customers and use our networks to build their own acceptance brands. In some cases, our brand may not be featured in the payment solution or may be secondary to other brands. Additionally, as part of our relationships with some issuers, our payment brand is only included on the back of the card. As a result, our brand may either be invisible to consumers or may not be the primary brand with which consumers associate the payment experience. This brand invisibility, or any consumer confusion as to our role in the consumer payment experience, could decrease the value of our brand, which could adversely affect our reputationbusiness.
Talent and Culture
We may not be able to attract, hire and retain a highly qualified and diverse workforce, or maintain our corporate culture, which could impact our ability to grow effectively.
Our performance largely depends on the talents and efforts of our employees, particularly our key personnel and senior management. We may be unable to retain or to attract highly qualified employees. The market for key personnel is highly competitive, particularly in technology and other skill areas significant to our business. Additionally, changes in immigration and work permit laws and regulations and related enforcement have made it difficult for employees to work in, or transfer among, jurisdictions in which we have operations and could impair our ability to attract and retain qualified employees. Failure to attract, hire, develop, motivate and retain highly qualified and diverse employee talent, or to maintain a corporate culture that fosters innovation, creativity and teamwork could harm our overall business and results of operations.
We rely on key personnel to lead with integrity. To the extent our issuersleaders behave in a manner that is not consistent with our values, we could experience significant impact to our brand and acquirers, merchants and other third parties process, transmit or store cardholder account and other information in connection with payment cards and devices. In addition, our customers may sponsor (or we may certify as PCI-compliant) third-party processors to process transactions generated by cards carrying our brands and merchants may use third parties to provide services related to card use. A breach of the systems on which sensitive cardholder data and account information are processed, transmitted or stored could lead to fraudulent activity involving cards carrying our brands, damage our reputation, and lead to claims against us, as well as subject us to regulatory actions. We routinely encounter account data compromise events, some of which have been high profile, involving merchants and third-party payment processors that process, store or transmit payment card data, which affect millions of MasterCard, Visa, Discover, American Express and other types of cardholders. These events typically involve external agents hacking the merchants’ or third-party processors’ systems and installing malware to compromise the confidentiality and integrity of those systems. Further data security breaches may subject us to reputational damage and/or lawsuits involving payment cards carrying our brands. Damage to our reputation or that of our brands resulting from an account data breach of either our systems or the systems of our customers, merchants and other third parties could decrease the use and acceptance of our cards and other payment devices, as well as the trend toward electronic payments, which in turn could have a material adverse impact on our transaction volumes, results of operations and prospects for future growth, or increase our costs by leading to additional regulatory burdens being imposed upon us.
In addition to reputational concerns, while most of the lawsuits resulting from account data breaches do not involve direct claims against us, we could face damage claims in various circumstances, which, if upheld, could materially and adversely affect our results of operations.
Fraudulent activity could damage our reputation and encourage regulatory intervention, which could reduce the use and acceptance of our cards and other payment devices.
Criminals are using increasingly sophisticated methods to capture cardholder account information to engage in illegal activities such as counterfeiting or other fraud. Cards that use magnetic-stripe technology, the most widely-used payment technology in the United States, continue to raise heightened vulnerabilities to fraud relative to other technologies due to the static nature of the information on the magnetic stripe. Fraud is also more likely to occur in transactions where the card is not present, such as online commerce, which constitutes an increasing percentage of transactions. In addition, as outsourcing and specialization become commonplace in the payments industry, there are more third parties involved in processing transactions using our cards. Increased fraud levels involving our cards, or misconduct or negligence by third parties processing or otherwise servicing our cards, could lead to regulatory intervention, such as enhanced security requirements, as well as damage to our reputation, which could reduce the use and acceptance of our cards or increase our compliance costs, and thereby have a material adverse impact on our business.corporate culture.
Acquisitions
Acquisitions, strategic investments or entry into new businesses could disrupt our business and harm our results of operations or reputation.
Although we may continue to evaluate and/or make strategic acquisitions of, or acquire interests in joint ventures or other entities related to, complementary businesses, products or technologies, we may not be able to successfully partner with or integrate them.them, despite original intentions and focused efforts. In addition, such an integration may divert management’s time and resources from our core business and disrupt our operations.
Moreover, we may spend time and money on acquisitions or projects that do not meet our expectations or increase our revenue. To the extent we pay the purchase price of any acquisition in cash, it would reduce our cash reserves available to us for other uses, and to the extent the purchase price is paid with our stock, it could be dilutive to our stockholders. Furthermore, we may not be able to successfully finance the business following the acquisition as a result of costs of operations, including any litigation risk which may be inherited from the acquisition.
Any acquisition or entry into a new business could subject us to new regulations with which we would need to comply,comply. This compliance could increase our costs, and we could be subject to liability or reputational harm to the extent we cannot meet any such compliance requirements. Our expansion into new businesses could also result in unanticipated issues which may be difficult to manage. Although we periodically evaluate potential acquisitions of businesses, products and technologies and anticipate continuing to make these evaluations, we cannot guarantee that we will be able to execute and integrate any such acquisitions.
Litigation
Liabilities we may incur for any litigation that has been or may be brought against us could materially and adversely affect our results of operations.
We are a defendant on a number of civil litigations and regulatory proceedings and investigations, including among others, those alleging violations of competition and antitrust law and those involving intellectual property clams. See Note 18 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part II, Item 8 for more details regarding the allegations contained in these complaints and the status of these proceedings. In the event we are found liable in any material litigations or proceedings, particularly in the event we may be found liable in a large class-action lawsuit or on the basis of an antitrust claim entitling the plaintiff to treble damages or under which we were jointly and severally liable, we could be subject to significant damages, which could have a material adverse impact on our overall business and results of operations.
Limitations on our business resulting from litigation or litigation settlements may materially and adversely affect our overall business and results of operations.
Certain limitations have been placed on our business in recent years because of litigation and litigation settlements, such as changes to our no-surcharge rule in the United States. Any future limitations on our business resulting from litigation or litigation settlements could reduce the volume of business that we do with our customers, which may materially and adversely affect our overall business and results of operations.
Class A Common Stock and Governance Structure
Provisions in our organizational documents and Delaware law could be considered anti-takeover provisions and have an impact on change-in-control.
Provisions contained in our amended and restated certificate of incorporation and bylaws and Delaware law could be considered anti-takeover provisions, including provisions that could delay or prevent entirely a merger or acquisition that our stockholders consider favorable. These provisions may also discourage acquisition proposals or have the effect of delaying or preventing entirely a change in control, which could harm our stock price. For example, subject to limited exceptions, our amended and restated certificate of incorporation prohibits any person from beneficially owning more than 15% of any of the Class A common stock or any other class or series of our stock with general voting power, or more than 15% of our total voting power. In addition:
our stockholders are not entitled to the right to cumulate votes in the election of directors;directors
our stockholders are not entitled to act by written consent;consent
a vote of 80% or more of all of the outstanding shares of our stock then entitled to vote is required for stockholders to amend any provision of our bylaws; andbylaws
any representative of a competitor of MasterCardMastercard or of theMastercard Foundation is disqualified from service on our board of directors.directors
TheMastercard Foundation’s substantial stock ownership, and restrictions on its sales, may impact corporate actions or acquisition proposals favorable to, or favored by, the other public stockholders.
As of February 4, 2016, the8, 2019, Mastercard Foundation owned 115,446,594112,181,762 shares of Class A common stock, representing approximately 10.6%11.1% of our general voting power. TheMastercard Foundation may not sell or otherwise transfer its shares of Class A common stock prior to April
26, 2026,May 1, 2027, except to the extent necessary to satisfy its charitable disbursement requirements, for which purpose earlier sales are permitted. Mastercard Foundation is permitted to sell all of its remaining shares after May 1, 2027, subject to certain conditions. The directors of theMastercard Foundation are required to be independent of us and our customers. The ownership of Class A common stock by theMastercard Foundation, together with the restrictions on transfer, could discourage or make more difficult acquisition proposals favored by the other holders of the Class A common stock. In addition, because theMastercard Foundation is restricted from selling its shares for an extended period of time, it may not have the same interest in short or medium-term movements in our stock price as, or incentive to approve a corporate action that may be favorable to, our other stockholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
As of December 31, 2015, MasterCard2018, Mastercard and its subsidiaries owned or leased 154169 commercial properties. We own our corporate headquarters, a 472,600 square foot building located in Purchase, New York. The building is approximately 500,000 square feet. There is no outstanding debt on this building. Our principal technology and operations center, is a 528,000 square foot leased facility located in O’Fallon, Missouri. The term of the lease on this facilityMissouri, is 10 years, which commenced on March 1, 2009.also approximately 500,000 square feet. Our leased properties in the United States are located in 9nine states and in the District of Columbia. We also lease and own properties in 6074 other countries. These facilities primarily consist of corporate and regional offices, as well as our operations centers.
We believe that our facilities are suitable and adequate for the business that we currently conduct. However, we periodically review our space requirements and may acquire or lease new space to meet the needs of our business, or consolidate and dispose of facilities that are no longer required.
ITEM 3. LEGAL PROCEEDINGS
Refer to Notes 10Note 12 (Accrued Expenses and Accrued Litigation) and 18Note 20 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part II, Item 8.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Price Range of Common Stock
Our Class A common stock trades on the New York Stock Exchange under the symbol “MA”. The following table sets forth the intra-day high and low sale prices for our Class A common stock for the four quarterly periods in each of 2015 and 2014. At February 4, 2016, the Company8, 2019, we had 7773 stockholders of record for itsour Class A common stock. We believe that the number of beneficial owners is substantially greater than the number of record holders because a large portion of our Class A common stock is held in “street name” by brokers.
|
| | | | | | | | | | | | | | | |
| | 2015 | | 2014 |
| | High | | Low | | High | | Low |
| First Quarter | $ | 93.00 |
| | $ | 79.82 |
| | $ | 84.75 |
| | $ | 71.75 |
|
| Second Quarter | 96.31 |
| | 85.37 |
| | 77.89 |
| | 68.68 |
|
| Third Quarter | 99.18 |
| | 74.61 |
| | 79.22 |
| | 73.64 |
|
| Fourth Quarter | 101.76 |
| | 88.92 |
| | 89.87 |
| | 69.64 |
|
There is currently no established public trading market for our Class B common stock. There were approximately 344287 holders of record of our non-voting Class B common stock as of February 4, 2016.8, 2019, constituting approximately 1.1% of our total outstanding equity.
Stock Performance Graph
The graph and table below compare the cumulative total stockholder return of Mastercard’s Class A common stock, the S&P 500 Financials and the S&P 500 Index for the five-year period ended December 31, 2018. The graph assumes a $100 investment in our Class A common stock and both of the indices and the reinvestment of dividends. Mastercard’s Class B common stock is not publicly traded or listed on any exchange or dealer quotation system.
Total returns to stockholders for each of the years presented were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | Indexed Returns |
| | Base period | | For the Years Ended December 31, |
| Company/Index | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 |
| Mastercard | $ | 100.00 |
| | $ | 103.73 |
| | $ | 118.05 |
| | $ | 126.20 |
| | $ | 186.37 |
| | $ | 233.56 |
|
| S&P 500 Financials | 100.00 |
| | 115.20 |
| | 113.44 |
| | 139.31 |
| | 170.21 |
| | 148.03 |
|
| S&P 500 Index | 100.00 |
| | 113.69 |
| | 115.26 |
| | 129.05 |
| | 157.22 |
| | 150.33 |
|
Dividend Declaration and Policy
During the years ended December 31, 20152018 and 2014,2017, we paid the following quarterly cash dividends per share on our Class A common stock and Class B Commoncommon stock:
| | | | Dividend per Share | Dividend per Share |
| | 2015 | | 2014 | 2018 | | 2017 |
| First Quarter | $ | 0.16 |
| | $ | 0.11 |
| $ | 0.25 |
| | $ | 0.22 |
|
| Second Quarter | 0.16 |
| | 0.11 |
| 0.25 |
| | 0.22 |
|
| Third Quarter | 0.16 |
| | 0.11 |
| 0.25 |
| | 0.22 |
|
| Fourth Quarter | 0.16 |
| | 0.11 |
| 0.25 |
| | 0.22 |
|
On December 8, 2015,4, 2018, our Board of Directors declared a quarterly cash dividend of $0.19$0.33 per share paid on February 9, 20168, 2019 to holders of record on January 8, 20169, 2019 of our Class A common stock and Class B common stock. On February 2, 2016,5, 2019, our Board of Directors declared a quarterly cash dividend of $0.19$0.33 per share payable on May 9, 20162019 to holders of record on April 8, 20169, 2019 of our Class A common stock and Class B common stock.
Subject to legally available funds, we intend to continue to pay a quarterly cash dividend on our outstanding Class A common stock and Class B common stock. However, the declaration and payment of future dividends is at the sole discretion of our Board of Directors after taking into account various factors, including our financial condition, operating results, available cash and current and anticipated cash needs.
Issuer Purchases of Equity Securities
On December 2, 2014, the Company’s4, 2017, our Board of Directors approved a new share repurchase program authorizing the Companyus to repurchase up to $3.75$4 billion of itsour Class A common stock (the “December 2014“2017 Share Repurchase Program”). This program became effective in 2018. On December 4, 2018, our Board of Directors approved a share repurchase program authorizing us to repurchase up to $6.5 billion of our Class A common stock (the “2018 Share Repurchase Program”). This program became effective in January 2015. On December 8, 2015, the Company’s Board of Directors approved a new share repurchase program authorizing the Company to repurchase up to $4 billion of its Class A common stock (the “December 2015 Share Repurchase Program”). This program became effective in February 2016. We typically complete a share repurchase program before a new program becomes effective.2019.
During the fourth quarter of 2015, MasterCard2018, we repurchased a total of approximately 8.14.4 million shares for $793$888 million at an average price of $97.43$201.20 per share of Class A common stock. The Company’sOur repurchase activity during the fourth quarter of 20152018 consisted of open market share repurchases and is summarized in the following table:
| | | Period | | Total Number of Shares Purchased | | Average Price Paid per Share (including commission cost) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Dollar Value of Shares that may yet be Purchased under the Plans or Programs 1 | | Total Number of Shares Purchased | | Average Price Paid per Share (including commission cost) | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Dollar Value of Shares that may yet be Purchased under the Plans or Programs 1 |
| October 1 – 31 | | 1,912,149 |
| | $ | 94.07 |
| | 1,912,149 |
| | $ | 1,119,663,418 |
| | 2,390,996 |
| | $ | 206.39 |
| | 2,390,996 |
| | $ | 695,528,134 |
|
| November 1 – 30 | | 2,837,992 |
| | $ | 99.42 |
| | 2,837,992 |
| | $ | 837,513,192 |
| | 1,027,633 |
| | 197.12 |
| | 1,027,633 |
| | 492,962,254 |
|
| December 1 – 31 | | 3,388,704 |
| | $ | 97.67 |
| | 3,388,704 |
| | $ | 4,506,532,273 |
| | 996,945 |
| | 192.94 |
| | 996,945 |
| | 6,800,613,788 |
|
| Total | | 8,138,845 |
| | $ | 97.43 |
| | 8,138,845 |
| | | | 4,415,574 |
| | 201.20 |
| | 4,415,574 |
| | |
1 Dollar value of shares that may yet be purchased under the December 20142017 Share Repurchase Program and the December 20152018 Share Repurchase Program isare as of the end of the period.each period presented.
ITEM 6. SELECTED FINANCIAL DATA
The statement of operations data and the cash dividends declared per sharepresented below for the years ended December 31, 2015, 20142018, 2017 and 2013,2016, and the balance sheet data as of December 31, 20152018 and 2014,2017, were derived from the audited consolidated financial statements of MasterCardMastercard Incorporated included in Part II, Item 8. The statement of operations data and the cash dividends declared per sharepresented below for the years ended December 31, 20122015 and 2011,2014, and the balance sheet data as of December 31, 2013, 20122016, 2015 and 2011,2014, were derived from audited consolidated financial statements not included in this Report. The data set forth below should be read in conjunction with, and are qualified by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 and our consolidated financial statements and notes thereto included in Part II, Item 8.
| | | | Years Ended December 31, | Years Ended December 31, |
| | 2015 | | 2014 | | 2013 | | 2012 | | 2011 | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | (in millions, except per share data) | (in millions, except per share data) |
| Statement of Operations Data: | | | | | | | | | | | | | | | | | | |
| Net revenue | $ | 9,667 |
| | $ | 9,441 |
| | $ | 8,312 |
| | $ | 7,391 |
| | $ | 6,714 |
| $ | 14,950 |
| | $ | 12,497 |
| | $ | 10,776 |
| | $ | 9,667 |
| | $ | 9,441 |
|
| Total operating expenses | 4,589 |
| | 4,335 |
| | 3,809 |
| | 3,454 |
| | 4,001 |
| 7,668 |
| | 5,875 |
| | 5,015 |
| | 4,589 |
| | 4,335 |
|
| Operating income | 5,078 |
| | 5,106 |
| | 4,503 |
| | 3,937 |
| | 2,713 |
| 7,282 |
| | 6,622 |
| | 5,761 |
| | 5,078 |
| | 5,106 |
|
| Net income | 3,808 |
| | 3,617 |
| | 3,116 |
| | 2,759 |
| | 1,906 |
| 5,859 |
| | 3,915 |
| | 4,059 |
| | 3,808 |
| | 3,617 |
|
| Basic earnings per share | 3.36 |
| | 3.11 |
| | 2.57 |
| | 2.20 |
| | 1.49 |
| 5.63 |
| | 3.67 |
| | 3.70 |
| | 3.36 |
| | 3.11 |
|
| Diluted earnings per share | 3.35 |
| | 3.10 |
| | 2.56 |
| | 2.19 |
| | 1.48 |
| 5.60 |
| | 3.65 |
| | 3.69 |
| | 3.35 |
| | 3.10 |
|
| | | | | | | | | | | | | | | | | | | |
| Balance Sheet Data: | | | | | | | | | | | | | | | | | | |
| Total assets | $ | 16,269 |
| | $ | 15,329 |
| | $ | 14,242 |
| | $ | 12,462 |
| | $ | 10,693 |
| $ | 24,860 |
| | $ | 21,329 |
| | $ | 18,675 |
| | $ | 16,250 |
| | $ | 15,329 |
|
| Long-term debt | 3,287 |
| | 1,494 |
| | — |
| | — |
| | — |
| 5,834 |
| | 5,424 |
| | 5,180 |
| | 3,268 |
| | 1,494 |
|
| Equity | 6,062 |
| | 6,824 |
| | 7,495 |
| | 6,929 |
| | 5,877 |
| |
| Total equity | | 5,418 |
| | 5,497 |
| | 5,684 |
| | 6,062 |
| | 6,824 |
|
| | | | | | | | | | | |
| Cash dividends declared per share | 0.67 |
| | 0.49 |
| | 0.29 |
| | 0.12 |
| | 0.06 |
| $ | 1.08 |
| | $ | 0.91 |
| | $ | 0.79 |
| | $ | 0.67 |
| | $ | 0.49 |
|
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and notes of MasterCardMastercard Incorporated and its consolidated subsidiaries, including MasterCardMastercard International Incorporated (“MasterCardMastercard International”) (together, “MasterCard”“Mastercard” or the “Company”), included elsewhere in this Report. Certain prior period amounts have been reclassified to conform to the 20152018 presentation. For 20142017 and 2013, net revenue and general and administrative expenses were revised to correctly classify $322016, $127 million and $34$113 million, respectively, of customer incentive expenses as contra revenue instead ofwere reclassified from advertising and marketing expenses to general and administrative expenses. This revisionThe reclassification had no impact on total operating expenses, operating income or net income. Percentage changes provided throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” were calculated on amounts rounded to the nearest thousand.
Business Overview
Mastercard is a technology company in the global payments industry that connects consumers, financial institutions, merchants, governments, digital partners, businesses and other organizations worldwide, enabling them to use electronic forms of payment instead of cash and checks. We make payments easier and more efficient by creating a wide range of payment solutions and services using our family of well-known brands, including Mastercard®, Maestro® and Cirrus®. We are a multi-rail network. Through our core global payments processing network, we facilitate the switching (authorization, clearing and settlement) of payment transactions and deliver related products and services. With additional payment capabilities that include real-time account based payments (including automated clearing house (“ACH”) transactions), we offer customers one partner to turn to for their payment needs for both domestic and cross-border transactions across multiple payment flows. We also provide value-added offerings such as safety and security products, information and analytics services, consulting, loyalty and reward programs and issuer and acquirer processing. Our payment solutions are designed to ensure safety and security for the global payments system.
A typical transaction on our core network involves four participants in addition to us: account holder (a consumer who holds a card or uses another device enabled for payment), issuer (the account holder’s financial institution), merchant and acquirer (the merchant’s financial institution). We do not issue cards, extend credit, determine or receive revenue from interest rates or other fees charged to account holders by issuers, or establish the rates charged by acquirers in connection with merchants’ acceptance of our branded products. In most cases, account holder relationships belong to, and are managed by, our financial institution customers.
Financial Results Overview
The following tables provide a summary of our operating results:
|
| | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | | Increase/ (Decrease) | | Year ended December 31, | | Increase/ (Decrease) |
| | 2018 | | 2017 | | | 2017 | | 2016 | |
| | ($ in millions, except per share data) |
| Net revenue | $ | 14,950 |
| | $ | 12,497 |
| | 20% | | $ | 12,497 |
| | $ | 10,776 |
| | 16% |
| | | | | | | | | | | | |
| Operating expenses | $ | 7,668 |
| | $ | 5,875 |
| | 31% | | $ | 5,875 |
| | $ | 5,015 |
| | 17% |
| Operating income | $ | 7,282 |
| | $ | 6,622 |
| | 10% | | $ | 6,622 |
| | $ | 5,761 |
| | 15% |
| Operating margin | 48.7 | % | | 53.0 | % | | (4.3) ppt | | 53.0 | % | | 53.5 | % | | (0.5) ppt |
| | | | | | | | | | | | |
| Income tax expense | $ | 1,345 |
| | $ | 2,607 |
| | (48)% | | $ | 2,607 |
| | $ | 1,587 |
| | 64% |
| Effective income tax rate | 18.7 | % | | 40.0 | % | | (21.3) ppt | | 40.0 | % | | 28.1 | % | | 11.9 ppt |
| | | | | | | | | | | | |
| Net income | $ | 5,859 |
| | $ | 3,915 |
| | 50% | | $ | 3,915 |
| | $ | 4,059 |
| | (4)% |
| | | | | | | | | | | | |
| Diluted earnings per share | $ | 5.60 |
| | $ | 3.65 |
| | 53% | | $ | 3.65 |
| | $ | 3.69 |
| | (1)% |
| Diluted weighted-average shares outstanding | 1,047 |
| | 1,072 |
| | (2)% | | 1,072 |
| | 1,101 |
| | (3)% |
Summary of Non-GAAP Results 1:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | | Increase/(Decrease) | | Year ended December 31, | | Increase/(Decrease) |
| | 2018 | | 2017 | | As adjusted | | Currency-neutral | | 2017 | | 2016 | | As adjusted | | Currency-neutral |
| | ($ in millions, except per share data) |
| Net revenue | $ | 14,950 |
| | $ | 12,497 |
| | 20% | | 20% | | $ | 12,497 |
| | $ | 10,776 |
| | 16% | | 15% |
| | | | | | | | | | | | | | | | |
| Adjusted operating expenses | $ | 6,540 |
| | $ | 5,693 |
| | 15% | | 15% | | $ | 5,693 |
| | $ | 4,898 |
| | 16% | | 16% |
| | | | | | | | | | | | | | | | |
| Adjusted operating margin | 56.2 | % | | 54.4 | % | | 1.8 ppt | | 1.8 ppt | | 54.4 | % | | 54.5 | % | | (0.1) ppt | | (0.2) ppt |
| | | | | | | | | | | | | | | | |
| Adjusted effective income tax rate | 18.5 | % | | 26.8 | % | | (8.3) ppt | | (8.2) ppt | | 26.8 | % | | 28.1 | % | | (1.3) ppt | | (1.3) ppt |
| | | | | | | | | | | | | | | | |
| Adjusted net income | $ | 6,792 |
| | $ | 4,906 |
| | 38% | | 38% | | $ | 4,906 |
| | $ | 4,144 |
| | 18% | | 17% |
| | | | | | | | | | | | | | | | |
| Adjusted diluted earnings per share | $ | 6.49 |
| | $ | 4.58 |
| | 42% | | 41% | | $ | 4.58 |
| | $ | 3.77 |
| | 21% | | 21% |
Note: Tables may not sum due to rounding.
1 The Summary of ContentsNon-GAAP Results excludes the impact of Special Items (subsequently defined) and/or foreign currency. See “Non-GAAP Financial Information” for further information on the Special Items, the impact of foreign currency and the reconciliation to GAAP reported amounts.
Key highlights for 2018 were as follows:
Net revenue increased 20% both as reported and on a currency-neutral basis, in 2018 versus 2017. Current year results include growth of 4 percentage points from the impact of the adoption of the new revenue standard and an additional 0.5 percentage points from our prior year acquisitions. The remaining 15 percentage points of growth was primarily driven by:
Ø Switched transaction growth of 17%, adjusted for the impact of the Venezuela deconsolidation1
Ø Cross-border growth of 18% on a local currency basis1
1 Adjusted to normalize for the effects of differing switching days between periods.
Ø Gross dollar volume growth of 14% on a local currency basis
Ø These increases were partially offset by higher rebates and incentives, which increased 18% both as reported and on a currency-neutral basis.
Operating expenses increased 31% in 2018 versus 2017. Excluding the impact of Special Items (defined below), operating expenses increased 15% both as adjusted and on a currency-neutral basis, primarily driven by:
Ø 3 percentage point increase from the adoption of the new revenue guidance
Ø 2 percentage point increase from acquisitions
Ø 2 percentage point increase from the $100 million contribution to the Mastercard Impact Fund (formerly referred to as Mastercard’s Center for Inclusive Growth Fund), a non-profit charitable organization.
The remaining 8 percentage points of growth was primarily related to our continued investment in strategic initiatives and higher operating costs.
The effective income tax rate was 18.7% in 2018 versus 40.0% in 2017. The lower effective tax rate for the period was primarily due to additional tax expense in 2017 attributable to comprehensive U.S. tax legislation (“U.S. Tax Reform”) passed on December 22, 2017, a lower enacted statutory tax rate in the U.S. and Belgium and a more favorable geographic mix of earnings. The lower effective tax rate for the period was also attributable to discrete tax benefits, relating primarily to the carryback of foreign tax credits due to transition rules, along with provisions for legal matters in the United States. These benefits were partially offset by the non-deductible fine issued by the European Commission.
Other financial highlights for 2018 were as follows:
We generated net cash flows from operations of $6.2 billion.
We completed a debt offering for an aggregate principal amount of $1.0 billion.
We repurchased 26 million shares of our common stock for $4.9 billion and paid dividends of $1.0 billion.
We recorded litigation provision charges of $1.1 billion. See Note 20 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part II, Item 8 for further discussion.
Non-GAAP Financial Information
Non-GAAP financial information is defined as a numerical measure of a company’s performance that excludes or includes amounts so as to be different than the most comparable measure calculated and presented in accordance with accounting principles generally accepted in the United States (“GAAP”). This report on Form 10-K containsOur non-GAAP financial measures that exclude the impact of the following special items (“Special Items”):.
Litigation provisions
U.S. Employee Pension Plan Settlement Charge - in 2015, the CompanyDuring 2018, we recorded a settlement chargepre-tax charges of $791,128 million ($501,008 million after tax, or $0.040.96 per diluted share) relatingrelated to the termination of its qualified U.S. defined benefit pension plan in general and administrative expenses. See Note 11 (Pension, Postretirement and Savings Plans) to the consolidated financial statementslitigation provisions which included in Part II, Item 8 for further discussion.pre-tax charges of:
Ø $654 million related to a fine issued by the European Commission
Ø $237 million related to both the U.S. merchant class litigation and the filed and anticipated opt-out U.S. merchant cases
Ø $237 million related to litigation settlements with U.K. Merchant Litigation Settlement Provision - in and Pan-European merchants.
2015, the CompanyDuring 2017, we recorded a provision for a litigation settlementpre-tax charges of $6115 million ($4410 million after tax, or $0.040.01 per diluted share) relatingrelated to a merchant litigation settlement with Canadian merchants.
During 2016, we recorded pre-tax charges of $117 million ($85 million after tax, or $0.08 per diluted share) related to litigation settlements with U.K. merchants.
Tax act
During 2018, we recorded a $75 million net tax benefit ($0.07 per diluted share) which included a $90 million benefit ($0.09 per diluted share) related to the carryback of foreign tax credits due to transition rules, offset by a net $15 million expense ($0.01 per diluted share) primarily related to the true-up to our 2017 mandatory deemed repatriation tax on accumulated foreign earnings.
During 2017, we recorded additional tax expense of $873 million ($0.81 per diluted share) which includes $825 million of provisional charges attributable to a one-time deemed repatriation tax on accumulated foreign earnings (the “Transition Tax”), the remeasurement of our net deferred tax asset in the U.K. U.S. and the recognition of a deferred tax liability related to a change in assertion regarding reinvestment of foreign earnings, as well as $48 million additional tax expense related to a foregone foreign tax credit benefit on 2017 repatriations.
Venezuela charge
During 2017, we recorded a pre-tax charge of $167 million ($108 million after tax, or $0.10 per diluted share) in general and administrative expenses related to the deconsolidation of our Venezuelan subsidiaries.
See Note 181 (Summary of Significant Accounting Policies), Note 19 (Income Taxes) and Note 20 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part II, Item 8 for further discussion.
Provision for settlements relating to U.S. Merchant Litigations - in 2013, the Company recorded an incremental net charge of $95 million ($61 million after tax or $0.05 per diluted share) related to the opt-out merchants, representing a change in its estimate of probable losses relating to these matters. See Note 18 (Legal and Regulatory Proceedings) for further discussion to the consolidated financial statements included in Part II, Item 8.
MasterCard excludesWe excluded these Special Items because itsas management monitors significantevaluates the underlying operations and performance of the Company separately from litigation judgments and settlements related to interchange and other one-time items, separately from ongoing operationsas well as the related tax impacts.
In addition, we present growth rates adjusted for the impact of foreign currency, which is a non-GAAP financial measure. Currency-neutral growth rates are calculated by remeasuring the prior period’s results using the current period’s exchange rates for both the translational and evaluates ongoing performance without these amounts. MasterCard presentstransactional impacts on operating results. The impact of foreign currency translation represents the effect of translating operating results where the functional currency is different than our U.S. dollar reporting currency. The impact of the transactional foreign currency represents the effect of converting revenue and expenses occurring in a currency other than the functional currency. We believe the presentation of the impact of foreign currency provides relevant information.
We believe that the non-GAAP financial measures to enhancepresented facilitate an investor’s understanding of MasterCard’s ongoingour operating resultsperformance and to facilitateprovide a meaningful comparison of itsour results between periods. MasterCard’s management uses theseWe use non-GAAP financial measures to, among other things, evaluate itsour ongoing operations in relation to historical results, for internal planning and forecasting purposes and in the calculation of performance-based compensation. See “Overview”
Operating expenses, operating margin, effective income tax rate, net income and “Financial Results” sectionsdiluted earnings per share, adjusted for the tables that provide a reconciliation of the operating results and growth to the most directly comparable GAAP measure. The presentation ofSpecial Items, are non-GAAP financial measures and should not be considered in isolation orrelied upon as a substitutesubstitutes for the Company’s related financial results preparedmeasures calculated in accordance with GAAP.
Overview
We recorded net income of $3.8 billion, or $3.35 per diluted share in 2015 versus net income of $3.6 billion, or $3.10 per diluted share in 2014. Reported net income grew 5% in 2015 versus the comparable period in 2014.
Excluding the impact of the Special Items, we had adjusted net income of $3.9 billion, or $3.43 per adjusted diluted share in 2015. Adjusted net income increased 8% in 2015 versus the comparable period in 2014. The increase in adjusted net income was driven by:
Net revenue growth of 2%, primarily driven by increases across our revenue categories and the impact from acquisitions, which contributed 2 percentage points of growth, partially offset by higher rebates and incentives and the impact from foreign currency translation, which decreased growth by 6 percentage points. In 2015, our processed transactions increased 12% versus the comparable period in the prior year. In 2015, our gross dollar volumes increased 13% and our cross-border volume increased 16%, both on a local currency basis, versus the comparable period in the prior year, respectively.
Excluding the impact of Special Items, adjusted operating expenses in 2015 increased 3%, primarily due to higher general and administrative expenses as a result of acquisitions and higher data processing costs, partially offset by improved cost control initiatives and the favorable impact of foreign currency translation and transaction gains. Including the impact of Special Items, operating expenses increased 6% in 2015 versus the comparable period in 2014.
Total other expense increased to $120 million in 2015 versus $27 million for the comparable period in 2014, resulting from impairment charges taken on certain investments in 2015 and higher interest expense resulting from incremental debt issued in 2014 and 2015.
An improved effective tax rate of 23.2% in 2015 versus an effective tax rate of 28.8% in the comparable period in 2014, due to the recognition of discrete tax benefits in 2015 resulting from the favorable impact of settlements with tax authorities and the recognition of U.S. foreign tax credit benefits.
The net impact of foreign currency translation, from the devaluation of the euro and the Brazilian real, decreased 2015 net income growth by $230 million or 7 percentage points.
Other financial highlights for 2015 were as follows:
We generated net cash flows from operations of $4.0 billion in 2015, compared to $3.4 billion in 2014.
We acquired two businesses for $609 million, which focus on expanding our footprint and enhancing critical capabilities, including in the area of data analytics with the acquisition of Applied Predictive Technologies.
We completed a debt offering of €1.65 billion ($1.7 billion) and established a commercial paper program with authorization to issue up to $3.75 billion in outstanding notes.
We repurchased 38 million shares of our Class A common stock for $3.5 billion in 2015.
The following tables provide a summary ofreconcile our operating results:as-reported financial measures calculated in accordance with GAAP to the respective non-GAAP adjusted financial measures:
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| | | | | | | | | | | | | | | | | |
| Year ended December 31, 2018 |
| Operating expenses |
| Operating margin |
| Effective income tax rate |
| Net income |
| Diluted earnings per share |
| ($ in millions, except per share data)
|
| Reported - GAAP | $ | 7,668 |
|
| 48.7 | % |
| 18.7 | % |
| $ | 5,859 |
|
| $ | 5.60 |
|
| Litigation provisions | (1,128 | ) |
| 7.5 | % |
| (1.1 | )% |
| 1,008 |
|
| 0.96 |
|
| Tax act | ** |
| | ** |
| | 0.9 | % | | (75 | ) | | (0.07 | ) |
| Non-GAAP | $ | 6,540 |
|
| 56.2 | % |
| 18.5 | % |
| $ | 6,792 |
|
| $ | 6.49 |
|
|
| | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2017 |
| | Operating expenses | | Operating margin | | Effective income tax rate | | Net income | | Diluted earnings per share |
| | ($ in millions, except per share data)
|
| Reported - GAAP | $ | 5,875 |
| | 53.0 | % | | 40.0 | % | | $ | 3,915 |
| | $ | 3.65 |
|
| Tax act | ** |
| | ** |
| | (13.4 | )% | | 873 |
| | 0.81 |
|
| Venezuela charge | (167 | ) | | 1.3 | % | | 0.2 | % | | 108 |
| | 0.10 |
|
| Litigation provisions | (15 | ) | | 0.1 | % | | — | % | | 10 |
| | 0.01 |
|
| Non-GAAP | $ | 5,693 |
| | 54.4 | % | | 26.8 | % | | $ | 4,906 |
| | $ | 4.58 |
|
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| | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, | | |
| | 2015 | | 2014 | | Percent Increase (Decrease) |
| | Actual | | Special Items 1 | | Non-GAAP | | Actual1 | | Actual | | Special Items 1 | | Non-GAAP |
| | (in millions, except per share data and percentages) |
| Net revenue | $ | 9,667 |
| | $ | — |
| | $ | 9,667 |
| | $ | 9,441 |
| | 2% | | —% | | 2% |
| | | | | | | | | | | | | | |
| Operating expenses | $ | 4,589 |
| | $ | (140 | ) | | $ | 4,449 |
| | $ | 4,335 |
| | 6% | | 3% | | 3% |
| Operating income | $ | 5,078 |
| | $ | 140 |
| | $ | 5,218 |
| | $ | 5,106 |
| | (1)% | | (3)% | | 2% |
| Operating margin | 52.5 | % | | | | 54.0 | % | | 54.1 | % | | | | | | |
| | | | | | | | | | | | | | |
| Income tax expense | $ | 1,150 |
| | $ | 45 |
| | $ | 1,195 |
| | $ | 1,462 |
| | (21)% | | (3)% | | (18)% |
| Effective income tax rate | 23.2 | % | | | | 23.4 | % | | 28.8 | % | | | | | | |
| | | | | | | | | | | | | | |
| Net income | $ | 3,808 |
| | $ | 95 |
| | $ | 3,903 |
| | $ | 3,617 |
| | 5% | | (3)% | | 8% |
| | | | | | | | | | | | | | |
| Diluted earnings per share | $ | 3.35 |
| | $ | 0.08 |
| | $ | 3.43 |
| | $ | 3.10 |
| | 8% | | (3)% | | 11% |
| Diluted weighted-average shares outstanding | 1,137 |
| | | | 1,137 |
| | 1,169 |
| | (3)% | | | | (3)% |
|
| | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2016 |
| | Operating expenses | | Operating margin | | Effective income tax rate | | Net income | | Diluted earnings per share |
| | ($ in millions, except per share data)
|
| Reported - GAAP | $ | 5,015 |
| | 53.5 | % | | 28.1 | % | | $ | 4,059 |
| | $ | 3.69 |
|
| Litigation provisions | (117 | ) | | 1.0 | % | | — | % | | 85 |
| | 0.08 |
|
| Non-GAAP | $ | 4,898 |
| | 54.5 | % | | 28.1 | % | | $ | 4,144 |
| | $ | 3.77 |
|
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| | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, | | |
| | 2014 | | 2013 | | Percent Increase (Decrease) |
| | Actual1 | | Actual | | Special Items 1 | | Non-GAAP | | Actual | | Special Items 1 | | Non-GAAP |
| | (in millions, except per share data and percentages) |
| Net revenue | $ | 9,441 |
| | $ | 8,312 |
| | $ | — |
| | $ | 8,312 |
| | 14% | | —% | | 14% |
| | | | | | | | | | | | | | |
| Operating expenses | $ | 4,335 |
| | $ | 3,809 |
| | $ | (95 | ) | | $ | 3,714 |
| | 14% | | (3)% | | 17% |
| Operating income | $ | 5,106 |
| | $ | 4,503 |
| | $ | 95 |
| | $ | 4,598 |
| | 13% | | 2% | | 11% |
| Operating margin | 54.1 | % | | 54.2 | % | | | | 55.3 | % | | | | | | |
| | | | | | | | | | | | | | |
| Income tax expense | $ | 1,462 |
| | $ | 1,384 |
| | $ | 34 |
| | $ | 1,418 |
| | 6% | | 3% | | 3% |
| Effective income tax rate | 28.8 | % | | 30.8 | % | | | | 30.9 | % | | | | | | |
| | | | | | | | | | | | | | |
| Net income | $ | 3,617 |
| | $ | 3,116 |
| | $ | 61 |
| | $ | 3,177 |
| | 16% | | 2% | | 14% |
| | | | | | | | | | | | | | |
| Diluted earnings per share | $ | 3.10 |
| | $ | 2.56 |
| | $ | 0.05 |
| | $ | 2.61 |
| | 21% | | 2% | | 19% |
| Diluted weighted-average shares outstanding | 1,169 |
| | 1,215 |
| | | | 1,215 |
| | (4)% | | | | (4)% |
1 See Non-GAAP Financial Information for the respective impacts relating to the Special Items. There were no Special Items recorded in 2014.
*Note: Tables may not sum due to rounding.
** Not applicable
Business Environment
We process transactions from more than 210 countries and territories and in more than 150 currencies.
Net revenue, generated in the United States was 39% of total revenue in each of 2015, 2014operating expenses, operating margin, effective income tax rate, net income and 2013. No individual country, other than the United States, generated more than 10% of total revenue in any such period, but differences in market growth, economic health and foreign exchange fluctuations in certain countries can have an impact on the proportion of revenue generated outside the United States over time. While the global nature of our business helps protect our operating results from adverse economic conditions in a single or a few countries, the significant concentration of our revenue generated in the United States makes our business particularly susceptible to adverse economic conditions in the United States.
The competitive and evolving nature of the global payments industry provides both challenges to and opportunitiesdiluted earnings per share, adjusted for the continued growth of our business. Adverse economic trends (including distress in financial markets, turmoil in specific economies around the world and additional government intervention) have impacted the environment in which we operate. Certain of our customers, merchants that accept our brands and cardholders who use our brands, have been directly impacted by these adverse economic conditions.
MasterCard’s financial results may be negatively impacted by actions taken by individual financial institutions Special Items and/or by governmental or regulatory bodies. In addition, political instability or a decline in economic conditions in the countries in which the Company operates may accelerate the timing of or increase the impact of risksforeign currency, are non-GAAP financial measures and should not be relied upon as substitutes for measures calculated in accordance with GAAP. The following tables represent the reconciliation of our growth rates reported under GAAP to our financial performance. As a result, our revenue or results of operationsNon-GAAP growth rates:
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| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2018 as compared to the Year Ended December 31, 2017 |
| | Increase/(Decrease) |
| | Net revenue | | Operating expenses | | Operating margin | | Effective income tax rate | | Net income | | Diluted earnings per share |
| Reported - GAAP | 20 | % | | 31 | % | | (4.3) ppt | | (21.3) ppt | | 50 | % | | 53 | % |
| Litigation provisions | ** |
| | (19 | )% | | 7.4 ppt | | (1.0) ppt | | 25 | % | | 26 | % |
| Tax act | ** |
| | ** |
| | ** | | 14.2 ppt | | (33 | )% | | (34 | )% |
| Venezuela charge | ** |
| | 3 | % | | (1.3) ppt | | (0.2) ppt | | (3 | )% | | (3 | )% |
| Non-GAAP | 20 | % | | 15 | % | | 1.8 ppt | | (8.3) ppt | | 38 | % | | 42 | % |
Foreign currency 1 | — | % | | — | % | | – ppt | | 0.1 ppt | | — | % | | — | % |
| Non-GAAP - currency-neutral | 20 | % | | 15 | % | | 1.8 ppt | | (8.2) ppt | | 38 | % | | 41 | % |
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 as compared to the Year Ended December 31, 2016 |
| | Increase/(Decrease) |
| | Net revenue | | Operating expenses | | Operating margin | | Effective income tax rate | | Net income | | Diluted earnings per share |
| Reported - GAAP | 16 | % | | 17 | % | | (0.5) ppt | | 11.9 ppt | | (4 | )% | | (1 | )% |
| Tax act | ** |
| �� | ** |
| | ** | | (13.4) ppt | | 21 | % | | 22 | % |
| Venezuela charge | ** |
| | (3 | )% | | 1.3 ppt | | 0.2 ppt | | 3 | % | | 3 | % |
| Litigation provisions | ** |
| | 3 | % | | (1.0) ppt | | – ppt | | (2 | )% | | (3 | )% |
| Non-GAAP | 16 | % | | 16 | % | | (0.1) ppt | | (1.3) ppt | | 18 | % | | 21 | % |
Foreign currency 1 | (1 | )% | | (1 | )% | | (0.1) ppt | | – ppt | | (1 | )% | | 1 | % |
| Non-GAAP - currency-neutral | 15 | % | | 16 | % | | (0.2) ppt | | (1.3) ppt | | 17 | % | | 21 | % |
Note: Tables may be negatively impacted. MasterCard continuesnot sum due to monitor politicalrounding.
** Not applicable
1 Represents the foreign currency translational and economic conditions around the world to identify opportunities for the continued growth of our business and to evaluate the evolution of the global payments industry. Notwithstanding recent encouraging trends, the extent and pace of economic recovery in various regions remains uncertain and the overall business environment may present challenges for MasterCard to grow its business. For a full discussion see “Risk Factors - Business Risk” in Part I, Item 1A.transactional impact.
In addition, our business and our customers’ businesses are subject to regulation in many countries. Regulatory bodies may seek to impose rules and price controls on certain aspects of our business and the payments industry. For further discussion, see Note 18 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part II, Item 8 and our risk factor in “Risk Factors - Legal and Regulatory Risks” in Part I, Item 1A. Further, information security risks for global payments and technology companies such as MasterCard have significantly increased in recent years. Although to date we have not experienced any material impacts relating to cyber-attacks or other information security breaches, there can be no assurance that we will be immune to these risks and not suffer such losses in the future. See our risk factor in “Risk Factors - Business Risks” in Part I, Item 1A related to a failure or breach of our security systems or infrastructure as a result of cyber-attacks.Impact of Foreign Currency Rates
Our primary revenue functional currencies are the U.S. dollar, euro, Brazilian real and the British pound. Our overall operating results are impacted by foreign currency translation, which represents the effect of translating operating results where the functional currency is different than our U.S. dollar reporting currency.
Our operating results can also be impacted by changes intransactional foreign currency. The impact of the transactional foreign currency exchange rates, especiallyrepresents the strengthening or weakeningeffect of the U.S. dollar versus the euroconverting revenue and Brazilian real. The functionalexpense transactions occurring in a currency of MasterCard Europe, our principal European operating subsidiary, is the euro, andother than the functional currency of our Brazilian subsidiary is the Brazilian real. Accordingly, the strengthening or weakening of the U.S. dollar versus the euro and Brazilian real impacts the translation of our European and Brazilian subsidiaries’ operating results into the U.S. dollar. During 2015, the euro and the Brazilian real devalued against the U.S. dollar by 16% and 28%, respectively, versus the comparable period in 2014.
The following table provides a summary of the foreign currency translational impact of changes in the U.S. dollar average exchange rates against the euro and Brazilian real to our operating results for the years ended December 31, 2015, and 2014:
|
| | | |
| | Positive (Negative) Impact from Foreign Currency Translation |
| | Percent |
| | 2015 | | 2014 |
| Net Revenue | (6)% | | (1)% |
| Operating Expenses | 4% | | 1% |
| Net Income | (7)% | | Less than (1)% |
In addition, changescurrency. Changes in foreign currency exchange rates directly impact the calculation of gross dollar volume (“GDV”) and gross euro volume (“GEV”), which are used in the calculation of our domestic assessments, fees, cross-border volume fees and volume relatedvolume-related rebates and incentives. These foreign currency impacts are incremental to the translation impacts discussed above. In
most non-European regions, GDV is calculated based on local currency spending volume converted to U.S. dollars using average exchange rates for the period. In Europe, GEV is calculated based on local currency spending volume converted to euros using average exchange rates for the period. As a result, our domestic assessments, cross-border volume fees and volume relatedvolume-related rebates and incentives are impacted by the strengthening or weakening of the U.S. dollar versus primarily non-European local currencies and the strengthening or weakening of the euro versus primarilyother European local currencies. For example, our billing in Australia is in the U.S. dollar, however, consumer spend in Australia is in the Australian dollar. The foreign currency transactional impact of converting Australian dollars to our U.S. dollar billing currency in U.S. dollars will have an impact on the revenue generated. The strengthening or weakening of the U.S. dollar is evident when GDV growth on a U.S. dollar converteddollar-converted basis is compared to GDV growth on a local currency basis. In 2015,2018, GDV on a U.S. dollar converteddollar-converted basis increased 1% versus13.0%, while GDV growth
on a local currency basis of 13%.increased 14.0% versus 2017. In 2014,2017, GDV on a U.S. dollar converteddollar-converted basis increased 10% versus8.5%, while GDV growth on a local currency basis increased 8.4% versus 2016. Further, the impact from transactional foreign currency occurs in transaction processing revenue, other revenue and operating expenses when the local currency of 13%these items are different than the functional currency.
We incur foreign currency gains and losses from remeasuring monetary assets and liabilities that are in a currency other than the functional currency and from remeasuring foreign exchange derivative contracts (“Foreign Exchange Activity”). The Company attempts toimpact of Foreign Exchange Activity has not been eliminated in our currency-neutral results (see “Non-GAAP Financial Information”) and is recorded in general and administrative expenses. We manage these foreign currency exposuresbalance sheet remeasurement and cash flow risk through itsour foreign exchange risk management activities, which are discussed further in Note 2022 (Foreign Exchange Risk Management) to the consolidated financial statements included in Part II, Item 8. Since we do not designate foreign currency derivatives as hedging instruments pursuant to the accounting standards for derivative instruments and hedging activities, we record gains and losses on foreign exchange derivatives immediately in current-period earnings, with the related hedged item being recognized as the exposures materialize.
The Company generates revenue and hasWe are exposed to currency devaluation in certain countries. In addition, we are subject to exchange control regulations that restrict the conversion of financial assets in countries at risk for currency devaluation.into U.S. dollars. While these revenues and financial assets are not material to MasterCardus on a consolidated basis, they couldwe can be negatively impacted ifshould there be a continued and sustained devaluation of local currencies occurs relative to the U.S. dollar.dollar and/or a continued and sustained deterioration of economic conditions in these countries. Specifically, in 2017, due to foreign exchange regulations which were restricting access to U.S. dollars in Venezuela, an other-than-temporary lack of exchangeability between the Venezuela bolivar and the U.S. dollar impacted our ability to manage risk, process cross-border transactions and satisfy U.S. dollar denominated liabilities related to our Venezuelan operations. As a result of these factors, we concluded that, effective December 31, 2017, we did not meet the accounting criteria for consolidation of these subsidiaries, and therefore we transitioned to the cost method of accounting. This accounting change resulted in a pre-tax charge of $167 million ($108 million after tax, or $0.10 per diluted share) in 2017. We continue to operate and serve our Venezuelan issuers, acquirers, merchants and account holders with our products and services. See Note 1 (Summary of Significant Accounting Policies) to the consolidated financial statements included in Part II, Item 8 for further discussion.
Financial Results
Revenue Description
MasterCard’s business model involves four participants in addition to us: cardholders, merchants, issuers (the cardholders’ financial institutions) and acquirers (the merchants’ financial institutions). Our gross revenue is generated by assessing our customers based primarily on the dollar volume of activity on the cards and other devices that carry our brands and from the fees that we charge our customers for providing transaction processing and other payment-related products and services. Our revenue is based upon transactional information accumulated by our systems or reported by our customers. Our primary revenue billing currencies are the U.S. dollar, euro and Brazilian real.
The price structure for our products and services is complex and is dependent on the nature of volumes, types of transactions and type of products and services we offer to our customers. Our net revenue can be significantly impacted by the following:
domestic or cross-border transactions;
signature-based or PIN-based transactions;
geographic region or country in which the transaction occurs;
volumes/transactions subject to tiered rates;
processed or not processed by MasterCard;
amount of usage of our other products or services; and
amount of rebates and incentives provided to customers.
The Company classifies its net revenue into the following five categories:
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1. | Domestic assessments fees: Domestic assessments are fees charged to issuers and acquirers based primarily on the dollar volume of activity on cards and other devices that carry our brands where the merchant country and the issuer country are the same. Domestic assessments include items such as card assessments, which are fees charged on the number of cards issued or assessments for specific purposes, such as acceptance development or market development programs.
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2. | Cross-border volume fees: Cross-border volume fees are charged to issuers and acquirers based on the dollar volume of activity on cards and other devices that carry our brands where the merchant country and the issuer country are different. In general, a cross-border transaction generates higher revenue than a domestic transaction since cross-border fees are higher than domestic fees, and in most cases also include fees for currency conversion.
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3. | Transaction processing fees: Transaction processing fees are charged for both domestic and cross-border transactions and are primarily based on the number of transactions. Transaction processing fees include charges for the following:
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Switching fees for the following products and services:
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Ø | Authorization is the process by which a transaction is routed to the issuer for approval. In certain circumstances such as when the issuer’s systems are unavailable or cannot be contacted, MasterCard or others, on behalf of the issuer approve in accordance with either the issuer’s instructions or applicable rules (also known as “stand-in”).
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Ø | Clearing is the exchange of financial transaction information between issuers and acquirers after a transaction has been successfully conducted at the point of interaction. MasterCard clears transactions among customers through our central and regional processing systems.
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Ø | Settlement is facilitating the exchange of funds between parties.
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Connectivity fees are charged to issuers and acquirers for network access, equipment and the transmission of authorization and settlement messages. These fees are based on the size of the data being transmitted through and the number of connections to the Company’s network.
Other Processing fees: We extend our processing capabilities in the payment value chain for issuer and acquirer solutions; payment gateways for e-commerce merchants; and mobile gateways for mobile initiated transactions.
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4. | Other revenues: Other revenues consist of other payment-related products and services and are primarily associated with the following:
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Consulting, data analytic and research fees are primarily generated by MasterCard Advisors, the Company’s professional advisory services group.
Safety and security services fees are for products and services we offer to prevent, detect and respond to fraud and to ensure the safety of transactions made on MasterCard products. We work with issuers, merchants and governments to help deploy standards for safe and secure transactions for the global payments system.
Loyalty and rewards solutions fees are charged to issuers for benefits provided directly to consumers with MasterCard-branded cards, such as access to a global airline lounge network, global and local concierge services, individual insurance coverages, emergency card replacement, emergency cash advance services and a 24-hour cardholder service center. For merchants, we provide targeted offers and rewards campaigns and management services for publishing offers, as well as opportunities for holders of co-brand or loyalty cards and rewards program members to obtain rewards points faster.
Program management services provided to prepaid card issuers consist of foreign exchange margin, commissions, load fees, and ATM withdrawal fees paid by cardholders on the sale and encashment of prepaid cards.
The Company also charges for a variety of other payment-related products and services, including account and transaction enhancement services, rules compliance and publications.
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5. | Rebates and incentives (contra-revenue): Rebates and incentives are provided to certain MasterCard customers and are recorded as contra-revenue.
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Revenue Analysis
Gross revenue increased 19% and 18%, or 19% and 17% on a currency-neutral basis, in 20152018 and 2014 increased $903 million2017, respectively, versus the prior year. The increase in both 2018 and $1.5 billion, or 7% and 13%, versus 2014 and 2013, respectively,2017 was primarily driven by an increase in transactions, dollar volume of activity and number of transactions on cards carrying our brands as well as growth in our Advisors business, which includes the impact of our newly acquired data analytics business. This was partially offset by the negative impact from foreign currency translationfor both domestic and the local foreign currency from billing. cross-border transactions and other payment-related products and services.
Rebates and incentives increased 18% and 22% in 20152018 and 2014 increased $677 million2017, respectively, versus the prior year, both as reported and $327 million, or 20%on a currency-neutral basis. The increases in rebates and 11%, versus 2014incentives in 2018 and 2013, respectively,2017 were primarily due to the impact from new and renewed agreements and increased volumes, partially offset by the positive impact of foreign currency translation. volumes.
Our net revenue increased 20% and 16%, or 20% and 15% on a currency-neutral basis, in 20152018 and 2014 increased 2% and 14%2017, respectively, versus 2014 and 2013, respectively. Acquisitions contributed 2the prior year. Current year results include growth of 4 percentage points to netfrom the impact of the adoption of the new revenue growth in both 2015standard and 2014, while foreign currency translation decreased net revenue growth by 6an additional 0.5 percentage points andfrom our prior year acquisitions.
See Note 1 percentage point(Summary of Significant Accounting Policies) to the consolidated financial statements included in 2015 and 2014, respectively.
The following table providesPart II, Item 8 for a summaryfurther discussion of the trend in volume and transaction growth:
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| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2015 | | 2014 |
| | Growth (USD) | | Growth (Local) | | Growth (USD) | | Growth (Local) |
MasterCard-branded GDV 1 | 1 | % | | 13 | % | | 10 | % | | 13 | % |
| Asia Pacific/Middle East/Africa | 6 | % | | 14 | % | | 14 | % | | 17 | % |
| Canada | — | % | | 16 | % | | — | % | | 7 | % |
| Europe | (6 | )% | | 16 | % | | 9 | % | | 14 | % |
| Latin America | (11 | )% | | 15 | % | | 5 | % | | 15 | % |
| United States | 7 | % | | 7 | % | | 8 | % | | 8 | % |
Cross-border Volume 1 | | | 16 | % | | | | 16 | % |
| Processed Transactions Growth | | | 12 | % | | | | 12 | % |
1 Excludes volume generated by Maestro and Cirrus cards.
A significant portion of ournew revenue is concentrated among our five largest customers. In 2015,guidance. Additionally, see Note 3 (Revenue) to the net revenue from these customers was approximately $2.3 billion, or 24%, of total net revenue. The loss of any of these customers or their significant card programs could adversely impact our revenue. In addition, as part of our business strategy, MasterCard, among other efforts, enters into business agreements with customers. These agreements can be terminated in a variety of circumstances. See our risk factor in “Risk Factor - Business Risks”consolidated financial statements included in Part I,II, Item 1A8 for a further discussion.discussion of how we recognize revenue.
The significant components of our net revenue were as follows:
| | | | For the Years Ended December 31, | | Percent Increase (Decrease) | For the Years Ended December 31, | | Percent Increase (Decrease) |
| | 2015 | | 2014 | | 2013 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 | | 2018 | | 2017 |
| | (in millions, except percentages) | ($ in millions) |
| Domestic assessments | $ | 4,086 |
| | $ | 3,967 |
| | $ | 3,688 |
| | 3% | | 8% | $ | 6,138 |
| | $ | 5,130 |
| | $ | 4,411 |
| | 20% | | 16% |
| Cross-border volume fees | 3,225 |
| | 3,054 |
| | 2,715 |
| | 6% | | 12% | 4,954 |
| | 4,174 |
| | 3,568 |
| | 19% | | 17% |
| Transaction processing fees | 4,345 |
| | 4,035 |
| | 3,554 |
| | 8% | | 14% | |
| Transaction processing | | 7,391 |
| | 6,188 |
| | 5,143 |
| | 19% | | 20% |
| Other revenues | 1,991 |
| | 1,688 |
| | 1,331 |
| | 18% | | 27% | 3,348 |
| | 2,853 |
| | 2,431 |
| | 17% | | 17% |
| Gross revenue | 13,647 |
| | 12,744 |
| | 11,288 |
| | 7% | | 13% | 21,831 |
| | 18,345 |
| | 15,553 |
| | 19% | | 18% |
| Rebates and incentives (contra-revenue) | (3,980 | ) | | (3,303 | ) | | (2,976 | ) | | 20% | | 11% | (6,881 | ) | | (5,848 | ) | | (4,777 | ) | | 18% | | 22% |
| Net revenue | $ | 9,667 |
| | $ | 9,441 |
| | $ | 8,312 |
| | 2% | | 14% | $ | 14,950 |
| | $ | 12,497 |
| | $ | 10,776 |
| | 20% | | 16% |
The following table summarizes the primary drivers of net revenue growth:
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| | Volume | | Foreign Currency 1 | | Acquisitions | Other 2 | | Total | Volume | | Acquisitions | | Revenue Standard 1 | | Foreign Currency 2 | | Other 3 | | Total |
| | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
| 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
| Domestic assessments | 12 | % | | 13 | % | | (6 | )% | | (1 | )% | | — | % | | — | % | | (3 | )% | 3 | (4 | )% | 3 | 3 | % | | 8 | % | 14 | % | | 10 | % | | — | % | | — | % | | 6 | % | | — | % | | (1 | )% | | 1 | % | | 2 | % | 4 | 6 | % | 4 | 20 | % | | 16 | % |
| Cross-border volume fees | 14 | % | | 15 | % | | (5 | )% | | — | % | | — | % | | — | % | | (3 | )% | | (3 | )% | | 6 | % | | 12 | % | 17 | % | | 14 | % | | — | % | | — | % | | 1 | % | | — | % | | 1 | % | | — | % | | — | % | | 3 | % | | 19 | % | | 17 | % |
| Transaction processing fees | 11 | % | | 9 | % | | (6 | )% | | — | % | | — | % | | 1 | % | | 3 | % | | 4 | % | | 8 | % | | 14 | % | |
| Transaction processing | | 14 | % | | 15 | % | | — | % | | 1 | % | | — | % | | — | % | | — | % | | 1 | % | | 5 | % | | 4 | % | | 19 | % | | 20 | % |
| Other revenues | ** |
| | ** |
| | (6 | )% | | (1 | )% | | 8 | % | | 7 | % | | 16 | % | 4 | 21 | % | 4 | 18 | % | | 27 | % | ** |
| | ** |
| | 2 | % | | 7 | % | | — | % | | — | % | | (1 | )% | | 1 | % | | 16 | % | 5 | 9 | % | 5 | 17 | % | | 17 | % |
| Rebates and incentives | 6 | % | | 9 | % | | (6 | )% | | (1 | )% | | — | % | | — | % | | 20 | % | 5 | 3 | % | 5 | 20 | % | | 11 | % | 10 | % | | 10 | % | | — | % | | — | % | | (2 | )% | | — | % | | (1 | )% | | 1 | % | | 11 | % | 6 | 11 | % | 6 | 18 | % | | 22 | % |
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| Net revenue | 12 | % | | 12 | % | | (6 | )% | | (1 | )% | | 2 | % | | 2 | % | | (6 | )% | | 1 | % | | 2 | % | | 14 | % | 14 | % | | 11 | % | | 0.5 | % | | 2 | % | | 4 | % | | — | % | | — | % | | 1 | % | | 2 | % | | 2 | % | | 20 | % | | 16 | % |
Note: Table may not sum due to rounding
** Not applicable
1 Reflects translation fromRepresents the euro and Brazilian realimpact of our adoption of the new revenue guidance. For a more detailed discussion on the impact of the new revenue guidance, refer to Note 1 (Summary of Significant Accounting Policies) to the U.S. dollar.consolidated financial statements included in Part II, Item 8.
2 Represents the foreign currency translational and transactional impact versus the prior year.
3 Includes impact from pricing local foreign currency impact from billing and other non-volume based fees.
34 Includes impact of the allocation of revenue to service deliverables, which are recorded in other revenue when services are performed.
45 Includes impacts from AdvisorAdvisors fees, safety and security fees, loyalty and reward solution fees and other payment-related products and services.
56 Includes the impact from timing of new, renewed and expired agreements.
The following table provides a summary of the trend in volume and transaction growth:
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| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2017 |
| | Growth (USD) | | Growth (Local) | | Growth (USD) | | Growth (Local) |
Mastercard-branded GDV 1 | 13 | % | | 14 | % | | 8 | % | | 8 | % |
| Asia Pacific/Middle East/Africa | 13 | % | | 13 | % | | 8 | % | | 9 | % |
| Canada | 10 | % | | 10 | % | | 13 | % | | 10 | % |
| Europe | 18 | % | | 19 | % | | 10 | % | | 10 | % |
| Latin America | 8 | % | | 17 | % | | 17 | % | | 15 | % |
| United States | 10 | % | | 10 | % | | 5 | % | | 5 | % |
Cross-border volume 1 | | | 19 | % | | | | 15 | % |
| Switched transactions | | | 13 | % | | | | 17 | % |
1 Excludes volume generated by Maestro and Cirrus cards.
In 2016, our GDV was impacted by the EU Interchange Fee Regulation related to card payments which became effective in June 2016. The regulation requires that we no longer collect fees on domestic European Economic Area payment transactions that do not use our network brand. Prior to that, we collected a de minimis assessment fee in a few countries, particularly France, on transactions with Mastercard co-badged cards if the brands of domestic networks (as opposed to Mastercard) were used. As a result, the non Mastercard co-badged volume is no longer being included.
The following table reflects GDV growth rates for Europe and Worldwide Mastercard. For comparability purposes, we adjusted growth rates for the impact of Article 8 of the EU Interchange Fee Regulation related to card payments, to exclude the prior period co-badged volume processed by other networks.
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| | | |
| | For the Years Ended December 31, |
| | 2018 | | 2017 |
| | Growth (Local) |
GDV 1 | | | |
| Worldwide as reported | 14% | | 8% |
| Worldwide as adjusted for EU Regulation | 14% | | 10% |
| | | | |
| Europe as reported | 19% | | 10% |
| Europe as adjusted for EU Regulation | 19% | | 16% |
1 Excludes volume generated by Maestro and Cirrus cards.
The following table reflects cross-border volume and switched transactions growth rates. For comparability purposes, we normalized the growth rates for the effects of differing switching days between periods. Additionally, we adjusted the switched transactions growth rate for the deconsolidation of our Venezuelan subsidiaries in 2017. For a more detailed discussion of the deconsolidation of our Venezuelan subsidiaries, refer to Note 1 (Summary of Significant Accounting Policies) to the consolidated financial statements included in Part II, Item 8.
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| | | |
| | For the Years Ended December 31, |
| | 2018 | | 2017 |
| | Growth (Local) |
| Cross-border volume as reported | 19% | | 15% |
| Cross-border volume, normalized | 18% | | 15% |
| | | | |
| Switched transactions as reported | 13% | | 17% |
Switched transactions, normalized1 | 17% | | 16% |
1 Adjusted for the deconsolidation of Venezuela subsidiaries.
No individual country, other than the United States, generated more than 10% of total net revenue in any such period. A significant portion of our revenue is concentrated among our five largest customers. In 2018, the net revenue from these customers was approximately $3.1 billion, or 21%, of total net revenue. The loss of any of these customers or their significant card programs could adversely impact our revenue.
Operating Expenses
Our operating expenses are comprised of general and administrative, advertising and marketing, depreciation and amortization expenses and provisions for litigation settlements. Operating expenses increased 6%31% and 17% in 2015 compared to 2014,2018 and increased 14% in 2014 compared to 2013.2017, respectively, versus the prior year. Excluding the impact of the Special Items, adjusted operating expenses increased 3%15% and 17%16% in 20152018 and 2014,2017, respectively, primarily due to higher generalversus the prior year, both as adjusted and administrative expenses.on a currency-neutral basis. Acquisitions contributed 2 percentage points of growth in 2018.
The components of operating expenses were as follows:
| | | | For the Years Ended December 31, | | | | | | | | | | | | | |
| | 2015 | | 2014 | | Percent Increase (Decrease) | Year ended December 31, | | Increase (Decrease) |
| | Actual | | Special Items 1 | | Non-GAAP | | Actual | | Actual | | Special Items 1 | | Non-GAAP | 2018 | | 2017 | | 2016 | | 2018 | | 2017 |
| | (in millions, except percentages) | ($ in millions) |
| General and administrative | $ | 3,341 |
| | $ | (79 | ) | | $ | 3,262 |
| | $ | 3,152 |
| | 6 | % | | 3% | | 3 | % | $ | 5,174 |
| | $ | 4,653 |
| | $ | 3,827 |
| | 11 | % | | 22 | % |
| Advertising and marketing | 821 |
| | — |
| | 821 |
| | 862 |
| | (5 | )% | | —% | | (5 | )% | 907 |
| | 771 |
| | 698 |
| | 18 | % | | 11 | % |
| Depreciation and amortization | 366 |
| | — |
| | 366 |
| | 321 |
| | 14 | % | | —% | | 14 | % | 459 |
| | 436 |
| | 373 |
| | 5 | % | | 17 | % |
| Provision for litigation settlement | 61 |
| | (61 | ) | | — |
| | — |
| | ** |
| | ** |
| |
| Provision for litigation | | 1,128 |
| | 15 |
| | 117 |
| | ** |
| | ** |
|
| Total operating expenses | $ | 4,589 |
| | $ | (140 | ) | | $ | 4,449 |
| | $ | 4,335 |
| | 6 | % | | 3% | | 3 | % | 7,668 |
| | 5,875 |
| | 5,015 |
| | 31 | % | | 17 | % |
Special Items1 | | (1,128 | ) | | (182 | ) | | (117 | ) | | ** |
| | ** |
|
Adjusted total operating expenses (excluding Special Items1) | | $ | 6,540 |
| | $ | 5,693 |
| | $ | 4,898 |
| | 15 | % | | 16 | % |
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| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended December 31, | | |
| | 2014 | | 2013 | | Percent Increase (Decrease) |
| | Actual | | Actual | | Special Items 1 | | Non-GAAP | | Actual | | Special Items 1 | | Non-GAAP |
| | (in millions, except percentages) |
| General and administrative | $ | 3,152 |
| | $ | 2,615 |
| | $ | — |
| | $ | 2,615 |
| | 21 | % | | —% | | 21 | % |
| Advertising and marketing | 862 |
| | 841 |
| | — |
| | 841 |
| | 3 | % | | —% | | 3 | % |
| Depreciation and amortization | 321 |
| | 258 |
| | — |
| | 258 |
| | 24 | % | | —% | | 24 | % |
| Provision for litigation settlement | — |
| | 95 |
| | (95 | ) | | — |
| | ** |
| | | | ** |
|
| Total operating expenses | $ | 4,335 |
| | $ | 3,809 |
| | $ | (95 | ) | | $ | 3,714 |
| | 14 | % | | (3)% | | 17 | % |
1 See Non-GAAP Financial Information for the respective impacts relating to the Special Items.
* TablesNote: Table may not sum due to rounding.
** Not meaningful.meaningful
371 See “Non-GAAP Financial Information” for further information on Special Items.
The following table summarizes the primary drivers of changes in adjusted operating expenses excluding Special Items, in 20152018 and 2014:2017:
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| | Acquisitions | | Foreign Currency 1 | | Other | | Total - Non-GAAP | Operational | | Special Items 1 | | Acquisitions | | Revenue Standard 2 | | Mastercard Impact Fund 3 | | Foreign Currency 4 | | Total |
| | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 | | 2015 | | 2014 |
| 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 | | 2018 | | 2017 |
| General and administrative | 7 | % | | 7 | % | | (3 | )% | | — | % | | (1 | )% | | 14 | % | | 3 | % | | 21 | % | 11 | % | | 11 | % | | (4 | )% | | 5 | % | | 1 | % | | 6 | % | | — | % | | — | % | | 2 | % | | — | % | | — | % | | 1 | % | | 11 | % | | 22 | % |
| Advertising and marketing | — | % | | — | % | | (7 | )% | | (1 | )% | | 2 | % | | 4 | % | | (5 | )% | | 3 | % | (4 | )% | | 9 | % | | — | % | | — | % | | — | % | | 1 | % | | 21 | % | | — | % | | — | % | | — | % | | — | % | | 1 | % | | 18 | % | | 11 | % |
| Depreciation and amortization | 11 | % | | 13 | % | | (1 | )% | | — | % | | 4 | % | | 11 | % | | 14 | % | | 24 | % | (5 | )% | | — | % | | — | % | | — | % | | 10 | % | | 17 | % | | — | % | | — | % | | — | % | | — | % | | — | % | | — | % | | 5 | % | | 17 | % |
| Provision for litigation settlement | ** |
| | ** |
| | ** |
| | ** |
| | ** |
| | ** |
| | ** |
| | ** |
| |
| Provision for litigation | | ** |
| | ** |
| | ** |
| | ** |
| | ** |
| | ** |
| | ** |
| | ** |
| | ** |
| | ** |
| | ** |
| | ** |
| | ** |
| | ** |
|
| Total operating expenses | 6 | % | | 6 | % | | (4 | )% | | (1 | )% | | 1 | % | | 12 | % | | 3 | % | | 17 | % | 8 | % | | 10 | % | | 16 | % | | 1 | % | | 2 | % | | 6 | % | | 3 | % | | — | % | | 2 | % | | — | % | | — | % | | 1 | % | | 31 | % | | 17 | % |
Note: Table may not sum due to rounding.
** Not meaningful
1 Reflects translation fromSee “Non-GAAP Financial Information” for further information on Special Items.
2 Represents the euro and Brazilian real toimpact of our adoption of the U.S. dollar.
General and Administrative
General and administrative expenses increased 6% in 2015 compared to 2014, and increased 21% in 2014 compared to 2013.
Excludingnew revenue guidance. For a more detailed discussion on the impact of the Special Items, adjusted general and administrative expenses increased 3%new revenue guidance, refer to Note 1 (Summary of Significant Accounting Policies) to the consolidated financial statements included in 2015 comparedPart II, Item 8.
3 Represents contribution to 2014, primarily due to acquisitions and higher data processing costs, partially offset by improved cost controls,a non-profit entity.
4 Represents the favorable impact of foreign currency translation, lapping oftranslational and transactional impact versus the impact of the restructuring charge taken in 2014 and foreign exchange activity gains. prior year.
General and administrative expenses increased 21% in 2014 compared to 2013, due to the impact of investments in our strategic initiatives, acquisitions and the restructuring charge of $87 million taken in 2014.Administrative
The significant components of our general and administrative expenses were as follows:
| | | | For the Years Ended December 31, | | Percent Increase (Decrease) | For the Years Ended December 31, | | Percent Increase (Decrease) |
| | 2015 | | 2014 | | 2013 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 | | 2018 | | 2017 |
| | (in millions, except percentages) | ($ in millions) |
| Personnel | $ | 2,105 |
| | $ | 2,064 |
| | $ | 1,739 |
| | 2% | | 19% | $ | 3,214 |
| | $ | 2,687 |
| | $ | 2,225 |
| | 20% | | 21% |
| Professional fees | 310 |
| | 307 |
| | 251 |
| | 1% | | 22% | 377 |
| | 355 |
| | 337 |
| | 6% | | 5% |
| Data processing and telecommunications | 362 |
| | 273 |
| | 226 |
| | 33% | | 21% | 600 |
| | 504 |
| | 420 |
| | 19% | | 20% |
| Foreign exchange activity | (82 | ) | | (30 | ) | | 2 |
| | ** | | ** | |
Foreign exchange activity 1 | | (36 | ) | | 106 |
| | 34 |
| | ** | | ** |
| Other | 646 |
| | 538 |
| | 397 |
| | 20% | | 36% | 1,019 |
| | 1,001 |
| | 811 |
| | 2% | | 23% |
| General and administrative expenses | 3,341 |
| | 3,152 |
| | 2,615 |
| | 6% | | 21% | 5,174 |
| | 4,653 |
| | 3,827 |
| | 11% | | 22% |
Special Items 1 | (79 | ) | | — |
| | — |
| | |
| Non-GAAP general and administrative expenses (excluding Special Items) | $ | 3,262 |
| | $ | 3,152 |
| | $ | 2,615 |
| | 3% | | 21% | |
Special Item 2 | | — |
| | (167 | ) | | — |
| | ** | | ** |
Adjusted general and administrative expenses (excluding Special Item) 2 | | $ | 5,174 |
| | $ | 4,486 |
| | $ | 3,827 |
| | 15% | | 17% |
1 Includes the impact of the U.S. Employee Pension Plan Settlement Charge, which was recognized in personnel expenses. See Non-GAAP Financial Information.
* TablesNote: Table may not sum due to rounding.
** Not meaningful.meaningful
The primary drivers of changes in general and administrative expenses in 2015 and 2014 were:
The increase in personnel expense in 1 2015 is due to an increase in the number of employees resulting from our acquisitions as well as the U.S. Employee Pension Plan Settlement Charge of $79 million recognized in 2015, partially offset by the lapping of the restructuring charge of $87 million recorded in 2014 and improved cost controls. The increase in personnel expenses in 2014 compared to 2013 was due to an increase in the number of employees from acquisitions and employees required to support our strategic initiatives and a restructuring charge of $87 million recorded in 2014.
Professional fees consist primarily of third-party services, legal costs to defend our outstanding litigation and the evaluation of regulatory developments that impact our industry and brand. Professional fees remained consistent in 2015 and increased in 2014, primarily due to higher third-party service expenses.
Data processing and telecommunication expense consists of expenses to support our global payments network infrastructure, expenses to operate and maintain our computer systems and other
telecommunication system. These expenses increased in both 2015 and 2014 due to capacity growth of our business and higher third party processing costs.
Foreign exchange activity includes gains and losses on foreign exchange derivative contracts and the impact of remeasurement of assets and liabilities denominated in foreign currencies. See Note 2022 (Foreign Exchange Risk Management) to the consolidated financial statements included in Part II, Item 8 for further discussion. Since
2 See “Non-GAAP Financial Information” for further information on Special Items.
The primary drivers of general and administrative expenses in 2018 and 2017, versus the Company does not designateprior year, were as follows:
Personnel expenses increased 20% and 21%, or 19% and 20% on a currency-neutral basis, respectively. The 2018 and 2017 increases were driven by a higher number of employees to support our continued investment in the areas of real-time account-based payments, digital, services, data analytics and geographic expansion. The impact of acquisitions contributed 2 and 6 percentage points of growth for 2018 and 2017, respectively.
Data processing and telecommunication expenses increased 19% and 20%, respectively, both as reported and on a currency-neutral basis, due to capacity growth of our business. Acquisitions contributed 3 and 8 percentage points, respectively.
Foreign exchange activity contributed a benefit of 3 percentage points in 2018 related to gains from our foreign currency derivatives as hedging instruments pursuantexchange activity for derivative contracts primarily due to the accounting standards for derivative instruments and hedging activities, it records gains and losses on foreign exchange derivatives on a current basis, withstrengthening of the associatedU.S. dollar, partially offset being recognized as the exposures materialize. During 2015, we recorded higher gains on derivative contracts, as well asby balance sheet remeasurement gains related primarilylosses. In 2017, foreign exchange activity had a negative impact of 2 percentage points due to the devaluation of the Venezuelan bolivar versus 2014. During 2014, we recorded highergreater losses from foreign exchange derivative gains versus the similar period in 2013.contracts.
Other expenses increased 2% and 23%, or 2% and 25% on a currency-neutral basis, respectively. In 2018, other expenses increased primarily due to the $100 million contribution to the Mastercard Impact Fund. The remaining increase was due to costs to support our strategic development efforts. These increases were primarily offset by the non-recurring Venezuela charge of $167 million recorded in 2017 which was the primary driver of growth for that period. Other expenses include costs to provide loyalty and rewards solutions, travel and meeting expenses and rental expense for our facilities. The increase infacilities and other expenses in both 2015 and 2014 was primarily due to the impact of acquisitions and expenses incurred to support strategic development efforts including costs associated with loyalty and rewards programs.our business.
Advertising and Marketing
In 2015,2018, advertising and marketing expenses decreased 5%, mainlyincreased 18% both as reported and on a currency-neutral basis versus 2017, primarily due to a change in accounting for certain marketing fund arrangements as a result of our adoption of the favorable impact from foreign currency translation and lower media spend,new revenue guidance, partially offset by higher sponsorship promotionsa net decrease in spending on certain marketing campaigns. For a more detailed discussion on the impact of the new revenue guidance, refer to support our strategic initiatives. AdvertisingNote 1 (Summary of Significant Accounting Policies). In 2017, advertising and marketing expenses increased 3% in 2014,11%, or 10% on a currency-neutral basis versus 2016, mainly due to new and renewed sponsorships and increased mediahigher marketing spend primarily related to support our strategic initiatives. See Value-Added Solutions and Marketing sections included in Part I, Item 1 for further discussion of ourcertain marketing strategy.campaigns.
Depreciation and Amortization
Depreciation and amortization expenses increased 14%5% and 17% in 20152018 and 24% in 2014.2017, respectively, versus the prior year, both as reported and on a currency-neutral basis. The increase in depreciation and amortization expense in both 2015 and 20142018 was primarily due to higherthe impact of acquisitions partially offset by the full amortization of capitalized software costs and other intangibles associated with ourcertain intangible assets. In 2017, the increase was primarily due to the impact of acquisitions.
Provision for Litigation Settlement
During 2015, the CompanyIn 2018, we recorded a pre-tax chargecharges of $61$1,128 million for a litigation settlement relating to a merchant litigation in the U.K. In the fourth quarter of 2013, MasterCard recorded an incremental net pre-tax charge of $95which includes $654 million related to a fine issued by the European Commission, $237 million related to both the U.S. merchant class litigation and the filed and anticipated opt-out U.S. merchant cases and $237 million related to litigation settlements with U.K. and Pan-European merchants. During 2017 and 2016, we recorded pre-tax charges of $15 million and $117 million related to litigations with merchants in Canada and the U.S. Merchant Litigation.U.K., respectively. See Note 1820 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part II, Item 8 for further discussion.
Other Income (Expense)
Other income (expense) is comprised primarily of investment income, interest expense, our share of income (losses) from equity method investments and other gains and losses. Total other expense increaseddecreased $22 million to $120$78 million in 20152018 versus $27$100 million for the comparable period in 2014 resulting from impairment charges taken on certain investments in 2015 and higher interest expense resulting from incremental debt issued in 2014 and 2015. Total other expense increased in 2014 compared to 2013 primarily2017 due to higher investment income partially offset by higher interest expense related to our debt issuance in March 2014.February 2018 and higher equity losses in the current year. Total other expense decreased $15 million to $100 million in 2017 versus $115 million in 2016 due to lower impairment charges taken on certain investments last year and a gain on an investment recorded in 2017, partially offset by higher interest expense from debt issued in the fourth quarter of 2017.
Income Taxes
On December 22, 2017, U.S. Tax Reform was enacted into law with the effective date for most provisions being January 1, 2018. U.S. Tax Reform represents significant changes to the U.S. internal revenue code and, among other things:
lowered the corporate income tax rate from 35% to 21%
imposed a one-time deemed repatriation tax on accumulated foreign earnings
provides for a 100% dividends received deduction on dividends from foreign affiliates
requires a current inclusion in U.S. federal taxable income of earnings of foreign affiliates that are determined to be global intangible low taxed income or “GILTI”
creates the base erosion anti-abuse tax, or “BEAT”
provides for an effective tax rate of 13.125% for certain income derived from outside of the U.S. (referred to as foreign derived intangible income or “FDII”)
introduced further limitations on the deductibility of executive compensation
permits 100% expensing of qualifying fixed assets acquired after September 27, 2017
limits the deductibility of interest expense in certain situations and
eliminates the domestic production activities deduction.
While the effective date of the law for most provisions was January 1, 2018, GAAP requires the effects of changes in tax rates be accounted for in the reporting period of enactment, which was the 2017 reporting period.
The effective tax rates for the years ended December 31, 2018, 2017 and 2016 were 18.7%, 40.0% and 28.1%, respectively. The effective income tax rate for 20152018 was lower than the effective income tax rate for 20142017 primarily due to settlements withadditional tax authoritiesexpense of $873 million attributable to U.S. Tax Reform in multiple jurisdictions. Further,2017, a lower 2018 statutory tax rate in the information gained related to the these matters was considered in measuring uncertain tax benefits recognized for the periods subsequent to the periods settled. In addition, the recognition of other U.S. foreign tax creditsand Belgium and a more favorable geographic mix of taxable earnings also contributed to theearnings. The lower effective tax rate is also attributable to discrete tax benefits, relating primarily to $90 million of foreign tax credits generated in 2015.
The2018, which can be carried back and utilized in 2017 under transition rules in the proposed foreign tax credit regulations issued on November 28, 2018, along with provisions for legal matters in the United States. These benefits were partially offset by the nondeductible nature of the fine issued by the European Commission. Excluding the impact of Special Items, the 2018 adjusted effective income tax rate for 2014 was lower than the effective tax rate for 2013improved by 8.3 percentage points to 18.5% from 26.8% in 2017 primarily due to the lower tax rate in the U.S. and a more favorable geographical mix of earnings.
The effective income tax rate for 2017 was higher than the effective income tax rate for 2016 primarily due to additional tax expense of $873 million attributable to U.S. Tax reform, which included provisional amounts of $825 million related to the Transition Tax, the remeasurement of our net deferred tax asset balance in the U.S. and the recognition of a larger repatriation benefit and an increase in the Company’s domestic production activity deduction in the U.S.deferred tax liability related to a change in assertion regarding the Company’s authorization revenue,indefinite reinvestment of a substantial amount of our foreign earnings, as well as $48 million due to a foregone foreign tax credit benefit on current year repatriations. Excluding the impact of U.S. Tax Reform and other Special Items, the 2017 adjusted effective income tax rate improved by 1.3 percentage points to 26.8% from 28.1% in 2016 primarily due to a more favorable geographical mix of earnings, partially offset by an unfavorable mix of earnings in 2014.
During the fourth quarter of 2014, we implemented an initiative to better align our legal entity anda lower U.S. foreign tax structure with our operational footprint outside of the U.S. This initiative resulted in a one-time taxable gain in Belgium relating to the transfer of intellectual property to a related foreign entity in the United Kingdom. We believe this improved alignment will result in greater
flexibility and efficiency with regard to the global deployment of cash, as well as ongoing benefits in our effective income tax rate. See Note 17 (Income Taxes) to the consolidated financial statements included in Part II, Item 8 for further discussion.credit benefit.
The provision for income taxes differs from the amount of income tax determined by applying the U.S. federal statutory income tax rate of 35%21% for 2018 and 35.0% for 2017 and 2016 to pretax income for the years ended December 31, as a result of the following:
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
| | (in millions, except percentages) | ($ in millions) |
| Income before income taxes | $ | 4,958 |
| | | | $ | 5,079 |
| | | | $ | 4,500 |
| | | $ | 7,204 |
| | | | $ | 6,522 |
| | | | $ | 5,646 |
| | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Federal statutory tax | 1,735 |
| | 35.0 | % | | 1,778 |
| | 35.0 | % | | 1,575 |
| | 35.0 | % | 1,513 |
| | 21.0 | % | | 2,283 |
| | 35.0 | % | | 1,976 |
| | 35.0 | % |
| State tax effect, net of federal benefit | 27 |
| | 0.5 | % | | 29 |
| | 0.6 | % | | 19 |
| | 0.4 | % | 46 |
| | 0.6 | % | | 43 |
| | 0.7 | % | | 22 |
| | 0.4 | % |
| Foreign tax effect | (144 | ) | | (2.9 | )% | | (108 | ) | | (2.1 | )% | | (208 | ) | | (4.6 | )% | (92 | ) | | (1.3 | )% | | (380 | ) | | (5.8 | )% | | (188 | ) | | (3.3 | )% |
| Foreign repatriation | (172 | ) | | (3.5 | )% | | (177 | ) | | (3.5 | )% | | (14 | ) | | (0.3 | )% | |
| Impact of settlements with tax authorities | (147 | ) | | (2.9 | )% | | — |
| | — | % | | — |
| | — | % | |
| Other foreign tax credits | (109 | ) | | (2.2 | )% | | (6 | ) | | (0.1 | )% | | (3 | ) | | — | % | |
| European Commission fine | | 194 |
| | 2.7 | % | | — |
| | — | % | | — |
| | — | % |
Foreign tax credits1 | | (110 | ) | | (1.5 | )% | | (27 | ) | | (0.4 | )% | | (141 | ) | | (2.5 | )% |
| Transition Tax | | 22 |
| | 0.3 | % | | 629 |
| | 9.6 | % | | — |
| | — | % |
| Remeasurement of deferred taxes | | (7 | ) | | (0.1 | )% | | 157 |
| | 2.4 | % | | — |
| | — | % |
| Windfall benefit | | (72 | ) | | (1.0 | )% | | (43 | ) | | (0.7 | )% | | — |
| | — | % |
| Other, net | (40 | ) | | (0.8 | )% | | (54 | ) | | (1.1 | )% | | 15 |
| | 0.3 | % | (149 | ) | | (2.0 | )% | | (55 | ) | | (0.8 | )% | | (82 | ) | | (1.5 | )% |
| Income tax expense | $ | 1,150 |
| | 23.2 | % | | $ | 1,462 |
| | 28.8 | % | | $ | 1,384 |
| | 30.8 | % | $ | 1,345 |
| | 18.7 | % | | $ | 2,607 |
| | 40.0 | % | | $ | 1,587 |
| | 28.1 | % |
| | | | | | | | | | | | | |
The Company’s1 Included within the impact of the 2018 foreign tax credits is a $90 million tax benefit relating to the carry back of certain foreign tax credits. Additionally, included in 2016 is a $116 million benefit associated with the repatriation of 2016 foreign earnings. There was no benefit associated with the repatriation of foreign earnings in 2018 and 2017 due to the enactment of U.S. Tax Reform.
Our GAAP effective income tax rates for 20152018, 2017 and 20132016 were affected by the tax benefits related to the Special Items as previously discussed.
During 2015, the Company’s unrecognized tax benefits related to tax positions taken during the current and prior periods decreased by $183 million. The decrease in the Company’s unrecognized tax benefits for 2015 was primarily due to settlements with tax authorities in multiple jurisdictions. Further, the information gained related to these matters was considered in measuring uncertain tax benefits recognized for the periods subsequent to the periods settled. As of December 31, 2015, the Company’sOur unrecognized tax benefits related to positions taken during the current and prior periodperiods were $181$164 million and $183 million, as of December 31, 2018 and 2017, respectively, all of which would reduce the Company’sour effective tax rate if recognized. Within the next twelve months, we believe that the resolution of certain federal, foreign and state and local tax examinations is reasonably possible and that a change in estimate, reducing unrecognized tax benefits, may occur. It is not possible to provide a range of the potential change until the examinations progress further or the related statute of limitations expire.
In 2010, in connection with the expansion of the Company’sour operations in the Asia Pacific, Middle East and Africa region, the Company’sour subsidiary in Singapore, MasterCardMastercard Asia Pacific Pte. Ltd. (“MAPPL”), received an incentive grant from the Singapore Ministry of Finance.
See Note 1719 (Income Taxes) to the consolidated financial statements included in Part II, Item 8 for further discussion.
Liquidity and Capital Resources
We needrely on existing liquidity, cash generated from operations and access to capital to fund our global operations, credit and settlement exposure, capital expenditures, investments in our business and current and potential obligations. The Company generates the cash required to meet these needs through operations. The following table summarizes the cash, cash equivalents, investments and credit available to the Companyus at December 31:
| | | | 2015 | | 2014 | | 2013 | 2018 | | 2017 |
| | (in billions) | (in billions) |
Cash, cash equivalents and investments 1 | $ | 6.7 |
| | $ | 6.4 |
| | $ | 6.3 |
| $ | 8.4 |
| | $ | 7.8 |
|
Unused line of credit 2 | 3.8 |
| | 3.0 |
| | 3.0 |
| |
| Unused line of credit | | 4.5 |
| | 3.8 |
|
1 Investments include available-for-sale securities and short-term held-to-maturity securities. At December 31, 2015, 20142018 and 2013,2017, this amount excludes restricted cash related to the U.S. merchant class litigation settlement of $541 million, $540$553 million and $723$546 million, respectively. This amount also excludes restricted security deposits held for customers of $1.1 billion at both December 31, 2018 and 2017.
2 Other thanIn 2017, as a result of U.S. Tax Reform, among other things, we changed our assertion regarding the indefinite reinvestment of foreign earnings outside the U.S. for business continuity planning, we did not use any funds from the linecertain of credit during the periods presented.
Cash, cash equivalents and investments held by our foreign subsidiaries (i.e., any entities where earnings would be subject to U.S.affiliates and recognized a provisional deferred tax upon repatriation) was $3.3 billionliability of $36 million. In 2018, we completed our analysis of global working capital and $2.6 billion at December 31, 2015 and 2014, respectively, or 48% and 42% as of such dates. The decrease in cash cash equivalents and investments held by our domestic subsidiaries during 2015 was primarily driven by our use of cash in the U.S. to fund our share repurchases and dividend activity.needs. It is our present intention to permanently
reinvest theour historic undistributed accumulated earnings associated with ourcertain foreign subsidiaries as of December 31, 2015 outside of the United States (as disclosed inU.S. See Note 1719 (Income Taxes) to the consolidated financial statements included in Part II, Item 8), and our current plans do not require repatriation of these earnings. If these earnings are needed8 for U.S operations or can no longer be permanently reinvested outside of the United States, the Company would be subject to U.S. tax upon repatriation.further discussion.
Our liquidity and access to capital could be negatively impacted by global credit market conditions. The Company guaranteesWe guarantee the settlement of many MasterCard, Cirrus and Maestro-brandedof the transactions between our issuers and acquirers.customers. See Note 1921 (Settlement and Other Risk Management) to the consolidated financial statements in Part II, Item 8 for a description of these guarantees. Historically, payments under these guarantees have not been significant; however, historical trends may not be an indication of the future.potential future losses. The risk of loss on these guarantees is specific to individual customers, but may also be driven significantly by regional or global economic conditions, including, but not limited to the health of the financial institutions in a country or region.
Our liquidity and access to capital could also be negatively impacted by the outcome of any of the legal or regulatory proceedings to which we are a party. SeeFor additional discussion of these and other risks facing our business, see our risk factor in “Risk Factors - Legal and Regulatory Risks” in Part I, Item 1A and Note 1820 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part II, Item 8; and Part II, Item 7 (Business Environment) for additional discussion of these and other risks facing our business..
Cash Flow
The table below shows a summary of the cash flows from operating, investing and financing activities for the years ended December 31:
| | | | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| | (in millions) | (in millions) |
| Cash Flow Data: | | | | | | | | | | |
| Net cash provided by operating activities | $ | 4,043 |
| | $ | 3,407 |
| | $ | 4,135 |
| $ | 6,223 |
| | $ | 5,664 |
| | $ | 4,637 |
|
| Net cash (used in) provided by investing activities | (715 | ) | | 690 |
| | (4 | ) | |
| Net cash used in investing activities | | (506 | ) | | (1,781 | ) | | (1,163 | ) |
| Net cash used in financing activities | (2,458 | ) | | (2,339 | ) | | (2,629 | ) | (4,966 | ) | | (4,764 | ) | | (2,344 | ) |
Net cash provided by operating activities for 2015 increased $636$559 million as compared to 2014,in 2018 versus 2017, primarily due to lower prepaid taxes and higher net income as adjusted for non-cash items, partially offset by deferred payments associated with U.S. Tax Reform in the prior year and the timing of customer settlements.settlement with customers. Net cash provided by operating activities for 2014 as compared to 2013, decreasedin 2017 versus 2016, increased by $728 million,$1.0 billion, primarily due to higher prepaidnet income taxesas adjusted for non-cash items and deferred payments associated with our legal entity and tax reorganization.U.S. Tax Reform.
The $1.4 billion decreaseNet cash used in investing activities decreased $1.3 billion in 2015 as compared to 2014 was2018 versus 2017, primarily due to the higher proceeds from the sales and maturities of investment securities in the prior year. The $694 million increase2017 acquisitions. Net cash used in investing activityactivities increased $618 million in 2014 as compared to 2013 was2017 versus 2016, primarily due to increased sales2017 acquisitions and investments in nonmarketable equity investments, partially offset by higher net proceeds of investment securities in 2014.securities.
Net cash used in financing activities for 2015 as compared to 2014 increased by $119$202 million in 2018 versus 2017, primarily due to higher repurchases of our Class A common stock and dividends paid, and an increase in purchases of treasury stock in 2015, partially offset by increasedthe proceeds from debt issued in 2015.the current year. Net cash used in financing activities increased $2.4 billion in 2014 as compared to 2013 decreased by $290 million,2017 versus 2016, primarily due to proceeds from debt issued in 2014, partially offset by2016, higher purchasesrepurchases of treasuryour Class A common stock and dividends in 2014.paid.
The table below shows a summary of theselect balance sheet data at December 31:
| | | | 2015 | | 2014 | | 2013 | 2018 | | 2017 |
| | (in millions) | (in millions) |
| Balance Sheet Data: | | | | | | | | |
| Current assets | $ | 10,985 |
| | $ | 10,997 |
| | $ | 10,950 |
| $ | 16,171 |
| | $ | 13,797 |
|
| Current liabilities | 6,269 |
| | 6,222 |
| | 6,032 |
| 11,593 |
| | 8,793 |
|
| Long-term liabilities | 3,938 |
| | 2,283 |
| | 715 |
| 7,778 |
| | 6,968 |
|
| Equity | 6,062 |
| | 6,824 |
| | 7,495 |
| 5,418 |
| | 5,497 |
|
The Company believesWe believe that itsour existing cash, cash equivalents and investment securities balances, itsour cash flow generating capabilities, itsour borrowing capacity and itsour access to capital resources are sufficient to satisfy itsour future operating cash needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with itsour existing operations and potential obligations.
Debt and Credit Availability
In December 2015, the CompanyFebruary 2018, we issued €1.65 billion aggregate principal amount of notes. This offering consisted of €700$500 million aggregate principal amount of notes due 2022, €800in 2028 and an additional $500 million aggregate principal amount of notes due 2027in 2048. Our total debt outstanding (including the current portion) was $6.3 billion and €150 million aggregate principal amount$5.4 billion at December 31, 2018 and 2017, respectively, with the earliest maturity of notes due 2030 (collectively the “Euro Notes”). In March 2014, the Company issued $500 million aggregateof principal amountoccurring in April 2019.
As of notes due 2019 and $1 billion aggregate principal amount of notes due 2024 (collectively the “USD Notes”). The Company is not subject to any financial covenants under the Euro Notes and the USD Notes (collectively the “Notes”). The Notes are senior unsecured obligations and would rank equally with any future unsecured and unsubordinated indebtedness. The proceeds of the Notes are to be used for general corporate purposes.
In November 2015, the Company establishedDecember 31, 2018, we have a commercial paper program (the “Commercial Paper Program”). Under the Commercial Paper Program, the Company is, under which we are authorized to issue up to $3.75$4.5 billion in outstanding notes, with maturities up to 397 days from the date of issuance. In conjunction with the Commercial Paper Program, the Company entered intowe have a committed unsecured $3.75$4.5 billion revolving credit facility (the “Credit Facility”) in October 2015, which expires in 2020. The Credit Facility amended and restated the Company’s prior credit facility.November 2023.
Borrowings under the Commercial Paper Program and the Credit Facility are to provide liquidity for general corporate purposes, including providing liquidity in the event of one or more settlement failures by the Company’sour customers. The CompanyIn addition, we may borrow and repay amounts under these facilities for business continuity purposes. We had no borrowings outstanding under the Commercial Paper Program and Credit Facility from time to time for business continuity and planning purposes. MasterCard had no borrowings underor the Credit Facility at December 31, 20152018 and 2014, as well as had no borrowings under the Commercial Paper Program at December 31, 2015.
See Note 12 (Debt) to the consolidated financial statements included in Part II, Item 8 for further discussion on the Notes, the Commercial Paper Program and the Credit Facility.2017.
In June 2015, the CompanyMarch 2018, we filed a universal shelf registration statement (replacing a previously filed shelf registration statement that was set to expire) to provide additional access to capital, if needed. Pursuant to the shelf registration statement, the Companywe may from time to time offer to sell debt securities, guarantees of debt securities, preferred stock, Class A common stock, depository shares, purchase contracts, units or warrants in one or more offerings.
See Note 14 (Debt) to the consolidated financial statements included in Part II, Item 8 for further discussion on our debt, the Commercial Paper Program and the Credit Facility.
Dividends and Share Repurchases
MasterCard hasWe have historically paid quarterly dividends on itsour outstanding Class A common stock and Class B common stock. Subject to legally available funds, we intend to continue to pay a quarterly cash dividend. However, the declaration and payment of future dividends is at the sole discretion of our Board of Directors after taking into account various factors, including our financial condition, operating results, available cash and current and anticipated cash needs. The following table summarizes the annual, per share dividends paid in the years reflected:
| | | | Years Ended December 31, | Years Ended December 31, |
| | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| | (in millions, except per share data) | (in millions, except per share data) |
| Cash dividend, per share | $ | 0.64 |
| | $ | 0.44 |
| | $ | 0.21 |
| $ | 1.00 |
| | $ | 0.88 |
| | $ | 0.76 |
|
| Cash dividends paid | $ | 727 |
| | $ | 515 |
| | $ | 255 |
| $ | 1,044 |
| | $ | 942 |
| | $ | 837 |
|
On December 8, 2015,4, 2018, our Board of Directors declared a quarterly cash dividend of $0.19$0.33 per share paid on February 9, 20168, 2019 to holders of record on January 8, 20169, 2019 of our Class A common stock and Class B common stock. The aggregate amount of this dividend was $212$340 million.
On February 2, 2016,5, 2019, our Board of Directors declared a quarterly cash dividend of $0.19$0.33 per share payable on May 9, 20162019 to holders of record on April 8, 20169, 2019 of our Class A common stock and Class B common stock. The aggregate amount of this dividend is estimated to be $211$339 million.
Shares in the Company’sRepurchased shares of our common stock that are repurchased are considered treasury stock. The timing and actual number of additional shares repurchased will depend on a variety of factors, including the operating needs of the business, legal requirements, price and economic and market conditions. In December 2015, the Company’s2018, 2017 and 2016, our Board of Directors approved a new share repurchase programprograms authorizing the Companyus to repurchase up to $6.5 billion, $4 billion and $4 billion, respectively, of itsour Class A common stock. ThisThe program approved in 2018 became effective in February 2016. We typically complete aJanuary 2019 after completion of the share repurchase program before a new program becomes effective.
authorized in 2017. The following table summarizes the Company’sour share repurchase authorizations of itsour Class A common stock through December 31, 2015, as well as historical purchases:2018, under the plans approved in 2018, 2017 and 2016:
|
| | | | | | | | | | | | | | | |
| | Authorization Dates |
| | December 2015 | | December 2014 | | December 2013 | | Total |
| | (in millions, except average price data) |
| Board authorization | $ | 4,000 |
| | $ | 3,750 |
| | $ | 3,500 |
| | $ | 11,250 |
|
| Remaining authorization at December 31, 2014 | $ | — |
| | $ | 3,750 |
| | $ | 275 |
| | $ | 4,025 |
|
| Dollar-value of shares repurchased in 2015 | $ | — |
| | $ | 3,243 |
| | $ | 275 |
| | $ | 3,518 |
|
| Remaining authorization at December 31, 2015 | $ | 4,000 |
| | $ | 507 |
| | $ | — |
| | $ | 4,507 |
|
| Shares repurchased in 2015 | — |
| | 35.1 |
| | 3.2 |
| | 38.3 |
|
| Average price paid per share in 2015 | $ | — |
| | $ | 92.39 |
| | $ | 84.31 |
| | $ | 91.70 |
|
|
| | | |
| | (in millions, except per share data) |
| Board authorization | $ | 14,500 |
|
| Remaining authorization at December 31, 2017 | $ | 5,234 |
|
| Dollar-value of shares repurchased in 2018 | $ | 4,933 |
|
| Remaining authorization at December 31, 2018 | $ | 6,801 |
|
| Shares repurchased in 2018 | 26.2 |
|
| Average price paid per share in 2018 | $ | 188.26 |
|
See Note 1315 (Stockholders’ Equity) to the consolidated financial statements included in Part II, Item 8 for further discussion.
Off-Balance Sheet Arrangements
MasterCard hasWe have no off-balance sheet debt, other than lease arrangements and other commitments as presented in the Future Obligations table that follows.
Future Obligations
The following table summarizes our obligations as of December 31, 20152018 that are expected to impact liquidity and cash flow in future periods. We believe we will be able to fund these obligations through cash generated from operations and our cash balances.
| | | | Payments Due by Period | Payments Due by Period |
| | Total | | 2016 | | 2017 - 2018 | | 2019 - 2020 | | 2021 and thereafter | Total | | 2019 | | 2020 - 2021 | | 2022 - 2023 | | 2024 and thereafter |
| | | | | | (in millions) | | | | | | | | | (in millions) | | | | |
| Debt | $ | 3,309 |
| | $ | 10 |
| | $ | — |
| | $ | 500 |
| | $ | 2,799 |
| $ | 6,389 |
| | $ | 500 |
| | $ | 650 |
| | $ | 801 |
| | $ | 4,438 |
|
| Interest on debt | 664 |
| | 77 |
| | 149 |
| | 134 |
| | 304 |
| 2,072 |
| | 166 |
| | 323 |
| | 288 |
| | 1,295 |
|
| Capital leases | 11 |
| | 6 |
| | 5 |
| | — |
| | — |
| 8 |
| | 4 |
| | 4 |
| | — |
| | — |
|
| Operating leases | 224 |
| | 38 |
| | 74 |
| | 54 |
| | 58 |
| 676 |
| | 72 |
| | 151 |
| | 126 |
| | 327 |
|
Other long-term obligations 1 | | | | | | | | | | |
Other obligations 1 | | | | | | | | | | |
Sponsorship, licensing and other 2 | 461 |
| | 242 |
| | 164 |
| | 44 |
| | 11 |
| 691 |
| | 350 |
| | 279 |
| | 62 |
| | — |
|
Employee benefits 3 | 214 |
| | 82 |
| | 27 |
| | 27 |
| | 78 |
| 273 |
| | 72 |
| | 49 |
| | 46 |
| | 106 |
|
Total 4 | $ | 4,883 |
| | $ | 455 |
| | $ | 419 |
| | $ | 759 |
| | $ | 3,250 |
| |
Transition Tax 4 | | 509 |
| | — |
| | 47 |
| | 156 |
| | 306 |
|
Redeemable non-controlling interests 5 | | 73 |
| | — |
| | 73 |
| | — |
| | — |
|
Total 6 | | $ | 10,691 |
| | $ | 1,164 |
| | $ | 1,576 |
| | $ | 1,479 |
| | $ | 6,472 |
|
1 The table does not include the $709 million$1.6 billion provision as of December 31, 20152018 related to litigation as the timing of payments is not fixed and determinable. See Note 20 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part II, Item 8 for further discussion. The table also does not include the $219 million accrual as of December 31, 2018 related to the merchant opt outs andcontingent consideration attributable to acquisitions made in 2017, which is pending our final assessment in accordance with the U.S. merchant class litigation sinceterms of the opt outs are not fixed and determinable and the Company has made apurchase agreement. This payment into escrowis expected to fund the U.S. merchant class litigation.be completed in 2019. See Note 18 (Legal7 (Fair Value and Regulatory Proceedings)Investment Securities) to the consolidated financial statements included in Part II, Item 8 for further discussion.
2 Amounts primarily relate to sponsorships to promote the MasterCardMastercard brand. Future cash payments that will become due to our customers under agreements which provide pricing rebates on our standard fees and other incentives in exchange for transaction volumes are not included in the table because the amounts due are contingent on future performance. We have accrued $2.1$4.1 billion as of December 31, 20152018 related to customer and merchant agreements.
3 Amounts relate to severance andliabilities along with expected funding requirements for defined benefit pension and postretirement plans.
4 The Company hasAmounts relate to the U.S. tax liability on the Transition Tax on accumulated non-U.S. earnings of U.S entities. See Note 19 (Income Taxes) to the consolidated financial statements included in Part II, Item 8 for further discussion.
5 Amount relates to the fixed-price put option for the Vocalink remaining shareholders to sell their ownership interest to Mastercard on the third and fifth anniversaries of the transaction and quarterly thereafter. See Note 2 (Acquisitions) to the consolidated financial statements included in Part II, Item 8 for further discussion.
6 We have recorded a liability for unrecognized tax benefits of $181$164 million at December 31, 2015.2018. Within the next twelve months, the Company believeswe believe that the resolution of certain federal, foreign and state and local examinations are reasonably possible and that a change in estimate, reducing unrecognized tax benefits, may occur. It is not possible to provide a range of the potential change until the examinations progress further or the related statute of limitations expire. These amounts have been excluded from the table since the settlement period of this liability cannot be reasonably estimated. The timing of these payments will ultimately depend on the progress of tax examinations with the various authorities.
Seasonality
The Company doesWe do not experience meaningful seasonality. No individual quarter in 2015, 20142018, 2017 or 20132016 accounted for more than 30% of net revenue.
Critical Accounting Estimates
The application of U.S. GAAP requires the Companyus to make estimates and assumptions about certain items and future events that directly affect the Company’sour reported financial condition. We have established detailed policies and control procedures to provide reasonable assurance that the methods used to make estimates and assumptions are well controlled and are applied consistently from period to period. The accounting estimates and assumptions discussed in this section are those that the Company considerswe consider to be the most critical to itsour financial statements. An accounting estimate is considered critical if both (a) the nature of the estimate or assumption is material due to the levels of subjectivity and judgment involved, and (b) the impact within a reasonable range of outcomes of the estimate and assumption is material to the Company’sour financial condition. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of the Company’sour Board of Directors. The Company’sOur significant accounting policies, including recent accounting pronouncements, are described in Note 1 (Summary of Significant Accounting Policies) to the consolidated financial statements included in Part II, Item 8.
Revenue Recognition
Application of the various accounting principles in U.S. GAAP related to the measurement and recognition of revenue requires the Companyus to make judgments and estimates. Specifically, complex arrangements with nonstandard terms and conditions may require significant contract interpretation to determine the appropriate accounting. Domestic assessment revenue requires an estimate of our customers’ performance in order to recognize this revenue. Rebates and incentives are recorded as a reduction to gross revenue based on these estimates. We consider various factors in estimating customer performance, including a review of specific transactions, historical experience with that customer and market and economic conditions. Differences between actual results and the Company’sour estimates are adjusted in the period the customer reports actual performance. If our customers’ actual performance is not consistent with our estimates of their performance, net revenue may be materially different.
Loss Contingencies
The Company isWe are currently involved in various claims and legal proceedings. The CompanyWe regularly reviewsreview the status of each significant matter and assessesassess its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the amount can be reasonably estimated, the Company accrueswe accrue a liability for the estimated loss. Significant judgment is required in both the determination of probability and whether an exposure is reasonably estimable. Our judgments are subjective based on the status of the legal or regulatory proceedings, the merits of our defenses and consultation with in-house and outside legal counsel. Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As additional information becomes available, the Company reassesseswe reassess the potential liability related to its pending claims and litigation and may revise itsour estimates. Due to the inherent uncertainties of the legal and regulatory process in the multiple jurisdictions in which we operate, our judgments may be materially different than the actual outcomes. See Note 1820 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part II, Item 8 for further discussion.
Income Taxes
In calculating our effective income tax rate, we need to make estimates regarding the timing and amount of taxable and deductible items which will adjust the pretax income earned in various tax jurisdictions. Through our interpretation of local tax regulations, adjustments to pretax income for income earned in various tax jurisdictions are reflected within various tax filings. Although we believe that our estimates and judgments discussed herein are reasonable, actual results may be materially different than the estimated amounts.
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. Significant judgment is required in determining the valuation allowance. We consider projected future taxable income and ongoing tax planning strategies in assessing the need for the valuation allowance. If it is determined that we are able to realize deferred tax assets in excess of the net carrying value or to the extent we are unable to realize a deferred tax asset, we would adjust the valuation allowance in the period in which such a determination is made, with a corresponding increase or decrease to earnings.
We record tax liabilities for uncertain tax positions taken, or expected to be taken, which may not be sustained or may only be partially sustained, upon examination by the relevant taxing authorities. We consider all relevant facts and current authorities in the tax law in assessing whether any benefit resulting from an uncertain tax position is more likely than not to be sustained
and, if so, how current law impacts the amount reflected within these financial statements. If upon examination, we realize a tax benefit which is not fully sustained or is more favorably sustained, this would decrease or increase earnings in the period. In certain situations, the Companywe will have offsetting tax credits or taxes in other jurisdictions.
We do not record U.S. income tax expenseDeferred taxes are established on the estimated foreign exchange gains or losses for foreign earnings that are not considered permanently reinvested, which we intendwill be recognized through cumulative translation adjustments as incurred. Ultimately, the working capital requirements of foreign affiliates will determine the amount of cash to reinvest indefinitely to expand our international operations. We consider business plans, planning opportunities, and expected future outcomes in assessing the needs for future expansion and support of our international operations. If our business plans change or our future outcomes differbe remitted from our expectations, U.S. income tax expense and our effective tax rate could increase or decrease in that period.respective jurisdictions.
Valuation of Assets
The valuation of assets acquired in a business combination and asset impairment reviews require the use of significant estimates and assumptions. The acquisition method of accounting for business combinations requires the Companyus to estimate the fair value of assets acquired, liabilities assumed and any non-controlling interest in the acquiree to properly allocate purchase price consideration between assets that are depreciated and amortized from goodwill.consideration. Impairment testing for assets, other than goodwill and indefinite-lived intangible assets, requires the allocation of cash flows to those assets or group of assets and if required, an estimate of fair value for the assets or group of assets. The Company’s estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions, which would not reflect unanticipated events and circumstances that may occur.
We evaluate goodwill and indefinite-lived intangible assets for impairment on an annual basis or sooner if indicators of impairment exist. Goodwill is tested for impairment at the reporting unit level. The impairment evaluation utilizeslevel utilizing a quantitative assessment using a two-step impairment test. The first step is to compare the reporting unit’s carrying value, including goodwill, to the fair value. The Company uses aassessment. We use market approachcapitalization for estimating the fair value of itsour reporting unit. If the fair value exceeds the carrying value, then no potential impairmentgoodwill is considered to exist.not impaired. If the carrying value exceeds the fair value, then goodwill is impaired and the second step is performed to determine if the implied fair valueexcess of the reporting unit’s goodwill exceeds the carrying value ofover the reporting unit. Anfair value is recognized as an impairment charge would be recorded if the carrying value exceeds the implied fair value. charge.
The impairment test for indefinite-lived intangible assets consists of a qualitative assessment to evaluate all relevant events and circumstances that could affect the significant inputs used to determine the fair value of indefinite-lived intangible assets. In performing thethese qualitative assessment,assessments, we consider relevant events and conditions, including but not limited to, macroeconomic trends, industry and market conditions, overall financial performance, cost factors, company-specific events, and legal and regulatory factors. If the qualitative assessment indicatesassessments indicate that it is more likely than not that the fair value of the indefinite-lived intangible assetassets is less than their carrying amounts, the Companywe must perform a quantitative impairment test.
Our estimates in the valuation of these assets are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable. These valuations require the use of management’s assumptions, which would not reflect unanticipated events and circumstances that may occur.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the potential for economic losses to be incurred on market risk sensitive instruments arising from adverse changes in market factors such as interest rates and foreign currency exchange rates and equity price risk.rates. Our exposure to market risk from changes in interest rates and foreign exchange rates and equity price risk is limited. Management establishes and oversees the implementation of policies governing our funding, investments and use of derivative financial instruments. We monitor risk exposures on an ongoing basis. The effect of a hypothetical 10% adverse change in foreign currencyexchange rates could result in a fair value loss of approximately $128$113 million on our foreign currency derivative contracts outstanding at December 31, 20152018 related to the hedging program. AIn addition, a 100 basis point adverse change in interest rates would not have a material impact on the Company’sour investments at December 31, 20152018 and 2014. In addition, there was no material equity price risk at December 31, 2015 or 2014.2017.
Foreign Exchange Risk
Our settlement activities are subject to foreign exchange risk resulting from foreign exchange rate fluctuations. This risk is typically limited to the one business day between setting the foreign exchange rates and clearing the financial transactions. We enter into derivativeforeign currency 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 ourthe functional currency. currencies of the entity.
We may also enter into foreign currency derivative contracts to offset possible changes in value due to foreign exchange fluctuations of earnings, assets and liabilities denominated in currencies other than the functional currency of the entity. The objective of these activities is to reduce our exposure to transaction gains and losses resulting from fluctuations of foreign currencies against our functional and reporting currencies, principally the U.S. dollar and euro.
Foreign currency exposures are managed together through our foreign exchange risk management activities, which are discussed further in Note 2022 (Foreign Exchange Risk Management) to the consolidated financial statements included in Part II, Item 8. The terms of the forward contracts are generally less than 18 months.months.
As of December 31, 2015,2018, the majority of derivative contracts to hedge foreign currency fluctuations had been entered into with customers of MasterCard. MasterCard’sour customers. Our derivative contracts are summarized below:
| | | | December 31, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
| | Notional | | Estimated Fair Value | | Notional | | Estimated Fair Value | Notional | | Estimated Fair Value | | Notional | | Estimated Fair Value |
| | (in millions) | (in millions) |
| Commitments to purchase foreign currency | $ | 232 |
| | $ | 1 |
| | $ | 47 |
| | $ | 4 |
| $ | 34 |
| | $ | (1 | ) | | $ | 27 |
| | $ | — |
|
| Commitments to sell foreign currency | 1,430 |
| | 12 |
| | 614 |
| | 27 |
| 1,066 |
| | 26 |
| | 968 |
| | (26 | ) |
| Options to sell foreign currency | 44 |
| | 1 |
| | — |
| | — |
| 25 |
| | 4 |
| | 27 |
| | 2 |
|
We also use foreign currency denominated debt to hedge a portion of our net investment in foreign operations against adverse movements in exchange rates, with changes in the translated value of the debt recorded within currency translation adjustment in accumulated other comprehensive income (loss). During the fourth quarter of 2015, weWe have designated our euro-denominated debt as a net investment hedge for a portion of our net investment in European foreign operations. Our euro-denominated debt is vulnerable to changes in the euro to U.S. dollar exchange rates. The principal amounts of our euro-denominated debt as well as the effective interest rates and scheduled annual maturities of the principal is included in Note 1214 (Debt) to the consolidated financial statements included in Part II, Item 8.
Our settlement activities are subject to foreign exchange risk resulting from foreign exchange rate fluctuations. This risk is typically limited to the one business day between setting the foreign exchange rates and clearing the financial transactions.
Interest Rate Risk
Our interest rate sensitive assets are our investments in debtfixed income securities, which we generally hold as available-for-sale investments. Our general policy is to invest in high quality securities, while providing adequate liquidity and maintaining diversification to avoid significant exposure. The fair value and maturity distribution of the Company’s available for saleour available-for-sale investments for debtfixed income securities as of December 31 was as follows:
| | | | | | | Maturity | | | | Maturity |
| | | Fair Market Value at December 31, 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 and there-after | | Fair Market Value at December 31, 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | 2024 and there-after |
| Financial Instrument | | Summary Terms | | | Summary Terms | |
| | | (in millions) | | (in millions) |
| Municipal securities | | Fixed / Variable Interest | | $ | 62 |
| | $ | 48 |
| | $ | 14 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | Fixed / Variable Interest | | $ | 15 |
| | $ | 13 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| U.S. government and agency securities | | Fixed / Variable Interest | | 72 |
| | 47 |
| | 17 |
| | 2 |
| | — |
| | — |
| | 6 |
| |
| Government and agency securities | | | Fixed / Variable Interest | | 157 |
| | 84 |
| | 28 |
| | 45 |
| | — |
| | — |
| | — |
|
| Corporate securities | | Fixed / Variable Interest | | 630 |
| | 204 |
| | 299 |
| | 123 |
| | 3 |
| | — |
| | 1 |
| | Fixed / Variable Interest | | 1,043 |
| | 271 |
| | 381 |
| | 316 |
| | 71 |
| | 3 |
| | 1 |
|
| Asset-backed securities | | Fixed / Variable Interest | | 57 |
| | 1 |
| | 20 |
| | 22 |
| | 13 |
| | 1 |
| | — |
| | Fixed / Variable Interest | | 217 |
| | 8 |
| | 77 |
| | 93 |
| | 33 |
| | 6 |
| | — |
|
| Other | | Fixed / Variable Interest | | 38 |
| | 9 |
| | 29 |
| | — |
| | — |
| | — |
| | — |
| |
| Total | | $ | 859 |
| | $ | 309 |
| | $ | 379 |
| | $ | 147 |
| | $ | 16 |
| | $ | 1 |
| | $ | 7 |
| | $ | 1,432 |
| | $ | 376 |
| | $ | 488 |
| | $ | 454 |
| | $ | 104 |
| | $ | 9 |
| | $ | 1 |
|
| | | | | | | Maturity | | | | Maturity |
| Financial Instrument | | Summary Terms | | Fair Market Value at December 31, 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 and there-after | | Summary Terms | | Fair Market Value at December 31, 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 and there-after |
| | | (in millions) | | (in millions) |
| Municipal securities | | Fixed / Variable Interest | | $ | 135 |
| | $ | 82 |
| | $ | 48 |
| | $ | 2 |
| | $ | — |
| | $ | — |
| | $ | 3 |
| | Fixed / Variable Interest | | $ | 17 |
| | $ | 12 |
| | $ | 5 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| U.S. government and agency securities | | Fixed / Variable Interest | | 199 |
| | 132 |
| | 52 |
| | 2 |
| | — |
| | — |
| | 13 |
| |
| Government and agency securities | | | Fixed / Variable Interest | | 185 |
| | 87 |
| | 59 |
| | 16 |
| | 23 |
| | — |
| | — |
|
| Corporate securities | | Fixed / Variable Interest | | 618 |
| | 325 |
| | 211 |
| | 82 |
| | — |
| | — |
| | — |
| | Fixed / Variable Interest | | 876 |
| | 212 |
| | 277 |
| | 287 |
| | 76 |
| | 23 |
| | 1 |
|
| Asset-backed securities | | Fixed / Variable Interest | | 178 |
| | 4 |
| | 59 |
| | 75 |
| | 28 |
| | 7 |
| | 5 |
| | Fixed / Variable Interest | | 70 |
| | 3 |
| | 24 |
| | 35 |
| | 8 |
| | — |
| | — |
|
| Other | | Fixed / Variable Interest | | 25 |
| | 15 |
| | 5 |
| | 1 |
| | — |
| | — |
| | 4 |
| |
| Total | | $ | 1,155 |
| | $ | 558 |
| | $ | 375 |
| | $ | 162 |
| | $ | 28 |
| | $ | 7 |
| | $ | 25 |
| | $ | 1,148 |
| | $ | 314 |
| | $ | 365 |
| | $ | 338 |
| | $ | 107 |
| | $ | 23 |
| | $ | 1 |
|
We also have time deposits that are classified as held-to-maturity securities. At December 31, 2018 and 2017, the cost which approximates fair value, of our short-term held-to-maturity securities was $264 million and $700 million, respectively.
At December 31, 2015,2018, we have U.S. dollar-denominated and euro-denominated debt, which is subject to interest rate risk. The principal amounts of this debt as well as the effective interest rates and scheduled annual maturities of the principal is included
in Note 1214 (Debt) to the consolidated financial statements included in Part II, Item 8. See “Future Obligations” for estimated interest payments due by period relating to the U.S. dollar-denominated and euro-denominated debt.
At December 31, 2015,2018, we have a credit facilitythe Commercial Paper Program and the Credit Facility which providesprovide liquidity for general corporate purposes, including providing liquidity in the event of one or more settlement failures by our customers. Borrowing rates under the Company’s customers. This credit facility hasCommercial Paper Program are based on market conditions. Borrowing rates under the Credit Facility are variable rates, which are applied to the borrowing based on terms and conditions set forth in the agreement. In conjunction with the credit facility, we have established a Commercial Paper Program. See Note 1214 (Debt) to the consolidated financial statements in Part II, Item 8 for additional information on the Company’s currentCredit Facility and prior credit facilities andthe Commercial Paper Program. With the exception for business continuity planning, we did not borrow under the prior or current credit facilities as of December 31, 2015 and 2014 and there wereWe had no outstanding borrowings under the Commercial Paper Program as ofor the Credit Facility at December 31, 2015.2018 and 2017.
Equity Price Risk
The Company did not have significant equity price risk as of December 31, 2015 and 2014.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MASTERCARD INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
| | |
| | | Page |
MasterCardMastercard Incorporated | |
As of December 31, 20152018 and 20142017 and for the years ended December 31, 2015, 20142018, 2017 and 20132016 |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of MasterCardMastercard Incorporated (“MasterCard”Mastercard”) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. As required by Section 404 of the Sarbanes-Oxley Act of 2002, management has assessed the effectiveness of MasterCard’sMastercard’s internal control over financial reporting as of December 31, 2015.2018. In making its assessment, management has utilized the criteria set forth in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management has concluded that, based on its assessment, MasterCard’sMastercard’s internal control over financial reporting was effective as of December 31, 2015.2018. The effectiveness of MasterCard’sMastercard’s internal control over financial reporting as of December 31, 20152018 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears on the next page.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and ShareholdersStockholders
of MasterCardMastercard Incorporated:
In our opinion,Opinions on the consolidated financial statements listed inFinancial Statements and Internal Control over Financial Reporting
We have audited the accompanying index present fairly, in all material respects, the financial positionconsolidated balance sheets of MasterCardMastercard Incorporated and its subsidiaries at(the “Company”) as of December 31, 20152018 and December 31, 2014,2017 and the resultsrelated consolidated statements of their operations, comprehensive income, changes in equity and their cash flows for each of the three years in the period ended December 31, 20152018, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015,2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Overover Financial Reporting. Our responsibility is to express opinions on thesethe Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 1 to the financial statements, the Company has changed its methodDefinition and Limitations of accounting for deferred income taxes as of December 31, 2015.
Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 12, 201613, 2019
We have served as the Company’s auditor since 1989.
MASTERCARD INCORPORATED
CONSOLIDATED BALANCE SHEET
|
| | | | | | | |
| | December 31, |
| | 2015 | | 2014 |
| | (in millions, except per share data) |
| ASSETS | | | |
| Cash and cash equivalents | $ | 5,747 |
| | $ | 5,137 |
|
| Restricted cash for litigation settlement | 541 |
| | 540 |
|
| Investments | 991 |
| | 1,238 |
|
| Accounts receivable | 1,079 |
| | 1,109 |
|
| Settlement due from customers | 1,068 |
| | 1,052 |
|
| Restricted security deposits held for customers | 895 |
| | 950 |
|
| Prepaid expenses and other current assets | 664 |
| | 671 |
|
| Deferred income taxes | — |
| | 300 |
|
| Total Current Assets | 10,985 |
| | 10,997 |
|
| Property, plant and equipment, net | 675 |
| | 615 |
|
| Deferred income taxes | 317 |
| | 96 |
|
| Goodwill | 1,891 |
| | 1,522 |
|
| Other intangible assets, net | 803 |
| | 714 |
|
| Other assets | 1,598 |
| | 1,385 |
|
| Total Assets | $ | 16,269 |
| | $ | 15,329 |
|
| LIABILITIES AND EQUITY | | | |
| Accounts payable | $ | 472 |
| | $ | 419 |
|
| Settlement due to customers | 866 |
| | 1,142 |
|
| Restricted security deposits held for customers | 895 |
| | 950 |
|
| Accrued litigation | 709 |
| | 771 |
|
| Accrued expenses | 2,763 |
| | 2,439 |
|
| Other current liabilities | 564 |
| | 501 |
|
| Total Current Liabilities | 6,269 |
| | 6,222 |
|
| Long-term debt | 3,287 |
| | 1,494 |
|
| Deferred income taxes | 79 |
| | 115 |
|
| Other liabilities | 572 |
| | 674 |
|
| Total Liabilities | 10,207 |
| | 8,505 |
|
| Commitments and Contingencies |
| |
|
| Stockholders’ Equity | | | |
| Class A common stock, $0.0001 par value; authorized 3,000 shares, 1,370 and 1,352 shares issued and 1,095 and 1,115 outstanding, respectively | — |
| | — |
|
| Class B common stock, $0.0001 par value; authorized 1,200 shares, 21 and 37 issued and outstanding, respectively | — |
| | — |
|
| Additional paid-in-capital | 4,004 |
| | 3,876 |
|
| Class A treasury stock, at cost, 275 and 237 shares, respectively | (13,522 | ) | | (9,995 | ) |
| Retained earnings | 16,222 |
| �� | 13,169 |
|
| Accumulated other comprehensive income (loss) | (676 | ) | | (260 | ) |
| Total Stockholders’ Equity | 6,028 |
| | 6,790 |
|
| Non-controlling interests | 34 |
| | 34 |
|
| Total Equity | 6,062 |
| | 6,824 |
|
| Total Liabilities and Equity | $ | 16,269 |
| | $ | 15,329 |
|
The accompanying notes are an integral part of these consolidated financial statements.
MASTERCARD INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2015 | | 2014 | | 2013 |
| | (in millions, except per share data) |
| Net Revenue | $ | 9,667 |
| | $ | 9,441 |
| | $ | 8,312 |
|
| Operating Expenses | | | | | |
| General and administrative | 3,341 |
| | 3,152 |
| | 2,615 |
|
| Advertising and marketing | 821 |
| | 862 |
| | 841 |
|
| Depreciation and amortization | 366 |
| | 321 |
| | 258 |
|
| Provision for litigation settlement | 61 |
| | — |
| | 95 |
|
| Total operating expenses | 4,589 |
| | 4,335 |
| | 3,809 |
|
| Operating income | 5,078 |
| | 5,106 |
| | 4,503 |
|
| Other Income (Expense) | | | | | |
| Investment income | 25 |
| | 28 |
| | 38 |
|
| Interest expense | (61 | ) | | (48 | ) | | (14 | ) |
| Other income (expense), net | (84 | ) | | (7 | ) | | (27 | ) |
| Total other income (expense) | (120 | ) | | (27 | ) | | (3 | ) |
| Income before income taxes | 4,958 |
| | 5,079 |
| | 4,500 |
|
| Income tax expense | 1,150 |
| | 1,462 |
| | 1,384 |
|
| Net Income | $ | 3,808 |
| | $ | 3,617 |
| | $ | 3,116 |
|
| | | | | | |
| Basic Earnings per Share | $ | 3.36 |
| | $ | 3.11 |
| | $ | 2.57 |
|
| Basic Weighted-Average Shares Outstanding | 1,134 |
| | 1,165 |
| | 1,211 |
|
| Diluted Earnings per Share | $ | 3.35 |
| | $ | 3.10 |
| | $ | 2.56 |
|
| Diluted Weighted-Average Shares Outstanding | 1,137 |
| | 1,169 |
| | 1,215 |
|
|
| | | | | | | |
| | December 31, |
| | 2018 | | 2017 |
| | (in millions, except per share data) |
| ASSETS | | | |
| Cash and cash equivalents | $ | 6,682 |
| | $ | 5,933 |
|
| Restricted cash for litigation settlement | 553 |
| | 546 |
|
| Investments | 1,696 |
| | 1,849 |
|
| Accounts receivable | 2,276 |
| | 1,969 |
|
| Settlement due from customers | 2,452 |
| | 1,375 |
|
| Restricted security deposits held for customers | 1,080 |
| | 1,085 |
|
| Prepaid expenses and other current assets | 1,432 |
| | 1,040 |
|
| Total Current Assets | 16,171 |
| | 13,797 |
|
| Property, plant and equipment, net | 921 |
| | 829 |
|
| Deferred income taxes | 570 |
| | 250 |
|
| Goodwill | 2,904 |
| | 3,035 |
|
| Other intangible assets, net | 991 |
| | 1,120 |
|
| Other assets | 3,303 |
| | 2,298 |
|
| Total Assets | $ | 24,860 |
| | $ | 21,329 |
|
| LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS AND EQUITY | | | |
| Accounts payable | $ | 537 |
| | $ | 933 |
|
| Settlement due to customers | 2,189 |
| | 1,343 |
|
| Restricted security deposits held for customers | 1,080 |
| | 1,085 |
|
| Accrued litigation | 1,591 |
| | 709 |
|
| Accrued expenses | 4,747 |
| | 3,931 |
|
| Current portion of long-term debt | 500 |
| | — |
|
| Other current liabilities | 949 |
| | 792 |
|
| Total Current Liabilities | 11,593 |
| | 8,793 |
|
| Long-term debt | 5,834 |
| | 5,424 |
|
| Deferred income taxes | 67 |
| | 106 |
|
| Other liabilities | 1,877 |
| | 1,438 |
|
| Total Liabilities | 19,371 |
| | 15,761 |
|
| | | | |
| Commitments and Contingencies |
| |
|
| | | | |
Redeemable Non-controlling Interests
| 71 |
| | 71 |
|
| | | | |
| Stockholders’ Equity | | | |
| Class A common stock, $0.0001 par value; authorized 3,000 shares, 1,387 and 1,382 shares issued and 1,019 and 1,040 outstanding, respectively | — |
| | — |
|
| Class B common stock, $0.0001 par value; authorized 1,200 shares, 12 and 14 issued and outstanding, respectively | — |
| | — |
|
| Additional paid-in-capital | 4,580 |
| | 4,365 |
|
| Class A treasury stock, at cost, 368 and 342 shares, respectively | (25,750 | ) | | (20,764 | ) |
| Retained earnings | 27,283 |
| | 22,364 |
|
| Accumulated other comprehensive income (loss) | (718 | ) | | (497 | ) |
| Total Stockholders’ Equity | 5,395 |
| | 5,468 |
|
| Non-controlling interests | 23 |
| | 29 |
|
| Total Equity | 5,418 |
| | 5,497 |
|
| Total Liabilities, Redeemable Non-controlling Interests and Equity | $ | 24,860 |
| | $ | 21,329 |
|
The accompanying notes are an integral part of these consolidated financial statements.
MASTERCARD INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
|
| | | | | | | | | | | |
| | For the Years Ended December 31, |
| | 2018 | | 2017 | | 2016 |
| | (in millions, except per share data) |
| Net Revenue | $ | 14,950 |
| | $ | 12,497 |
| | $ | 10,776 |
|
| Operating Expenses | | | | | |
| General and administrative | 5,174 |
| | 4,653 |
| | 3,827 |
|
| Advertising and marketing | 907 |
| | 771 |
| | 698 |
|
| Depreciation and amortization | 459 |
| | 436 |
| | 373 |
|
| Provision for litigation | 1,128 |
| | 15 |
| | 117 |
|
| Total operating expenses | 7,668 |
| | 5,875 |
| | 5,015 |
|
| Operating income | 7,282 |
| | 6,622 |
| | 5,761 |
|
| Other Income (Expense) | | | | | |
| Investment income | 122 |
| | 56 |
| | 43 |
|
| Interest expense | (186 | ) | | (154 | ) | | (95 | ) |
| Other income (expense), net | (14 | ) | | (2 | ) | | (63 | ) |
| Total other income (expense) | (78 | ) | | (100 | ) | | (115 | ) |
| Income before income taxes | 7,204 |
| | 6,522 |
| | 5,646 |
|
| Income tax expense | 1,345 |
| | 2,607 |
| | 1,587 |
|
| Net Income | $ | 5,859 |
| | $ | 3,915 |
| | $ | 4,059 |
|
| | | | | | |
| Basic Earnings per Share | $ | 5.63 |
| | $ | 3.67 |
| | $ | 3.70 |
|
| Basic weighted-average shares outstanding | 1,041 |
| | 1,067 |
| | 1,098 |
|
| Diluted Earnings per Share | $ | 5.60 |
| | $ | 3.65 |
| | $ | 3.69 |
|
| Diluted weighted-average shares outstanding | 1,047 |
| | 1,072 |
| | 1,101 |
|
The accompanying notes are an integral part of Contentsthese consolidated financial statements.
MASTERCARD INCORPORATED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| | (in millions) | (in millions) |
| Net Income | $ | 3,808 |
| | $ | 3,617 |
| | $ | 3,116 |
| $ | 5,859 |
| | $ | 3,915 |
| | $ | 4,059 |
|
| Other comprehensive income (loss): | | | | | | | | | | |
| Foreign currency translation adjustments | (460 | ) | | (436 | ) | | 113 |
| (319 | ) | | 565 |
| | (275 | ) |
| Income tax effect | 27 |
| | — |
| | — |
| 40 |
| | 2 |
| | (11 | ) |
| Foreign currency translation adjustments, net of income tax effect | (433 | ) | | (436 | ) | | 113 |
| (279 | ) | | 567 |
| | (286 | ) |
| | | | | | | | | | | |
| Translation adjustments on net investment hedge | (40 | ) | | — |
| | — |
| 96 |
| | (236 | ) | | 60 |
|
| Income tax effect | 14 |
| | — |
| | — |
| (21 | ) | | 83 |
| | (22 | ) |
| Translation adjustments on net investment hedge, net of income tax effect | (26 | ) | | — |
| | — |
| 75 |
| | (153 | ) | | 38 |
|
| | | | | | | | | | | |
| Defined benefit pension and other postretirement plans | (19 | ) | | (3 | ) | | 7 |
| (18 | ) | | 15 |
| | (2 | ) |
| Income tax effect | 7 |
| | 2 |
| | (3 | ) | 3 |
| | (1 | ) | | — |
|
| Defined benefit pension and other postretirement plans, net of income tax effect | (12 | ) | | (1 | ) | | 4 |
| (15 | ) | | 14 |
| | (2 | ) |
| | | | | | | | | | | |
| Reclassification adjustment for defined benefit pension and other postretirement plans | 80 |
| | 7 |
| | 6 |
| |
| Income tax effect | (29 | ) | | (3 | ) | | (2 | ) | |
| Reclassification adjustment for defined benefit pension and other postretirement plans, net of income tax effect | 51 |
| | 4 |
| | 4 |
| |
| | | | | | | |
| Investment securities available-for-sale | (11 | ) | | (5 | ) | | (3 | ) | (3 | ) | | (3 | ) | | 3 |
|
| Income tax effect | — |
| | 1 |
| | 2 |
| 1 |
| | 2 |
| | (1 | ) |
| Investment securities available-for-sale, net of income tax effect | (11 | ) | | (4 | ) | | (1 | ) | (2 | ) | | (1 | ) | | 2 |
|
| | | | | | | | | | | |
| Reclassification adjustment for investment securities available-for-sale | 15 |
| | (1 | ) | | (5 | ) | |
| Income tax effect | — |
| | — |
| | 2 |
| |
| Reclassification adjustment for investment securities available-for-sale, net of income tax effect | 15 |
| | (1 | ) | | (3 | ) | |
| | | | | | | |
| Other comprehensive income (loss), net of tax | (416 | ) | | (438 | ) | | 117 |
| |
| Other comprehensive income (loss), net of income tax effect | | (221 | ) | | 427 |
| | (248 | ) |
| Comprehensive Income | $ | 3,392 |
| | $ | 3,179 |
| | $ | 3,233 |
| $ | 5,638 |
| | $ | 4,342 |
| | $ | 3,811 |
|
The accompanying notes are an integral part of these consolidated financial statements.
MASTERCARD INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY | | | | Total | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Common Stock | | Additional Paid-In Capital | | Class A Treasury Stock | | Non- Controlling Interests | Stockholders’ Equity | | | | |
| | | Class A | | Class B | | Common Stock | | Additional Paid-In Capital | | Class A Treasury Stock | | Retained Earnings | | Accumulated
Other
Comprehensive
Income (Loss) | | Non- Controlling Interests | | Total Equity |
| | (in millions, except per share data) | Class A | | Class B | |
| Balance at December 31, 2012 | $ | 6,929 |
| | $ | 7,354 |
| | $ | 61 |
| | $ | — |
| | $ | — |
| | $ | 3,641 |
| | $ | (4,139 | ) | | $ | 12 |
| |
| | | (in millions, except per share data) |
| Balance at December 31, 2015 | | $ | — |
| | $ | — |
| | $ | 4,004 |
| | $ | (13,522 | ) | | $ | 16,222 |
| | $ | (676 | ) | | $ | 34 |
| | $ | 6,062 |
|
| Net income | 3,116 |
| | 3,116 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | 4,059 |
| | — |
| | — |
| | 4,059 |
|
| Activity related to non-controlling interests | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (6 | ) | | (6 | ) |
| Other comprehensive income (loss), net of tax | 117 |
| | — |
| | 117 |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | (248 | ) | | — |
| | (248 | ) |
| Cash dividends declared on Class A and Class B common stock, $0.29 per share | (349 | ) | | (349 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Cash dividends declared on Class A and Class B common stock, $0.79 per share | | — |
| | — |
| | — |
| | — |
| | (863 | ) | | — |
| | — |
| | (863 | ) |
| Purchases of treasury stock | (2,443 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (2,443 | ) | | — |
| — |
| | — |
| | — |
| | (3,503 | ) | | — |
| | — |
| | — |
| | (3,503 | ) |
| Share-based payments | 126 |
| | — |
| | — |
| | — |
| | — |
| | 121 |
| | 5 |
| | — |
| — |
| | — |
| | 179 |
| | 4 |
| | — |
| | — |
| | — |
| | 183 |
|
| Conversion of Class B to Class A common stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Balance at December 31, 2013 | 7,495 |
| | 10,121 |
| | 178 |
| | — |
| | — |
| | 3,762 |
| | (6,577 | ) | | 11 |
| |
| Balance at December 31, 2016 | | — |
| | — |
| | 4,183 |
| | (17,021 | ) | | 19,418 |
| | (924 | ) | | 28 |
| | 5,684 |
|
| Net income | 3,617 |
| | 3,617 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | 3,915 |
| | — |
| | — |
| | 3,915 |
|
| Activity related to non-controlling interests | 23 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 23 |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
| Other comprehensive income (loss), net of tax | (438 | ) | | — |
| | (438 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | 427 |
| | — |
| | 427 |
|
| Cash dividends declared on Class A and Class B common stock, $0.49 per share | (569 | ) | | (569 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Cash dividends declared on Class A and Class B common stock, $0.91 per share | | — |
| | — |
| | — |
| | — |
| | (969 | ) | | — |
| | — |
| | (969 | ) |
| Purchases of treasury stock | (3,424 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (3,424 | ) | | — |
| — |
| | — |
| | — |
| | (3,747 | ) | | — |
| | — |
| | — |
| | (3,747 | ) |
| Share-based payments | 120 |
| | — |
| | — |
| | — |
| | — |
| | 114 |
| | 6 |
| | — |
| — |
| | — |
| | 182 |
| | 4 |
| | — |
| | — |
| | — |
| | 186 |
|
| Conversion of Class B to Class A common stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Balance at December 31, 2014 | 6,824 |
| | 13,169 |
| | (260 | ) | | — |
| | — |
| | 3,876 |
| | (9,995 | ) | | 34 |
| |
| Balance at December 31, 2017 | | — |
| | — |
| | 4,365 |
| | (20,764 | ) | | 22,364 |
| | (497 | ) | | 29 |
| | 5,497 |
|
| Adoption of revenue standard | | — |
| | — |
| | — |
| | — |
| | 366 |
| | — |
| | — |
| | 366 |
|
| Adoption of intra-entity asset transfers standard | | — |
| | — |
| | — |
| | — |
| | (183 | ) | | — |
| | — |
| | (183 | ) |
| Net income | 3,808 |
| | 3,808 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | 5,859 |
| | — |
| | — |
| | 5,859 |
|
| Activity related to non-controlling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (6 | ) | | (6 | ) |
| Other comprehensive income (loss), net of tax | (416 | ) | | — |
| | (416 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | (221 | ) | | — |
| | (221 | ) |
| Cash dividends declared on Class A and Class B common stock, $0.67 per share | (755 | ) | | (755 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Cash dividends declared on Class A and Class B common stock, $1.08 per share | | — |
| | — |
| | — |
| | — |
| | (1,123 | ) | | — |
| | — |
| | (1,123 | ) |
| Purchases of treasury stock | (3,532 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (3,532 | ) | | — |
| — |
| | — |
| | — |
| | (4,991 | ) | | — |
| | — |
| | — |
| | (4,991 | ) |
| Share-based payments | 133 |
| | — |
| | — |
| | — |
| | — |
| | 128 |
| | 5 |
| | — |
| — |
| | — |
| | 215 |
| | 5 |
| | — |
| | — |
| | — |
| | 220 |
|
| Conversion of Class B to Class A common stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Balance at December 31, 2015 | $ | 6,062 |
| | $ | 16,222 |
| | $ | (676 | ) | | $ | — |
| | $ | — |
| | $ | 4,004 |
| | $ | (13,522 | ) | | $ | 34 |
| |
| Balance at December 31, 2018 | | $ | — |
| | $ | — |
| | $ | 4,580 |
| | $ | (25,750 | ) | | $ | 27,283 |
| | $ | (718 | ) | | $ | 23 |
| | $ | 5,418 |
|
The accompanying notes are an integral part of these consolidated financial statements.
MASTERCARD INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
| | | | For the Years Ended December 31, | For the Years Ended December 31, |
| | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| | (in millions) | (in millions) |
| Operating Activities | | | | | | | | | | |
| Net income | $ | 3,808 |
| | $ | 3,617 |
| | $ | 3,116 |
| $ | 5,859 |
| | $ | 3,915 |
| | $ | 4,059 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
| Amortization of customer and merchant incentives | 764 |
| | 691 |
| | 603 |
| 1,235 |
| | 1,001 |
| | 860 |
|
| Depreciation and amortization | 366 |
| | 321 |
| | 258 |
| 459 |
| | 437 |
| | 373 |
|
| Share-based payments | 22 |
| | (15 | ) | | 63 |
| |
| Share-based compensation | | 196 |
| | 176 |
| | 149 |
|
| Tax benefit for share-based payments | | — |
| | — |
| | (48 | ) |
| Deferred income taxes | (16 | ) | | (91 | ) | | (119 | ) | (244 | ) | | 86 |
| | (20 | ) |
| Venezuela charge | | — |
| | 167 |
| | — |
|
| Other | (81 | ) | | 52 |
| | 67 |
| 31 |
| | 59 |
| | 29 |
|
| Changes in operating assets and liabilities: | | | | | | | | | | |
| Accounts receivable | (35 | ) | | (164 | ) | | (42 | ) | (317 | ) | | (445 | ) | | (338 | ) |
| Income taxes receivable | (14 | ) | | (8 | ) | | 153 |
| (120 | ) | | (8 | ) | | (1 | ) |
| Settlement due from customers | (98 | ) | | 185 |
| | (194 | ) | (1,078 | ) | | (281 | ) | | (10 | ) |
| Prepaid expenses | (802 | ) | | (1,316 | ) | | (598 | ) | (1,769 | ) | | (1,402 | ) | | (1,073 | ) |
| Accrued litigation and legal settlements | (63 | ) | | (115 | ) | | 160 |
| 869 |
| | (12 | ) | | 17 |
|
| Restricted security deposits held for customers | | (6 | ) | | 94 |
| | 96 |
|
| Accounts payable | 49 |
| | 61 |
| | (20 | ) | 101 |
| | 290 |
| | 145 |
|
| Settlement due to customers | (186 | ) | | (165 | ) | | 322 |
| 849 |
| | 394 |
| | 66 |
|
| Accrued expenses | 325 |
| | 389 |
| | 315 |
| 439 |
| | 589 |
| | 520 |
|
| Long-term taxes payable | | (20 | ) | | 577 |
| | — |
|
| Net change in other assets and liabilities | 4 |
| | (35 | ) | | 51 |
| (261 | ) | | 27 |
| | (187 | ) |
| Net cash provided by operating activities | 4,043 |
| | 3,407 |
| | 4,135 |
| 6,223 |
| | 5,664 |
| | 4,637 |
|
| Investing Activities | | | | | | | | | | |
| Purchases of investment securities available-for-sale | (974 | ) | | (2,385 | ) | | (2,526 | ) | (1,300 | ) | | (714 | ) | | (957 | ) |
| Purchases of other short-term investments held-to-maturity | (918 | ) | | — |
| | — |
| |
| Purchases of investments held-to-maturity | | (509 | ) | | (1,145 | ) | | (867 | ) |
| Proceeds from sales of investment securities available-for-sale | 703 |
| | 2,477 |
| | 1,488 |
| 604 |
| | 304 |
| | 277 |
|
| Proceeds from maturities of investment securities available-for-sale | 542 |
| | 1,358 |
| | 1,321 |
| 379 |
| | 500 |
| | 339 |
|
| Proceeds from maturities of investment securities held-to-maturity | 857 |
| | — |
| | 36 |
| |
| Proceeds from maturities of investments held-to-maturity | | 929 |
| | 1,020 |
| | 456 |
|
| Purchases of property, plant and equipment | (177 | ) | | (175 | ) | | (155 | ) | (330 | ) | | (300 | ) | | (215 | ) |
| Capitalized software | (165 | ) | | (159 | ) | | (144 | ) | (174 | ) | | (123 | ) | | (167 | ) |
| Acquisition of businesses, net of cash acquired | (584 | ) | | (525 | ) | | — |
| — |
| | (1,175 | ) | | — |
|
| (Increase) decrease in restricted cash for litigation settlement | (1 | ) | | 183 |
| | 3 |
| |
| Investment in nonmarketable equity investments | | (91 | ) | | (147 | ) | | (31 | ) |
| Other investing activities | 2 |
| | (84 | ) | | (27 | ) | (14 | ) | | (1 | ) | | 2 |
|
| Net cash (used in) provided by investing activities | (715 | ) | | 690 |
| | (4 | ) | |
| Net cash used in investing activities | | (506 | ) | | (1,781 | ) | | (1,163 | ) |
| Financing Activities | | | | | | | | | | |
| Purchases of treasury stock | (3,518 | ) | | (3,386 | ) | | (2,443 | ) | (4,933 | ) | | (3,762 | ) | | (3,511 | ) |
| Proceeds from debt | 1,735 |
| | 1,530 |
| | 35 |
| 991 |
| | — |
| | 1,972 |
|
| Payment of debt | | — |
| | (64 | ) | | — |
|
| Dividends paid | (727 | ) | | (515 | ) | | (255 | ) | (1,044 | ) | | (942 | ) | | (837 | ) |
| Tax benefit for share-based payments | 42 |
| | 54 |
| | 19 |
| — |
| | — |
| | 48 |
|
| Tax withholdings related to share-based payments | | (80 | ) | | (47 | ) | | (51 | ) |
| Cash proceeds from exercise of stock options | 27 |
| | 28 |
| | 26 |
| 104 |
| | 57 |
| | 37 |
|
| Other financing activities | (17 | ) | | (50 | ) | | (11 | ) | (4 | ) | | (6 | ) | | (2 | ) |
| Net cash used in financing activities | (2,458 | ) | | (2,339 | ) | | (2,629 | ) | (4,966 | ) | | (4,764 | ) | | (2,344 | ) |
| Effect of exchange rate changes on cash and cash equivalents | (260 | ) | | (220 | ) | | 45 |
| |
| Net increase in cash and cash equivalents | 610 |
| | 1,538 |
| | 1,547 |
| |
| Cash and cash equivalents - beginning of period | 5,137 |
| | 3,599 |
| | 2,052 |
| |
| Cash and cash equivalents - end of period | $ | 5,747 |
| | $ | 5,137 |
| | $ | 3,599 |
| |
| Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents | | (6 | ) | | 200 |
| | (50 | ) |
| Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents | | 745 |
| | (681 | ) | | 1,080 |
|
| Cash, cash equivalents, restricted cash and restricted cash equivalents - beginning of period | | 7,592 |
| | 8,273 |
| | 7,193 |
|
| Cash, cash equivalents, restricted cash and restricted cash equivalents - end of period | | $ | 8,337 |
| | $ | 7,592 |
| | $ | 8,273 |
|
The accompanying notes are an integral part of these consolidated financial statements.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Organization
MasterCardMastercard Incorporated and its consolidated subsidiaries, including MasterCardMastercard International Incorporated (“MasterCardMastercard International” and together with MasterCardMastercard Incorporated, “MasterCard”“Mastercard” or the “Company”), is a technology company in the global payments industry that connects consumers, financial institutions, merchants, governments, digital partners, businesses and businessesother organizations worldwide, enabling them to use electronic forms of payment instead of cash and checks. The Company facilitates the processing of payment transactions including authorization, clearing and settlement, and delivers related products and services. The Company makes payments easier and more efficient by creating a wide range of payment solutions and services through a family of well-known brands, including MasterCard, MaestroMastercard®, Maestro® and Cirrus.Cirrus®. The Company is a multi-rail network. Through its core global payments processing network, Mastercard facilitates the switching (authorization, clearing and settlement) of payment transactions, and delivers related products and services. With additional payment capabilities that include real-time account based payments (including automated clearing house (“ACH”) transactions), Mastercard offers customers one partner to turn to for their payment needs for both domestic and cross-border transactions across multiple payment flows. The Company also provides value-added offerings such as safety and security products, information and analytics services, consulting, loyalty and reward programs information services and consulting.issuer and acquirer processing. The Company’s network ispayment solutions are designed to ensure safety and security for the global payments system.
A typical transaction on the Company’s core network involves four participants in addition to the Company: cardholder, merchant,account holder (a consumer who holds a card or uses another device enabled for payment), issuer (the cardholder’saccount holder’s financial institution), merchant and acquirer (the merchant’s financial institution). The Company’s customers encompass a vast array of entities, including financial institutions and other entities that act as “issuers” and “acquirers”, as well as merchants, governments, telecommunication companies and other businesses. The Company does not issue cards, extend credit, determine or receive revenue from interest rates or other fees charged to cardholdersaccount holders by issuers, or establish the rates charged by acquirers in connection with merchants’ acceptance of the Company’s branded cards.products. In most cases, account holder relationships belong to, and are managed by, the Company’s financial institution customers.
Significant Accounting Policies
Consolidation and basis of presentation - The consolidated financial statements include the accounts of MasterCardMastercard and its majority-owned and controlled entities, including any variable interest entities (“VIEs”) for which the Company is the primary beneficiary. Investments in VIEs for which the Company is not considered the primary beneficiary are not consolidated and are accounted for as equity method or cost method investments and recorded in other assets on the consolidated balance sheet. At December 31, 20152018 and 2014,2017, there were no significant VIEs which required consolidation and the investments were not considered material to the consolidated financial statements. Intercompany transactions and balances have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the 20152018 presentation. In 2014For 2017 and 2013, net revenue and general and administrative expenses were revised to correctly classify $322016, $127 million and $34$113 million, respectively, of customer incentive expenses as contra revenue instead ofwere reclassified from advertising and marketing expenses to general and administrative expenses. This revisionThe reclassification had no impact on total operating expenses, operating income or net income. The Company follows accounting principles generally accepted in the United States of America (“GAAP”).
Prior to December 31, 2017, the Company included the financial results from its Venezuela subsidiaries in the consolidated financial statements using the consolidation method of accounting. In 2017, due to foreign exchange regulations restricting access to U.S. dollars in Venezuela, an other-than-temporary lack of exchangeability between the Venezuelan bolivar and U.S. dollar impacted the Company’s ability to manage risk, process cross-border transactions and satisfy U.S. dollar denominated liabilities related to operations in Venezuela. As a result of these factors, Mastercard concluded that effective December 31, 2017, it did not meet the accounting criteria for consolidation of these Venezuelan subsidiaries, and therefore would transition to the cost method of accounting as of December 31, 2017. This accounting change resulted in a pre-tax charge of $167 million ($108 million after tax or $0.10 per diluted share) that was recorded in general and administrative expenses on the consolidated statement of operations for the year ended December 31, 2017.
Non-controlling interests represent the equity interest not owned by the Company and are recorded for consolidated entities in which the Company owns less than 100% of the interests. Changes in a parent’s ownership interest while the parent retains its controlling interest are accounted for as equity transactions, and upon loss of control, retained ownership interests are remeasured at fair value, with any gain or loss recognized in earnings. For 2015, 20142018, 2017 and 2013, income2016, losses from non-controlling interests waswere de minimis and, as a result, amounts are included inon the consolidated statement of operations within other income (expense).
The Company accounts for investments in common stock or in-substance common stock under the equity method of accounting when it has the ability to exercise significant influence over the investee, generally when it holds between 20% and 50% ownership
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
in the entity. In addition, investments in flow-through entities such as limited partnerships and limited liability companies are also accounted for under the equity method when the Company has the ability to exercise significant influence over the investee, generally when the investment ownership percentage is equal to or greater than 5% of the outstanding ownership interest. The excess of the cost over the underlying net equity of investments accounted for under the equity method is allocated to identifiable tangible and intangible assets and liabilities based on fair values at the date of acquisition. The amortization of the excess of the cost over the underlying net equity of investments and MasterCard’sMastercard’s share of net earnings or losses of entities accounted for under the equity method of accounting is included in other income (expense) on the consolidated statement of operations.
The Company accounts for investments in common stock or in-substance common stock under the cost method of accounting when it does not exercise significant influence, generally when it holds less than 20% ownership in the entity or when the interest in a limited partnership or limited liability company is less than 5% and the Company has no significant influence over the operation of the investee. Investments in companies that MasterCardMastercard does not control, but that are not in the form of common stock or in-substance common stock, are also accounted for under the cost method of accounting. These investments for which there is no readily determinable fair value and the cost method of accounting is used are adjusted for changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer.
Investments for which the equity method or cost method of accounting is used are classified as nonmarketable equity investments and recorded in other assets on the consolidated balance sheet.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Use of estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Future events and their effects cannot be predicted with certainty; accordingly, accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of the Company’s consolidated financial statements may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes. Actual results may differ from these estimates.
Revenue recognition - Revenue is recognized when persuasive evidenceto depict the transfer of an arrangement exists, delivery has occurredpromised goods or services have been rendered,to customers in an amount that reflects the priceconsideration to which the Company expects to be entitled to in exchange for those goods or services. Revenue is fixedgenerated by charging fees to issuers, acquirers and other stakeholders for providing switching services, as well as by assessing customers based primarily on the dollar volume of activity, or determinable,gross dollar volume, on the cards and collectibility is reasonably assured.other devices that carry the Company’s brands. Revenue is generally derived from transactional information accumulated by ourMastercard’s systems or reported by our customers. The Company’s revenue is based on the volume of activity on cards that carry the Company’s brands, the number of transactions processed or the nature of other payment-related products and services.
Volume-based revenue (domestic assessments and cross-border volume fees) is recorded as revenue in the period it is earned, which is when the related volume is generated on the cards. Certain volume-based revenue is based upon information reported to us by our customers. Transaction-based revenue (transaction processing fees) is primarily based on the number and type of transactions and is recognized as revenue in the same period asin which the related transactions occur. Other payment-related products and services are recognized as revenue in the same period asin which the related transactions occur or services are rendered.performed or transactions occur.
MasterCardMastercard has business agreements with certain customers that provide for rebates or other support when the customers meet certain volume hurdles as well as other support incentives such as marketing, which are tied to performance. Rebates and incentives are recorded as a reduction of revenue eitherprimarily when volume- and transaction-based revenues are recognized over the revenue is recognized by the Company or at the time the rebate or incentive is earned by the customer.contractual term. Rebates and incentives are calculated based upon estimated performance and the terms of the related business agreements. In addition, MasterCardMastercard may make payments to a customer directly related to entering into an agreement, which are generally deferredcapitalized and amortized over the life of the agreement on a straight-line basis.
Contract assets include unbilled consideration typically resulting from executed consulting, data analytic and research services performed for customers in connection with Mastercard’s payment network service arrangements. Collection for these services typically occurs over the contractual term. Contract assets are included in prepaid expenses and other current assets and other assets on the consolidated balance sheet.
The Company defers the recognition of revenue when consideration has been received prior to the satisfaction of performance obligations. As these performance obligations are satisfied, revenue is subsequently recognized. Deferred revenue is primarily derived from consulting, data analytic and research services. Deferred revenue is included in other current liabilities and other liabilities on the consolidated balance sheet.
Business combinations - The Company accounts for business combinations under the acquisition method of accounting. The Company measures the tangible and intangible identifiable assets acquired, liabilities assumed and any non-controlling interest
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
in the acquiree, at their fair values at the acquisition date. Acquisition-related costs are expensed as incurred and are included in general and administrative expenses. Any excess of purchase price over the fair value of net assets acquired, including identifiable intangible assets, is recorded as goodwill.
IntangibleGoodwill and other intangible assets - IntangibleIndefinite-lived intangible assets consist of goodwill, which represents the synergies expected to arise after the acquisition date and the assembled workforce, and customer relationships. Finite-lived intangible assets consist of capitalized software costs, trademarks, tradenames, customer relationships and other intangible assets, which have finite lives, and customer relationships which have indefinite lives.assets. Intangible assets with finite useful lives are amortized over their estimated useful lives, on a straight-line basis, which range from one to tentwenty years. Capitalized software includes internal and external costs incurred directly related to the design, development and testing phases of each capitalized software project.
Impairment of assets - - Goodwill and indefinite-lived intangible assets are not amortized but are tested annually for impairment in the fourth quarter, or sooner when circumstances indicate an impairment may exist. The impairment evaluation for goodwill utilizes a quantitative assessment. If the fair value of a reporting unit exceeds the carrying value, goodwill is not impaired. If the fair value of the reporting unit is less than its carrying value, then goodwill is impaired and the excess of the reporting unit’s carrying value over the fair value is recognized as an impairment charge.
The impairment test for indefinite-lived intangible assets consists of a qualitative assessment to evaluate relevant events and circumstances that could affect the significant inputs used to determine the fair value of indefinite-lived intangible assets. If the qualitative assessment indicates that it is more likely than not that indefinite-lived intangible assets are impaired, then a quantitative assessment is required.
Long-lived assets, other than goodwill and indefinite-lived intangible assets, are tested for impairment whenever events or circumstances indicate that their carrying amount may not be recoverable. If the carrying value of the asset cannot be recovered from estimated future cash flows, undiscounted and without interest, the fair value of the asset is calculated using the present value of estimated net future cash flows. If the carrying amount of the asset exceeds its fair value, an impairment is recorded.
Goodwill and indefinite-lived intangible assets are not amortized and are tested annually for impairment in the fourth quarter, or sooner when circumstances indicate an impairment may exist. Goodwill is tested for impairment at the reporting unit level. The impairment evaluation utilizes a quantitative assessment using a two-step impairment test. The first step is to compare the reporting unit’s carrying value, including goodwill, to the fair value. If the fair value exceeds the carrying value, then no potential impairment is considered to exist. If the carrying value exceeds the fair value, the second step is performed to determine if the implied fair value of the reporting unit’s goodwill exceeds the carrying value of the reporting unit. An impairment charge would be recorded if the carrying value exceeds the implied fair value. Impairment charges, if any, are recorded in general and administrative expenses.
The impairment test for indefinite-lived intangible assets consists of a qualitative assessment to evaluate all relevant events and circumstances that could affect the significant inputs used to determine the fair value of indefinite-lived intangible assets. If the qualitative assessment indicates that it is more likely than not that indefinite-lived intangible assets are impaired, then a
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
quantitative assessment is required. Basedexpenses on the qualitative assessment performed in 2015, it was determined that the Company’s indefinite-lived intangible assets were not impaired.consolidated statement of operations.
Litigation - The Company is a party to certain legal and regulatory proceedings with respect to a variety of matters. The Company evaluates the likelihood of an unfavorable outcome of all legal or regulatory proceedings to which it is a party and accrues a loss contingency when the loss is probable and reasonably estimable. These judgments are subjective based on the status of the legal or regulatory proceedings, the merits of its defenses and consultation with in-house and external legal counsel. Legal costs are expensed as incurred and recorded in general and administrative expenses.expenses on the consolidated statement of operations.
Settlement and other risk management - MasterCard’sMastercard’s rules guarantee the settlement of many of the MasterCard, Cirrus and Maestro-branded transactions between its issuers and acquirers.customers. Settlement exposure is the outstanding settlement risk to customers under MasterCard’sMastercard’s rules due to the difference in timing between the payment transaction date and subsequent settlement. While the term and amount of the guarantee are unlimited, the duration of settlement exposure is short term and typically limited to a few days. In the event that MasterCard effects a payment on behalf of a failed customer, MasterCard may seek an assignment of the underlying receivables of the failed customer. Customers may be charged for the amount of any settlement loss incurred during the ordinary course activities of the Company.
The Company also enters into agreements in the ordinary course of business under which the Company agrees to indemnify third parties against damages, losses and expenses incurred in connection with legal and other proceedings arising from relationships or transactions with the Company. As the extent of the Company’s obligations under these agreements depends entirely upon the occurrence of future events, the Company’s potential future liability under these agreements is not determinable.
The Company accounts for each of its guarantees by recording the guarantee at its fair value at the inception or modification date through earnings.
Income taxes - The Company follows an asset and liability based approach in accounting for income taxes as required under GAAP. Deferred income tax assets and liabilities are recorded to reflect the tax consequences on future years of temporary differences between the financial statement carrying amounts and income tax bases of assets and liabilities. Deferred income taxes are displayed separately as separate line itemsnoncurrent assets and liabilities on the consolidated balance sheet. In 2015, the Company early adopted accounting guidance issued by the Financial Accounting Standards Board (“FASB”) in the fourth quarter of 2015, which requires all deferred income taxes to be recorded as non-current. The standard was applied prospectively, and as such, the prior period balance sheet was not reclassified. Valuation allowances are provided against assets which are not more likely than not to be realized. The Company recognizes all material tax positions, including uncertain tax positions in which it is more likely than not that the position will be sustained based on its technical merits and if challenged by the relevant taxing authorities. At each balance sheet date, unresolved uncertain tax positions are reassessed to determine whether subsequent developments require a change in the amount of recognized tax benefit. The allowance for uncertain tax positions is recorded in other current and noncurrent liabilities on the consolidated balance sheet. The Company
The Company
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
records interest expense related to income tax matters as interest expense in itson the consolidated statement of operations. The Company includes penalties related to income tax matters in the income tax provision.
The Company does not provide for U.S. federal income tax andwill recognize earnings of foreign withholding taxes on undistributed earnings from non-U.S. subsidiaries when such earningsaffiliates that are intendeddetermined to be reinvested indefinitely outside ofglobal intangible low taxed income (“GILTI”) in the U.S.period it arises and it will not recognize deferred taxes for basis differences that may reverse as GILTI in future years.
Cash and cash equivalents - Cash and cash equivalents include certain investments with daily liquidity and with a maturity of three months or less from the date of purchase. Cash equivalents are recorded at cost, which approximates fair value.
Restricted cash - The Company classifies cash and cash equivalents as restricted when the cashit is unavailable for withdrawal or usage foruse in its general operations. Restrictions may include legallyThe Company has the following types of restricted deposits, contracts entered into with others, or the Company’s statements of intention with regard to particular deposits. In December 2012, thecash and restricted cash equivalents:
Restricted cash for litigation settlement - The Company madehas restricted cash for litigation within a payment into a qualified cash settlement fund related to itsa preliminary settlement agreement for the U.S. merchant class litigation. The funds continue to be restricted for payments until the litigation matter is resolved.
Restricted security deposits held for customers - The Company requires collateral from certain customers for settlement of their transactions. The majority of collateral for settlement is in the form of standby letters of credit and bank guarantees which are not recorded on the consolidated balance sheet. Additionally, the Company holds cash deposits and certificates of deposit from certain customers as collateral for settlement of their transactions, which are recorded as assets on the consolidated balance sheet. These assets are fully offset by corresponding liabilities included on the consolidated balance sheet. These security deposits are typically held for the duration of the agreement with the customers.
Other restricted cash balances - The Company has presented these funds asother restricted cash for litigation settlement sincebalances which include contractually restricted deposits, as well as cash balances that are restricted based on the use ofCompany’s intention with regard to usage. These funds are classified on the funds under the qualified cash settlement fund is restricted for payment under the settlement agreement.consolidated balance sheet within prepaid expenses and other current assets and other assets.
Fair value - The Company measures certain financial assets and liabilities at fair value on a recurring basis by estimating the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants. The Company classifies these recurring fair value measurements into a three-level hierarchy (“Valuation Hierarchy”).
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Valuation Hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. A financial instrument’s categorization within the Valuation Hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The three levels of the Valuation Hierarchy are as follows:
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in inactive markets and inputs that are observable for the asset or liability.
Level 3 - inputs to the valuation methodology are unobservable and cannot be directly corroborated by observable market data.
Certain assets are measured at fair value on a nonrecurring basis. The Company’s non-financial assets measured at fair value on a nonrecurring basis include property, plant and equipment, nonmarketable equity investments, goodwill and other intangible assets. These assets are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.
The valuation methods for goodwill and other intangible assets acquired in business combinations involve assumptions concerning comparable company multiples, discount rates, growth projections and other assumptions of future business conditions. The Company uses an income approachvarious valuation techniques to determine fair value, primarily discounted cash flows analysis, relief-from-royalty, and multi-period excess earnings for estimating the fair value of its intangible assets and aassets. The Company uses market approachcapitalization for estimating the fair value of its reporting unit, when necessary.unit. As the assumptions employed to measure these assets and liabilities on a nonrecurring basis are based on management’s judgment using internal and external data, these fair value determinations are classified in Level 3 of the Valuation Hierarchy.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Contingent consideration - Certain business combinations involve the potential for future payment of consideration that is contingent upon the achievement of performance milestones. These liabilities are classified within Level 3 of the Valuation Hierarchy as the inputs used to measure fair value are unobservable and require management’s judgment. The fair value of the contingent consideration at the acquisition date and subsequent periods is determined utilizing an income approach based on a Monte Carlo technique and is recorded in other current liabilities and other liabilities on the consolidated balance sheet. Changes to projected performance milestones of the acquired businesses could result in a higher or lower contingent consideration liability. Measurement period adjustments, if any, to the preliminary estimated fair value of contingent consideration as of the acquisition date will be recorded to goodwill, however, changes in fair value as a result of updated assumptions will be recorded in general and administrative expenses on the consolidated statement of operations.
Investment securities - The Company classifies investments in debt and equity securities as available-for-sale. Available-for-sale securities that are available to meet the Company’s current operational needs are classified as current assets. Available-for-sale securities that are not available to meet the Company’s current operational needs are classified as non-current assets.assets on the consolidated balance sheet.
The investments in debt and equity securities are carried at fair value, with unrealized gains and losses, net of applicable taxes, recorded as a separate component of accumulated other comprehensive income (loss) on the consolidated statement of comprehensive income. Net realized gains and losses on debt and equity securities are recognized in investment income on the consolidated statement of operations. The specific identification method is used to determine realized gains and losses.
The Company evaluates its debt securities for other-than-temporary impairment on an ongoing basis. When there has been a decline in fair value of a debt security below the amortized cost basis, the Company recognizes an other-than-temporary impairment if: (1) it has the intent to sell the security; (2) it is more likely than not that it will be required to sell the security before recovery of the amortized cost basis; or (3) it does not expect to recover the entire amortized cost basis of the security. The credit loss component of the impairment would be recognized in other income (expense), net on the consolidated statement of operations while the non-credit loss would remain in accumulated other comprehensive income (loss) until realized from a sale or an other-than-temporary impairment.
The Company classifies time deposits with maturities greater than 3three months as held-to-maturity. Held-to-maturity securities that mature within one year are classified as current assets while held-to-maturity securities with maturities of greater than one year are classified as non-current assets. Time deposits are carried at amortized cost on the consolidated balance sheet and are intended to be held until maturity.
Derivative financial instruments - The Company records all derivativesCompany’s derivative financial instruments are recorded as either assets or liabilities on the balance sheet and measured at fair value. The Company’s foreign exchange forward and option contracts are included in Level 2 of the Valuation Hierarchy as the fair value of these contracts are based on inputs, which are observable based on broker quotes for the same or similar instruments. ChangesAs the Company does not elect hedge accounting for any derivative instruments, realized and unrealized gains and losses from the change in the fair value of derivative instrumentsthese contracts are reportedrecognized immediately in current-period earnings. TheseThe Company’s derivative contracts hedge foreign exchange risk and wereare not entered into for trading or speculative purposes. The Company did not have any derivative contracts accounted for under hedge accounting as of December 31, 20152018 and 2014.2017.
The Company has numerous investments in its foreign subsidiaries. The net assets of these subsidiaries are exposed to volatility in foreign currency exchange rates. The Company uses foreign currency denominated debt to hedge a portion of its net investment in foreign operations against adverse movements in exchange rates. The effective portion of the foreign currency gains and losses related to the foreign currency denominated debt are reported in accumulated other comprehensive income (loss) on the consolidated balance sheet as part of the cumulative translation adjustment component of equity. The ineffective portion, if any, is recognized in earnings in the current period. The Company evaluates the effectiveness of the net investment hedge each quarter.
Settlement due from/due to customers - The Company operates systems for clearing and settling payment transactions among MasterCard customers. Net settlements are generally cleared daily among customers through settlement cash accounts by wire transfer or other bank clearing means. However, some transactions may not settle until subsequent business days, resulting in amounts due from and due to MasterCard customers.
Restricted security deposits held for MasterCard customers - MasterCard requires collateral from certain customers for settlement of their transactions. The majority of collateral for settlement is in the form of standby letters of credit and bank guarantees
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
which are not recorded on the balance sheet. Additionally, MasterCard holds cash deposits and certificates of deposit from certain customers of MasterCard as collateral for settlement of their transactions. These assets are fully offset by corresponding liabilities included on the consolidated balance sheet.
Property, plant and equipment - Property, plant and equipment are stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Depreciation of leasehold improvements and amortization of capital leases is included in depreciation and amortization expense.expense on the consolidated statement of operations.
The useful lives of the Company’s assets are as follows:
|
| | |
| Asset Category | | Estimated Useful Life |
| Buildings | | 30 years |
| Building equipment | | 10 - 15 years |
| Furniture and fixtures and equipment | | 23 - 5 years |
| Leasehold improvements | | Shorter of life of improvement or lease term |
| Capital leases | | LeaseShorter of life of the asset or lease term |
Leases - The Company enters into operating and capital leases for the use of premises software and equipment. Rent expense related to lease agreements that contain lease incentives is recorded on a straight-line basis over the term of the lease.
Pension and other postretirement plans - The Company recognizes the funded status of its single-employer defined benefit pension plans orand postretirement plans as assets or liabilities on its consolidated balance sheet and recognizes changes in the funded status in the year in which the changes occur through accumulated other comprehensive income (loss). The funded status is measured as the difference between the fair value of plan assets and the projected benefit obligation at December 31, the measurement date. The fair value of plan assets represents the current market value of the pension assets. Overfunded plans, if any, are aggregated and recorded in long-term other assets, while underfunded plans are aggregated and recorded as accrued expenses and long-term other liabilities.liabilities on the consolidated balance sheet.
Net periodic pension and postretirement benefit cost/(income), excluding the service cost component, is recognized in general and administrative expenses inother income (expense) on the consolidated statement of operations. These costs include service costs, interest cost, expected return on plan assets, amortization of prior service costs or credits and gains or losses previously recognized as a component of accumulated other comprehensive income (loss). The service cost component is recognized in general and administrative expenses on the consolidated statement of operations.
Defined contribution plans - The Company’s contributions to defined contribution plans are recorded when employees render service to the Company. The charge is recorded in general and administrative expenses.expenses on the consolidated statement of operations.
Advertising and marketing - Expenses incurred to promote Mastercard’s products, services and brand are recognized in advertising and marketing on the consolidated statement of operations. The cost of media advertising is expensed when the advertising takes place. Advertising production costs are expensed as incurred. Promotional items are expensed at the time the promotional event occurs. Sponsorship costs are recognized over the period of benefit.
Foreign currency remeasurement and translation - Monetary assets and liabilities are remeasured to functional currencies using current exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are recorded at historical exchange rates. Revenue and expense accounts are remeasured at the weighted-average exchange rate for the period. Resulting exchange gains and losses related to remeasurement are included in general and administrative expenses on the consolidated statement of operations.
Where a non-U.S. currency is the functional currency, translation from that functional currency to U.S. dollars is performed for balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted-average exchange rate for the period. Resulting translation adjustments are reported as a component of accumulated other comprehensive income (loss).
Treasury stock - The Company records the repurchase of shares of its common stock at cost on the trade date of the transaction. These shares are considered treasury stock, which is a reduction to stockholders’ equity. Treasury stock is included in authorized and issued shares but excluded from outstanding shares.
Share-based payments - The Company measures share-based compensation expense at the grant date, based on the estimated fair value of the award and uses the straight-line method of attribution, net of estimated forfeitures, for expensing awards over
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
the requisite employee service period. The Company estimates the fair value of its non-qualified stock option awards (“Options”) using a Black-Scholes valuation model. The fair value of restricted stock units (“RSUs”) is determined and fixed on the grant date based on the Company’s stock price, adjusted for the exclusion of dividend equivalents. The Monte Carlo simulation valuation
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
model is used to determine the grant date fair value of performance stock units (“PSUs”) granted. All share-based compensation expenses are recorded in general and administrative expenses.expenses on the consolidated statement of operations.
Redeemable non-controlling interests - The Company’s business combinations may include provisions allowing non-controlling equity owners the ability to require the Company to purchase additional interests in the subsidiary at their discretion. These interests are initially recorded at fair value and in subsequent reporting periods are accreted or adjusted to their estimated redemption value. These adjustments to the redemption value will impact retained earnings or additional paid-in capital on the consolidated balance sheet, but will not impact the consolidated statement of operations. The redeemable non-controlling interests are considered temporary and reported outside of permanent equity on the consolidated balance sheet at the greater of the carrying amount adjusted for the non-controlling interest’s share of net income (loss) or its redemption value.
Earnings per share - The Company calculates basic earnings per share (“EPS”) by dividing net income by the weighted-average number of common shares outstanding during the year. Diluted EPS is calculated by dividing net income by the weighted-average number of common shares outstanding during the year, adjusted for the potentially dilutive effect of stock options and unvested stock units using the treasury stock method. The Company may be required to calculate EPS using the two-class method as a result of its redeemable non-controlling interests. If redemption value exceeds the fair value of the redeemable non-controlling interests, the excess would be a reduction to net income for the EPS calculation. For 2018, 2017 and 2016, there was no impact to EPS for adjustments related to redeemable non-controlling interests.
RecentRecently adopted accounting pronouncements
Disclosure requirements for defined benefit plans - In August 2018, the Financial Accounting Standards Board (the “FASB”) issued accounting guidance which modifies disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by removing, modifying and adding certain disclosures. This guidance is required to be applied retrospectively and is effective for periods ending after December 15, 2020, with early adoption permitted. The Company adopted this guidance effective December 31, 2018, which did not result in a material impact on the Company’s current year consolidated financial statements.
Income taxes - In March 2018, the FASB incorporated the Securities and Exchange Commission’s (the “SEC’s”) interpretive guidance from Staff Accounting Bulletin No. 118 (“SAB 118”), issued on December 22, 2017, into the income tax accounting codification under GAAP. The guidance allows for the recognition of provisional amounts related to 2017 U.S. tax reform (“U.S. Tax Reform”) during a one year measurement period with changes recorded as a component of income tax expense. This guidance was effective upon issuance. Refer to Note 19 (Income Taxes) for further discussion.
Net periodic pension cost and net periodic postretirement benefit cost - In November 2015,March 2017, the FASB issued accounting guidance that removesto improve the reporting requirement to split deferred income taxes between currentpresentation of net periodic pension cost and non-current. Instead,net periodic postretirement benefit cost. Under this guidance, the new accounting guidance requires all deferred income taxesservice cost component is required to be reported in the same line item as non-current.other compensation costs arising from services rendered by employees during the period. The other components of the net periodic benefit costs are required to be presented on the consolidated statement of operations separately from the service cost component and outside of operating income. This standardguidance is required to be applied retrospectively and is effective for fiscal yearsperiods beginning after December 15, 2016. Early adoption is permitted.2017. The Company early adopted the accountingthis guidance effective December 31, 2015.January 1, 2018, which did not result in a material impact on the Company’s current year consolidated financial statements. The Company applieddid not apply this guidance retrospectively, as the new guidance prospectivelyimpact was de minimis to the prior year consolidated financial statements. Refer to Note 13 (Pension, Postretirement and as such, prior periods were not reclassified.Savings Plans) for the components of the Company’s net periodic pension cost and net periodic postretirement benefit costs.
Debt issuance costsRestricted cash - In April 2015,November 2016, the FASB issued accounting guidance that will changeto address diversity in the currentclassification and presentation of debt issuance costschanges in restricted cash on the balance sheet.consolidated statement of cash flows. Under this guidance, companies are required to present restricted cash and restricted cash equivalents with cash and cash equivalents when reconciling the beginning-of-period and end-of-period amounts shown on the consolidated statement of cash flows. This new guidance will move debt issuance costs from the assets section of the balance sheetis required to the liabilities section as a direct deduction from the carrying amount of the debt issued.be applied retrospectively and is effective for periods beginning after December 15, 2017, with early adoption permitted. The Company will adopt the accountingadopted this guidance effective January 1, 2018. In accordance with the adoption of this standard, the Company includes restricted cash, which currently consists of restricted cash for litigation settlement, restricted security deposits held for customers and other restricted cash balances in its reconciliation of beginning-of-period and end-of-period amounts shown on the consolidated statement of cash flows. Refer to Note 5 (Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents) for related disclosures.
Intra-entity asset transfers - In October 2016, the FASB issued accounting guidance to simplify the accounting for income tax consequences of intra-entity transfers of assets other than inventory. Under this guidance, companies are required to recognize
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
the income tax consequences of an intra-entity asset transfer when the transfer occurs. This guidance must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the period of adoption. The guidance is effective for periods beginning after December 15, 2017. The Company adopted this guidance effective January 1, 2018. Refer to Note 19 (Income Taxes) for further discussion. See the section in this note entitled Cumulative Effect of the Adopted Accounting Pronouncements for a summary of the cumulative impact of adopting this standard as of January 1, 2018.
Financial instruments - In January 2016, the FASB issued accounting guidance to amend certain aspects of recognition, measurement, presentation and does not anticipatedisclosure of financial instruments, including the requirement to measure certain equity investments at fair value with changes in fair value recognized in income. This guidance is required to be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. Amendments related to equity securities without readily determinable fair values should be applied prospectively to equity investments that it will haveexist as of the date of adoption. The guidance is effective for periods beginning after December 15, 2017. The Company adopted this guidance effective January 1, 2018. The cumulative effect of the adoption of the standard was de minimis to the Company’s balance sheet upon adoption. For the year ended December 31, 2018, the Company recorded a material impactgain on its consolidated financial statements.non-marketable equity investments, which resulted in a pre-tax increase of $12 million.
Revenue recognition - In May 2014, the FASB issued accounting guidance that provides a single, comprehensive revenue recognition model for all contracts with customers and supersedes most of the existing revenue recognition requirements. Under this guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted this guidance effective January 1, 2018 under the modified retrospective transition method, applying the standard to contracts not completed as of January 1, 2018 and considered the aggregate amount of modifications. See the section in this note entitled Cumulative Effect of the Adopted Accounting Pronouncements for a summary of the cumulative impact of adopting this standard as of January 1, 2018.
This new revenue guidance impacts the timing of certain customer incentives recognized in the Company’s consolidated statement of operations, as they are recognized over the life of the contract. Previously, such incentives were recognized when earned by the customer. The new revenue guidance also impacts the Company’s accounting recognition for certain market development fund contributions and expenditures. Historically, these items were recorded on a net basis in net revenue and will now be recognized on a gross basis, resulting in an increase to both revenues and expenses.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables summarize the impact of the revenue standard on the Company’s consolidated statement of operations for the year ended December 31, 2018 and consolidated balance sheet as of December 31, 2018:
|
| | | | | | | | | | | |
| | Year Ended December 31, 2018 |
| | Balances excluding revenue standard | | Impact of revenue standard | | As reported |
| | (in millions) |
| Net Revenue | $ | 14,471 |
| | $ | 479 |
| | $ | 14,950 |
|
| | | | | | |
| Operating Expenses | | | | | |
| Advertising and marketing | 743 |
| | 164 |
| | 907 |
|
| | | | | | |
| Income before income taxes | 6,889 |
| | 315 |
| | 7,204 |
|
| Income tax expense | 1,278 |
| | 67 |
| | 1,345 |
|
| Net Income | 5,611 |
| | 248 |
| | 5,859 |
|
|
| | | | | | | | | | | |
| | December 31, 2018 |
| | Balances excluding revenue standard | | Impact of revenue standard | | As reported |
| | (in millions) |
| Assets | | | | | |
| Accounts receivable | $ | 2,214 |
| | $ | 62 |
| | $ | 2,276 |
|
| Prepaid expenses and other current assets | 1,176 |
| | 256 |
| | 1,432 |
|
| Deferred income taxes | 666 |
| | (96 | ) | | 570 |
|
| Other assets | 2,388 |
| | 915 |
| | 3,303 |
|
| | | | | | |
| Liabilities | | | | | |
| Accounts payable | 959 |
| | (422 | ) | | 537 |
|
| Accrued expenses | 4,375 |
| | 372 |
| | 4,747 |
|
| Other current liabilities | 1,085 |
| | (136 | ) | | 949 |
|
| Other liabilities | 1,145 |
| | 732 |
| | 1,877 |
|
| | | | | | |
| Equity | | | | | |
| Retained earnings | 26,692 |
| | 591 |
| | 27,283 |
|
For a more detailed discussion on revenue recognition, refer to Note 3 (Revenue).
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Cumulative Effect of the Adopted Accounting Pronouncements
The following table summarizes the cumulative impact of the changes made to the January 1, 2018 consolidated balance sheet for the adoption of the new accounting standards pertaining to revenue recognition and intra-entity asset transfers. The prior periods have not been restated and have been reported under the accounting standards in effect for those periods.
|
| | | | | | | | | | | | | | | |
| | Balance at December 31, 2017 | | Impact of revenue standard | | Impact of intra-entity asset transfers standard | | Balance at
January 1, 2018 |
| | (in millions) |
| Assets | | | | | | | |
| Accounts receivable | $ | 1,969 |
| | $ | 44 |
| | $ | — |
| | $ | 2,013 |
|
| Prepaid expenses and other current assets | 1,040 |
| | 181 |
| | (17 | ) | | 1,204 |
|
| Deferred income taxes | 250 |
| | (69 | ) | | 186 |
| | 367 |
|
| Other assets | 2,298 |
| | 690 |
| | (352 | ) | | 2,636 |
|
| Liabilities | | | | | | | |
| Accounts payable | 933 |
| | (495 | ) | | — |
| | 438 |
|
| Accrued expenses | 3,931 |
| | 391 |
| | — |
| | 4,322 |
|
| Other current liabilities | 792 |
| | (44 | ) | | — |
| | 748 |
|
| Other liabilities | 1,438 |
| | 628 |
| | — |
| | 2,066 |
|
| Equity | | | | | | | |
| Retained earnings | 22,364 |
| | 366 |
| | (183 | ) | | 22,547 |
|
Recent accounting pronouncements not yet adopted
Implementation costs incurred in a hosting arrangement that is a service contract - In August 2015,2018, the FASB issued accounting guidance which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that delayedis a service contract with the effective date of this standard by one year, making therequirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for fiscal yearsperiods beginning after December 15, 2017. Early application2019 and early adoption is permitted aspermitted. Companies are required to adopt this guidance either retrospectively or by prospectively applying the guidance to all implementation costs incurred after the date of the original effective date, December 15, 2016. The Company will adopt the new accounting guidance effective January 1, 2018. The accounting guidance permits either a full retrospective or a modified retrospective transition method.adoption. The Company is in the process of evaluating which transition methodwhen it will applyadopt this guidance and the potential effects this guidance will have on its consolidated financial statements.
Income taxes Disclosure requirements for fair value measurement - In August 2018, the FASB issued accounting guidance which modifies disclosure requirements for fair value measurements by removing, modifying and adding certain disclosures. This guidance is effective for periods beginning after December 15, 2019. Companies are permitted to early adopt the removed or modified disclosures and delay adoption of added disclosures until the effective date. Companies are required to adopt the guidance for certain added disclosures prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption and all other amendments retrospectively to all periods presented upon their effective date. The Company is in the process of evaluating when it will adopt this guidance and the potential effects this guidance will have on its disclosures.
Comprehensive income - In July 2013,February 2018, the FASB issued accounting guidance that requires entitiesallows for a one-time reclassification from accumulated other comprehensive income (loss) to present an unrecognizedretained earnings for stranded tax benefit neteffects resulting from U.S. Tax Reform. The guidance is effective for periods beginning after December 15, 2018, with certain deferred tax assets when specific requirements are met.early adoption permitted. The Company adopted the revised accountingwill adopt this guidance effective January 1, 2014. This new2019 and does not expect the impacts of this standard to be material.
Derivatives and hedging - In August 2017, the FASB issued accounting guidance didto improve and simplify existing guidance to allow companies to better reflect their risk management activities in the financial statements. The guidance expands the ability to hedge nonfinancial and financial risk components, eliminates the requirement to separately measure and recognize hedge ineffectiveness and eases requirements of an entity’s assessment of hedge effectiveness. This guidance is effective for periods beginning after December 15, 2018 and early adoption is permitted. The Company currently does not haveaccount for its foreign currency derivative contracts under hedge accounting. The Company will adopt this guidance effective January 1, 2019 and does not expect the impacts of this standard to be material. For a materialmore detailed discussion of the Company’s foreign exchange risk management activities, refer to Note 22 (Foreign Exchange Risk Management).
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Credit losses - In June 2016, the FASB issued accounting guidance to amend the measurement of credit losses for financial instruments. The guidance requires all expected credit losses for most financial assets held at the reporting date to be measured based on historical experience, current conditions, and reasonable and supportable forecasts, generally resulting in the earlier recognition of allowance for losses. The guidance is effective for periods beginning after December 15, 2019, with early adoption permitted. The Company is required to apply the provisions of this guidance as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company will adopt this guidance effective January 1, 2020 and does not expect the impacts of this standard to be material.
Leases - In February 2016, the FASB issued accounting guidance that will change how companies account for and present lease arrangements. This guidance requires companies to recognize leased assets and liabilities for both financing and operating leases. This guidance is effective for periods beginning after December 15, 2018. The Company will adopt this guidance effective January 1, 2019 using the modified retrospective approach as of the date of adoption with the available practical expedients. Upon adoption of the standard, the estimated impact on the Company’s consolidated financial statements.
Foreign currency - In March 2013,statements is expected to be an increase in non-current assets with a corresponding increase in current and non-current liabilities. The Company estimates that the FASB issued clarifying accounting guidance on the releaseincrease in assets and liabilities will represent approximately 2% of cumulative translation adjustment into net income when an entity ceases to have a controlling financial interest in a subsidiary or a group of assets that is a business within a foreign entity. The revised accounting guidance became effective January 1, 2014 and did not have an impact on the Company’s consolidated financial statements.total assets and total liabilities as of December 31, 2018 and expects no significant impact to retained earnings.
Note 2. Acquisitions
In 2015,2017, the Company acquired two businesses for $609 million in cash.total consideration of $1.5 billion, representing both cash and contingent consideration. For thesethe businesses acquired, Mastercard allocated the Company recorded $474 million as goodwill representingvalues associated with the preliminary estimatesassets, liabilities and redeemable non-controlling interests based on their respective fair values on the acquisition dates. Refer to Note 1 (Summary of Significant Accounting Policies), for the aggregate excess of the purchase consideration over thevaluation techniques Mastercard utilizes to fair value of netthe assets acquired.
The Company acquired eight businesses in 2014. In 2014, two of the business combinations were achieved in stages, with non-controlling interestsand liabilities acquired in previous years. One of the business combinations was a transaction for less than 100 percent of the equity interest.combinations. The total consideration transferred was $575 million, of which $509 million was recorded as goodwill.
A portion of theresidual value allocated to goodwill related to the 2015 and 2014 acquisitions is not expected to be deductible for local tax purposes.
The Company made nohas finalized the purchase accounting for businesses acquired during 2017. The final fair values of the purchase price allocations, as of the acquisition dates, are noted below:
|
| | | |
| | (in millions) |
| Cash consideration | $ | 1,286 |
|
| Contingent consideration | 202 |
|
| Redeemable non-controlling interests | 69 |
|
| Gain on previously held minority interest | 14 |
|
| Total fair value of businesses acquired | $ | 1,571 |
|
| | |
| Assets: | |
| Cash and cash equivalents | $ | 111 |
|
| Other current assets | 110 |
|
| Other intangible assets | 488 |
|
| Goodwill | 1,135 |
|
| Other assets | 91 |
|
| Total assets | 1,935 |
|
| | |
| Liabilities: | |
Short-term debt1 | 64 |
|
| Other current liabilities | 170 |
|
| Net pension liability | 66 |
|
| Other liabilities | 64 |
|
| Total liabilities | 364 |
|
| | |
| Net assets acquired | $ | 1,571 |
|
1 The short-term debt assumed through acquisitions was repaid during 2017.
The following table summarizes the identified intangible assets acquired:
|
| | | | | |
| | Acquisition Date Fair Value | | Weighted-Average Useful Life |
| | (in millions) | | (Years) |
| Developed technologies | $ | 319 |
| | 7.5 |
| Customer relationships | 166 |
| | 9.9 |
| Other | 3 |
| | 1.4 |
| Other intangible assets | $ | 488 |
| | 8.3 |
For the businesses acquired in 2013. 2017, the largest acquisition relates to Vocalink, a payment systems and ATM switching platform operator, located principally in the U.K. On April 28, 2017, Mastercard acquired 92.4% controlling interest in Vocalink for cash consideration of £719 million ($929 million as of the acquisition date). In addition, the Vocalink sellers have the potential to earn additional contingent consideration of £169 million (approximately $214 million as of December 31, 2018), upon meeting 2018 revenue targets in accordance with terms of the purchase agreement. Refer to Note 7 (Fair Value and Investment Securities) for additional information related to the fair value of contingent consideration.
A majority of Vocalink’s shareholders have retained a 7.6% ownership for at least three years, which is recorded as redeemable non-controlling interests on the consolidated balance sheet. These remaining shareholders have a put option to sell their ownership interest to Mastercard on the third and fifth anniversaries of the transaction and quarterly thereafter (the “Third Anniversary Option” and “Fifth Anniversary Option”, respectively). The Third Anniversary Option is exercisable at a fixed price of £58 million (approximately $73 million as of December 31, 2018) (“Fixed Price”). The Fifth Anniversary Option is exercisable at the greater of the Fixed Price or fair value. Additionally, Mastercard has a call option to purchase the remaining interest from Vocalink’s shareholders on the fifth anniversary of the transaction and quarterly thereafter, which is exercisable at the greater of the Fixed Price or fair value. The fair value of the redeemable non-controlling interests was determined utilizing a market approach, which extrapolated the consideration transferred that was discounted for lack of control and marketability.
The consolidated financial statements include the operating results of the acquired businesses from the dates of their respective acquisition. Pro forma information related to the acquisitions was not included because the impact on the Company’s consolidated results of operations was not considered to be material.
Note 3. Revenue
Mastercard’s business model involves four participants in addition to the Company: account holders, issuers (the account holders’ financial institutions), merchants and acquirers (the merchants’ financial institutions). Revenue from contracts with customers is recognized when services are performed in an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those services. Revenue recognized from domestic assessments, cross-border volume fees and transaction processing are derived from Mastercard’s payment network services. Revenue is generated by charging fees to issuers, acquirers and other stakeholders for providing switching services, as well as by assessing customers based primarily on the dollar volume of activity, or gross dollar volume, on the cards and other devices that carry the Company’s brands. Revenue is generally derived from transactional information accumulated by Mastercard’s systems or reported by customers. In addition, the Company recognizes revenue from other payment-related products and services in the period in which the related transactions occur or services are performed.
The price structure for Mastercard’s products and services is dependent on the nature of volumes, types of transactions and type of products and services offered to customers. Net revenue can be impacted by the following:
domestic or cross-border transactions
geographic region or country in which the transaction occurs
volumes/transactions subject to tiered rates
processed or not processed by the Company
amount of usage of the Company’s other products or services
amount of rebates and incentives provided to customers
The Company classifies its net revenue into the following five categories:
Domestic assessments are fees charged to issuers and acquirers based primarily on the dollar volume of activity on cards and other devices that carry the Company’s brands where the acquirer country and the issuer country are the same. Revenue from domestic assessments is recorded as revenue in the period it is earned, which is when the related volume is generated on the cards or other devices that carry the Company’s brands.
Cross-border volume fees are charged to issuers and acquirers based on the dollar volume of activity on cards and other devices that carry the Company’s brands where the acquirer country and the issuer country are different. Revenue from cross-border volume is recorded as revenue in the period it is earned, which is when the related volume is generated on the cards or other devices that carry the Company’s brands.
Transaction processing revenue is recognized for both domestic and cross-border transactions in the period in which the related transactions occur. Transaction processing includes the following:
61Switched transaction revenue is generated fromthe following products and services:
| |
| ◦ | Authorization is the process by which a transaction is routed to the issuer for approval. In certain circumstances, such as when the issuer’s systems are unavailable or cannot be contacted, Mastercard or others approve such transactions on behalf of the issuer in accordance with either the issuer’s instructions or applicable rules (also known as “stand-in”). |
| |
| ◦ | Clearing is the determination and exchange of financial transaction information between issuers and acquirers after a transaction has been successfully conducted at the point of interaction. Transactions are cleared among customers through Mastercard’s central and regional processing systems. |
| |
| ◦ | Settlement is facilitating the exchange of funds between parties. |
Connectivity fees are charged to issuers, acquirers and other financial institutions for network access, equipment and the transmission of authorization and settlement messages. These fees are based on the size of the data being transmitted and the number of connections to the Company’s network.
Other processing fees include issuer and acquirer processing solutions; payment gateways for e-commerce merchants; mobile gateways for mobile initiated transactions; and safety and security.
Other revenues consist of value added service offerings that are typically sold with the Company’s payment service offerings and are recognized in the period in which the related services are performed or transactions occur. Other revenues include the following:
Consulting, data analytic and research fees.
Safety and security services fees are for products and services offered to prevent, detect and respond to fraud and to ensure the safety of transactions made primarily on Mastercard products.
Loyalty and rewards solutions fees are charged to issuers for benefits provided directly to consumers with Mastercard-branded cards, such as access to a global airline lounge network, global and local concierge services, individual insurance coverages, emergency card replacement, emergency cash advance services and a 24-hour cardholder service center. Loyalty and reward solution fees also include rewards campaigns and management services.
Program management services provided to prepaid card issuers consist of foreign exchange margin, commissions, load fees and ATM withdrawal fees paid by cardholders on the sale and encashment of prepaid cards.
Bank account-based payment services relating to ACH transactions and other ACH related services.
Other payment-related products and services, including account and transaction enhancement services, rules compliance and publications.
Rebates and incentives (contra-revenue) are provided to customers that meet certain volume targets and can be in the form of a rebate or other support incentives, which are tied to performance. Rebates and incentives are recorded as a reduction of revenue primarily when volume- and transaction-based revenues are recognized over the contractual term. In addition,
Mastercard may make incentive payments to a customer directly related to entering into an agreement, which are generally capitalized and amortized over the life of the agreement on a straight-line basis.
The following table disaggregates the Company’s net revenue by source and geographic region for the year ended December 31, 2018:
|
| | | |
| | (in millions) |
| | |
| Revenue by source: | |
| Domestic assessments | $ | 6,138 |
|
| Cross-border volume fees | 4,954 |
|
| Transaction processing | 7,391 |
|
| Other revenues | 3,348 |
|
| Gross revenue | 21,831 |
|
| Rebates and incentives (contra-revenue) | (6,881 | ) |
| Net revenue | $ | 14,950 |
|
| | |
| Net revenue by geographic region: | |
| North American Markets | $ | 5,311 |
|
| International Markets | 9,441 |
|
Other 1 | 198 |
|
| Net revenue | $ | 14,950 |
|
1 Includes revenues managed by corporate functions.
Receivables from contracts with customers of $2.1 billion and $1.9 billion as of December 31, 2018 and 2017, respectively, are recorded within accounts receivable on the consolidated balance sheet. The Company’s customers are billed quarterly or more frequently dependent upon the nature of the performance obligation and the underlying contractual terms. The Company does not offer extended payment terms to customers.
Contract assets are included in prepaid expenses and other current assets and other assets on the consolidated balance sheet at December 31, 2018 in the amounts of $40 million and $92 million, respectively. The Company did not have contract assets at December 31, 2017.
Deferred revenue is included in other current liabilities and other liabilities on the consolidated balance sheet at December 31, 2018 in the amounts of $218 million and $101 million, respectively. The comparable amounts included in other current liabilities and other liabilities at December 31, 2017 were $230 million and $17 million, respectively. Revenue recognized from such performance obligations satisfied during 2018 was $904 million.
The Company’s remaining performance periods for its contracts with customers for its payment network services are typically long-term in nature (generally up to 10 years). As a payment network service provider, the Company provides its customers with continuous access to its global payment processing network and stands ready to provide transaction processing and related services over the contractual term. Consideration is variable based upon the number of transactions processed and volume activity on the cards and other devices that carry the Company’s brands. The Company has elected the optional exemption to not disclose the remaining performance obligations related to its payment network services. The Company also earns revenues from other value added services comprised of bank account-based payment services, consulting and research fees, loyalty programs and other payment-related products and services. At December 31, 2018, the estimated aggregate consideration allocated to unsatisfied performance obligations for these other value added services is $1.0 billion, which is expected to be recognized through 2022. The estimated remaining performance obligations related to these revenues are subject to change and are affected by several factors, including modifications and terminations and are not expected to be material to any future annual period.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 3.4. Earnings Per Share
The components of basic and diluted EPS for common shares for each of the years ended December 31 were as follows:
| | | | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| | (in millions, except per share data) | (in millions, except per share data) |
| Numerator: | | | | | | |
| Numerator | | | | | | |
| Net income | $ | 3,808 |
| | $ | 3,617 |
| | $ | 3,116 |
| $ | 5,859 |
| | $ | 3,915 |
| | $ | 4,059 |
|
| Denominator: | | | | | | |
| Denominator | | | | | | |
| Basic weighted-average shares outstanding | 1,134 |
| | 1,165 |
| | 1,211 |
| 1,041 |
| | 1,067 |
| | 1,098 |
|
| Dilutive stock options and stock units | 3 |
| | 4 |
| | 4 |
| 6 |
| | 5 |
| | 3 |
|
Diluted weighted-average shares outstanding 1 | 1,137 |
| | 1,169 |
| | 1,215 |
| 1,047 |
| | 1,072 |
| | 1,101 |
|
| Earnings per Share | | | | | | | | | | |
| Basic | $ | 3.36 |
| | $ | 3.11 |
| | $ | 2.57 |
| $ | 5.63 |
| | $ | 3.67 |
| | $ | 3.70 |
|
| Diluted | $ | 3.35 |
| | $ | 3.10 |
| | $ | 2.56 |
| $ | 5.60 |
| | $ | 3.65 |
| | $ | 3.69 |
|
*Note: Table may not sum due to rounding.
1 For the years presented, the calculation of diluted EPS excluded a minimal amount of anti-dilutive share-based payment awards.
Note 5. Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents
The following table provides a reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents reported on the consolidated balance sheet that total to the amounts shown on the consolidated statement of cash flows.
|
| | | | | | | | | | | | | | | |
| | December 31, |
| | 2018 | | 2017 | | 2016 | | 2015 |
| | (in millions) |
| Cash and cash equivalents | $ | 6,682 |
| | $ | 5,933 |
| | $ | 6,721 |
| | $ | 5,747 |
|
| Restricted cash and restricted cash equivalents | | | | | | | |
| Restricted cash for litigation settlement | 553 |
| | 546 |
| | 543 |
| | 541 |
|
| Restricted security deposits held for customers | 1,080 |
| | 1,085 |
| | 991 |
| | 895 |
|
| Prepaid expenses and other current assets | 22 |
| | 28 |
| | 3 |
| | — |
|
| Other assets | — |
| | — |
| | 15 |
| | 10 |
|
| Cash, cash equivalents, restricted cash and restricted cash equivalents | $ | 8,337 |
| | $ | 7,592 |
| | $ | 8,273 |
| | $ | 7,193 |
|
| | | | | | | | |
Note 4.6. Supplemental Cash Flows
The following table includes supplemental cash flow disclosures for each of the years ended December 31:
| | | | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| | (in millions) | (in millions) |
| Cash paid for income taxes, net of refunds | $ | 1,097 |
| | $ | 2,036 |
| | $ | 1,215 |
| $ | 1,790 |
| | $ | 1,893 |
| | $ | 1,579 |
|
| Cash paid for interest | 44 |
| | 24 |
| | 2 |
| 153 |
| | 135 |
| | 74 |
|
| Cash paid for legal settlements | 124 |
| | 28 |
| | — |
| 260 |
| | 47 |
| | 101 |
|
| Non-cash investing and financing activities: | | | | | | |
| Non-cash investing and financing activities | | | | | | |
| Dividends declared but not yet paid | 212 |
| | 184 |
| | 131 |
| 340 |
| | 263 |
| | 238 |
|
| Assets recorded pursuant to capital lease | 10 |
| | 8 |
| | 7 |
| |
| Capital leases and other | | 10 |
| | 30 |
| | 3 |
|
Fair value of assets acquired, net of cash acquired | 626 |
| | 768 |
| | — |
| — |
| | 1,825 |
| | — |
|
| Fair value of liabilities assumed related to acquisitions | 42 |
| | 141 |
| | — |
| — |
| | 365 |
| | — |
|
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 5.7. Fair Value and Investment Securities
Financial Instruments - Recurring Measurements
The Company classifies its fair value measurements of financial instruments into a three-level hierarchy (the “Valuation Hierarchy”). Except forwithin the reclassification of U.S. government securities from Level 2 to Level 1, thereValuation Hierarchy. There were no transfers made among the three levels in the Valuation Hierarchy for 2015 and 2014.2018.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The distribution of the Company’s financial instruments which are measured at fair value on a recurring basis within the Valuation Hierarchy waswere as follows:
| | | | December 31, 2015 | December 31, 2018 | | December 31, 2017 |
| | Quoted Prices in Active Markets (Level 1) 1 | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Fair Value | Quoted Prices
in Active
Markets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Total | | Quoted Prices
in Active
Markets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Total |
| | (in millions) | (in millions) |
| Assets | | | | | | | | | | | | | | | | |
Investment securities available for sale 1: | | | | | | | | | | | | | | | | |
| Municipal securities | $ | — |
| | $ | 62 |
| | $ | — |
| | $ | 62 |
| $ | — |
| | $ | 15 |
| | $ | — |
| | $ | 15 |
| | $ | — |
| | $ | 17 |
| | $ | — |
| | $ | 17 |
|
U.S. government and agency securities 2 | 31 |
| | 41 |
| | — |
| | 72 |
| |
| Government and agency securities | | 65 |
| | 92 |
| | — |
| | 157 |
| | 81 |
| | 104 |
| | — |
| | 185 |
|
| Corporate securities | — |
| | 630 |
| | — |
| | 630 |
| — |
| | 1,043 |
| | — |
| | 1,043 |
| | — |
| | 876 |
| | — |
| | 876 |
|
| Asset-backed securities | — |
| | 57 |
| | — |
| | 57 |
| — |
| | 217 |
| | — |
| | 217 |
| | — |
| | 70 |
| | — |
| | 70 |
|
| Other | 2 |
| | 52 |
| | — |
| | 54 |
| |
| Total | $ | 33 |
| | $ | 842 |
| | $ | — |
| | $ | 875 |
| |
| Equity securities | | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | 1 |
|
Derivative instruments 2: | | | | | | | | | | | | | | | | |
| Foreign currency derivative assets | | — |
| | 35 |
| | — |
| | 35 |
| | — |
| | 6 |
| | — |
| | 6 |
|
Deferred compensation plan 3: | | | | | | | | | | | | | | | | |
| Deferred compensation assets | | 54 |
| | — |
| | — |
| | 54 |
| | 55 |
| | — |
| | — |
| | 55 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2014 | |
| | Quoted Prices in Active Markets (Level 1) 1 | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Fair Value | |
| | (in millions) | |
| Municipal securities | $ | — |
| | $ | 135 |
| | $ | — |
| | $ | 135 |
| |
U.S. government and agency securities 2 | 85 |
| | 114 |
| | — |
| | 199 |
| |
| Corporate securities | — |
| | 618 |
| | — |
| | 618 |
| |
| Asset-backed securities | — |
| | 178 |
| | — |
| | 178 |
| |
| Other | 13 |
| | 56 |
| | — |
| | 69 |
| |
| Total | $ | 98 |
| | $ | 1,101 |
| | $ | — |
| | $ | 1,199 |
| |
| Liabilities | | | | | | | | | | | | | | | | |
Derivative instruments 2: | | | | | | | | | | | | | | | | |
| Foreign currency derivative liabilities | | $ | — |
| | $ | (6 | ) | | $ | — |
| | $ | (6 | ) | | $ | — |
| | $ | (30 | ) | | $ | — |
| | $ | (30 | ) |
Deferred compensation plan 4: | | | | | | | | | | | | | | | | |
| Deferred compensation liabilities | | (54 | ) | | — |
| | — |
| | (54 | ) | | (54 | ) | | — |
| | — |
| | (54 | ) |
1 During 2015, U.S. government securities were reclassified from Level 2 to Level 1 due to a reassessment of the availability of quoted prices. Prior period amounts have been revised to conform to the 2015 presentation.
2 Excludes amounts held in escrow related to the U.S. merchant class litigation settlement of $541 million and $540 million at December 31, 2015 and December 31, 2014, which would be included in Level 1 of the Valuation Hierarchy. See Note 10 (Accrued Expenses and Accrued Litigation) and Note 18 (Legal and Regulatory Proceedings) for further details.
The fair value of the Company’s available-for-sale municipal securities, U.S. government agency securities, corporate securities, asset-backed securities and other fixed income securities included in the Other category are based on quoted prices for similar assets in active markets and are therefore included in Level 2 of the Valuation Hierarchy. The Company’s foreign currency derivative contracts have also been classified within Level 2 in the Other category of the Valuation Hierarchy, as the fair value is based on broker quotes for the same or similar derivative instruments. See Note 20 (Foreign Exchange Risk Management) for further details. The Company’s U.S. government securities and marketable equity securities are classified within Level 1 of the Valuation Hierarchy as the fair values are based on unadjusted quoted prices for identical assets in active markets. The fair value of the Company’s available-for-sale municipal securities, government and agency securities, corporate securities and asset-backed securities are based on observable inputs such as quoted prices, benchmark yields and issuer spreads for similar assets in active markets and are therefore included in Level 2 of the Valuation Hierarchy.
2 The Company’s foreign currency derivative asset and liability contracts have been classified within Level 2 of the Valuation Hierarchy as the fair value is based on observable inputs such as broker quotes relating to foreign currency exchange rates for similar derivative instruments. See Note 22 (Foreign Exchange Risk Management) for further details.
3 The Company has a nonqualified deferred compensation plan where assets are invested primarily in mutual funds held in a rabbi trust, which is restricted for payments to participants of the plan. The Company has elected to use the fair value option for these mutual funds, which are measured using quoted prices of identical instruments in active markets and are included in prepaid expenses and other current assets on the consolidated balance sheet.
4 The deferred compensation liabilities are measured at fair value based on the quoted prices of identical instruments to the investment vehicles selected by the participants. These are included in other liabilities on the consolidated balance sheet.
Settlement and Other Guarantee Liabilities
The Company estimates the fair value of its settlement and other guarantees using market assumptions for relevant though not directly comparable undertakings, as the latter are not observable in the market given the proprietary nature of such guarantees. At December 31, 2018 and 2017, the carrying value and fair value of settlement and other guarantee liabilities were not material
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
and accordingly are not included in the Valuation Hierarchy table above. Settlement and other guarantee liabilities are classified within Level 3 of the Valuation Hierarchy as their valuation requires substantial judgment and estimation of factors that are not observable in the market. See Note 21 (Settlement and Other Risk Management) for additional information regarding the Company’s settlement and other guarantee liabilities.
Financial Instruments - Non-Recurring Measurements
Held-to-Maturity Securities
Investments on the consolidated balance sheet include both available-for-sale and short-term held-to-maturity securities. Held-to-maturity securities are not measured at fair value on a recurring basis and are not included in the Valuation Hierarchy table above. At December 31, 2018 and 2017, the Company held $264 million and $700 million, respectively, of held-to-maturity securities due within one year. The cost of these securities approximates fair value.
Nonmarketable Equity Investments
The Company’s nonmarketable equity investments are measured at fair value at initial recognition. In addition, nonmarketable equity investments accounted for under the cost method of accounting are adjusted for changes resulting from identifiable price changes in orderly transactions for the identical or similar investments of the same issuer. Nonmarketable equity investments are classified within Level 3 of the Valuation Hierarchy due to the absence of quoted market prices, the inherent lack of liquidity, and the fact that inputs used to measure fair value are unobservable and require management’s judgment. The Company uses discounted cash flows and market assumptions to estimate the fair value of its nonmarketable equity investments when certain events or circumstances indicate that impairment may exist. These investments are included in other assets on the consolidated balance sheet. See Note 8 (Prepaid Expenses and Other Assets) for further details.
Debt
The Company estimates the fair value of its long-term debt based on market quotes. These debt instruments are not traded in active markets and are classified as Level 2 of the Valuation Hierarchy. At December 31, 2018, the carrying value and fair value of total long-term debt (including the current portion) was $6.3 billion and $6.5 billion, respectively. At December 31, 2017, the carrying value and fair value of long-term debt was $5.4 billion and $5.7 billion, respectively.
Other Financial Instruments
Certain financial instruments are carried on the consolidated balance sheet at cost, which approximates fair value due to their short-term, highly liquid nature. These instruments include cash and cash equivalents, restricted cash, time deposits, accounts receivable, settlement due from customers, restricted security deposits held for customers, accounts payable, settlement due to customers and other accrued expenses. In addition, nonmarketable equity investments are measured at fair value on a nonrecurring basis for purposes of initial recognition and impairment testing.liabilities.
InvestmentsContingent Consideration
The contingent consideration attributable to acquisitions made in 2017 is primarily based on the Consolidated Balance Sheet include both available-for-saleachievement of 2018 revenue targets and held-to-maturity securities. Available-for-sale securities areis measured at fair value on a recurring basis and arebasis. This contingent consideration liability is included in other current liabilities on the Valuation Hierarchy table above. Held-to-maturity securities are made up of time deposits with maturities of greater than three monthsconsolidated balance sheet and less than one year and areis classified aswithin Level 23 of the Valuation Hierarchy but are not included in the table above due to their fair values not being measured on a recurring basis. At December 31, 2015 and December 31, 2014, the cost, which approximates fair value,absence of quoted market prices. The activity of the Company’s held-to-maturity securitiescontingent consideration liability for 2018 was $130 million and $70 million, respectively.as follows:
|
| | | |
| | (in millions) |
| Balance at December 31, 2017 | $ | 219 |
|
| Net change in valuation | 19 |
|
| Payments | (5 | ) |
| Foreign currency translation | (14 | ) |
| Balance at December 31, 2018 | $ | 219 |
|
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Debt
The Company estimates the fair value of its long-term debt using the market pricing approach which applies market assumptions for relevant though not directly comparable undertakings. Long-term debt is classified as Level 2 of the Valuation Hierarchy. At December 31, 2015 the carrying value and fair value of long-term debt was $3.3 billion. At December 31, 2014, the carrying value and fair value of long-term debt was $1.5 billion.
Settlement and Other Guarantee Liabilities
The Company estimates the fair value of its settlement and other guarantees using the market pricing approach which applies market assumptions for relevant though not directly comparable undertakings, as the latter are not observable in the market given the proprietary nature of such guarantees. At December 31, 2015 and 2014, the carrying value and fair value of settlement and other guarantee liabilities were not material. Settlement and other guarantee liabilities are classified as Level 3 of the Valuation hierarchy as their valuation requires substantial judgment and estimation of factors that are not currently observable in the market. For additional information regarding the Company’s settlement and other guarantee liabilities, see Note 19 (Settlement and Other Risk Management).
Non-Financial Instruments
Certain assets are measured at fair value on a nonrecurring basis for purposes of initial recognition and impairment testing. The Company’s non-financial assets measured at fair value on a nonrecurring basis include property, plant and equipment, goodwill and other intangible assets. These assets are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.
Amortized Costs and Fair Values – Available-for-Sale Investment Securities
The major classes of the Company’s 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 statement of comprehensive income, and their respective amortized cost basis and fair values as of December 31, 20152018 and 20142017 were as follows:
| | | | December 31, 2015 | December 31, 2018 | | December 31, 2017 |
| | Amortized Cost | | Gross Unrealized Gain | | Gross Unrealized Loss | | Fair Value | Amortized Cost | | Gross Unrealized Gain | | Gross Unrealized Loss | | Fair Value | | Amortized Cost | | Gross Unrealized Gain | | Gross Unrealized Loss | | Fair Value |
| | (in millions) | (in millions) |
| Municipal securities | $ | 62 |
| | $ | — |
| | $ | — |
| | $ | 62 |
| $ | 15 |
| | $ | — |
| | $ | — |
| | $ | 15 |
| | $ | 17 |
| | $ | — |
| | $ | — |
| | $ | 17 |
|
| U.S. government and agency securities | 72 |
| | — |
| | — |
| | 72 |
| |
| Government and agency securities | | 157 |
| | — |
| | — |
| | 157 |
| | 185 |
| | — |
| | — |
| | 185 |
|
| Corporate securities | 631 |
| | — |
| | (1 | ) | | 630 |
| 1,044 |
| | 1 |
| | (2 | ) | | 1,043 |
| | 875 |
| | 2 |
| | (1 | ) | | 876 |
|
| Asset-backed securities | 57 |
| | — |
| | — |
| | 57 |
| 217 |
| | — |
| | — |
| | 217 |
| | 70 |
| | — |
| | — |
| | 70 |
|
| Other | 39 |
| | 1 |
| | — |
| | 40 |
| |
| Equity securities | | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
|
| Total | $ | 861 |
| | $ | 1 |
| | $ | (1 | ) | | $ | 861 |
| $ | 1,433 |
| | $ | 1 |
| | $ | (2 | ) | | $ | 1,432 |
| | $ | 1,147 |
| | $ | 3 |
| | $ | (1 | ) | | $ | 1,149 |
|
| | | | | | | | | |
| | December 31, 2014 | |
| | Amortized Cost | | Gross Unrealized Gain | | Gross Unrealized Loss | | Fair Value | |
| | (in millions) | |
| Municipal securities | $ | 135 |
| | $ | — |
| | $ | — |
| | $ | 135 |
| |
| U.S. government and agency securities | 199 |
| | — |
| | — |
| | 199 |
| |
| Corporate securities | 619 |
| | — |
| | (1 | ) | | 618 |
| |
| Asset-backed securities | 178 |
| | — |
| | — |
| | 178 |
| |
| Other | 41 |
| | 1 |
| | (4 | ) | | 38 |
| |
| Total | $ | 1,172 |
| | $ | 1 |
| | $ | (5 | ) | | $ | 1,168 |
| |
The Company’s available-for-sale investment securities held at December 31, 2018 and 2017, primarily carried a credit rating of A-, or better. The municipal securities are primarily comprised of tax-exempt bonds and are diversified across states and sectors. The U.S. governmentGovernment and agency securities are primarily invested ininclude U.S. government bonds, and U.S. government sponsored agency
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
the U.S. government bonds. Corporate securities are comprised of commercial paper and corporate bonds. The asset-backed securities are investments in bonds which are collateralized primarily by automobile loan receivables.
Investment Maturities:
The maturity distribution based on the contractual terms of the Company’s investment securities at December 31, 20152018 was as follows:
| | | | Available-For-Sale | Available-For-Sale |
| | Amortized Cost | | Fair Value | Amortized Cost | | Fair Value |
| | (in millions) | (in millions) |
| Due within 1 year | $ | 309 |
| | $ | 309 |
| $ | 376 |
| | $ | 376 |
|
| Due after 1 year through 5 years | 544 |
| | 543 |
| 1,056 |
| | 1,055 |
|
| Due after 5 years through 10 years | 1 |
| | 1 |
| 1 |
| | 1 |
|
| Due after 10 years | 6 |
| | 6 |
| |
No contractual maturity 1 | 1 |
| | 2 |
| |
| Total | $ | 861 |
| | $ | 861 |
| $ | 1,433 |
| | $ | 1,432 |
|
1 Equity securities have been included in the No contractual maturity category, as these securities do not have stated maturity dates.
Investment Income
InterestInvestment income primarily consists of interest income generated from cash, cash equivalents and investments. Gross realized gains and losses are recorded within investment income on the Company’s consolidated statement of operations. The gross realized gains and losses from the sales of available-for-sale securities for 2015, 20142018, 2017 and 20132016 were not significant.
Note 6.8. Prepaid Expenses and Other Assets
Prepaid expenses and other current assets consisted of the following at December 31:
| | | | 2015 | | 2014 | 2018 | | 2017 |
| | (in millions) | (in millions) |
| Customer and merchant incentives | $ | 345 |
| | $ | 260 |
| $ | 778 |
| | $ | 464 |
|
| Prepaid income taxes | 72 |
| | 237 |
| 51 |
| | 77 |
|
| Other | 247 |
| | 174 |
| 603 |
| | 499 |
|
| Total prepaid expenses and other current assets | $ | 664 |
| | $ | 671 |
| $ | 1,432 |
| | $ | 1,040 |
|
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Other assets consisted of the following at December 31:
| | | | 2015 | | 2014 | 2018 | | 2017 |
| | (in millions) | (in millions) |
| Customer and merchant incentives | $ | 810 |
| | $ | 556 |
| $ | 2,458 |
| | $ | 1,434 |
|
| Nonmarketable equity investments | 166 |
| | 245 |
| 337 |
| | 249 |
|
| Prepaid income taxes | 352 |
| | 407 |
| — |
| | 352 |
|
| Income taxes receivable | 160 |
| | 89 |
| 298 |
| | 178 |
|
| Other | 110 |
| | 88 |
| 210 |
| | 85 |
|
| Total other assets | $ | 1,598 |
| | $ | 1,385 |
| $ | 3,303 |
| | $ | 2,298 |
|
Customer and merchant incentives represent payments made or amounts to be paid to customers and merchants under business agreements. Costs directly related to entering into such an agreement are generally deferred and amortized over the life of the agreement. Amounts to be paid for theseThe increase in customer and merchant incentives and the related liability were includeddecrease in accrued expenses and other liabilities.
Non-current prepaid income taxes included in the other asset table above,at December 31, 2018 from December 31, 2017 are primarily consists of taxes paid in the fourth quarter of 2014 relatingdue to the deferred charge resultingimpact from the reorganizationadoption of our legal entitythe new accounting standards pertaining to revenue recognition and tax structure to better align with our business footprintintra-entity asset transfers, respectively. See Note 1 (Summary of our non-U.S. operations.Significant Accounting Policies) for additional information on the cumulative impact of the adoption of these accounting pronouncements.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 7.9. Property, Plant and Equipment
Property, plant and equipment consisted of the following at December 31:
| | | | 2015 | | 2014 | 2018 | | 2017 |
| | (in millions) | (in millions) |
| Building, building equipment and land | $ | 503 |
| | $ | 510 |
| $ | 481 |
| | $ | 455 |
|
| Equipment | 497 |
| | 398 |
| 987 |
| | 841 |
|
| Furniture and fixtures | 54 |
| | 53 |
| 85 |
| | 81 |
|
| Leasehold improvements | 112 |
| | 91 |
| 215 |
| | 166 |
|
| Property, plant and equipment | 1,166 |
| | 1,052 |
| 1,768 |
| | 1,543 |
|
| Less: accumulated depreciation and amortization | (491 | ) | | (437 | ) | (847 | ) | | (714 | ) |
| Property, plant and equipment, net | $ | 675 |
| | $ | 615 |
| $ | 921 |
| | $ | 829 |
|
As of December 31, 20152018 and 2014,2017, capital leases of $20$33 million and $29$32 million,, respectively, were included in equipment. Accumulated amortization of these capital leases was $9$24 million and $17$18 million as of December 31, 20152018 and 2014,2017, respectively.
Depreciation and amortization expense for the above property, plant and equipment was $131$209 million, $107185 million and $92151 million for 2015, 20142018, 2017 and 2013,2016, respectively.
Note 8.10. Goodwill
The changes in the carrying amount of goodwill for the years ended December 31, 20152018 and 20142017 were as follows:
| | | | 2015 | | 2014 | 2018 | | 2017 |
| | (in millions) | (in millions) |
| Beginning balance | $ | 1,522 |
| | $ | 1,122 |
| $ | 3,035 |
| | $ | 1,756 |
|
| Goodwill acquired during the year | 458 |
| | 525 |
| |
| Additions | | 2 |
| | 1,136 |
|
| Foreign currency translation | (89 | ) | | (106 | ) | (133 | ) | | 143 |
|
| Other | — |
| | (19 | ) | |
| Ending balance | $ | 1,891 |
| | $ | 1,522 |
| $ | 2,904 |
| | $ | 3,035 |
|
The Company had no accumulated impairment losses for goodwill at December 31, 2015 or 2014.2018. Based on annual impairment testing, the Company’s goodwill is not impaired.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 9.11. Other Intangible Assets
The following table sets forth net intangible assets, other than goodwill, at December 31:
| | | | 2015 | | 2014 | 2018 | | 2017 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | (in millions) | (in millions) |
| Amortized intangible assets: | | | | | | | | | | | | |
| Finite-lived intangible assets | | | | | | | | | | | | |
| Capitalized software | $ | 1,086 |
| | $ | (625 | ) | | $ | 461 |
| | $ | 839 |
| | $ | (496 | ) | | $ | 343 |
| $ | 1,514 |
| | $ | (898 | ) | | $ | 616 |
| | $ | 1,572 |
| | $ | (888 | ) | | $ | 684 |
|
| Trademarks and tradenames | 30 |
| | (23 | ) | | 7 |
| | 48 |
| | (38 | ) | | 10 |
| |
| Customer relationships | 318 |
| | (149 | ) | | 169 |
| | 292 |
| | (115 | ) | | 177 |
| 439 |
| | (232 | ) | | 207 |
| | 473 |
| | (214 | ) | | 259 |
|
| Other | 25 |
| | (19 | ) | | 6 |
| | 20 |
| | (14 | ) | | 6 |
| 46 |
| | (45 | ) | | 1 |
| | 57 |
| | (55 | ) | | 2 |
|
| Total | 1,459 |
| | (816 | ) | | 643 |
| | 1,199 |
| | (663 | ) | | 536 |
| 1,999 |
| | (1,175 | ) | | 824 |
| | 2,102 |
| | (1,157 | ) | | 945 |
|
| Unamortized intangible assets: | | | | | | | | | | | | |
| Indefinite-lived intangible assets | | | | | | | | | | | | |
| Customer relationships | 160 |
| | — |
| | 160 |
| | 178 |
| | — |
| | 178 |
| 167 |
| | — |
| | 167 |
| | 175 |
| | — |
| | 175 |
|
| Total | $ | 1,619 |
| | $ | (816 | ) | | $ | 803 |
| | $ | 1,377 |
| | $ | (663 | ) | | $ | 714 |
| $ | 2,166 |
| | $ | (1,175 | ) | | $ | 991 |
| | $ | 2,277 |
| | $ | (1,157 | ) | | $ | 1,120 |
|
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The increasedecrease in the netgross carrying amount of amortized intangible assets in 20152018 was primarily related to our acquired businesses.the retirement of fully amortized intangible assets, partially offset by additions to capitalized software. Certain intangible assets including amortizable and unamortizable customer relationships and trademarks and tradenames, are denominated in foreign currencies. As such, the change in intangible assets includes a component attributable to foreign currency translation. Based on the qualitative assessment performed in 2018, it was determined that the Company’s indefinite-lived intangible assets were not impaired.
Amortization on the assets above amounted to $235$250 million, $214$252 million and $166221 million in 2015, 20142018, 2017 and 2013,2016, respectively. The following table sets forth the estimated future amortization expense on amortizablefinite-lived intangible assets on the consolidated balance sheet at December 31, 20152018 for the years ending December 31:
|
| | | |
| | (in millions) |
| 2016 | $ | 231 |
|
| 2017 | 168 |
|
| 2018 | 105 |
|
| 2019 | 47 |
|
| 2020 and thereafter | 92 |
|
| | $ | 643 |
|
|
| | | |
| | (in millions) |
| 2019 | $ | 248 |
|
| 2020 | 187 |
|
| 2021 | 127 |
|
| 2022 | 51 |
|
| 2023 and thereafter | 211 |
|
| | $ | 824 |
|
Note 10.12. Accrued Expenses and Accrued Litigation
Accrued expenses consisted of the following at December 31:
| | | | 2015 | | 2014 | 2018 | | 2017 |
| | (in millions) | (in millions) |
| Customer and merchant incentives | $ | 1,748 |
| | $ | 1,433 |
| $ | 3,275 |
| | $ | 2,648 |
|
| Personnel costs | 473 |
| | 531 |
| 744 |
| | 613 |
|
| Advertising | 114 |
| | 154 |
| 103 |
| | 88 |
|
| Income and other taxes | 143 |
| | 105 |
| 158 |
| | 194 |
|
| Other | 285 |
| | 216 |
| 467 |
| | 388 |
|
| Total accrued expenses | $ | 2,763 |
| | $ | 2,439 |
| $ | 4,747 |
| | $ | 3,931 |
|
Customer and merchant incentives represent amounts to be paid to customers under business agreements. The increase in customer and merchant incentives is due to the adoption of the new accounting standard pertaining to revenue recognition and timing of payments to customers. See Note 1 (Summary of Significant Accounting Policies) for additional information on the cumulative impact of the adoption of the revenue recognition guidance.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of December 31, 20152018 and 2014, personnel costs included a restructuring accrual with a remaining balance of $25 million and $84 million, respectively. This accrual relates to a restructuring charge of $87 million recorded in general and administrative expenses in 2014. The Company restructured its organization to align with its strategic priorities and to best meet the Company’s continued growth. The Company is substantially complete with these restructuring activities. The decrease in the balance was primarily due to payments and lower than expected severance actions.
As of December 31, 2015 and 2014,2017, the Company’s provision related to U.S. merchant litigationsfor litigation was $709$1,591 million and $771$709 million, respectively. These amounts are not included in the accrued expenses table above and are separately reported as accrued litigation on the consolidated balance sheet. During 2015 and 2014, MasterCard executed settlement agreements with a number of opt-out merchants and no adjustment to the amount previously recorded was deemed necessary. See Note 1820 (Legal and Regulatory Proceedings) for further discussion ofadditional information regarding the U.S. merchant classCompany’s accrued litigation.
Note 11.13. Pension, Postretirement and Savings Plans
The Company and certain of its subsidiaries maintain various pension and other postretirement plans that cover substantially all employees worldwide.
Defined Contribution Plans
The Company sponsors defined contribution retirement plans. The primary plan is the MasterCardMastercard Savings Plan, a 401(k) plan for substantially all of the Company’s U.S. employees, which is subject to the provisions of the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended. In addition, the Company has several defined contribution plans outside of the U.S. The Company’s total expense for its defined contribution plans was $61$98 million, $57$84 million and $51$73 million in 2015, 20142018, 2017 and 2013,2016, respectively.
Defined Benefit and Other Postretirement Plans
During the third quarterThe Company sponsors pension and postretirement plans for certain non-U.S. employees (the “non-U.S. Plans”) that cover various benefits specific to their country of 2015,employment. In 2017, the Company terminated its non-contributory, qualified, U.S.acquired a majority interest in Vocalink. Vocalink has a defined benefit pension plan (the “U.S. Employee Pension“Vocalink Plan”). which was permanently closed to new entrants and future accruals as of July 21, 2013, however, plan participants’ obligations are adjusted for future salary changes. The U.S. Employee Pension Plan participants hadCompany has agreed to make contributions of £15 million (approximately $18 million as of December 31, 2018) annually until March 2020. The term “Pension Plans” includes the option to receive a lump sum distribution or to participate in an annuity with a third-party insurance company. As a result of this termination,non-U.S. Plans and the Company settled its
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
obligation for $287 million, which resulted in a pension settlement charge of $79 million recorded in general and administrative expense during 2015.Vocalink Plan.
The Company maintains a postretirement plan providing health coverage and life insurance benefits for substantially all of its U.S. employees hired before July 1, 2007 (“U.S. Postretirement(the “Postretirement Plan”). As
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company sponsors pensionuses a December 31 measurement date for the Pension Plans and postretirement plans for non-U.S. employees (“non-U.S. plans”its Postretirement Plan (collectively the “Plans”) that cover various benefits specific to their country of employment.. The Company recognizes the funded status of its defined benefit pension plans and other postretirement benefit plans,Plans, measured as the difference between the fair value of the plan assets and the projected benefit obligation, in the Consolidated Balance Sheet.consolidated balance sheet. The non-U.S. plans do not have a material impact onfollowing table sets forth the Plans’ funded status, key assumptions and amounts recognized in the Company’s consolidated balance sheet at December 31:
|
| | | | | | | | | | | | | | | |
| | Pension Plans | | Postretirement Plan |
| | 2018 | | 2017 | | 2018 | | 2017 |
| | ($ in millions) |
| Change in benefit obligation | | | | | | | |
| Benefit obligation at beginning of year | $ | 468 |
| | $ | 46 |
| | $ | 61 |
| | $ | 59 |
|
| Benefit obligation acquired during the year | — |
| | 410 |
| | — |
| | — |
|
| Service cost | 9 |
| | 9 |
| | 1 |
| | 1 |
|
| Interest cost | 12 |
| | 8 |
| | 2 |
| | 2 |
|
| Actuarial (gain) loss | (7 | ) | | (44 | ) | | (2 | ) | | 3 |
|
| Benefits paid | (22 | ) | | (12 | ) | | (5 | ) | | (4 | ) |
| Transfers in | 1 |
| | 3 |
| | — |
| | — |
|
| Foreign currency translation | (23 | ) | | 48 |
| | — |
| | — |
|
| Benefit obligation at end of year | 438 |
| | 468 |
| | 57 |
| | 61 |
|
| | | | | | | | |
| Change in plan assets | | | | | | | |
| Fair value of plan assets at beginning of year | 427 |
| | 33 |
| | — |
| | — |
|
| Fair value of plan assets acquired during the year | — |
| | 344 |
| | — |
| | — |
|
| Actual (loss) gain on plan assets | (8 | ) | | (4 | ) | | — |
| | — |
|
| Employer contributions | 33 |
| | 23 |
| | 5 |
| | 4 |
|
| Benefits paid | (23 | ) | | (12 | ) | | (5 | ) | | (4 | ) |
| Transfers in | 2 |
| | 3 |
| | — |
| | — |
|
| Foreign currency translation | (21 | ) | | 40 |
| | — |
| | — |
|
| Fair value of plan assets at end of year | 410 |
| | 427 |
| | — |
| | — |
|
| Funded status at end of year | $ | (28 | ) | | $ | (41 | ) | | $ | (57 | ) | | $ | (61 | ) |
| | | | | | | | |
| Amounts recognized on the consolidated balance sheet consist of: | | | | | | | |
| Other liabilities, short-term | $ | — |
| | $ | — |
| | $ | (3 | ) | | $ | (3 | ) |
| Other liabilities, long-term | (28 | ) | | (41 | ) | | (54 | ) | | (58 | ) |
| | $ | (28 | ) | | $ | (41 | ) | | $ | (57 | ) | | $ | (61 | ) |
| | | | | | | | |
| Accumulated other comprehensive income consists of: | | | | | | | |
| Net actuarial (gain) loss | $ | (5 | ) | | $ | (22 | ) | | $ | (7 | ) | | $ | (5 | ) |
| Prior service credit | 1 |
| | — |
| | (6 | ) | | (8 | ) |
| Balance at end of year | $ | (4 | ) | | $ | (22 | ) | | $ | (13 | ) | | $ | (13 | ) |
| | | | | | | | |
| Weighted-average assumptions used to determine end of year benefit obligations | | | | | | | |
| Discount rate | | | | | | | |
| Non-U.S. Plans | 1.80 | % | | 1.80 | % | | * |
| | * |
|
| Vocalink Plan | 3.10 | % | | 2.80 | % | | * |
| | * |
|
| Postretirement Plan | * |
| | * |
| | 4.25 | % | | 3.50 | % |
| | | | | | | | |
| Rate of compensation increase | | | | | | | |
| Non-U.S. Plans | 2.60 | % | | 2.60 | % | | * |
| | * |
|
| Vocalink Plan | 4.00 | % | | 3.85 | % | | * |
| | * |
|
| Postretirement Plan | * |
| | * |
| | 3.00 | % | | 3.00 | % |
* Not applicable
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Each of the Pension Plans had benefit obligations in excess of plan assets at December 31, 2018 and 2017. Information on the Pension Plans were as follows:
|
| | | | | | | | |
| | | 2018 | | 2017 |
| | | (in millions) |
| Projected benefit obligation | | $ | 438 |
| | $ | 468 |
|
| Accumulated benefit obligation | | 430 |
| | 428 |
|
| Fair value of plan assets | | 410 |
| | 427 |
|
For the year ended December 31, 2018, the Company’s projected benefit obligation related to its Pension Plans decreased $30 million attributable primarily to foreign currency translation and benefits paid. For the year ended December 31, 2017, the Company’s projected benefit obligation related to its Pension Plans increased $422 million attributable primarily to the acquisition of Vocalink.
Components of net periodic benefit cost recorded in earnings were as follows for the Plans for each of the years ended December 31:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Plans | | Postretirement Plan |
| | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| | | (in millions) |
| Service cost | | $ | 9 |
| | $ | 9 |
| | $ | 10 |
| | $ | 1 |
| | $ | 1 |
| | $ | 1 |
|
| Interest cost | | 12 |
| | 8 |
| | 1 |
| | 2 |
| | 2 |
| | 2 |
|
| Expected return on plan assets | | (20 | ) | | (13 | ) | | (1 | ) | | — |
| | — |
| | — |
|
| Curtailment gain | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Amortization of actuarial loss | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Amortization of prior service credit | | — |
| | — |
| | — |
| | (2 | ) | | (2 | ) | | (1 | ) |
| Pension settlement charge | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Net periodic benefit cost | | $ | 1 |
| | $ | 4 |
| | $ | 10 |
| | $ | 1 |
| | $ | 1 |
| | $ | 2 |
|
Net periodic benefit cost, excluding the service cost component, is recognized in other income (expense) on the consolidated statement of operations. The service cost component is recognized in general and administrative expenses on the consolidated statement of operations.
Other changes in plan assets and benefit obligations recognized in other comprehensive income for the years ended December 31 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Pension Plans | | Postretirement Plan |
| | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| | | (in millions) |
| Curtailment gain | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| Current year actuarial loss (gain) | | 17 |
| | (22 | ) | | 1 |
| | (2 | ) | | 5 |
| | — |
|
| Current year prior service credit | | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Amortization of prior service credit | | — |
| | — |
| | — |
| | 2 |
| | 2 |
| | 1 |
|
| Pension settlement charge | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Total other comprehensive loss (income) | | $ | 18 |
| | $ | (22 | ) | | $ | 1 |
| | $ | — |
| | $ | 7 |
| | $ | 1 |
|
| Total net periodic benefit cost and other comprehensive loss (income) | | $ | 19 |
| | $ | (18 | ) | | $ | 11 |
| | $ | 1 |
| | $ | 8 |
| | $ | 3 |
|
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Assumptions
Weighted-average assumptions used to determine net periodic benefit cost were as follows for the years ended December 31:
|
| | | | | | | | | | | | | | | | | | |
| | | Pension Plans | | Postretirement Plan |
| | | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| Discount rate | | | | | | | | | | | | |
| Non-U.S. Plans | | 1.80 | % | | 1.60 | % | | 1.85 | % | | * |
| | * |
| | * |
|
| Vocalink Plan | | 2.80 | % | | 2.50 | % | | * |
| | * |
| | * |
| | * |
|
| Postretirement Plan | | * |
| | * |
| | * |
| | 3.50 | % | | 4.00 | % | | 4.25 | % |
| Expected return on plan assets | | | | | | | | | | | | |
| Non-U.S. Plans | | 3.00 | % | | 3.25 | % | | 3.25 | % | | * |
| | * |
| | * |
|
| Vocalink Plan | | 4.75 | % | | 4.75 | % | | * |
| | * |
| | * |
| | * |
|
| Rate of compensation increase | | | | | | | | | | | | |
| Non-U.S. Plans | | 2.60 | % | | 2.59 | % | | 2.64 | % | | * |
| | * |
| | * |
|
| Vocalink Plan | | 3.85 | % | | 3.95 | % | | * |
| | * |
| | * |
| | * |
|
| Postretirement Plan | | * |
| | * |
| | * |
| | 3.00 | % | | 3.00 | % | | 3.00 | % |
* Not applicable
The Company’s discount rate assumptions are based on yield curves derived from high quality corporate bonds, which are matched to the expected cash flows of each respective plan. The expected return on plan assets assumptions are derived using the current and expected asset allocations of the Pension Plans’ assets and considering historical as well as expected returns on various classes of plan assets. The rates of compensation increases are determined by the Company, based upon its long-term plans for such increases.
The following additional assumptions were used at December 31 in accounting for the Postretirement Plan:
|
| | | | | | |
| | | 2018 | | 2017 |
| Health care cost trend rate assumed for next year | | 6.00 | % | | 6.50 | % |
| Ultimate trend rate | | 5.00 | % | | 5.00 | % |
| Year that the rate reaches the ultimate trend rate | | 2 |
| | 3 |
|
Assets
Plan assets are managed taking into account the timing and amount of future benefit payments. The Vocalink Plan assets are managed within the following target asset allocations: non-government fixed income 39%, government securities (including U.K. governmental bonds) 28%, investment funds 25% and other 8%. The investment funds are currently comprised of approximately 44% derivatives, 28% equity, 16% fixed income and 12% other. For the non-U.S. Plans, the assets are concentrated primarily in insurance contracts.
The Valuation Hierarchy of the Pension Plans’ assets is determined using a consistent application of the categorization measurements for the Company’s financial statements, individuallyinstruments. See Note 1 (Summary of Significant Accounting Policies) for additional information.
Cash and cash equivalents and other public investment vehicles (including certain mutual funds and government and agency securities) are valued at quoted market prices, which represent the net asset value of the shares held by the Vocalink Plan, and are therefore included in Level 1 of the Valuation Hierarchy. Certain other mutual funds (including commingled funds), governmental and agency securities and insurance contracts are valued at unit values provided by investment managers, which are based on the fair value of the underlying investments utilizing public information, independent external valuation from third-party services or third-party advisors, and are therefore included in Level 2 of the aggregate.Valuation Hierarchy. Asset-backed securities are classified as Level 3 due to a lack of observable inputs in measuring fair value.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following tables set forth by level, within the Valuation Hierarchy, the Pension Plans’ assets at fair value as of December 31, 2018 and 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 | | December 31, 2017 |
| | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Fair Value | | Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Fair Value |
| | (in millions) |
| Cash and cash equivalents | $ | 22 |
| | $ | — |
| | $ | — |
| | $ | 22 |
| | $ | 21 |
| | $ | — |
| | $ | — |
| | $ | 21 |
|
| Government and agency securities | — |
| | 88 |
| | — |
| | 88 |
| | 21 |
| | 95 |
| | — |
| | 116 |
|
| Mutual funds | 154 |
| | 30 |
| | — |
| | 184 |
| | 146 |
| | 28 |
| | — |
| | 174 |
|
| Insurance contracts | — |
| | 57 |
| | — |
| | 57 |
| | — |
| | 45 |
| | — |
| | 45 |
|
| Asset-backed securities | — |
| | — |
| | 34 |
| | 34 |
| | — |
| | — |
| | 31 |
| | 31 |
|
| Other | — |
| | 25 |
| | — |
| | 25 |
| | 2 |
| | 16 |
| | 22 |
| | 40 |
|
| Total | $ | 176 |
| | $ | 200 |
| | $ | 34 |
| | $ | 410 |
| | $ | 190 |
| | $ | 184 |
| | $ | 53 |
| | $ | 427 |
|
| | | | | | | | | | | | | | | | |
The following table summarizes expected benefit payments through 2028 for the Pension Plans and the Postretirement Plan, including those payments expected to be paid from the Company’s general assets. Actual benefit payments may differ from expected benefit payments.
|
| | | | | | | | |
| | | Pension Plans | | Postretirement Plan |
| | | (in millions) |
| 2019 | | $ | 14 |
| | $ | 3 |
|
| 2020 | | 10 |
| | 4 |
|
| 2021 | | 11 |
| | 4 |
|
| 2022 | | 14 |
| | 4 |
|
| 2023 | | 13 |
| | 4 |
|
| 2024 - 2028 | | 64 |
| | 20 |
|
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 12.14. Debt
Long-term debt consisted of the following at December 31:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| Notes | | Issuance Date | | Interest Payment Terms | | Maturity Date | | Aggregate Principal Amount | | Stated Interest Rate | | Effective Interest Rate | | 2018 | | 2017 |
| | | | | | | | | (in millions, except percentages) |
| 2018 USD Notes | | February 2018 | | Semi-annually | | 2028 | | $ | 500 |
| | 3.500 | % | | 3.598 | % | | $ | 500 |
| | $ | — |
|
| | | | | | | 2048 | | $ | 500 |
| | 3.950 | % | | 3.990 | % | | 500 |
| | — |
|
| | | | | | | | | $ | 1,000 |
| | | | | | | | |
| | | | | | | | | | | | | | | | | |
| 2016 USD Notes | | November 2016 | | Semi-annually | | 2021 | | $ | 650 |
| | 2.000 | % | | 2.236 | % | | 650 |
| | 650 |
|
| | | | | | | 2026 | | 750 |
| | 2.950 | % | | 3.044 | % | | 750 |
| | 750 |
|
| | | | | | | 2046 | | 600 |
| | 3.800 | % | | 3.893 | % | | 600 |
| | 600 |
|
| | | | | | | | | $ | 2,000 |
| | | | | | | | |
| | | | | | | | | | | | | | | | | |
| 2015 Euro Notes | | December 2015 | | Annually | | 2022 | | € | 700 |
| | 1.100 | % | | 1.265 | % | | 801 |
| | 839 |
|
| | | | | | | 2027 | | 800 |
| | 2.100 | % | | 2.189 | % | | 916 |
| | 958 |
|
| | | | | | | 2030 | | 150 |
| | 2.500 | % | | 2.562 | % | | 172 |
| | 180 |
|
| | | | | | | | | € | 1,650 |
| | | | | | | | |
| | | | | | | | | | | | | | | | | |
| 2014 USD Notes | | March 2014 | | Semi-annually | | 2019 | | $ | 500 |
| | 2.000 | % | | 2.178 | % | | 500 |
| | 500 |
|
| | | | | | | 2024 | | 1,000 |
| | 3.375 | % | | 3.484 | % | | 1,000 |
| | 1,000 |
|
| | | | | | | | | $ | 1,500 |
| | | | | | | | |
| | | | | | | | | | | | | | | 6,389 |
| | 5,477 |
|
| Less: Unamortized discount and debt issuance costs | | (55 | ) | | (53 | ) |
| Total debt outstanding | | 6,334 |
| | 5,424 |
|
Less: Current portion1 | | (500 | ) | | — |
|
| Long-term debt | | $ | 5,834 |
| | $ | 5,424 |
|
1 Relates to the current portion of the 2014 USD Notes, due in April 2019, classified as current portion of long-term debt on the consolidated balance sheet.
In December 2015,February 2018, the Company issued €1.65 billion ($1.8 billion as translated at the December 31, 2015 exchange rate) aggregate principal amount of notes. This offering consisted of €700$500 million aggregate principal amount of notes due 2022, €800February 2028 and $500 million aggregate principal amount of notes due 2027 and €150 million aggregate principal amount of notes due 2030February 2048 (collectively the “Euro“2018 USD Notes”). The net proceeds from the issuance of the Euro2018 USD Notes, after deducting the original issue discount, underwriting discount and offering expenses, were $1.723 billion. Interest on the Euro Notes is payable annually on December 1, commencing on December 1, 2016.$991 million.
In March 2014, the Company issued $500 million aggregate principal amount of notes due April 1, 2019 and $1 billion aggregate principal amount of notes due April 1, 2024 (collectively the “USD Notes”). The net proceeds, after deducting the original issue discount, underwriting discount and offering expenses, from the issuance of the 2016 USD Notes, after deducting the underwriting discount2015 Euro Notes and offering expenses, were $1.484 billion. Interest on the 2014 USD Notes, is payable semi-annually on April 1were $1.969 billion, $1.723 billion and October 1.$1.484 billion, respectively.
The Companyoutstanding debt, described above, is not subject to any financial covenants under the Euro Notes and the USD Notes (collectively the “Notes”). The Notesit may be redeemed in whole, or in part, at ourthe Company’s option at any time for a specified make-whole amount. The NotesThese notes are senior unsecured obligations and would rank equally with any future unsecured and unsubordinated indebtedness. The proceeds of the Notesnotes are to be used for general corporate purposes.
Long-term debt consisted of the following at December 31:
|
| | | | | | | | | | | | | |
| | Stated Interest Rate | | Effective Interest Rate | | 2015 | | 2014 |
| | (in millions, except percentages) |
| USD Notes | | | | | | | |
| Due 2019 | 2.000 | % | | 2.178 | % | | $ | 500 |
| | $ | 500 |
|
| Due 2024 | 3.375 | % | | 3.484 | % | | 1,000 |
| | 1,000 |
|
| Euro Notes | | | | | | | |
| Due 2022 | 1.100 | % | | 1.265 | % | | 763 |
| | — |
|
| Due 2027 | 2.100 | % | | 2.189 | % | | 872 |
| | — |
|
| Due 2030 | 2.500 | % | | 2.562 | % | | 164 |
| | — |
|
| | | | | | 3,299 |
| | 1,500 |
|
| Less: Unamortized discount | | | | | (12 | ) | | (6 | ) |
| Long-term debt | | | | | $ | 3,287 |
| | $ | 1,494 |
|
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Scheduled annual maturities of the principal portion of long-term debt outstanding at December 31, 20152018 are summarized below. Amounts exclude capital lease obligations disclosed in Note 16 (Commitments).
| | | | (in millions) | (in millions) |
| 2016 - 2018 | $ | — |
| |
| 2019 | 500 |
| $ | 500 |
|
| 2020 | — |
| — |
|
| 2021 | | 650 |
|
| 2022 | | 801 |
|
| 2023 | | — |
|
| Thereafter | 2,799 |
| 4,438 |
|
| Total | $ | 3,299 |
| $ | 6,389 |
|
InOn November 2015,15, 2018, the Company established aincreased its commercial paper program (the “Commercial Paper Program”). Under the Commercial Paper Program, from $3.75 billion to $4.5 billion under which the Company is authorized to issue up to $3.75 billion in outstandingunsecured commercial paper notes with maturities of up to 397 days from the date of issuance. The Commercial Paper Program is available in U.S. dollars.
In conjunction with the Commercial Paper Program, the Company entered into a committed five-year unsecured $3.75$4.5 billion revolving credit facility (the “Credit Facility”) on October 21, 2015,November 15, 2018. The Credit Facility, which expires on October 21, 2020. The Credit FacilityNovember 15, 2023, amended and restated the Company’s prior $3.75 billion credit facility.facility which was set to expire in October 2022. Borrowings under the Credit Facility are available in U.S. dollars and/or euros. The facility fee and borrowing cost under the Credit Facility are contingent uponis determined according to the Company’s credit rating. At December 31, 2015, the applicable facility fee was 8 basis pointsrating and is payable on the average daily commitment, (whether or not utilized).regardless of usage, per annum. In addition to the facility fee, interest rates on borrowings under the Credit Facility would be charged atbased on prevailing market interest rates plus applicable margins that fluctuate based on the London Interbank Offered Rate (LIBOR) plus an applicable margin of 79.5 basis points, or an alternative base rate.Company’s credit rating. The Credit Facility contains customary representations, warranties, events of default and affirmative and negative covenants, including a financial covenant limiting the maximum level of consolidated debt to earnings before interest, taxes, depreciation and amortization (EBITDA), which are substantially similar to the prior credit facility. MasterCard(“EBITDA”). The Company was in compliance in all material respects with the covenants of the Credit Facility at December 31, 20152018 and 2014.2017. The majority of Credit Facility lenders are customers or affiliates of customers of MasterCard.Mastercard.
Borrowings under the Commercial Paper Program and the Credit Facility are used to provide liquidity for general corporate purposes, including providing liquidity in the event of one or more settlement failures by the Company’s customers. The Company may borrow and repay amounts under the Commercial Paper Program and Credit Facility from time to time for business continuity and planning purposes. MasterCardtime. The Company had no borrowings under the Credit Facility at December 31, 2015 and 2014, as well as had no borrowings under the Commercial Paper Program at December 31, 2015.2018 and 2017.
On June 15, 2015,In March 2018, the Company filed a universal shelf registration statement (replacing a previously filed shelf registration statement that was set to expire) to provide additional access to capital, if needed. Pursuant to the shelf registration statement, the Company may from time to time offer to sell debt securities, guarantees of debt securities, preferred stock, Class A common stock, depository shares, purchase contracts, units or warrants in one or more offerings.
The Company also has $10 million and $41 million in debt outside the United States that is included in other current liabilities on the consolidated balance sheet at December 31, 2015 and 2014, respectively.
Note 13.15. Stockholders’ Equity
Classes of Capital Stock
MasterCard’sMastercard’s amended and restated certificate of incorporation authorizes the following classes of capital stock:
| | | Class | | Par Value Per Share | | Authorized Shares (in millions) | | Dividend and Voting Rights | | Par Value Per Share | | Authorized Shares (in millions) | | Dividend and Voting Rights |
| A | | $0.0001 | | 3,000 |
| | One vote per share
Dividend rights | | $0.0001 | | 3,000 |
| | One vote per share
Dividend rights |
| B | | $0.0001 | | 1,200 |
| | Non-voting
Dividend rights | | $0.0001 | | 1,200 |
| | Non-voting
Dividend rights |
| Preferred | | $0.0001 | | 300 |
| | No shares issued or outstanding at December 31, 2015 and 2014, respectively. Dividend and voting rights are to be determined by the Board of Directors of the Company upon issuance. | | $0.0001 | | 300 |
| | No shares issued or outstanding at December 31, 2018 and 2017, respectively. Dividend and voting rights are to be determined by the Board of Directors of the Company upon issuance. |
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Ownership and Governance Structure
Equity ownership and voting power of the Company’s shares were allocated as follows as of December 31:
| | | | 2015 | | 2014 | 2018 | | 2017 |
| | Equity Ownership | | General Voting Power | | Equity Ownership | | General Voting Power | Equity Ownership | | General Voting Power | | Equity Ownership | | General Voting Power |
| Public Investors (Class A stockholders) | 87.7 | % | | 89.4 | % | | 86.6 | % | | 89.4 | % | 88.0 | % | | 89.0 | % | | 88.0 | % | | 89.2 | % |
| Principal or Affiliate Customers (Class B stockholders) | 1.9 | % | | — | % | | 3.2 | % | | — | % | 1.1 | % | | — | % | | 1.4 | % | | — | % |
| The MasterCard Foundation (Class A stockholders) | 10.4 | % | | 10.6 | % | | 10.2 | % | | 10.6 | % | |
| Mastercard Foundation (Class A stockholders) | | 10.9 | % | | 11.0 | % | | 10.6 | % | | 10.8 | % |
Class B Common Stock Conversions
Shares of Class B common stock are convertible on a one-for-one basis into shares of Class A common stock. Entities eligible to hold MasterCard’sMastercard’s Class B common stock are defined in the Company’s amended and restated certificate of incorporation (generally the Company’s principal or affiliate customers), and they are restricted from retaining ownership of shares of Class A common stock. Class B stockholders are required to subsequently sell or otherwise transfer any shares of Class A common stock received pursuant to such a conversion.
The MasterCardMastercard Foundation
In connection and simultaneously with its 2006 initial public offering (the “IPO���“IPO”), the Company issued and donated 135 million newly authorized shares of Class A common stock to The MasterCard Foundation (the “Foundation”). TheMastercard Foundation. Mastercard Foundation is a private charitable foundation incorporated in Canada that is controlled by directors who are independent of the Company and its principal customers. Under the terms of the donation, theMastercard Foundation became able to resell the donated shares in May 2010 and to the extent necessary to meet charitable disbursement requirements dictated by Canadian tax law. Under Canadian tax law, theMastercard Foundation is generally required to disburse at least 3.5% of its assets not used in administration each year for qualified charitable disbursements. However, theMastercard Foundation obtained permission from the Canadian tax authorities to defer the giving requirements for up to ten years, which was extended in 2011 to fifteen years. Theuntil 2021. Mastercard Foundation, at its discretion, may decide to meet its disbursement obligations on an annual basis or to settle previously accumulated obligations during any given year. TheMastercard Foundation will be permitted to sell all of its remaining shares beginning twenty years and eleven months after the consummation of the IPO.May 1, 2027, subject to certain conditions.
Stock Repurchase Programs
In June 2012, theThe Company’s Board of Directors have approved a share repurchase programprograms authorizing the Company to repurchase up to $1.5 billionshares of its Class A common stock (the “June 2012 Share Repurchase Program”), which becameCommon Stock. These programs become effective in June 2012.
On February 5, 2013,after the Company’s Boardcompletion of Directors approved athe previously authorized share repurchase program authorizing the Company to repurchase up to $2 billion of its Class A common stock (the “February 2013 Share Repurchase Program”), which became effective in March 2013. program.
On December 10, 2013, the Company’s Board of Directors approved a new share repurchase program authorizing the Company to repurchase up to $3.5 billion of its Class A common stock (the “December 2013 Share Repurchase Program”), which became effective in January 2014.
On December 2, 2014, the Company’s Board of Directors approved a new share repurchase program authorizing the Company to repurchase up to $3.75 billion of its Class A common stock (the “December 2014 Share Repurchase Program”), which became effective in January 2015.
On December 8, 2015, the Company’s Board of Directors approved a new share repurchase program authorizing the Company to repurchase up to $4 billion of its Class A common stock (the “December 2015 Share Repurchase Program”), which became effective in February 2016.
We typically complete a share repurchase program before a new program becomes effective.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table summarizes the Company’s share repurchase authorizations of its Class A common stock through December 31, 20152018, as well as historical purchases:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Authorization Dates |
| | December 2015 | | December 2014 | | December 2013 | | February 2013 | | June 2012 | | Total |
| | (in millions, except average price data) |
| Board authorization | $ | 4,000 |
| | $ | 3,750 |
| | $ | 3,500 |
| | $ | 2,000 |
| | $ | 1,500 |
| | $ | 14,750 |
|
| Dollar-value of shares repurchased in 2013 | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,839 |
| | $ | 604 |
| | $ | 2,443 |
|
| Remaining authorization at December 31, 2013 | $ | — |
| | $ | — |
| | $ | 3,500 |
| | $ | 161 |
| | $ | — |
| | $ | 3,661 |
|
| Dollar-value of shares repurchased in 2014 | $ | — |
| | $ | — |
| | $ | 3,225 |
| | $ | 161 |
| | $ | — |
| | $ | 3,386 |
|
| Remaining authorization at December 31, 2014 | $ | — |
| | $ | 3,750 |
| | $ | 275 |
| | $ | — |
| | $ | — |
| | $ | 4,025 |
|
| Dollar-value of shares repurchased in 2015 | $ | — |
| | $ | 3,243 |
| | $ | 275 |
| | $ | — |
| | $ | — |
| | $ | 3,518 |
|
| Remaining authorization at December 31, 2015 | $ | 4,000 |
| | $ | 507 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4,507 |
|
| | | | | | | | | | | | |
| Shares repurchased in 2013 | — |
| | — |
| | — |
| | 29.2 |
| | 11.7 |
| | 40.9 |
|
| Average price paid per share in 2013 | $ | — |
| | $ | — |
| | $ | — |
| | $ | 63.01 |
| | $ | 51.72 |
| | $ | 59.78 |
|
| Shares repurchased in 2014 | — |
| | — |
| | 42.6 |
| | 1.9 |
| | — |
| | 44.5 |
|
| Average price paid per share in 2014 | $ | — |
| | $ | — |
| | $ | 75.81 |
| | $ | 83.22 |
| | $ | — |
| | $ | 76.14 |
|
| Shares repurchased in 2015 | — |
| | 35.1 |
| | 3.2 |
| | — |
| | — |
| | 38.3 |
|
| Average price paid per share in 2015 | $ | — |
| | $ | 92.39 |
| | $ | 84.31 |
| | $ | — |
| | $ | — |
| | $ | 91.70 |
|
| Cumulative shares repurchased through December 31, 2015 | — |
| | 35.1 |
| | 45.8 |
| | 31.1 |
| | 31.1 |
| | 143.1 |
|
| Cumulative average price paid per share | $ | — |
| | $ | 92.39 |
| | $ | 76.42 |
| | $ | 64.26 |
| | $ | 48.16 |
| | $ | 71.55 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
| Board authorization dates | December
2018 | | December
2017 | | December
2016 | | December 2015 | | December 2014 | | |
| | | | | | | | | | | | |
| Date program became effective | January 2019 | | March 2018 | | April 2017 | | February 2016 | | January 2015 | | Total |
| | (in millions, except average price data) |
| Board authorization | $ | 6,500 |
| | $ | 4,000 |
| | $ | 4,000 |
| | $ | 4,000 |
| | $ | 3,750 |
| | $ | 22,250 |
|
| Dollar-value of shares repurchased in 2016 | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3,004 |
| | $ | 507 |
| | $ | 3,511 |
|
| Remaining authorization at December 31, 2016 | $ | — |
| | $ | — |
| | $ | 4,000 |
| | $ | 996 |
| | $ | — |
| | $ | 4,996 |
|
| Dollar-value of shares repurchased in 2017 | $ | — |
| | $ | — |
| | $ | 2,766 |
| | $ | 996 |
| | $ | — |
| | $ | 3,762 |
|
| Remaining authorization at December 31, 2017 | $ | — |
| | $ | 4,000 |
| | $ | 1,234 |
| | $ | — |
| | $ | — |
| | $ | 5,234 |
|
| Dollar-value of shares repurchased in 2018 | $ | — |
| | $ | 3,699 |
| | $ | 1,234 |
| | $ | — |
| | $ | — |
| | $ | 4,933 |
|
| Remaining authorization at December 31, 2018 | $ | 6,500 |
| | $ | 301 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 6,801 |
|
| | | | | | | | | | | | |
| Shares repurchased in 2016 | — |
| | — |
| | — |
| | 31.2 |
| | 5.7 |
| | 36.9 |
|
| Average price paid per share in 2016 | $ | — |
| | $ | — |
| | $ | — |
| | $ | 96.15 |
| | $ | 89.76 |
| | $ | 95.18 |
|
| Shares repurchased in 2017 | — |
| | — |
| | 21.0 |
| | 9.1 |
| | — |
| | 30.1 |
|
| Average price paid per share in 2017 | $ | — |
| | $ | — |
| | $ | 131.97 |
| | $ | 109.16 |
| | $ | — |
| | $ | 125.05 |
|
| Shares repurchased in 2018 | — |
| | 19.0 |
| | 7.2 |
| | — |
| | — |
| | 26.2 |
|
| Average price paid per share in 2018 | $ | — |
| | $ | 194.77 |
| | $ | 171.11 |
| | $ | — |
| | $ | — |
| | $ | 188.26 |
|
| Cumulative shares repurchased through December 31, 2018 | — |
| | 19.0 |
| | 28.2 |
| | 40.4 |
| | 40.8 |
| | 128.4 |
|
| Cumulative average price paid per share | $ | — |
| | $ | 194.77 |
| | $ | 141.99 |
| | $ | 99.10 |
| | $ | 92.03 |
| | $ | 120.44 |
|
The following table presents the changes in the Company’s outstanding Class A and Class B common stock for the years ended December 31:
|
| | | | | |
| | Outstanding Shares |
| | Class A | | Class B |
| | (in millions) |
| Balance at December 31, 2015 | 1,095.0 |
| | 21.3 |
|
| Purchases of treasury stock | (36.9 | ) | | — |
|
| Share-based payments | 2.3 |
| | — |
|
| Conversion of Class B to Class A common stock | 2.0 |
| | (2.0 | ) |
| Balance at December 31, 2016 | 1,062.4 |
| | 19.3 |
|
| Purchases of treasury stock | (30.1 | ) | | — |
|
| Share-based payments | 2.2 |
| | — |
|
| Conversion of Class B to Class A common stock | 5.2 |
| | (5.2 | ) |
| Balance at December 31, 2017 | 1,039.7 |
| | 14.1 |
|
| Purchases of treasury stock | (26.2 | ) | | — |
|
| Share-based payments | 2.8 |
| | — |
|
| Conversion of Class B to Class A common stock | 2.3 |
| | (2.3 | ) |
| Balance at December 31, 2018 | 1,018.6 |
| | 11.8 |
|
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 14.16. Accumulated Other Comprehensive Income (Loss)
The changes in the balances of each component of accumulated other comprehensive income (loss), net of tax, for the years ended December 31, 20152018 and 20142017 were as follows:
|
| | | | | | | | | | | | | | | | | | | |
| | Foreign Currency Translation Adjustments | | Translation Adjustments on Net Investment Hedge | | Defined Benefit Pension and Other Postretirement Plans | | Investment Securities Available-for-Sale | | Accumulated Other Comprehensive Income (Loss) |
| | (in millions) |
| Balance at December 31, 2013 | $ | 206 |
| | $ | — |
| | $ | (29 | ) | | $ | 1 |
| | $ | 178 |
|
Other comprehensive income (loss) 1 | (436 | ) | | — |
| | 3 |
| | (5 | ) | | (438 | ) |
| Balance at December 31, 2014 | (230 | ) | | — |
| | (26 | ) | | (4 | ) | | (260 | ) |
Other comprehensive income (loss) 1,2,3 | (433 | ) | | (26 | ) | | 39 |
| | 4 |
| | (416 | ) |
| Balance at December 31, 2015 | $ | (663 | ) | | $ | (26 | ) | | $ | 13 |
| | $ | — |
| | $ | (676 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | Foreign Currency Translation Adjustments1 | | Translation Adjustments on Net Investment Hedge | | Defined Benefit Pension and Other Postretirement Plans2 | | Investment Securities Available-for-Sale3 | | Accumulated Other Comprehensive Income (Loss) |
| | (in millions) |
| Balance at December 31, 2016 | $ | (949 | ) | | $ | 12 |
| | $ | 11 |
| | $ | 2 |
| | $ | (924 | ) |
| Other comprehensive income (loss) | 567 |
| | (153 | ) | | 14 |
| | (1 | ) | | 427 |
|
| Balance at December 31, 2017 | (382 | ) | | (141 | ) | | 25 |
| | 1 |
| | (497 | ) |
| Other comprehensive income (loss) | (279 | ) | | 75 |
| | (15 | ) | | (2 | ) | | (221 | ) |
| Balance at December 31, 2018 | $ | (661 | ) | | $ | (66 | ) | | $ | 10 |
| | $ | (1 | ) | | $ | (718 | ) |
1 During 2015 and 2014,2017, the decrease in the accumulated other comprehensive loss related to foreign currency translation adjustments was driven primarily by the appreciation of the euro. During 2018, the increase in the accumulated other comprehensive loss related to foreign currency translation adjustments was driven primarily by the devaluation of the euro, British pound and Brazilian real.
2 During 2015, $80 million of deferred costs ($51 million after-tax)2017, the increase in the accumulated other comprehensive gain related to the Company’s defined benefit pension plan and other post retirementpostretirement plans were reclassified to general and administrative expenses. The deferred costs werewas driven primarily by the terminationaddition of the Company's U.S. defined benefit plan (SeeVocalink Plan. Deferred gains related to the Company’s postretirement plans, reclassified from accumulated other comprehensive income (loss) to earnings, were $2 million before tax and $1 million after tax. During 2018, the decrease in the accumulated other comprehensive gain related to the Company’s postretirement plans was driven primarily by an actuarial loss related to the Vocalink Plan. Deferred gains related to the Company’s postretirement plans, reclassified from accumulated other comprehensive income (loss) to earnings, were $1 million before and after tax. See Note 11, Pension,13 (Pension, Postretirement and Savings Plans). for additional information.
3 During 2015, $15 million of an unrealized loss (no tax impact)2017 and 2018, gains and losses on a foreign denominated available-for-sale security wasinvestment securities, reclassified from accumulated other comprehensive income (loss) to otherinvestment income, (expense) due to an other-than-temporary impairment.were not significant.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 15.17. Share-Based Payments
In May 2006, the Company implemented the MasterCardMastercard Incorporated 2006 Long-TermLong Term Incentive Plan, which was amended and restated as of June 5, 2012 (the “LTIP”). The LTIP is a shareholder-approvedstockholder-approved plan that permits the grant of various types of equity awards to employees.
The Company has granted Options, RSUs and PSUs under the LTIP. The Options, which expire ten years from the date of grant, generally vest ratably over four years from the date of grant. The RSUs and PSUs generally vest after three years.years. The Company uses the straight-line method of attribution for expensing equity awards. Compensation expense is recorded net of estimated forfeitures. Estimates are adjusted as appropriate.
Upon termination of employment,For all awards granted prior to March 2017, a participant’s unvested awards are forfeited. However, whenforfeited upon termination of employment. For all awards granted on or after March 1, 2017, in the event of termination due to job elimination (as defined by the Company), a participant will retain a pro-rata portion of the unvested awards for services performed through the date of termination. In the event a participant terminates employment due to disability or retirement more than six months (seven months for those granted on or after March 1, 2017) after receiving the award, the participant retains all of their awards without providing additional service to the Company. Retirement eligibility is dependent upon age and years of service. Compensation expense is recognized over the shorter of the vesting periods stated in the LTIP or the date the individual becomes eligible to retire but not less than six months.months (or seven months for grants awarded on or after March 1, 2017).
There are approximately 116 million shares of Class A common stock authorized for equity awards under the LTIP. Although the LTIP permits the issuance of shares of Class B common stock, no such shares have been authorized for issuance. Shares issued as a result of Option exercises and the conversions of RSUs and PSUs were funded primarily with the issuance of new shares of Class A common stock.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Stock Options
The fair value of each Option is estimated on the date of grant using a Black-Scholes option pricing model. The following table presents the weighted-average assumptions used in the valuation and the resulting weighted-average fair value per option granted for the years ended December 31:
| | | | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| Risk-free rate of return | 1.5 | % | | 1.5 | % | | 0.8 | % | 2.7 | % | | 2.0 | % | | 1.3 | % |
| Expected term (in years) | 5.00 |
| | 5.00 |
| | 5.00 |
| 6.00 |
| | 5.00 |
| | 5.00 |
|
| Expected volatility | 20.6 | % | | 19.1 | % | | 27.1 | % | 19.7 | % | | 19.3 | % | | 23.3 | % |
| Expected dividend yield | 0.7 | % | | 0.6 | % | | 0.5 | % | 0.6 | % | | 0.8 | % | | 0.8 | % |
| Weighted-average fair value per Option granted | $ | 17.29 |
| | $ | 14.29 |
| | $ | 12.33 |
| $ | 40.90 |
| | $ | 21.23 |
| | $ | 18.58 |
|
The risk-free rate of return was based on the U.S. Treasury yield curve in effect on the date of grant. The expected term and the expected volatility were based on historical MasterCardMastercard information. The expected dividend yields were based on the Company’s expected annual dividend rate on the date of grant.
The following table summarizes the Company’s option activity for the year ended December 31, 2015:2018:
|
| | | | | | | | | | | | |
| | Options | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term | | Aggregate Intrinsic Value |
| | (in millions) | | | | (in years) | | (in millions) |
| Outstanding at January 1, 2015 | 7.5 |
| | $ | 44 |
| | | | |
| Granted | 1.6 |
| | $ | 90 |
| | | | |
| Exercised | (0.9 | ) | | $ | 30 |
| | | | |
| Forfeited/expired | (0.1 | ) | | $ | 70 |
| | | | |
| Outstanding at December 31, 2015 | 8.1 |
| | $ | 54 |
| | 6.7 | | $ | 348 |
|
| Exercisable at December 31, 2015 | 4.1 |
| | $ | 35 |
| | 5.3 | | $ | 256 |
|
| Options vested and expected to vest at December 31, 2015 | 7.9 |
| | $ | 54 |
| | 6.7 | | $ | 346 |
|
|
| | | | | | | | | | | | |
| | Options | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term | | Aggregate Intrinsic Value |
| | (in millions) | | | | (in years) | | (in millions) |
| Outstanding at January 1, 2018 | 8.6 |
| | $ | 77 |
| | | | |
| Granted | 0.9 |
| | $ | 173 |
| | | | �� |
| Exercised | (1.8 | ) | | $ | 57 |
| | | | |
| Forfeited/expired | (0.1 | ) | | $ | 112 |
| | | | |
| Outstanding at December 31, 2018 | 7.6 |
| | $ | 93 |
| | 6.4 | | $ | 726 |
|
| Exercisable at December 31, 2018 | 4.3 |
| | $ | 72 |
| | 5.2 | | $ | 505 |
|
| Options vested and expected to vest at December 31, 2018 | 7.6 |
| | $ | 93 |
| | 6.4 | | $ | 723 |
|
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of December 31, 2015,2018, there was $28$34 million of total unrecognized compensation cost related to non-vested Options. The cost is expected to be recognized over a weighted-average period of 2.32.1 years.
Restricted Stock Units
The following table summarizes the Company’s RSU activity for the year ended December 31, 2015:2018:
|
| | | | | | | | | | | | |
| | Units | | Weighted-Average Grant-Date Fair Value | | Weighted-Average Remaining Contractual Term | | Aggregate Intrinsic Value |
| | (in millions) | | | | (in years) | | (in millions) |
| Outstanding at January 1, 2015 | 4.2 |
| | $ | 56 |
| | | | |
| Granted | 1.2 |
| | $ | 88 |
| | | | |
| Converted | (1.5 | ) | | $ | 42 |
| | | | |
| Forfeited/expired | (0.1 | ) | | $ | 68 |
| | | | |
| Outstanding at December 31, 2015 | 3.8 |
| | $ | 71 |
| | 1.2 | | $ | 366 |
|
| RSUs vested and expected to vest at December 31, 2015 | 3.6 |
| | $ | 71 |
| | 1.1 | | $ | 353 |
|
|
| | | | | | | | | | |
| | Units | | Weighted-Average Grant-Date Fair Value | | Aggregate Intrinsic Value |
| | (in millions) | | | | (in millions) |
| Outstanding at January 1, 2018 | 4.1 |
| | $ | 97 |
| | |
| Granted | 0.9 |
| | $ | 171 |
| | |
| Converted | (1.1 | ) | | $ | 90 |
| | |
| Forfeited | (0.2 | ) | | $ | 110 |
| | |
| Outstanding at December 31, 2018 | 3.7 |
| | $ | 117 |
| | $ | 702 |
|
| RSUs expected to vest at December 31, 2018 | 3.6 |
| | $ | 116 |
| | $ | 680 |
|
The fair value of each RSU is the closing stock price on the New York Stock Exchange of the Company’s Class A common stock on the date of grant, adjusted for the exclusion of dividend equivalents. Upon vesting, a portion of the RSU award may be withheld to satisfy the minimum statutory withholding taxes. The remaining RSUs will be settled in shares of the Company’s Class A
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
common stock after the vesting period. As of December 31, 2015,2018, there was $99$153 million of total unrecognized compensation cost related to non-vested RSUs. The cost is expected to be recognized over a weighted-average period of 1.81.7 years.
Performance Stock Units
The following table summarizes the Company’s PSU activity for the year ended December 31, 2015:2018:
|
| | | | | | | | | | | | |
| | Units | | Weighted-Average Grant-Date Fair Value | | Weighted-Average Remaining Contractual Term | | Aggregate Intrinsic Value |
| | (in millions) | | | | (in years) | | (in millions) |
| Outstanding at January 1, 2015 | 0.6 |
| | $ | 74 |
| | | | |
| Granted | 0.1 |
| | $ | 99 |
| | | | |
| Performance | 0.1 |
| | $ | 56 |
| | | | |
| Converted | (0.3 | ) | | $ | 83 |
| | | | |
| Forfeited/expired | — |
| | $ | — |
| | | | |
| Outstanding at December 31, 2015 | 0.5 |
| | $ | 72 |
| | 0.9 | | $ | 53 |
|
| PSUs vested and expected to vest at December 31, 2015 | 0.5 |
| | $ | 71 |
| | 0.9 | | $ | 52 |
|
|
| | | | | | | | | | |
| | Units | | Weighted-Average Grant-Date Fair Value | | Aggregate Intrinsic Value |
| | (in millions) | | | | (in millions) |
| Outstanding at January 1, 2018 | 0.5 |
| | $ | 105 |
| | |
| Granted | 0.1 |
| | $ | 226 |
| | |
| Converted | (0.3 | ) | | $ | 99 |
| | |
Other1 | 0.3 |
| | $ | 94 |
| | |
| Outstanding at December 31, 2018 | 0.6 |
| | $ | 120 |
| | $ | 119 |
|
| PSUs expected to vest at December 31, 2018 | 0.6 |
| | $ | 119 |
| | $ | 118 |
|
1 Represents additional shares issued in March 2018 related to the 2015 PSU grant based on performance and market conditions achieved over the three-year measurement period. These shares vested upon issuance.
Since 2013, PSUs containing performance and market conditions have been issued. Performance measures used to determine the actual number of shares that vest after three years include net revenue growth, EPS growth and relative total shareholder return (“TSR”). Relative TSR is considered a market condition, while net revenue and EPS growth are considered performance conditions. The Monte Carlo simulation valuation model is used to determine the grant-date fair value.
Compensation expenses for PSUs are recognized over the requisite service period if it is probable that the performance target will be achieved and subsequently adjusted if the probability assessment changes. As of December 31, 2015,2018, there was $9$13 million of total unrecognized compensation cost related to non-vested PSUs. The cost is expected to be recognized over a weighted-average period of 1.71.3 years.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Additional Information
The following table includes additional share-based payment information for each of the years ended December 31:
| | | | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| | (in millions, except weighted-average fair value) | (in millions, except weighted-average fair value) |
| Share-based compensation expense: Options, RSUs and PSUs | $ | 122 |
| | $ | 111 |
| | $ | 121 |
| $ | 196 |
| | $ | 176 |
| | $ | 148 |
|
| Income tax benefit recognized for equity awards | 41 |
| | 37 |
| | 42 |
| 41 |
| | 57 |
| | 49 |
|
| Income tax benefit related to Options exercised | 19 |
| | 20 |
| | 16 |
| |
| Income tax benefit realized related to Options exercised | | 53 |
| | 36 |
| | 31 |
|
| | | | | | | | | | | |
| Options: | | | | | | | | | | |
| Total intrinsic value of Options exercised | 57 |
| | 60 |
| | 48 |
| 242 |
| | 106 |
| | 86 |
|
| RSUs: | | | | | | | | | | |
| Weighted-average grant-date fair value of awards granted | 88 |
| | 76 |
| | 52 |
| 171 |
| | 112 |
| | 91 |
|
| Total intrinsic value of RSUs converted into shares of Class A common stock | 135 |
| | 173 |
| | 78 |
| 194 |
| | 131 |
| | 122 |
|
| PSUs: | | | | | | | | | | |
| Weighted-average grant-date fair value of awards granted | 99 |
| | 78 |
| | 56 |
| 226 |
| | 126 |
| | 92 |
|
| Total intrinsic value of PSUs converted into shares of Class A common stock | 24 |
| | 28 |
| | 29 |
| 40 |
| | 13 |
| | 25 |
|
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 16.18. Commitments
At December 31, 2015,2018, the Company had the following future minimum payments due under non-cancelable agreements:
| | | | Total | | Capital
Leases | | Operating Leases | | Sponsorship, Licensing & Other | Total | | Capital
Leases | | Operating Leases | | Sponsorship, Licensing & Other |
| | (in millions) | (in millions) |
| 2016 | $ | 286 |
| | $ | 6 |
| | $ | 38 |
| | $ | 242 |
| |
| 2017 | 154 |
| | 4 |
| | 40 |
| | 110 |
| |
| 2018 | 89 |
| | 1 |
| | 34 |
| | 54 |
| |
| 2019 | 60 |
| | — |
| | 29 |
| | 31 |
| $ | 426 |
| | $ | 4 |
| | $ | 72 |
| | $ | 350 |
|
| 2020 | 38 |
| | — |
| | 25 |
| | 13 |
| 259 |
| | 4 |
| | 75 |
| | 180 |
|
| 2021 | | 175 |
| | — |
| | 76 |
| | 99 |
|
| 2022 | | 121 |
| | — |
| | 68 |
| | 53 |
|
| 2023 | | 67 |
| | — |
| | 58 |
| | 9 |
|
| Thereafter | 69 |
| | — |
| | 58 |
| | 11 |
| 327 |
| | — |
| | 327 |
| | — |
|
| Total | $ | 696 |
| | $ | 11 |
| | $ | 224 |
| | $ | 461 |
| $ | 1,375 |
| | $ | 8 |
| | $ | 676 |
| | $ | 691 |
|
Included in the table above are capital leases with a net present value of minimum lease payments of $11$8 million. In addition, at December 31, 2015, $232018, $25 million of the future minimum payments in the table above for sponsorship, licensing and other agreements was accrued. Consolidated rental expense for the Company’s leased office space was $52$94 million, $48$77 million and $38$62 million for 2015, 20142018, 2017 and 2013,2016, respectively. Consolidated lease expense for automobiles, computer equipment and office equipment was $17$20 million, $17$22 million and $14$19 million for 2015, 20142018, 2017 and 2013,2016, respectively.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 17.19. Income Taxes
The totalOn December 22, 2017, U.S. Tax Reform was enacted into law with the effective date for most provisions being January 1, 2018. U.S. Tax Reform represents significant changes to the U.S. internal revenue code and, among other things:
lowered the corporate income tax provisionrate from 35% to 21%
imposed a one-time deemed repatriation tax on accumulated foreign earnings (the “Transition Tax”)
provides for a 100% dividends received deduction on dividends from foreign affiliates
requires a current inclusion in U.S. federal taxable income of earnings of foreign affiliates that are determined to be global intangible low taxed income or “GILTI”
creates the years ended December 31 is comprisedbase erosion anti-abuse tax, or “BEAT”
provides for an effective tax rate of 13.125% for certain income derived from outside of the following components:U.S. (referred to as foreign derived intangible income or “FDII”)
introduced further limitations on the deductibility of executive compensation |
| | | | | | | | | | | |
| | 2015 | | 2014 | | 2013 |
| | | | (in millions) | | |
| Current | | | | | |
| Federal | $ | 677 |
| | $ | 977 |
| | $ | 1,010 |
|
| State and local | 45 |
| | 47 |
| | 33 |
|
| Foreign | 444 |
| | 528 |
| | 456 |
|
| | 1,166 |
| | 1,552 |
| | 1,499 |
|
| Deferred |
| |
| |
|
| Federal | 4 |
| | (81 | ) | | (100 | ) |
| State and local | (3 | ) | | (3 | ) | | (4 | ) |
| Foreign | (17 | ) | | (6 | ) | | (11 | ) |
| | (16 | ) | | (90 | ) | | (115 | ) |
| Income tax expense | $ | 1,150 |
| | $ | 1,462 |
| | $ | 1,384 |
|
limits the deductibility of interest expense in certain situations and
eliminates the domestic production activities deduction.
While the effective date of the law for most provisions was January 1, 2018, GAAP requires the effects of changes in tax rates be accounted for in the reporting period of enactment, which was the 2017 reporting period.
Components of Income and Income tax expense
The domestic and foreign components of income before income taxes for the years ended December 31 are as follows:
| | | | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| | | | (in millions) | | | | | (in millions) | | |
| United States | $ | 3,399 |
| | $ | 3,378 |
| | $ | 2,741 |
| $ | 3,510 |
| | $ | 3,482 |
| | $ | 3,736 |
|
| Foreign | 1,559 |
| | 1,701 |
| | 1,759 |
| 3,694 |
| | 3,040 |
| | 1,910 |
|
| Income before income taxes | $ | 4,958 |
| | $ | 5,079 |
| | $ | 4,500 |
| $ | 7,204 |
| | $ | 6,522 |
| | $ | 5,646 |
|
MasterCard has not provided for U.S. federal income and foreign withholding taxes on approximately $3.5 billion of undistributed earnings from non-U.S. subsidiaries as of December 31, 2015 because such earnings are intended to be reinvested indefinitely outside of the United States. If these earnings were distributed, foreign tax credits may become available under current law to reduce the resulting U.S. income tax liability. However, it is not practicable to determine the amount of the tax and credits.
The provision for income taxes differs from the amount of income tax determined by applying the U.S. federal statutory income tax rate of 35% to pretax income for the years ended December 31, as a result of the following:
|
| | | | | | | | | | | | | | | | | | | | |
| | 2015 | | 2014 | | 2013 |
| | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
| | (in millions, except percentages) |
| Income before income taxes | $ | 4,958 |
| | | | $ | 5,079 |
| | | | $ | 4,500 |
| | |
| | | | | | | | | | | | |
| Federal statutory tax | 1,735 |
| | 35.0 | % | | 1,778 |
| | 35.0 | % | | 1,575 |
| | 35.0 | % |
| State tax effect, net of federal benefit | 27 |
| | 0.5 | % | | 29 |
| | 0.6 | % | | 19 |
| | 0.4 | % |
| Foreign tax effect | (144 | ) | | (2.9 | )% | | (108 | ) | | (2.1 | )% | | (208 | ) | | (4.6 | )% |
| Foreign repatriation | (172 | ) | | (3.5 | )% | | (177 | ) | | (3.5 | )% | | (14 | ) | | (0.3 | )% |
| Impact of settlements with tax authorities | (147 | ) |
| (2.9 | )% |
| — |
|
| — | % |
| — |
|
| — | % |
| Other foreign tax credits | (109 | ) |
| (2.2 | )% |
| (6 | ) |
| (0.1 | )% |
| (3 | ) |
| — | % |
| Other, net | (40 | ) |
| (0.8 | )% |
| (54 | ) |
| (1.1 | )% |
| 15 |
|
| 0.3 | % |
| Income tax expense | $ | 1,150 |
| | 23.2 | % | | $ | 1,462 |
| | 28.8 | % | | $ | 1,384 |
| | 30.8 | % |
Effective Income Tax Rate
The effective income tax rates for the years ended December 31, 2015, 2014 and 2013 were 23.2%, 28.8% and 30.8%, respectively. The effective tax rate for 2015 was lower than the effective tax rate for 2014 primarily due to settlements with tax authorities in multiple jurisdictions. Further, the information gained related to these matters was considered in measuring uncertain tax benefits recognized for the periods subsequent to the periods settled. In addition, the recognition of other U.S. foreign tax credits and a more favorable geographic mix of taxable earnings also contributed to the lower effective tax rate in 2015. The effective tax rate for 2014 was lower than the effective tax rate for 2013 primarily due to the recognition of a larger repatriation benefit and an increase in the Company’s domestic production activity deduction in the U.S. related to the Company’s authorization revenue, partially offset by an unfavorable mix of taxable earnings in 2014.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
DuringThe total income tax provision for the fourth quarter of 2014, the Company implemented an initiative to better align its legal entity and tax structure with its operational footprint outsideyears ended December 31 is comprised of the following components:
|
| | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | | | (in millions) | | |
| Current | | | | | |
| Federal | $ | 649 |
| | $ | 1,704 |
| | $ | 1,074 |
|
| State and local | 69 |
| | 65 |
| | 36 |
|
| Foreign | 871 |
| | 752 |
| | 497 |
|
| | 1,589 |
| | 2,521 |
| | 1,607 |
|
| Deferred | | | | | |
| Federal | (228 | ) | | 134 |
| | (6 | ) |
| State and local | (11 | ) | | 1 |
| | (2 | ) |
| Foreign | (5 | ) | | (49 | ) | | (12 | ) |
| | (244 | ) | | 86 |
| | (20 | ) |
| Income tax expense | $ | 1,345 |
| | $ | 2,607 |
| | $ | 1,587 |
|
Effective Income Tax Rate
A reconciliation of the effective income tax rate to the U.S. This initiativefederal statutory income tax rate for the years ended December 31, is as follows:
|
| | | | | | | | | | | | | | | | | | | | |
| | 2018 | | 2017 | | 2016 |
| | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
| | (in millions, except percentages) |
| Income before income taxes | $ | 7,204 |
| | | | $ | 6,522 |
| | | | $ | 5,646 |
| | |
| | | | | | | | | | | | |
| Federal statutory tax | 1,513 |
| | 21.0 | % | | 2,283 |
| | 35.0 | % | | 1,976 |
| | 35.0 | % |
| State tax effect, net of federal benefit | 46 |
| | 0.6 | % | | 43 |
| | 0.7 | % | | 22 |
| | 0.4 | % |
| Foreign tax effect | (92 | ) | | (1.3 | )% | | (380 | ) | | (5.8 | )% | | (188 | ) | | (3.3 | )% |
| European Commission fine | 194 |
| | 2.7 | % | | — |
| | — | % | | — |
| | — | % |
Foreign tax credits1 | (110 | ) | | (1.5 | )% | | (27 | ) | | (0.4 | )% | | (141 | ) | | (2.5 | )% |
| Transition Tax | 22 |
| | 0.3 | % | | 629 |
| | 9.6 | % | | — |
| | — | % |
| Remeasurement of deferred taxes | (7 | ) | | (0.1 | )% | | 157 |
| | 2.4 | % | | — |
| | — | % |
| Windfall benefit | (72 | ) | | (1.0 | )% | | (43 | ) | | (0.7 | )% | | — |
| | — | % |
| Other, net | (149 | ) |
| (2.0 | )% |
| (55 | ) |
| (0.8 | )% |
| (82 | ) |
| (1.5 | )% |
| Income tax expense | $ | 1,345 |
| | 18.7 | % | | $ | 2,607 |
| | 40.0 | % | | $ | 1,587 |
| | 28.1 | % |
1 Included within the impact of the 2018 foreign tax credits is a $90 million tax benefit relating to the carryback of certain foreign tax credits. Additionally, included in 2016 is a $116 million benefit associated with the repatriation of 2016 foreign earnings. There was no benefit associated with the repatriation of foreign earnings in 2018 and 2017 due to the enactment of U.S. Tax Reform.
The effective tax rates for the years ended December 31, 2018, 2017 and 2016 were 18.7%, 40.0% and 28.1%, respectively. The effective income tax rate for 2018 was lower than the effective income tax rate for 2017 primarily due to additional tax expense of $873 million attributable to U.S. Tax Reform in 2017, a lower 2018 statutory tax rate in the U.S. and Belgium and a more favorable geographic mix of earnings. The lower effective tax rate is also attributable to discrete tax benefits, relating primarily to $90 million of foreign tax credits generated in 2018, which can be carried back and utilized in 2017 under transition rules in the proposed foreign tax credit regulations issued on November 28, 2018, along with provisions for legal matters in the United States. These benefits were partially offset by the nondeductible nature of the fine issued by the European Commission. See Note 20 (Legal and Regulatory Proceedings) for further discussion of the European Commission fine and U.S. merchant class litigation. The impact of U.S. Tax Reform for the period ending December 31, 2018 resulted in a one-time taxable gain in Belgium relatingnet $75 million non-recurring tax benefit due to the transfercarry back of intellectual propertycertain foreign tax credits, incremental transition tax and the remeasurement of deferred taxes.
The effective income tax rate for 2017 was higher than the effective income tax rate for 2016 primarily due to additional tax expense of $873 million attributable to U.S. Tax reform, which included provisional amounts of $825 million related to the Transition Tax, the remeasurement of the Company’s net deferred tax asset balance in the U.S. and the recognition of a deferred tax liability related to a relatedchange in assertion regarding the indefinite reinvestment of a substantial amount of the Company’s foreign entity in the United Kingdom. Management believes this improved alignment will result in greater flexibility and efficiency with regard to the global deployment of cash,earnings, as well as ongoing benefits in$48 million due to a foregone foreign tax credit benefit on 2017 repatriations. In addition, the
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Company’s 2017 effective income tax rate. rate versus 2016 was impacted by a more favorable geographic mix of earnings in 2017, partially offset by a lower U.S. foreign tax credit benefit.
SAB 118
The Company was able to make reasonable estimates at December 31, 2017 and had recorded a provisional charge of $629 million related to the Transition Tax, $157 million for the remeasurement of the Company’s net deferred tax asset in the U.S. and $36 million related to the change in assertion regarding the indefinite reinvestment of foreign earnings. However, these amounts were adjusted during the measurement period due to evolving analysis and interpretations of law, including issuance by the Internal Revenue Service (the “IRS”) and Treasury of Notices and regulations, discussions with the Department of Treasury (“Treasury”), as well as interpretations of how accounting for income taxes should be applied.
At the close of the measurement period, the Company has finalized its assessment of the impact of U.S. Tax Reform resulting in a Transition Tax liability of $687 million and a $150 million charge related to the incomeremeasurement of the Company’s net deferred tax assets in the U.S. In 2018, the Company recorded an increase in the transition tax liability of $36 million, with an offsetting decrease to its deferred tax liabilities. The Company recorded additional Transition Tax expense of $22 million and has recorded a $7 million reduction to the charge for the remeasurement of its net deferred tax assets. The adjustments in 2018 were primarily the result of additional administrative guidance and proposed regulations issued by the IRS and Treasury.
The Transition Tax will be paid over eight annual installments. The initial installment of $55 million was due and paid by April 15, 2018. Additionally, the overpayment appearing on intercompany profits that resulted from the transfer. The2017 U.S. federal tax associated withreturn has been applied against the transferCompany’s Transition Tax liability. Approximately $509 million of the remaining tax due is deferred and amortized utilizing a 25-year life. This deferred charge is includedrecorded in other current assets and other assetsliabilities on ourthe consolidated balance sheet at December 31, 2015 in2018. At December 31, 2017 the amountsCompany had reflected a current liability of $15$52 million and $352 million, respectively. The comparable amounts included inan other current assets and other assets were $18 million and $407 million, respectively, at December 31, 2014, withliability of $577 million. Under U.S. Tax Reform, for purposes of IRS examination of the difference driven by changes in foreign exchange rates and current period amortization.Transition Tax, the statute of limitations is extended to six years.
Singapore Income Tax Rate
In 2010, in connection with the expansion of the Company’s operations in the Asia Pacific, Middle East and Africa region, the Company’s subsidiary in Singapore, MasterCardMastercard Asia Pacific Pte. Ltd. (“MAPPL”) received an incentive grant from the Singapore Ministry of Finance.Finance in 2010. The incentive had provided MAPPL with, among other benefits, a reduced income tax rate for the 10-year period commencing January 1, 2010 on taxable income in excess of a base amount. The Company continued to explore business opportunities in this region, resulting in an expansion of the incentives being granted by the Ministry of Finance, including a further reduction to the income tax rate on taxable income in excess of a revised fixed base amount commencing July 1, 2011 and continuing through December 31, 2025. Without the incentive grant, MAPPL would have been subject to the statutory income tax rate on its earnings. For 2015, 20142018, 2017 and 2013,2016, the impact of the incentive grant received from the Ministry of Finance resulted in a reduction of MAPPL’s income tax liability of $47$212 million, or $0.20 per diluted share, $104 million, or $0.10 per diluted share, and $49 million, or $0.04 per diluted share, $40respectively.
Intra-entity asset transfers
During 2014, the Company implemented an initiative to better align its legal entity and tax structure with its operational footprint outside of the U.S. This initiative resulted in a one-time taxable gain in Belgium relating to the transfer of intellectual property to a related foreign entity in the United Kingdom. The Company recorded a deferred charge related to the income tax expense on intercompany profits that resulted from the transfer. The tax associated with the transfer was deferred and amortized utilizing a 25-year life. The deferred charge was included in other current assets and other assets on the consolidated balance sheet at December 31, 2017 in the amounts of $17 million or $0.03 per diluted share, and $76$352 million, or $0.06 per diluted share, respectively. The aforementioned deferred charge of $369 million at December 31, 2017, was written off to retained earnings as a component of the cumulative-effect adjustment as of January 1, 2018. In addition, deferred taxes are a component of the cumulative-effect adjustment whereby the Company has recorded a $186 million deferred tax asset in this regard. See Note 1 (Summary of Significant Accounting Policies) for additional information related to this guidance.
Indefinite Reinvestment
In 2017, as a result of U.S. Tax Reform, among other things, the Company changed its assertion regarding the indefinite reinvestment of foreign earnings outside the U.S. for certain of our foreign affiliates and recognized a provisional deferred tax liability of $36 million. In 2018, the Company completed its analysis of global working capital and cash needs. It is the Company’s
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
present intention to indefinitely reinvest a portion of its historic undistributed accumulated earnings associated with certain foreign subsidiaries outside of the U.S.
As part of its analysis, the Company determined that approximately $5.8 billion of the approximately $6.7 billion of unremitted foreign earnings as of December 31, 2017, were no longer permanently reinvested. Notwithstanding the fact that some earnings continue to be permanently reinvested, all historical earnings, approximately $7.0 billion, were taxed in the U.S. as part of transition tax pursuant to U.S. Tax Reform, of which $267 million was repatriated in 2017.
Additionally, during 2018, the Company repatriated approximately $3.3 billion. As of December 31, 2018, the Company had approximately $2.5 billion of accumulated earnings to be repatriated in the future, for which $8 million of deferred tax benefit was recorded. The tax effect is primarily related to the estimated foreign exchange impact recognized when earnings are repatriated. The Company expects that foreign withholding taxes associated with these future repatriated earnings will not be material. Earnings of approximately $0.9 billion remain permanently reinvested and the Company estimates that an immaterial U.S. federal and state and local income tax benefit would result, primarily from foreign exchange, if these earnings were to be repatriated.
Deferred Taxes
Deferred tax assets and liabilities represent the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. The components of deferred tax assets and liabilities at December 31 are as follows:
| | | | 2015 1 | | 2014 | 2018 | | 2017 |
| | (in millions) | (in millions) |
| Deferred Tax Assets | | | | | | |
| Accrued liabilities | $ | 169 |
| | $ | 177 |
| $ | 297 |
| | $ | 158 |
|
| Compensation and benefits | 242 |
| | 262 |
| 210 |
| | 127 |
|
| State taxes and other credits | 54 |
| | 65 |
| 30 |
| | 28 |
|
| Net operating losses | 67 |
| | 56 |
| |
| Net operating and capital losses | | 104 |
| | 105 |
|
| Unrealized gain/loss - 2015 Euro Notes | | 28 |
| | 48 |
|
| Recoverable basis of deconsolidated entities | | — |
| | 35 |
|
Intangible assets1 | | 170 |
| | — |
|
| Previously taxed earnings and profits | | 7 |
| | — |
|
| Other items | 90 |
| | 38 |
| 80 |
| | 83 |
|
| Less: Valuation allowance | (54 | ) | | (41 | ) | (94 | ) | | (91 | ) |
| Total Deferred Tax Assets | 568 |
| | 557 |
| 832 |
| | 493 |
|
| | | | | | | |
| Deferred Tax Liabilities | | | | | | |
| Prepaid expenses and other accruals | 46 |
| | 58 |
| 89 |
| | 48 |
|
| Intangible assets | 136 |
| | 92 |
| 125 |
| | 151 |
|
| Property, plant and equipment | 118 |
| | 115 |
| 97 |
| | 83 |
|
| Previously taxed earnings and profits | | — |
| | 36 |
|
| Other items | 30 |
| | 18 |
| 18 |
| | 31 |
|
| Total Deferred Tax Liabilities | 330 |
| | 283 |
| 329 |
| | 349 |
|
| | | | | | | |
| Net Deferred Tax Assets | $ | 238 |
| | $ | 274 |
| $ | 503 |
| | $ | 144 |
|
1 As described within Recent Accounting Pronouncements section of Note 1. Summary of Significant Accounting Policies,On January 1, 2018 a $186 million deferred tax asset was established related to intra-entity transfers as discussed above.
Both the Company has early adopted recent guidance2018 and now reflects 2015 deferred taxes as non-current deferred taxes within the Consolidated Balance Sheet.
The 2015 and 20142017 valuation allowances relate primarily to the Company’s ability to recognize tax benefits associated with certain foreign net operating losses. The recognition of these benefitsthe foreign losses is dependent upon the future taxable income in such foreign jurisdictions and the ability under tax law in these jurisdictions to utilize net operating losses following a change in control.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
A reconciliation of the beginning and ending balance for the Company’s unrecognized tax benefits for the years ended December 31, is as follows:
| | | | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| | | | (in millions) | | | (in millions) |
| Beginning balance | $ | 364 |
| | $ | 320 |
| | $ | 257 |
| $ | 183 |
| | $ | 169 |
| | $ | 181 |
|
| Additions: | | | | | | | | | | |
| Current year tax positions | 20 |
| | 61 |
| | 80 |
| 23 |
| | 21 |
| | 20 |
|
| Prior year tax positions | 10 |
| | 19 |
| | 12 |
| 5 |
| | 9 |
| | 13 |
|
| Reductions: | | | | | | | | | | |
| Prior year tax positions | (151 | ) | | (6 | ) | | (8 | ) | (17 | ) | | (1 | ) | | (28 | ) |
| Settlements with tax authorities | (53 | ) | | — |
| | (2 | ) | (18 | ) | | (4 | ) | | (2 | ) |
| Expired statute of limitations | (9 | ) | | (30 | ) | | (19 | ) | (12 | ) | | (11 | ) | | (15 | ) |
| Ending balance | $ | 181 |
| | $ | 364 |
| | $ | 320 |
| $ | 164 |
| | $ | 183 |
| | $ | 169 |
|
The entire unrecognized tax benefit of $164 million, if recognized, would reduce the effective tax rate. During 2015,2018, there was a reduction to the balance of the Company’s unrecognized tax benefits. This was primarily due to a favorable court decision and settlements with tax authorities in multiple jurisdictions. Further, the information gained related to these matters was considered in measuring uncertain tax benefits recognized for the periods subsequent to the periods settled.
The entire unrecognized tax benefits of $181 million, if recognized, would reduce the effective tax rate. The Company is subject to tax in the United States,U.S., Belgium, Singapore, the United Kingdom and various other foreign jurisdictions, as well as state and local jurisdictions. Uncertain tax positions are reviewed on an ongoing basis and are adjusted after considering facts and circumstances, including progress of tax audits, developments in case law and closing of statutes of limitation. Within the next twelve months, the Company believes that the resolution of certain federal, foreign and state and local examinations are reasonably possible and that a change in estimate, reducing unrecognized tax benefits, may occur. While such a change may be significant, it is not possible to provide a range of the potential change until the examinations progress further or the related statutes of limitation expire. The Company has effectively settled its U.S. federal income tax obligations through 2008, with the exception of transfer pricing issues which are settled through 2011. With limited exception, the Company is no longer subject to state and local or foreign examinations by tax authorities for years before 2006.2010.
It is the Company’s policy to account for interest expense related to income tax matters as interest expense in its statement of operations, and to include penalties related to income tax matters in the income tax provision. For 2015, 2014 and 2013, the Company recorded tax-related interest income of $3 million, $2 million and $4 million, respectively, in its consolidated statement of operations. At December 31, 20152018 and 2014,2017, the Company had a net income tax-related interest payable of $12$8 million and $15$10 million, respectively, in its consolidated balance sheet. AtTax-related interest income /(expense) in the periods 2018, 2017 and 2016, were not material. In addition, as of December 31, 20152018 and 2014,2017, the amounts the Company hadhas recognized for penalties payable in its consolidated balance sheet were not significant.material.
Note 18.20. Legal and Regulatory Proceedings
MasterCardMastercard 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 are based on complex claims involving substantial uncertainties and unascertainable damages. Accordingly, except as discussed below, it is not possible to determine the probability of loss or estimate damages, and therefore, MasterCardMastercard has not established reserves for any of these proceedings. When the Company determines that a loss is both probable and reasonably estimable, MasterCardMastercard records a liability and discloses the amount of the liability if it is material. When a material loss contingency is only reasonably possible, MasterCardMastercard does not record a liability, but instead discloses the nature and the amount of the claim, and an estimate of the loss or range of loss, if such an estimate can be made. Unless otherwise stated below with respect to these matters, MasterCardMastercard cannot provide an estimate of the possible loss or range of loss based on one or more of the following reasons: (1) actual or potential plaintiffs have not claimed an amount of monetary damages or the amounts are unsupportable or exaggerated, (2) the matters are in early stages, (3) there is uncertainty as to the outcome of pending appeals or motions, (4) there are significant factual issues to be resolved, (5) the existence in many such proceedings of multiple defendants or potential defendants whose share of any potential financial responsibility has yet to be determined and/or (6) there are novel legal issues presented. Furthermore, except as identified with respect to the matters below, MasterCardMastercard does not believe that the outcome of any individual existing legal or regulatory proceeding to which it is a party will have a material adverse effect on its results of operations, financial condition or overall business. However, an adverse judgment or other outcome or settlement with respect to any proceedings discussed below could result in fines or payments by MasterCardMastercard and/or could require MasterCardMastercard to change its business practices. In addition, an adverse outcome in a regulatory proceeding could lead to the filing of civil damage claims and possibly result in significant damage awards. Any of these events could have a material adverse effect on MasterCard’sMastercard’s results of operations, financial condition and overall business.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Interchange Litigation and Regulatory Proceedings
MasterCard’sMastercard’s interchange fees and other practices are subject to regulatory, and/or legal review and/or challenges in a number of jurisdictions, including the proceedings described below. When taken as a whole, the resulting decisions, regulations and legislation with respect to interchange fees and acceptance practices may have a material adverse effect on the Company’s prospects for future growth and its overall results of operations, financial position and cash flows.
United States. In June 2005, the first of a series of complaints were filed on behalf of merchants (the majority of the complaints were styled as class actions, although a few complaints were filed on behalf of individual merchant plaintiffs) against MasterCardMastercard International, Visa U.S.A., Inc., Visa International Service Association and a number of financial institutions. Taken together, the claims in the complaints were generally brought under both Sections 1 and 2 of the Sherman Act, which prohibit monopolization and attempts or conspiracies to monopolize a particular industry, and some of these complaints contain unfair competition law claims under state law. The complaints allege, among other things, that MasterCard,Mastercard, Visa, and certain financial institutions conspired to set the price of interchange fees, enacted point of sale acceptance rules (including the no surcharge rule) in violation of antitrust laws and engaged in unlawful tying and bundling of certain products and services. The cases were consolidated for pre-trial proceedings in the U.S. District Court for the Eastern District of New York in MDL No. 1720. The plaintiffs filed a consolidated class action complaint that seeks treble damages.
In July 2006, the group of purported merchant class plaintiffs filed a supplemental complaint alleging that MasterCard’sMastercard’s initial public offering of its Class A Common Stock in May 2006 (the “IPO”) and certain purported agreements entered into between MasterCardMastercard and financial institutions in connection with the IPO: (1) violate U.S. antitrust laws and (2) constituted a fraudulent conveyance because the financial institutions allegedly attempted to release, without adequate consideration, MasterCard’sMastercard’s right to assess them for MasterCard’sMastercard’s litigation liabilities. The class plaintiffs sought treble damages and injunctive relief including, but not limited to, an order reversing and unwinding the IPO.
In February 2011, MasterCardMastercard and MasterCardMastercard International entered into each of: (1) an omnibus judgment sharing and settlement sharing agreement with Visa Inc., Visa U.S.A. Inc. and Visa International Service Association and a number of financial institutions; and (2) a MasterCardMastercard settlement and judgment sharing agreement with a number of financial institutions. The agreements provide for the apportionment of certain costs and liabilities which MasterCard,Mastercard, the Visa parties and the financial institutions may incur, jointly and/or severally, in the event of an adverse judgment or settlement of one or all of the cases in the merchant litigations. Among a number of scenarios addressed by the agreements, in the event of a global settlement involving the Visa parties, the financial institutions and MasterCard, MasterCardMastercard, Mastercard would pay 12% of the monetary portion of the settlement. In the event of a settlement involving only MasterCardMastercard and the financial institutions with respect to their issuance of MasterCardMastercard cards, MasterCardMastercard would pay 36% of the monetary portion of such settlement.
In October 2012, the parties entered into a definitive settlement agreement with respect to the merchant class litigation (including with respect to the claims related to the IPO) and the defendants separately entered into a settlement agreement with the individual merchant plaintiffs. The settlements included cash payments that were apportioned among the defendants pursuant to the omnibus judgment sharing and settlement sharing agreement described above. MasterCardMastercard also agreed to provide class members with a short-term reduction in default credit interchange rates and to modify certain of its business practices, including its No Surcharge Rule. Objections to the settlement were filed by both merchants and certain competitors, including Discover. Discover’s objections include a challenge to the settlement on the grounds that certain of the rule changes agreed to in the settlement constitute a restraint of trade in violation of Section 1 of the Sherman Act.“no surcharge” rule. The court granted final approval of the settlement in December 2013. Objectors2013, and objectors to the settlement appealed that decision to the decision, and an oral argument was heard onU.S. Court of Appeals for the appeal in September 2015. Separately,Second Circuit. In June 2016, the objectors filed a motion in July 2015 to set asidecourt of appeals vacated the approval order, contending that the merchant class was inadequately represented andaction certification, reversed the settlement approval and sent the case back to the district court for further proceedings. The court of appeals’ ruling was insufficient becausebased primarily on whether the merchants were adequately represented by counsel in the settlement. As a result of the appellate court ruling, the district court divided the merchants’ claims into two separate classes - monetary damages claims (the “Damages Class”) and claims seeking changes to business practices (the “Rules Relief Class”). The court appointed separate counsel for several individual merchant plaintiffs improperly exchanged communications with a defense counsel who ateach class.
Prior to the time was representing MasterCard.
Merchantsreversal of the settlement approval, merchants representing slightly more than 25% of the MasterCardMastercard and Visa purchase volume over the relevant period chose to opt out of the class settlement. MasterCard anticipatesMastercard had anticipated that most of the larger merchants who opted out of the settlement willwould initiate separate actions seeking to recover damages, and over 30 opt-out complaints have been filed on behalf of numerous merchants in various jurisdictions. Mastercard has executed settlement agreements with a number of opt-out merchants. Mastercard believes these settlement agreements are not impacted by the ruling of the court of appeals. The defendants have consolidated all of these matters (except for one state court action in New Mexico) in front of the same federal district court that is overseeingapproved the approval of themerchant class settlement. In July 2014, the district court denied the defendants’ motion to dismiss the opt-out merchant complaints for failure to state a claim.
MasterCard recorded a pre-tax charge of $770 million in the fourth quarter of 2011 and an additional $20 million pre-tax charge in the second quarter of 2012 relating to the settlement agreements described above. In 2012, MasterCard paid $790 million with respect to the settlements, of which $726 million was paid into a qualified cash settlement fund related to the merchant
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
In September 2018, the parties to the Damages Class litigation entered into a class litigation. settlement agreement to resolve the Damages Class claims. Mastercard increased its reserve by $237 million during 2018 to reflect both its expected financial obligation under the Damages Class settlement agreement and the filed and anticipated opt-out merchant cases. In January 2019, the district court issued an order granting preliminary approval of the settlement and authorized notice of the settlement to class members. Damages Class members will now have the opportunity to opt out of the class settlement agreement, after which the district court will schedule a hearing on final approval. The settlement agreement does not relate to the Rules Relief Class claims. Separate settlement negotiations with the Rules Relief Class are ongoing.
As of December 31, 20152018 and December 31, 2014, MasterCard had $541 million and $540 million, in the qualified cash settlement fund classified as restricted cash on its balance sheet. The class settlement agreement provided for a return to the defendants of a portion of the class cash settlement fund, based upon the percentage of purchase volume represented by the opt-out merchants. This resulted in $164 million from the cash settlement fund being returned to MasterCard in January 2014 and reclassified at that time from restricted cash to cash and cash equivalents. In the fourth quarter of 2013, MasterCard recorded an incremental net pre-tax charge of $95 million related to the opt-out merchants, representing a change in its estimate of probable losses relating to these matters. MasterCard has executed settlement agreements with a number of opt-out merchants and no adjustment to the amount previously recorded was deemed necessary. As of December 31, 2015, MasterCard2017, Mastercard had accrued a liability of $709$915 million and $708 million, respectively, as a reserve for both the merchant class litigation and the filed and anticipated opt-out merchant cases.
As of December 31, 2018 and 2017, Mastercard had $553 million and $546 million, respectively, in a qualified cash settlement fund related to the merchant class litigation and classified as restricted cash on its consolidated balance sheet. Mastercard believes the reserve for both the merchant class litigation and the filed and anticipated opt-out merchants represents its best estimate of its probable liabilities in these matters. The portion of the accrued liability relating to both the opt-out merchants and the merchant class litigation settlement does not represent an estimate of a loss, if any, if the opt-out merchant matters were litigated to a final outcome, in which case MasterCardoutcome. Mastercard cannot estimate the potential liability. MasterCard’s estimate involves significant judgment and may change depending on progress in settlement negotiations or depending upon decisions in any opt-out merchant cases. In addition, in the eventliability if that the merchant class litigation settlement approval is overturned, a negative outcome in the litigation could have a material adverse effect on MasterCard’s results of operations, financial position and cash flows.were to occur.
Canada. In December 2010, a proposed class action complaint was commenced against MasterCardMastercard in Quebec on behalf of Canadian merchants. ThatThe suit essentially repeated the allegations and arguments of a previously filed application by the Canadian Competition Bureau to the Canadian Competition Tribunal (dismissed in MasterCard’sMastercard’s favor) related toconcerning certain MasterCardMastercard rules related to point-of-sale acceptance, including the “honor all cards” and “no surcharge” rules. The Quebec suit sought compensatory and punitive damages in unspecified amounts, as well as injunctive relief. In the first half of 2011, additional purported class action lawsuits containing similar allegations to the Quebec class action were commenced in British Columbia and Ontario against MasterCard,Mastercard, Visa and a number of large Canadian financial institutions. The British Columbia suit seekssought compensatory damages in unspecified amounts, and the Ontario suit seekssought compensatory damages of $5 billion. The British Columbiabillion on the basis of alleged conspiracy and Ontario suits also seek punitive damages in unspecified amounts, as well as injunctive relief, interest and legal costs. The Quebec suit was later amended to include the same defendants and similar claims as in the British Columbia and Ontario suits. With respect to the statusvarious alleged breaches of the proceedings: (1) the Quebec suit has been stayed, (2) the Ontario suit is being temporarily suspended while the British Columbia suit proceeds, and (3) the British Columbia appellate court issued an order in August 2015 allowing several of the merchants’ claims to proceed on a class basis.Canadian Competition Act. Additional proposedpurported class action complaints have been filedwere commenced in Saskatchewan and Alberta with claims that largely mirror those in the British Columbia and Ontarioother suits. IfIn June 2017, Mastercard entered into a class settlement agreement to resolve all of the Canadian class action lawsuits are ultimately successful, negative decisions couldlitigation. The settlement, which requires Mastercard to make a cash payment and modify its “no surcharge” rule, has received court approval in each Canadian province. Objectors to the settlement have sought to appeal the approval orders. In 2017, Mastercard recorded a significant adverse impact on the revenueprovision for litigation of MasterCard’s Canadian customers and on MasterCard’s overall business in Canada and could result in substantial damage awards.$15 million related to this matter.
Europe. In July 2015, the European Commission (“EC”) issued a Statement of Objections related to MasterCard’sMastercard’s interregional interchange fees and central acquiring rulesrule within the European Economic Area.Area (the “EEA”). The Statement of Objections, which followsfollowed an investigation opened in 2013, includesincluded preliminary conclusions concerning the alleged anticompetitive effects of these practices. In December 2018, Mastercard announced the anticipated resolution of the EC’s investigation. With respect to interregional interchange fees, Mastercard made a settlement proposal whereby it would make changes to its interregional interchange fees. The European Commissionproposed settlement is subject to market testing by the EC before it is made binding in an EC decision. The EC has indicated it intendsannounced that Visa has entered into a parallel proposed settlement. In addition, with respect to seek fines if these conclusions are subsequently confirmed. AlthoughMastercard’s historic central acquiring rule, the StatementEC issued a negative decision in January 2019. The EC’s negative decision covers a period of Objectionstime of less than two years before the rule’s modification. The rule was modified in late 2015 to comply with the requirements of the EEA Interchange Fee Regulation. The decision does not quantifyrequire any modification of Mastercard’s current business practices but includes a fine of €571 million. Mastercard incurred a charge of $654 million in the levelfourth quarter of fines, it is possible that they could be substantial. MasterCard would not expect fines2018 in relation to be imposed if it agrees with the Commission to business practice changes that address the Commission’s concerns.this matter.
In the United Kingdom, beginning inSince May 2012, a number of United Kingdom (“U.K.”) retailers filed claims or threatened litigation against MasterCardMastercard seeking damages for alleged anti-competitive conduct with respect to MasterCard’sMastercard’s cross-border interchange fees and its U.K. and Ireland domestic interchange fees. More than 30 different retailers have filed claims or threatened litigation. Approximately 30 additional merchants havefees (the “U.K. Merchant claimants”). In addition, Mastercard, has faced similar filed or threatened litigation by merchants with respect to interchange rates in other countries in Europe (“Pan-European(the “Pan-European Merchant claimants”). AlthoughIn aggregate, the alleged damages claims from the U.K. and Pan-European Merchant claimants have not quantifiedwere in the full extentamount of their compensatory and punitiveapproximately £3 billion (approximately $4 billion as of December 31, 2018). Mastercard has resolved over £2 billion (approximately $3 billion as of December 31, 2018) of these damages their purported damages exceed $2 billion. Inclaims through settlement or judgment. Since June 2015, MasterCard entered into a settlementMastercard has recorded litigation provisions for settlements, judgments and legal fees relating to these claims, including charges of $237 million and $117 million in 2018 and 2016, respectively. There were no litigation charges relating to U.K. and Pan-European Merchant claimants in 2017. As detailed below, Mastercard continues to litigate with one of these merchants for $61 million, recorded as a provision for litigation settlement. MasterCardthe remaining U.K. and Pan-European Merchant claimants and it has submitted statements of defense to the remaining retailers’ claims disputing liability and damages. A trial fordamages claims.
In January 2017, Mastercard received a liability and damages for onejudgment in its favor on all significant matters in a separate action brought by ten of the U.K. merchantMerchant claimants. Three of the U.K. Merchant claimants appealed the judgment, and these appeals were
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
combined with Mastercard’s appeal of a 2016 judgment in favor of one U.K. merchant. In July 2018, the U.K. appellate court ruled against both Mastercard and Visa on two of the three legal issues being considered, concluding that U.K. interchange rates restricted competition and that they were not objectively necessary for the payment networks. The appellate court sent the cases commenced in January 2016. The merchant in that action has claimed compensatory damagesback to trial for reconsideration on the remaining issue concerning the “lawful” level of approximately $300 million,interchange. Mastercard and is also seeking costs and punitive damages. MasterCard has argued that there is no liability or damageVisa have been granted permission to appeal the appellate court ruling to the merchant. The trial is expectedU.K. Supreme Court. Mastercard expects the litigation process to conclude in Marchbe delayed pending the resolution of its appeal to the U.K. Supreme Court.
In September 2016, with a decision expected laterproposed collective action was filed in the year. United Kingdom on behalf of U.K. consumers seeking damages for intra-EEA and domestic U.K. interchange fees that were allegedly passed on to consumers by merchants between 1992 and 2008. The complaint, which seeks to leverage the European Commission’s 2007 decision on intra-EEA interchange fees, claims damages in an amount that exceeds £14 billion (approximately $18 billion as of December 31, 2018). In July 2017, the court denied the plaintiffs’ application for the case to proceed as a collective action. The plaintiffs were granted permission to appeal the denial of their collective action application and the appellate court heard an oral argument on the appeal in February 2019.
ATM Non-Discrimination Rule Surcharge Complaints
In October 2011, a trade association of independent Automated Teller Machine (“ATM”) operators and 13 independent ATM operators filed a complaint styled as a class action lawsuit in the U.S. District Court for the District of Columbia against both
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
MasterCard Mastercard and Visa (the “ATM Operators Complaint”). Plaintiffs seek to represent a class of non-bank operators of ATM terminals that operate ATM terminals in the United States with the discretion to determine the price of the ATM access fee for the terminals they operate. Plaintiffs allege that MasterCardMastercard and Visa have violated Section 1 of the Sherman Act by imposing rules that require ATM operators to charge non-discriminatory ATM surcharges for transactions processed over MasterCard’sMastercard’s and Visa’s respective networks that are not greater than the surcharge for transactions over other networks accepted at the same ATM. Plaintiffs seek both injunctive and monetary relief equal to treble the damages they claim to have sustained as a result of the alleged violations and their costs of suit, including attorneys’ fees. Plaintiffs have not quantified their damages although they allege that they expect damages to be in the tens of millions of dollars.
Subsequently, multiple related complaints were filed in the U.S. District Court for the District of Columbia alleging both federal antitrust and multiple state unfair competition, consumer protection and common law claims against MasterCardMastercard and Visa on behalf of putative classes of users of ATM services (the “ATM Consumer Complaints”). The claims in these actions largely mirror the allegations made in the ATM Operators Complaint, although these complaints seek damages on behalf of consumers of ATM services who pay allegedly inflated ATM fees at both bank and non-bank ATM operators as a result of the defendants’ ATM rules. Plaintiffs seek both injunctive and monetary relief equal to treble the damages they claim to have sustained as a result of the alleged violations and their costs of suit, including attorneys’ fees. Plaintiffs have not quantified their damages although they allege that they expect damages to be in the tens of millions of dollars.
In January 2012, the plaintiffs in the ATM Operators Complaint and the ATM Consumer Complaints filed amended class action complaints that largely mirror their prior complaints. In February 2013, the district court granted MasterCard’sMastercard’s motion to dismiss the complaints for failure to state a claim. On appeal, the Court of Appeals reversed the district court’s order in August 2015 and sent the case back for further proceedings.
U.S. Liability Shift Litigation
In March 2016, a proposed U.S. merchant class action complaint was filed in federal court in California alleging that Mastercard, Visa, American Express and Discover (the “Network Defendants”), EMVCo and a number of issuing banks (the “Bank Defendants”) engaged in a conspiracy to shift fraud liability for card present transactions from issuing banks to merchants not yet in compliance with the standards for EMV chip cards in the United States (the “EMV Liability Shift”), in violation of the Sherman Act and California law. Plaintiffs allege damages equal to the value of all chargebacks for which class members became liable as a result of the EMV Liability Shift on October 1, 2015. The plaintiffs seek treble damages, attorney’s fees and costs and an injunction against future violations of governing law, and the defendants have filed a motion to dismiss. In September 2016, the court denied the Network Defendants’ motion to dismiss the complaint, but granted such a motion for EMVCo and the Bank Defendants. In May 2017, the court transferred the case to New York so that discovery could be coordinated with the U.S. merchant class interchange litigation described above. The plaintiffs have filed a renewed motion for class certification, following the district court’s denial of their initial motion.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Telephone Consumer Protection Class Action
Mastercard is a defendant in a Telephone Consumer Protection Act (“TCPA”) class action pending in Florida. The plaintiffs are individuals and businesses who allege that approximately 381,000 unsolicited faxes were sent to them advertising a Mastercard co-brand card issued by First Arkansas Bank (“FAB”). The TCPA provides for uncapped statutory damages of $500 per fax. Mastercard has asserted various defenses to the claims, and has notified FAB of an indemnity claim that it has (which FAB has disputed). In June 2018, the court granted Mastercard’s motion to stay the proceedings until the Federal Communications Commission makes a decision on the application of the TCPA to online fax services.
Note 19.21. Settlement and Other Risk Management
MasterCard’sMastercard’s rules guarantee the settlement of many of the MasterCard, Cirrus and Maestro branded transactions between its issuers and acquirerscustomers (“settlement risk”). Settlement exposure is the outstanding settlement risk to customers under MasterCard’sMastercard’s rules due to the difference in timing between the payment transaction date and subsequent settlement. While the term and amount of the guarantee are unlimited, the duration of settlement exposure is short term and typically limited to a few days.
Gross settlement exposure is estimated using the average daily cardpayment volume during the quarterthree months ended December 31, 2018 multiplied by the estimated number of days to settle.of exposure. The Company has global risk management policies and procedures, which include risk standards, to provide a framework for managing the Company’s settlement risk. Customer-reported transaction datarisk and the transaction clearing data underlying the settlement exposure calculation may be revised in subsequent reporting periods.
exposure. In the event that MasterCard effects a payment on behalf of a failed customer, MasterCardMastercard may seek an assignmentpursue one or more remedies available under our rules to recover potential losses. Historically, the Company has experienced a low level of the underlying receivableslosses from customer failures.
As part of the failed customer. Customers may be charged for the amount of any settlement loss incurred during these ordinary course activities of the Company.
The Company’s global risk managementits policies, and procedures are aimed at managing the settlement exposure. These risk management procedures include interaction with the bank regulators of countries in which it operates, requiring customers to make adjustments to settlement processes, and requiring collateral from customers. MasterCardMastercard requires certain customers that are not in compliance with the Company’s risk standards in effect at the time of review to post collateral, typically in the form of cash, letters of credit, or guarantees. This requirement is based on management’sa review of the individual risk circumstances for each customer that is out of compliance. In addition to these amounts, MasterCard holds collateral to cover variability and future growth in customer programs. The Company may also hold collateral to pay merchants in the event of an acquirer failure. Although the Company is not contractually obligated under its rules to effect such payments to merchants, the Company may elect to do so to protect brand integrity. MasterCardcustomer. 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 exposure are revised as necessary.
The Company’s estimated settlement exposure from MasterCard, Cirrus and Maestro branded transactions was as follows:
|
| | | | | | | |
| | December 31,
2015 | | December 31, 2014 |
| | (in millions) |
| Gross settlement exposure | $ | 39,674 |
| | $ | 41,729 |
|
| Settlement exposure covered by collateral | (3,601 | ) | | (3,415 | ) |
| Net uncollateralized settlement exposure | $ | 36,073 |
| | $ | 38,314 |
|
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
General economic and political conditions in countries in which MasterCard operates affect the Company’s settlement risk. Many of the Company’s financial institution customers have been directly and adversely impacted by political instability and uncertain economic conditions. These conditions present increased risk that the Company may have to perform under its settlement guarantee. This risk could increase if political, economic and financial market conditions deteriorate further. The Company’s global risk management policies and procedures are revised and enhanced from time to time. Historically, the Company has experienced a low level of losses from financial institution failures. |
| | | | | | | |
| | December 31,
2018 | | December 31, 2017 |
| | (in millions) |
| Gross settlement exposure | $ | 49,666 |
| | $ | 47,002 |
|
| Collateral held for settlement exposure | (4,711 | ) | | (4,360 | ) |
| Net uncollateralized settlement exposure | $ | 44,955 |
| | $ | 42,642 |
|
MasterCardMastercard also provides guarantees to customers and certain other counterparties indemnifying them from losses stemming from failures of third parties to perform duties. This includes guarantees of MasterCard-brandedMastercard-branded travelers cheques issued, but not yet cashed of $420$377 million and $465395 million at December 31, 20152018 and 2014,2017, respectively, of which $332$297 million and $370313 million at December 31, 20152018 and 2014,2017, respectively, is mitigated by collateral arrangements. In addition, the Company enters into business agreements in the ordinary course of business under which the Company agrees to indemnify third parties against damages, losses and expenses incurred in connection with legal and other proceedings arising from relationships or transactions with the Company. Certain indemnifications do not provide a stated maximum exposure. As the extent of the Company’s obligations under these agreements depends entirely upon the occurrence of future events, the Company’s potential future liability under these agreements is not determinable. Historically, payments made by the Company under these types of contractual arrangements have not been material.
Note 20.22. Foreign Exchange Risk Management
The Company monitors and manages its foreign currency exposures as part of its overall risk management program which focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results. A primary objective of the Company’s risk management strategies is to reduce the financial impact that may arise from volatility in foreign currency exchange rates principally through the use of both foreign currency derivative contracts (Derivatives) and foreign currency denominated debt (Net Investment Hedge).
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Derivatives
The Company enters into foreign currency derivative contracts to manage risk associated with anticipated receipts and disbursements which are either transacted in a non-functional currency or valued based on a currencycurrencies other than itsthe functional currency.currencies of the entity. The Company may also enter into foreign currency derivative contracts to offset possible changes in value due to foreign exchange fluctuations of earnings, assets and liabilities denominated in currencies other than its functional currency.liabilities. The objective of these activities is to reduce the Company’s exposure to gains and losses resulting from fluctuations of foreign currencies against its functional currencies.
The Company does not designate foreign currency derivatives as hedging instruments pursuant to the accounting guidance for derivative instruments and hedging activities. The Company records the change in the estimated fair value of the outstanding derivatives at the end of the reporting period on its consolidated balance sheet and consolidated statement of operations.
As of December 31, 20152018, and 2017, the majority of derivative contracts to hedge foreign currency fluctuations had been entered into with customers of MasterCard. MasterCard’sMastercard. Mastercard’s derivative contracts are summarized below:
| | | | December 31, 2015 | | December 31, 2014 | December 31, 2018 | | December 31, 2017 |
| | Notional | | Estimated Fair Value | | Notional | | Estimated Fair Value | Notional | | Estimated Fair Value | | Notional | | Estimated Fair Value |
| | (in millions) | (in millions) |
| Commitments to purchase foreign currency | $ | 232 |
| | $ | 1 |
| | $ | 47 |
| | $ | 4 |
| $ | 34 |
| | $ | (1 | ) | | $ | 27 |
| | $ | — |
|
| Commitments to sell foreign currency | 1,430 |
| | 12 |
| | 614 |
| | 27 |
| 1,066 |
| | 26 |
| | 968 |
| | (26 | ) |
| Options to sell foreign currency | 44 |
| | 1 |
| | — |
| | — |
| 25 |
| | 4 |
| | 27 |
| | 2 |
|
| Balance sheet location: | | | | | | | | |
| Balance sheet location | | | | | | | | |
Accounts receivable 1 | | | $ | 23 |
| | | | $ | 35 |
| | | $ | — |
| | | | $ | 6 |
|
Prepaid expenses and other current assets 1 | | | | 35 |
| | | | — |
|
Other current liabilities 1 | | | (9 | ) | | | | (4 | ) | | | (6 | ) | | | | (30 | ) |
1 The fair values of derivative contracts are presented on a gross basis on the balance sheet and are subject to enforceable master netting arrangements, which contain various netting and setoff provisions.
The amount of gain (loss) recognized in incomeon the consolidated statement of operations for the contracts to purchase and sell foreign currency derivative contracts is summarized below:
| | | | Year Ended December 31, | Year Ended December 31, |
| | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| | (in millions) | (in millions) |
| Foreign currency derivative contracts | | | | | | | | | | |
| General and administrative | $ | 51 |
| | $ | (78 | ) | | $ | 48 |
| $ | 53 |
| | $ | (75 | ) | | $ | (6 | ) |
| Net revenue | — |
| | — |
| | 4 |
| |
| Total | $ | 51 |
| | $ | (78 | ) | | $ | 52 |
| |
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The fair value of the foreign currency derivative contracts generally reflects the estimated amounts that the Company would receive (or pay), on a pre-tax basis, to terminate the contracts at the reporting date based on broker quotes for the same or similar instruments.contracts. The terms of the foreign currency derivative contracts are generally less than 18 months. The Company had no deferred gains or losses related to foreign exchange contracts in accumulated other comprehensive income as of December 31, 20152018 and 20142017, as therethese contracts were no derivative contractsnot accounted for under hedge accounting.
The Company’s derivative financial instruments are subject to both market and counterparty credit risk. Market risk is the potential for economic losses to be incurred on market risk of loss due to the potential changesensitive instruments arising from adverse changes in an instrument’s value caused by fluctuations inmarket factors such as foreign currency exchange rates, interest rates and other variables related to currency exchange rates.variables. The effect of a hypothetical 10% adverse change in foreign currencyU.S. dollar forward rates could result in a fair value loss of approximately $128$113 million on the Company’s foreign currency derivative contracts outstanding at December 31, 20152018. Counterparty credit risk is the risk of loss due to failure of the counterparty to perform its obligations in accordance with contractual terms. To mitigate counterparty credit risk, the Company enters into derivative contracts with a diversified group of selected financial institutions based upon their credit ratings and other factors. Generally, the Company does not obtain collateral related to derivatives because of the high credit ratings of the counterparties.
Net investment hedgeInvestment Hedge
The Company uses foreign currency denominated debt to hedge a portion of its net investment in foreign operations against adverse movements in exchange rates, with changes in the value of the debt recorded within currency translation adjustment in accumulated other comprehensive income (loss). The Company monitors and manages those exposures as part of its overall risk management program which focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on our operating results. A principal objective of the Company’s risk management strategies is to reduce significant, unanticipated earnings fluctuations that may arise from volatility in foreign currency exchange rates principally through the use of derivative instruments. During the fourth quarter ofIn 2015, the Company designated its €1.65 billion euro-denominated debt as a net investment hedge for a portion of its net investment in European foreign operations. As of December 31, 20152018, the Company had a net foreign currency transaction pre-tax loss of $40$120 million in accumulated other comprehensive income (loss) associated with hedging activity. There was no ineffectiveness in the current period.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 21.23. Segment Reporting
MasterCardMastercard has concluded it has one operating and reportable segment, “Payment Solutions.” MasterCard’sMastercard’s President and Chief Executive Officer has been identified as the chief operating decision-maker. All of the Company’s activities are interrelated, and each activity is dependent upon and supportive of the other. Accordingly, all significant operating decisions are based upon analysis of MasterCardMastercard at the consolidated level.
Revenue by geographic market is based on the location of the Company’s customer that issued the card, as well as the location of the merchant acquirer where the card is being used. Revenue generated in the U.S. was approximately 39%33% of nettotal revenue in 2015, 20142018, 35% in 2017 and 2013.38% in 2016. No individual country, other than the U.S., generated more than 10% of total revenue in those periods.
MasterCardMastercard did not have any oneindividual customer that generated greater than 10% of net revenue in 2015, 20142018, 2017 or 2013.2016. The following table reflects the geographical location of the Company’s property, plant and equipment, net, as of December 31:
| | | | 2015 | | 2014 | | 2013 | 2018 | | 2017 | | 2016 |
| | (in millions) | (in millions) |
| United States | $ | 471 |
| | $ | 450 |
| | $ | 410 |
| $ | 613 |
| | $ | 572 |
| | $ | 504 |
|
| Other countries | 204 |
| | 165 |
| | 116 |
| 308 |
| | 257 |
| | 229 |
|
| Total | $ | 675 |
| | $ | 615 |
| | $ | 526 |
| $ | 921 |
| | $ | 829 |
| | $ | 733 |
|
MASTERCARD INCORPORATED
SUMMARY OF QUARTERLY DATA (Unaudited)
| | | | 2015 Quarter Ended | | | 2018 Quarter Ended | | |
| | March 31 | | June 30 | | September 30 | | December 31 | | 2015 Total | March 31 | | June 30 | | September 30 | | December 31 | | 2018 Total |
| | (in millions, except per share data) | (in millions, except per share data) |
| Net revenue | $ | 2,230 |
| | $ | 2,390 |
| | $ | 2,530 |
| | $ | 2,517 |
| | $ | 9,667 |
| $ | 3,580 |
| | $ | 3,665 |
| | $ | 3,898 |
| | $ | 3,807 |
| | $ | 14,950 |
|
| Operating income | 1,351 |
| | 1,251 |
| | 1,369 |
| | 1,107 |
| | 5,078 |
| 1,825 |
| | 1,936 |
| | 2,287 |
| | 1,234 |
| | 7,282 |
|
| Net income | 1,020 |
| | 921 |
| | 977 |
| | 890 |
| | 3,808 |
| 1,492 |
| | 1,569 |
| | 1,899 |
| | 899 |
| | 5,859 |
|
| Basic earnings per share | $ | 0.89 |
| | $ | 0.81 |
| | $ | 0.86 |
| | $ | 0.79 |
| | $ | 3.36 |
| $ | 1.42 |
| | $ | 1.50 |
| | $ | 1.83 |
| | $ | 0.87 |
| | $ | 5.63 |
|
| Basic weighted-average shares outstanding | 1,148 |
| | 1,138 |
| | 1,130 |
| | 1,121 |
| | 1,134 |
| 1,051 |
| | 1,043 |
| | 1,037 |
| | 1,032 |
| | 1,041 |
|
| Diluted earnings per share | $ | 0.89 |
| | $ | 0.81 |
| | $ | 0.86 |
| | $ | 0.79 |
| | $ | 3.35 |
| $ | 1.41 |
| | $ | 1.50 |
| | $ | 1.82 |
| | $ | 0.87 |
| | $ | 5.60 |
|
| Diluted weighted-average shares outstanding | 1,152 |
| | 1,141 |
| | 1,133 |
| | 1,124 |
| | 1,137 |
| 1,057 |
| | 1,049 |
| | 1,043 |
| | 1,038 |
| | 1,047 |
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | 2014 Quarter Ended | | | 2017 Quarter Ended | | |
| | March 31 | | June 30 | | September 30 | | December 31 | | 2014 Total | March 31 | | June 30 | | September 30 | | December 31 | | 2017 Total |
| | (in millions, except per share data) | (in millions, except per share data) |
| Net revenue | $ | 2,172 |
| | $ | 2,368 |
| | $ | 2,490 |
| | $ | 2,411 |
| | $ | 9,441 |
| $ | 2,734 |
| | $ | 3,053 |
| | $ | 3,398 |
| | $ | 3,312 |
| | $ | 12,497 |
|
| Operating income | 1,285 |
| | 1,383 |
| | 1,420 |
| | 1,018 |
| | 5,106 |
| 1,506 |
| | 1,653 |
| | 1,941 |
| | 1,522 |
| | 6,622 |
|
| Net income | 870 |
| | 931 |
| | 1,015 |
| | 801 |
| | 3,617 |
| 1,081 |
| | 1,177 |
| | 1,430 |
| | 227 |
| | 3,915 |
|
| Basic earnings per share | $ | 0.73 |
| | $ | 0.80 |
| | $ | 0.88 |
| | $ | 0.70 |
| | $ | 3.11 |
| $ | 1.00 |
| | $ | 1.10 |
| | $ | 1.34 |
| | $ | 0.21 |
| | $ | 3.67 |
|
| Basic weighted-average shares outstanding | 1,185 |
| | 1,165 |
| | 1,157 |
| | 1,153 |
| | 1,165 |
| 1,078 |
| | 1,070 |
| | 1,063 |
| | 1,057 |
| | 1,067 |
|
| Diluted earnings per share | $ | 0.73 |
| | $ | 0.80 |
| | $ | 0.87 |
| | $ | 0.69 |
| | $ | 3.10 |
| $ | 1.00 |
| | $ | 1.10 |
| | $ | 1.34 |
| | $ | 0.21 |
| | $ | 3.65 |
|
| Diluted weighted-average shares outstanding | 1,189 |
| | 1,169 |
| | 1,160 |
| | 1,157 |
| | 1,169 |
| 1,082 |
| | 1,075 |
| | 1,068 |
| | 1,063 |
| | 1,072 |
|
*Note: Tables may not sum due to rounding.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to management, including our President and Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding disclosure. The President and Chief Executive Officer and the Chief Financial Officer, with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of December 31, 20152018 and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.
Internal Control over Financial Reporting
In addition, MasterCardMastercard Incorporated’s management assessed the effectiveness of MasterCard’sMastercard’s internal control over financial reporting as of December 31, 2015.2018. Management’s report on internal control over financial reporting is included in Part II, Item 8. PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the consolidated financial statements included in this Annual Report on Form 10-K and, as part of their audit, has issued their report, included herein, on the effectiveness of our internal control over financial reporting.
Changes in Internal Control over Financial Reporting
There was no change in MasterCard’sMastercard’s internal control over financial reporting that occurred during the three months ended December 31, 20152018 that has materially affected, or is reasonably likely to materially affect, MasterCard’sMastercard’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, we hereby incorporate by reference herein the disclosure contained in Exhibit 99.1 of this Report.
