UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



x☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September~~June 30, ~~2018~~2019



¨☐	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)



Delaware		13-4172551
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification Number)

2000 Purchase Street		10577
Purchase,	NY	(Zip Code)
(Address of principal executive offices)

~~(914)~~ (914) 249-2000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange of which registered
Class A Common Stock	MA	New York Stock Exchange
1.100% Notes due 2022	MA22	New York Stock Exchange
2.100% Notes due 2027	MA27	New York Stock Exchange
2.500% Notes due 2030	MA30	New York Stock Exchange

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. Yesx☒ No o☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesx☒ No o☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):



Large accelerated filer	x☒	Accelerated filer	o☐

Non-accelerated filer	o ☐	Smaller reporting company	o☐

		Emerging growth company	o☐

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 o☐ No x☒

As of ~~October~~July 25, ~~2018,~~2019, there were ~~1,020,931,497~~1,003,110,553 shares outstanding of the registrant’s Class A common stock, par value $0.0001 per share; and ~~11,862,884~~11,448,914 shares outstanding of the registrant’s Class B common stock, par value $0.0001 per share.

MASTERCARD INCORPORATED

FORM 10-Q

TABLE OF CONTENTS



	Page
PART I — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	4
~~Consolidated Balance Sheet — September 30, 2018 and December 31, 2017~~	4
~~Consolidated Statement of Operations — Three and Nine Months Ended September 30, 2018 and 2017~~	5
Consolidated Balance Sheet — June 30, 2019 and December 31, 2018	5
Consolidated Statement of Operations — Three and Six Months Ended June 30, 2019 and 2018	6
Consolidated Statement of Comprehensive Income — Three and ~~Nine~~Six Months Ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~	6
~~Consolidated Statement of Changes in Equity — Nine Months Ended September 30,~~ 2018	7
Consolidated Statement of ~~Cash Flows~~Changes in Equity — ~~Nine~~Three and Six Months Ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018	8
Consolidated Statement of Cash Flows — Six Months Ended June 30, 2019 and 2018	10
Notes to Consolidated Financial Statements	911
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	3532
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	5044
ITEM 4. CONTROLS AND PROCEDURES	50
~~REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM~~	5244

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS	5345
ITEM 1A. RISK FACTORS	5345
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	5345
ITEM 5. OTHER INFORMATION	5345
ITEM 6. EXHIBITS	5345
SIGNATURES	5547

Table of Contents

In this Report on Form 10-Q (“Report”), references to the “Company,” “Mastercard,” “we,” “us” or “our” refer to the ~~Mastercard brand generally, and to the~~ business conducted by Mastercard Incorporated and its consolidated subsidiaries, including our operating subsidiary, Mastercard 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 Mastercard or on its behalf, including, but not limited to, the following factors:

~~direct~~ regulation ofdirectly related to the payments industry (including regulatory, legislative and litigation 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

regulation ~~to which we are~~of privacy, data protection, security and the digital economy

regulation that directly or indirectly ~~subject~~applies to us based on our participation in the global payments industry (including anti-money laundering, ~~and~~counter terrorist financing, economic sanctions ~~financial sector oversight, real-time~~and anti-corruption; account-based payment ~~systems,~~systems; issuer practice ~~regulation~~regulation; and regulation of internet and digital transactions)

the impact of changes in tax laws, ~~including the recent U.S. tax legislation,~~as well as regulations and interpretations ~~thereof,~~of such laws or challenges to our tax positions

~~regulation of privacy, data protection and security~~

potential or incurred liability and limitations on business ~~resulting from~~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

the challenges relating to operating anreal-time account-based payment system ~~in addition to our core network~~ and to working with new customers and end users

the impact of information security 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 merchants and governments

exposure to loss or illiquidity due to ~~settlement guarantees and~~our role as guarantor, as well as other ~~significant third-party~~contractual obligations

the impact of global economic, political, financial and ~~political~~societal events and conditions (including global financial market activity, declines in cross-border activity, negative trends in consumer spending, the effect of adverse currency fluctuation and the effects of the U.K.’s proposed withdrawal from the E.U.)

reputational impact, including impact related to brand perception

the inability to attract, hire and retain a highly qualified and diverse workforce, or maintain our corporate culture

issues related to acquisition integration, strategic investments and entry into new businesses

issues related to our Class A common stock and corporate governance structure

Please see a complete discussion of these risk factors in Part I, Item 1A - Risk Factors of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. 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.

Table of Contents

PART I — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MASTERCARD INCORPORATED

CONSOLIDATED BALANCE SHEET

(UNAUDITED)


	September 30, 2018			December 31, 2017			June 30, 2019			December 31, 2018
	(in millions, except per share data)						(in millions, except per share data)
ASSETS
Cash and cash equivalents	$	6,871		$	5,933		$	5,691		$	6,682
Restricted cash for litigation settlement	550			546			662			553
Investments	1,622			1,849			809			1,696
Accounts receivable	2,277			1,969			2,607			2,276
Settlement due from customers	1,335			1,375			1,549			2,452
Restricted security deposits held for customers	1,034			1,085			1,061			1,080
Prepaid expenses and other current assets	1,375			1,040			1,786			1,432
Total Current Assets	15,064			13,797			14,165			16,171
Property, plant and equipment, net of accumulated depreciation of $813 and $714, respectively	876			829
Property, equipment and right-of-use assets, net of accumulated depreciation of $970 and $847, respectively							1,348			921
Deferred income taxes	502			250			478			570
Goodwill	2,950			3,035			3,524			2,904
Other intangible assets, net of accumulated amortization of $1,198 and $1,157, respectively	1,023			1,120
Other intangible assets, net of accumulated amortization of $1,250 and $1,175, respectively							1,232			991
Other assets	2,925			2,298			3,984			3,303
Total Assets	$	23,340		$	21,329		$	24,731		$	24,860
LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS AND EQUITY
Accounts payable	$	382		$	933		$	432		$	537
Settlement due to customers	1,155			1,343			1,330			2,189
Restricted security deposits held for customers	1,034			1,085			1,061			1,080
Accrued litigation	920			709			935			1,591
Accrued expenses	4,745			3,931			4,752			4,747
Current portion of long-term debt	500			—			—			500
Other current liabilities	973			792			987			949
Total Current Liabilities	9,709			8,793			9,497			11,593
Long-term debt	5,858			5,424			7,806			5,834
Deferred income taxes	50			106			95			67
Other liabilities	1,856			1,438			2,224			1,877
Total Liabilities	17,473			15,761			19,622			19,371

Commitments and Contingencies

Redeemable Non-controlling Interests	71			71			74			71

Stockholders’ Equity
Class A common stock, $0.0001 par value; authorized 3,000 shares, 1,386 and 1,382 shares issued and 1,023 and 1,040 outstanding, respectively	—			—
Class B common stock, $0.0001 par value; authorized 1,200 shares, 12 and 14 issued and outstanding, respectively	—			—
Class A common stock, $0.0001 par value; authorized 3,000 shares, 1,389 and 1,387 shares issued and 1,005 and 1,019 outstanding, respectively							—			—
Class B common stock, $0.0001 par value; authorized 1,200 shares, 11 and 12 issued and outstanding, respectively							—			—
Additional paid-in-capital	4,526			4,365			4,675			4,580
Class A treasury stock, at cost, 364 and 342 shares, respectively	(24,807		)	(20,764		)
Class A treasury stock, at cost, 385 and 368 shares, respectively							(29,454		)	(25,750		)
Retained earnings	26,726			22,364			30,517			27,283
Accumulated other comprehensive income (loss)	(670		)	(497		)	(730		)	(718		)
Total Stockholders’ Equity	5,775			5,468			5,008			5,395
Non-controlling interests	21			29			27			23
Total Equity	5,796			5,497			5,035			5,418
Total Liabilities, Redeemable Non-controlling Interests and Equity	$	23,340		$	21,329		$	24,731		$	24,860

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

MASTERCARD INCORPORATED

CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
	(in millions, except per share data)												(in millions, except per share data)
Net Revenue	$	3,898		$	3,398		$	11,143		$	9,185		$	4,113		$	3,665		$	8,002		$	7,245
Operating Expenses
General and administrative	1,236			1,136			3,684			3,162			1,369			1,184			2,736			2,505
Advertising and marketing	235			203			694			587			225			205			417			402
Depreciation and amortization	111			118			346			321			122			115			239			235
Provision for litigation settlements	29			—			371			15
Provision for litigation													—			225			—			342
Total operating expenses	1,611			1,457			5,095			4,085			1,716			1,729			3,392			3,484
Operating income	2,287			1,941			6,048			5,100			2,397			1,936			4,610			3,761
Other Income (Expense)
Investment income	31			15			79			44			24			31			51			48
Gains (losses) on equity investments, net													143			—			148			—
Interest expense	(48		)	(35		)	(139		)	(113		)	(51		)	(48		)	(97		)	(91		)
Other income (expense), net	(6		)	11			1			7			6			3			10			7
Total other income (expense)	(23		)	(9		)	(59		)	(62		)	122			(14		)	112			(36		)
Income before income taxes	2,264			1,932			5,989			5,038			2,519			1,922			4,722			3,725
Income tax expense	365			502			1,029			1,350			471			353			812			664
Net Income	$	1,899		$	1,430		$	4,960		$	3,688		$	2,048		$	1,569		$	3,910		$	3,061

Basic Earnings per Share	$	1.83		$	1.34		$	4.75		$	3.45		$	2.01		$	1.50		$	3.82		$	2.92
Basic Weighted-Average Shares Outstanding	1,037			1,063			1,044			1,071
Basic weighted-average shares outstanding													1,020			1,043			1,023			1,047
Diluted Earnings per Share	$	1.82		$	1.34		$	4.73		$	3.43		$	2.00		$	1.50		$	3.80		$	2.91
Diluted Weighted-Average Shares Outstanding	1,043			1,068			1,050			1,075
Diluted weighted-average shares outstanding													1,025			1,049			1,028			1,053

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

MASTERCARD INCORPORATED

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017			2019			2018			2019			2018
	(in millions)												(in millions)
Net Income	$	1,899		$	1,430		$	4,960		$	3,688		$	2,048		$	1,569		$	3,910		$	3,061
Other comprehensive income (loss):
Foreign currency translation adjustments	(42		)	199			(233		)	515			(34		)	(352		)	(23		)	(191		)
Income tax effect	4			(1		)	9			—			—			7			3			5
Foreign currency translation adjustments, net of income tax effect	(38		)	198			(224		)	515			(34		)	(345		)	(20		)	(186		)

Translation adjustments on net investment hedge	2			(65		)	70			(207		)	(28		)	113			8			68
Income tax effect	(1		)	23			(16		)	75			6			(27		)	(2		)	(15		)
Translation adjustments on net investment hedge, net of income tax effect	1			(42		)	54			(132		)	(22		)	86			6			53

Defined benefit pension and other postretirement plans	—			—			(1		)	(2		)	(1		)	—			(1		)	(1		)
Income tax effect	—			—			—			1			—			—			—			—
Defined benefit pension and other postretirement plans, net of income tax effect	—			—			(1		)	(1		)	(1		)	—			(1		)	(1		)

Investment securities available-for-sale	(1		)	1			(2		)	(1		)	—			—			4			(1		)
Income tax effect	—			—			—			1			—			—			(1		)	—
Investment securities available-for-sale, net of income tax effect	(1		)	1			(2		)	—			—			—			3			(1		)

Other comprehensive income (loss), net of tax	(38		)	157			(173		)	382			(57		)	(259		)	(12		)	(135		)
Comprehensive Income	$	1,861		$	1,587		$	4,787		$	4,070		$	1,991		$	1,310		$	3,898		$	2,926

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

MASTERCARD INCORPORATED

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(UNAUDITED)

Stockholders’ Equity
Common Stock Additional
Paid-In
Capital Class A
Treasury
Stock
Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Non-
Controlling
Interests
Total Equity
Class A Class B
(in millions, except per share data)
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 —
—
—
—
4,960
—
—
4,960
Activity related to non-controlling interests —
—
—
—
—
—
(8 ) (8 )
Other comprehensive income (loss), net of tax —
—
—
—
—
(173 ) —
(173 )
Cash dividends declared on Class A and Class B common stock, $0.75 per share —
—
—
—
(781 ) —
—
(781 )
Purchases of treasury stock —
—
—
(4,048 ) —
—
—
(4,048 )
Share-based payments —
—
161
5
—
—
—
166
Balance at September 30, 2018 $ —
$ —
$ 4,526
$ (24,807 ) $ 26,726
$ (670 ) $ 21
$ 5,796



	Stockholders’ Equity
	Common Stock				Additional Paid-In Capital			Class A Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Non- Controlling Interests			Total Equity
	Class A		Class B		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)
Balance at December 31, 2018	$	—	$	—	$	4,580		$	(25,750	)	$	27,283		$	(718	)	$	23		$	5,418
Net income	—		—		—			—			1,862			—			—			1,862
Activity from non-controlling interests	—		—		—			—			—			—			(1		)	(1		)
Other comprehensive income, net of tax	—		—		—			—			—			45			—			45
Cash dividends declared on Class A and Class B common stock, $0.33 per share	—		—		—			—			(339		)	—			—			(339		)
Purchases of treasury stock	—		—		—			(1,790		)	—			—			—			(1,790		)
Share-based payments	—		—		(11		)	6			—			—			—			(5		)
Balance at March 31, 2019	—		—		4,569			(27,534		)	28,806			(673		)	22			5,190
Net income	—		—		—			—			2,048			—			—			2,048
Activity from non-controlling interests	—		—		—			—			—			—			5			5
Other comprehensive income, net of tax	—		—		—			—			—			(57		)	—			(57		)
Cash dividends declared on Class A and Class B common stock, $0.33 per share	—		—		—			—			(337		)	—			—			(337		)
Purchases of treasury stock	—		—		—			(1,920		)	—			—			—			(1,920		)
Share-based payments	—		—		106			—			—			—			—			106
Balance at June 30, 2019	$	—	$	—	$	4,675		$	(29,454	)	$	30,517		$	(730	)	$	27		$	5,035

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

MASTERCARD INCORPORATED

CONSOLIDATED STATEMENT OF ~~CASH FLOWS~~CHANGES IN EQUITY - (Continued)

(UNAUDITED)

Nine Months Ended September 30,
2018 2017
(in millions)
Operating Activities
Net income $ 4,960
$ 3,688
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of customer and merchant incentives 885
761
Depreciation and amortization 346
321
Share-based compensation 153
137
Deferred income taxes (209 ) (56 )
Other 11
22
Changes in operating assets and liabilities:
Accounts receivable (317 ) (321 )
Settlement due from customers 39
(105 )
Prepaid expenses (1,174 ) (1,286 )
Accrued litigation and legal settlements 202
(12 )
Restricted security deposits held for customers (51 ) 35
Accounts payable (44 ) 85
Settlement due to customers (186 ) 54
Accrued expenses 461
380
Net change in other assets and liabilities (185 ) 138
Net cash provided by operating activities 4,891
3,841
Investing Activities
Purchases of investment securities available-for-sale (953 ) (531 )
Purchases of investments held-to-maturity (400 ) (925 )
Proceeds from sales of investment securities available-for-sale 491
153
Proceeds from maturities of investment securities available-for-sale 291
371
Proceeds from maturities of investments held-to-maturity 762
872
Purchases of property, plant and equipment (255 ) (214 )
Capitalized software (126 ) (87 )
Acquisition of businesses, net of cash acquired —
(1,175 )
Investment in nonmarketable equity investments (32 ) (128 )
Other investing activities (15 ) 41
Net cash used in investing activities (237 ) (1,623 )
Financing Activities
Purchases of treasury stock (4,045 ) (2,731 )
Dividends paid (785 ) (709 )
Proceeds from debt 991
—
Payment of debt —
(64 )
Tax withholdings related to share-based payments (79 ) (46 )
Cash proceeds from exercise of stock options 92
48
Other financing activities (7 ) 8
Net cash used in financing activities (3,833 ) (3,494 )
Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents 65
194
Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents 886
(1,082 )
Cash, cash equivalents, restricted cash and restricted cash equivalents - beginning of period 7,592
8,273
Cash, cash equivalents, restricted cash and restricted cash equivalents - end of period $ 8,478
$ 7,191



	Stockholders’ Equity
	Common Stock				Additional Paid-In Capital		Class A Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Non- Controlling Interests			Total Equity
	Class A		Class B		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)

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	—		—		—		—			1,492			—			—			1,492
Activity related to non-controlling interests	—		—		—		—			—			—			(1		)	(1		)
Other comprehensive income, net of tax	—		—		—		—			—			124			—			124
Cash dividends declared on Class A and Class B common stock, $0.25 per share	—		—		—		—			(262		)	—			—			(262		)
Purchases of treasury stock	—		—		—		(1,383		)	—			—			—			(1,383		)
Share-based payments	—		—		2		4			—			—			—			6
Balance at March 31, 2018	—		—		4,367		(22,143		)	23,777			(373		)	28			5,656
Net income	—		—		—		—			1,569			—			—			1,569
Activity from non-controlling interests	—		—		—		—			—			—			(6		)	(6		)
Other comprehensive income, net of tax	—		—		—		—			—			(259		)	—			(259		)
Cash dividends declared on Class A and Class B common stock, $0.25 per share	—		—		—		—			(260		)	—			—			(260		)
Purchases of treasury stock	—		—		—		(1,507		)	—			—			—			(1,507		)
Share-based payments	—		—		86		—			—			—			—			86
Balance at June 30, 2018	$	—	$	—	$	4,453	$	(23,650	)	$	25,086		$	(632	)	$	22		$	5,279

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

MASTERCARD INCORPORATED

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)



	Six Months Ended June 30,
	2019			2018
	(in millions)
Operating Activities
Net income	$	3,910		$	3,061
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of customer and merchant incentives	623			578
Depreciation and amortization	239			235
(Gains) losses on equity investments, net	(148		)	—
Share-based compensation	130			98
Deferred income taxes	65			(107		)
Other	12			5
Changes in operating assets and liabilities:
Accounts receivable	(327		)	(195		)
Settlement due from customers	903			(158		)
Prepaid expenses	(1,015		)	(843		)
Accrued litigation and legal settlements	(641		)	231
Restricted security deposits held for customers	(19		)	(93		)
Accounts payable	(105		)	(86		)
Settlement due to customers	(858		)	(109		)
Accrued expenses	(13		)	81
Net change in other assets and liabilities	92			(174		)
Net cash provided by operating activities	2,848			2,524
Investing Activities
Purchases of investment securities available-for-sale	(386		)	(705		)
Purchases of investments held-to-maturity	(124		)	(242		)
Proceeds from sales of investment securities available-for-sale	935			412
Proceeds from maturities of investment securities available-for-sale	219			171
Proceeds from maturities of investments held-to-maturity	237			646
Purchases of property and equipment	(174		)	(172		)
Capitalized software	(150		)	(79		)
Purchases of equity investments	(386		)	(21		)
Acquisition of businesses, net of cash acquired	(723		)	—
Other investing activities	(2		)	(16		)
Net cash used in investing activities	(554		)	(6		)
Financing Activities
Purchases of treasury stock	(3,741		)	(2,881		)
Dividends paid	(677		)	(525		)
Proceeds from debt	1,980			991
Payment of debt	(500		)	—
Contingent consideration paid	(199		)	—
Tax withholdings related to share-based payments	(120		)	(73		)
Cash proceeds from exercise of stock options	91			67
Other financing activities	6			5
Net cash used in financing activities	(3,160		)	(2,416		)
Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents	(26		)	74
Net (decrease) increase in cash, cash equivalents, restricted cash and restricted cash equivalents	(892		)	176
Cash, cash equivalents, restricted cash and restricted cash equivalents - beginning of period	8,337			7,592
Cash, cash equivalents, restricted cash and restricted cash equivalents - end of period	$	7,445		$	7,768

The accompanying notes are an integral part of these consolidated financial statements.

Table of Contents

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. 1. Summary of Significant Accounting Policies

Organization

Mastercard Incorporated and its consolidated subsidiaries, including Mastercard International Incorporated (“Mastercard International” and together with Mastercard Incorporated, “Mastercard” or the “Company”), 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.

Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of Mastercard and its majority-owned and controlled entities, including any variable interest entities (“VIEs”) for which the Company is the primary beneficiary. At ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, there were no significant VIEs which required consolidation. The Company consolidates acquisitions as of the date in which the Company has obtained a controlling financial interest. Intercompany transactions and balances have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the ~~2018~~2019 presentation. The Company follows accounting principles generally accepted in the United States of America (“GAAP”).

The balance sheet as of December 31, ~~2017~~2018 was derived from the audited consolidated financial statements as of December 31, ~~2017.~~2018. The consolidated financial statements for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018 and as of ~~September~~June 30, ~~2018~~2019 are unaudited, and in the opinion of management, include all normal recurring adjustments that are necessary to present fairly the results for interim periods. The results of operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 are not necessarily indicative of the results to be expected for the full year.

The accompanying unaudited consolidated financial statements are presented in accordance with the U.S. Securities and Exchange Commission (“SEC”) requirements for Quarterly Reports on Form 10-Q. Reference should be made to the Mastercard Incorporated Annual Report on Form 10-K for the year ended December 31, ~~2017~~2018 for additional disclosures, including a summary of the Company’s significant accounting policies.

Non-controlling interest amounts are included in the consolidated statement of operations within other income (expense). For the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, activity from non-controlling interests was not material to the respective period results.

Recently adopted accounting pronouncements

Comprehensive income - In February 2018, the Financial Accounting Standards Board (the “FASB”) issued accounting guidance that allows for a one-time reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from U.S. tax reform. The Company adopted this guidance effective January 1, 2019, electing to retain the stranded tax effects in accumulated other comprehensive income (loss). The adoption did not result in a material impact on the Company’s consolidated financial statements.

Leases - In February 2016, the FASB issued accounting guidance that changed how companies account for and present lease arrangements. This guidance requires companies to recognize lease assets and liabilities for both financing and operating leases on the consolidated balance sheet. The Company adopted this guidance effective January 1, 2019, under the modified retrospective transition method with the available practical expedients.

Table of Contents

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

The following table summarizes the impact of the changes made to the January 1, 2019 consolidated balance sheet for the adoption of the new accounting standard pertaining to leases. The prior periods have not been restated and have been reported under the accounting standard in effect for those periods.



	Balance at December 31, 2018		Impact of lease standard		Balance at January 1, 2019
	(in millions)
Assets
Property, equipment and right-of-use assets, net	$	921	$	375	$	1,296
Liabilities
Other current liabilities	949		72		1,021
Other liabilities	1,877		303		2,180

For a more detailed discussion on lease arrangements, refer to Note 8 (Property, Equipment and Right-of-Use Assets).

Recent ~~Accounting Pronouncements~~accounting pronouncements not yet adopted

Implementation costs incurred in a hosting arrangement that is a service contract - In August 2018, the ~~Financial Accounting Standards Board (the “FASB”)~~FASB issued accounting guidance which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for periods beginning after December 15, ~~2019 and early adoption is permitted.~~2019. Companies are required to adopt this guidance either retrospectively or by prospectively applying the guidance to all implementation costs incurred after the date of adoption. The Company expects to adopt this guidance effective January 1, 2020 by applying the prospective approach as of the date of adoption and is in the process of evaluating ~~when it will adopt this guidance and~~ the potential effects this guidance will have on its consolidated financial ~~statements.~~

~~Disclosure requirements for defined benefit plans -~~ ~~In August 2018,~~statements and, at this time, does not expect 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 requiredimpacts to be ~~applied retrospectively and is effective for periods ending after December 15, 2020, with early adoption permitted. The Company expects to adopt this guidance effective December 31, 2018.~~material.

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~~expects to adopt this guidance ~~and the potential effects this guidance will have on its disclosures.~~

~~Table of Contents~~

~~MASTERCARD INCORPORATED~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)~~

~~Income taxes~~- In March 2018, the FASB issued guidance allowing for the recognition of provisional amounts related to the 2017 U.S. tax reform (the “U.S. Tax Reform”) in the event that the accounting was not complete by the end of the period enacted. The provisional amounts can be updated within a one year measurement period with changes recorded as a component of income tax expense during the reporting period. This guidance was effective ~~upon issuance. For a more detailed discussion, refer to Note 13 (Income Taxes) for further discussion.~~

~~Comprehensive income~~ - In February 2018, the FASB issued accounting guidance that allows for a one-time reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the U.S. Tax Reform. The guidance is effective for periods beginning after December 15, 2018, with early adoption permitted. The Company is in the process of evaluating the impacts this guidance will have on its consolidated financial statementsJanuary 1, 2020 and ~~at this time,~~ does not expect the impacts to be material.

~~Derivatives and hedging~~ - In August 2017, the FASB issued accounting guidance to 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 account for nonfinancial and financial risk components under hedge accounting and 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 account for its foreign currency derivative contracts under hedge accounting and does not expect the standard to have an impact to the Company. For a more detailed discussion of the Company’s foreign exchange risk management activities, refer to Note 16 (Foreign Exchange Risk Management).

~~Net periodic pension cost and net periodic postretirement benefit cost~~ - In March 2017, the FASB issued accounting guidance to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. Under this guidance, the service cost component is required to be reported in the same line item as 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 in the consolidated statement of operations separately from the service cost component and outside of operating income. This guidance is required to be applied retrospectively and is effective for periods beginning after December 15, 2017. The Company adopted this guidance effective January 1, 2018, which did not result in a material impact on the Company’s current year consolidated financial statements. The Company did not apply this guidance retrospectively, as the impact was de minimis to the prior year consolidated financial statements.

~~Restricted cash~~ - In November 2016, the FASB issued accounting guidance to address diversity in the classification and presentation of changes in restricted cash on the 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 guidance is required to be applied retrospectively and is effective for periods beginning after December 15, 2017. The Company adopted this guidance effective January 1, 2018. In accordance with the adoption of this standard, the Company includes restricted cash, which currently consists primarily of restricted cash for litigation settlement and restricted security deposits held for customers in its reconciliation of beginning-of-period and end-of-period amounts shown on the consolidated statement of cash flows.

~~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 will be required to recognize 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 13 (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.

~~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 after December 15, 2018 and early adoption is permitted. Companies are required to adopt the guidance using a modified retrospective approach by recognizing a cumulative effect adjustment to the opening balance of retained earnings. In July 2018, the FASB provided companies with an option to apply the modified retrospective approach as of either the date of adoption or as of the earliest date presented. The Company expects to adopt this guidance effective January

~~Table of Contents~~

~~MASTERCARD INCORPORATED~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)~~

1, 2019 by applying the modified retrospective approach as of the date of adoption with the available practical expedients. The Company is in the process of evaluating the potential effects this guidance will have on its consolidated financial statements.

~~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.

~~Table of Contents~~

~~MASTERCARD INCORPORATED~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)~~

The following tables summarize the impact of the revenue standard on the Company’s consolidated statement of operations for the three and nine months ended September 30, 2018 and consolidated balance sheet as of September 30, 2018:

Three Months Ended September 30, 2018 Nine Months Ended September 30, 2018
Balances excluding revenue standard Impact of revenue standard As reported Balances excluding revenue standard Impact of revenue standard As reported
(in millions)
Net Revenue $ 3,798
$ 100
$ 3,898
$ 10,831
$ 312
$ 11,143

Operating Expenses
General and administrative 1,235
1
1,236
3,688
(4 ) 3,684
Advertising and marketing 208
27
235
568
126
694

Income before income taxes 2,192
72
2,264
5,799
190
5,989
Income tax expense 351
14
365
987
42
1,029
Net Income 1,841
58
1,899
4,812
148
4,960

September 30, 2018
Balances excluding revenue standard Impact of revenue standard As reported
(in millions)
Assets
Accounts receivable $ 2,222
$ 55
$ 2,277
Prepaid expenses and other current assets 1,161
214
1,375
Deferred income taxes 590
(88 ) 502
Other assets 2,055
870
2,925

Liabilities
Accounts payable 1,013
(631 ) 382
Accrued expenses 4,191
554
4,745
Other current liabilities 1,118
(145 ) 973
Other liabilities 1,078
778
1,856

Equity
Retained earnings 26,231
495
26,726

~~For a more detailed discussion on revenue recognition, refer to Note 3 (Revenue).~~

~~Table of Contents~~

~~MASTERCARD INCORPORATED~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (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. During the second quarter of 2018, there was an adjustment to the impact of adopting the new revenue standard which increased liabilities $88 million with a corresponding tax-effected adjustment to retained earnings. In addition, certain reclassifications were made primarily between other assets, accrued expenses, and other liabilities. These revisions did not result in a material impact to the balances at January 1, 2018 or the consolidated financial statements for the period ended March 31, 2018.

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

Note 2. Acquisitions

~~In 2017,~~During the six months ended June 30, 2019, the Company ~~acquired~~entered into commitments to acquire businesses for total consideration of ~~$1.5 billion. The Company has finalized the purchase accounting for businesses acquired during the nine months ended September 30, 2017. For the final fair values~~$1.2 billion, primarily in cash, all of ~~the purchase price allocations,~~which have closed as of the ~~acquisition dates, refer~~filing date of this Report. These acquisitions are expected to complement the Company’s current suite of products and technologies and support the execution of its strategy. Refer to Note ~~2 (Acquisitions)~~1 (Summary of Significant Accounting Policies) to the consolidated financial statements included in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2017.~~

~~Note 3.~~ ~~Revenue~~

~~Mastercard’s~~2018, for the valuation techniques Mastercard utilizes to fair value the respective components of business ~~model involves four participants in addition~~combinations. The residual value allocated to goodwill is primarily attributable to the ~~Company: account holders, merchants, issuers (the account holders’ financial institutions)~~synergies expected to arise after the acquisition date 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~~not expected to be ~~entitled to in exchange~~deductible 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.local tax purposes.

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~~

1312

Table of Contents

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

~~volumes/transactions subject to tiered rates~~

~~processed or not processed by~~During the six months ended June 30, 2019, the Company

~~amount~~ acquired several businesses for total consideration of ~~usage~~$784 million. The Company is evaluating and finalizing the purchase accounting. The preliminary estimated fair values of the ~~Company’s other products or services~~purchase price allocations in aggregate, as of the acquisition dates, are noted below:

~~amount of rebates and incentives provided to customers~~



	(in millions)
Assets:
Cash and cash equivalents	$	10
Other current assets	16
Other intangible assets	213
Goodwill	619
Other assets	12
Total assets	870

Liabilities:
Other current liabilities	11
Deferred income taxes	52
Other liabilities	23
Total liabilities	86

Net assets acquired	$	784

The ~~Company classifies its net revenue into~~following table summarizes the ~~following five categories:~~identified intangible assets acquired:

~~Domestic assessments~~ ~~are fees charged~~



	Acquisition Date Fair Value		Weighted-Average Useful Life
	(in millions)		(in years)
Developed technologies	$	127	8.6
Customer relationships	80		13.3
Other	6		1.7
Other intangible assets	$	213	10.2

Pro forma information related to ~~issuers and acquirers based primarily~~the acquisitions was not included because the impact on the ~~dollar volume~~Company’s consolidated results 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 are 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 brand.operations was not considered to be material.

~~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 are 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 brand.

~~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:~~

~~Switched 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~~

1413

Table of Contents

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

~~fees and ATM withdrawal fees paid by cardholders on the sale and encashment of prepaid cards.~~

~~Bank account-based payment services relating to automated clearing house (“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 when revenue is recognized, ratably 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.Note 3. Revenue

The ~~following table disaggregates the~~ Company’s disaggregated net revenue by source and geographic region ~~for the three and nine months ended September 30, 2018:~~were as follows:


							Three Months Ended June 30,						Six Months Ended June 30,
	Three Months Ended September 30, 2018			Nine Months Ended September 30, 2018			2019			2018			2019			2018
	(in millions)						(in millions)
Revenue by source:
Domestic assessments	$	1,564		$	4,559		$	1,680		$	1,537		$	3,285		$	2,995
Cross-border volume fees	1,338			3,693			1,374			1,198			2,637			2,355
Transaction processing	1,912			5,449			2,053			1,830			3,975			3,537
Other revenues	819			2,352			962			785			1,804			1,533
Gross revenue	5,633			16,053			6,069			5,350			11,701			10,420
Rebates and incentives (contra-revenue)	(1,735		)	(4,910		)	(1,956		)	(1,685		)	(3,699		)	(3,175		)
Net revenue	$	3,898		$	11,143		$	4,113		$	3,665		$	8,002		$	7,245

Net revenue by geographic region:
North American Markets	$	1,361		$	3,940		$	1,430		$	1,334		$	2,777		$	2,581
International Markets	2,488			7,050			2,629			2,288			5,135			4,590
Other ¹	49			153			54			43			90			74
Net revenue	$	3,898		$	11,143		$	4,113		$	3,665		$	8,002		$	7,245

¹Includes revenues managed by corporate functions.

Receivables from contracts with customers of ~~$2,156 million~~$2.5 billion and ~~$1,873 million~~$2.1 billion as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, 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 typically offer extended payment terms to customers.

~~Table of Contents~~

~~MASTERCARD INCORPORATED~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)~~

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. These contract assets are included in prepaid expenses and other current assets and other assets on the consolidated balance sheet at ~~September~~June 30, ~~2018~~2019 in the amounts of ~~$36~~$51 million and ~~$77~~$115 million, respectively. The ~~Company did not have contract~~comparable amounts included in prepaid expenses and other current assets and other assets at December 31, ~~2017.~~2018 were $40 million and $92 million, respectively.

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 at ~~September~~June 30, ~~2018~~2019 in the amounts of ~~$260~~$344 million and ~~$111~~$104 million, respectively. The comparable amounts included in other current liabilities and other liabilities at December 31, ~~2017~~2018 were ~~$230~~$218 million and ~~$17~~$101 million, respectively. Revenue recognized from performance obligations satisfied during the three and ~~nine~~six months ended ~~September~~June 30, 2019 and 2018 was ~~$202~~$182 million and ~~$570~~$367 million and $207 million and $368 million, respectively.

The Company’s remaining performance period 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 payment 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 September 30, 2018, the estimated aggregate consideration allocated to unsatisfied performance obligations for these other value added services is $940 million, 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 termination clauses, modifications and adjustments for currency and are not expected to be material to any future annual period.

Table of Contents

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Note 4. Earnings Per Share

The components of basic and diluted earnings per share (“EPS”) for common ~~stock~~shares were as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(in millions, except per share data)
Numerator
Net income	$	2,048	$	1,569	$	3,910	$	3,061
Denominator
Basic weighted-average shares outstanding	1,020		1,043		1,023		1,047
Dilutive stock options and stock units	5		6		5		6
Diluted weighted-average shares outstanding¹	1,025		1,049		1,028		1,053
Earnings per Share
Basic	$	2.01	$	1.50	$	3.82	$	2.92
Diluted	$	2.00	$	1.50	$	3.80	$	2.91

Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017
(in millions, except per share data)
Numerator
Net income $ 1,899
$ 1,430
$ 4,960
$ 3,688
Denominator
Basic weighted-average shares outstanding 1,037
1,063
1,044
1,071
Dilutive stock options and stock units 6
5
6
4
Diluted weighted-average shares outstanding¹
1,043
1,068
1,050
1,075
Earnings per Share
Basic $ 1.83
$ 1.34
$ 4.75
$ 3.45
Diluted $ 1.82
$ 1.34
$ 4.73
$ 3.43

¹ For the periods 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 Company’s 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 approximate fair value.

~~Table of Contents~~

~~MASTERCARD INCORPORATED~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)~~

The Company classifies cash and cash equivalents as restricted when the cash is unavailable for withdrawal or usage for general operations. The Company has the following types of restricted cash and restricted cash equivalents balances:

~~Restricted cash for litigation settlement~~ - The Company has restricted cash for litigation within a qualified settlement fund related to a preliminary settlement agreement for the U.S. merchant class litigation. The funds continue to be restricted for payments until the litigation matter is resolved. Refer to ~~Note 14 (Legal and Regulatory Proceedings)~~.

~~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 of Mastercard 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 other restricted cash balances which include contractually restricted deposits, as well as cash balances that are restricted based on the Company’s intention with regards to usage. These funds are classified on the consolidated balance sheet within prepaid expenses and other currents assets and other assets.

The following table provides a reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents reported ~~within~~on the ~~statement of financial position~~consolidated balance sheet that total to the ~~beginning of period and end of period~~ amounts ~~shown in the statement of cash flows.~~

December 31,
2017 2016
(in millions)
Cash and cash equivalents $ 5,933
$ 6,721
Restricted cash and restricted cash equivalents
Restricted cash for litigation settlement 546
543
Restricted security deposits held for customers 1,085
991
Prepaid expenses and other current assets 28
3
Other assets —
15
Cash, cash equivalents, restricted cash and restricted cash equivalents - beginning of period ¹
$ 7,592
$ 8,273

September 30,
2018 2017
(in millions)
Cash and cash equivalents $ 6,871
$ 5,559
Restricted cash and restricted cash equivalents
Restricted cash for litigation settlement 550
545
Restricted security deposits held for customers 1,034
1,026
Prepaid expenses and other current assets 23
61
Cash, cash equivalents, restricted cash and restricted cash equivalents - end of period ¹
$ 8,478
$ 7,191

¹ As shown on the consolidated statement of cash flows.



	December 31,
	2018		2017
	(in millions)
Cash and cash equivalents	$	6,682	$	5,933
Restricted cash and restricted cash equivalents
Restricted cash for litigation settlement	553		546
Restricted security deposits held for customers	1,080		1,085
Prepaid expenses and other current assets	22		28
Cash, cash equivalents, restricted cash and restricted cash equivalents - beginning of period	$	8,337	$	7,592

	June 30,
	2019		2018
	(in millions)
Cash and cash equivalents	$	5,691	$	6,210
Restricted cash and restricted cash equivalents
Restricted cash for litigation settlement	662		549
Restricted security deposits held for customers	1,061		992
Prepaid expenses and other current assets	31		17
Cash, cash equivalents, restricted cash and restricted cash equivalents - end of period	$	7,445	$	7,768

Table of Contents

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Note 6. Fair Value andInvestment Securities

Financial Instruments – Recurring Measurements

The Company classifies its fair value measurements of financial instruments into a three-level hierarchy (the “Valuation Hierarchy”). There were no transfers made among the three levels in the Valuation Hierarchy during the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019.

The distribution of the Company’s financial instruments measured at fair value on a recurring basis within the Valuation Hierarchy were as follows:



	June 30, 2019											December 31, 2018
	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)
Assets
Investment securities available for sale ¹:
Municipal securities	$	—		$	3		$	—	$	3		$	—		$	15		$	—	$	15
Government and agency securities	69			52			—		121			65			92			—		157
Corporate securities	—			431			—		431			—			1,043			—		1,043
Asset-backed securities	—			103			—		103			—			217			—		217
Derivative instruments ²:
Foreign currency derivative assets	—			12			—		12			—			35			—		35
Marketable equity investments ³:
Equity securities	487			—			—		487			—			—			—		—
Deferred compensation plan ⁴:
Deferred compensation assets	64			—			—		64			54			—			—		54

Liabilities
Derivative instruments ²:
Foreign currency derivative liabilities	$	—		$	(19	)	$	—	$	(19	)	$	—		$	(6	)	$	—	$	(6	)
Deferred compensation plan ⁵:
Deferred compensation liabilities	(65		)	—			—		(65		)	(54		)	—			—		(54		)

September 30, 2018 December 31, 2017

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)
Assets
Investment securities available for sale ¹:

Municipal securities $ —
$ 16
$ —
$ 16
$ —
$ 17
$ —
$ 17
Government and agency securities 52
91
—
143
81
104
—
185
Corporate securities —
959
—
959
—
876
—
876
Asset-backed securities —
180
—
180
—
70
—
70
Equity securities 1
—
—
1
1
—
—
1
Derivative instruments ²:

Foreign currency derivative assets —
37
—
37
—
6
—
6
Deferred compensation plan ³:

Deferred compensation assets 61
—
—
61
55
—
—
55

Liabilities
Derivative instruments ²:

Foreign currency derivative liabilities $ —
$ (5 ) $ —
$ (5 ) $ —
$ (30 ) $ —
$ (30 )
Deferred compensation plan ⁴:

Deferred compensation liabilities (62 ) —
—
(62 ) (54 ) —
—
(54 )

¹The 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 1617 (Foreign Exchange Risk Management) for further details.

³ The Company’s marketable equity securities are publicly held and classified within Level 1 of the Valuation Hierarchy as the fair values are based on unadjusted quoted prices in active markets for identical assets.

⁴ 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.

⁴⁵ The deferred compensation liabilities are measured at fair value based on the quoted prices of identical instruments ~~identical~~ to the investment vehicles selected by the participants. ~~They~~These are included in other liabilities on the consolidated balance sheet.

1816

Table of Contents

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Marketable Equity Investments

During the second quarter of 2019, the Company invested $348 million in certain marketable equity securities. Marketable equity securities have readily determinable fair values with changes in fair value recorded in gain (losses) on equity investments, net on the consolidated statement of operations. These marketable equity investments are included in other assets 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 ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the carrying value and fair value of settlement and other guarantee liabilities were not material 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 1516 (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 ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company held ~~$323~~$151 million and ~~$700~~$264 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 and for impairment testing. In addition, nonmarketable equity investments~~ accounted for under the equity method or measurement alternative method. The Company’s share of net earnings or losses of equity method investments is included in other income (expense), net on the consolidated statement of operations. Measurement alternative investments do not have readily determinable fair values, and therefore are measured at cost, ~~method of accounting are~~less any impairment and adjusted for changes resulting from ~~observable~~identifiable price changes in orderly transactions for the identical or similar investments of the same issuer. Fair value adjustments of measurement alternative investments are included in gain (losses) of equity investments, net on the consolidated statement of operations. 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~~unobservable inputs used to measure fair value ~~are unobservable and~~that 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~~Nonmarketable equity investments are included in other assets on the consolidated balance ~~sheet~~sheet.

At June 30, 2019, the carrying value of measurement alternative and ~~in Note 7 (Prepaid Expenses~~equity method investments was $265 million and ~~Other Assets).~~$115 million, respectively. At December 31, 2018, the carrying value of measurement alternative and equity method investments was $232 million and $105 million, respectively.

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 ~~within~~as Level 2 of the Valuation Hierarchy. At ~~September~~June 30, 2019, the carrying value and fair value of total long-term debt outstanding was $7.8 billion and $8.4 billion, respectively. At December 31, 2018, the carrying value and fair value of total long-term debt outstanding (including the current portion) was ~~$6.4 billion. At December 31, 2017, the carrying value and fair value of long-term debt was $5.4~~$6.3 billion and ~~$5.7~~$6.5 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, accounts receivable, settlement due from customers, restricted security deposits held for customers, accounts payable, settlement due to customers and other accrued liabilities.

~~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.

1917

Table of Contents

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Gains (Losses) on Equity Investments

Gains (losses) on equity investments consists of realized and unrealized gains or losses on marketable equity investments and fair value adjustments, including impairments, of nonmarketable equity investments. During the three and six months ended June 30, 2019, the Company recorded a gain of $143 million and $148 million, respectively, primarily related to unrealized gains in certain marketable equity securities.

Contingent Consideration

The contingent consideration attributable to acquisitions made in 2017 iswas primarily based on the achievement of 2018 revenue ~~targets.~~targets and was measured at fair value on a recurring basis. This contingent consideration liability isof $219 million was included in other current liabilities on the consolidated balance sheet ~~and is~~at December 31, 2018. This liability was classified within Level 3 of the Valuation Hierarchy due to the absence of quoted market ~~prices. The activity of~~prices and unobservable inputs used to measure fair value that require management’s judgment. During the ~~Company’s contingent consideration liability for the nine~~six months ended ~~September~~June 30, ~~2018 was as follows:~~

(in millions)
Balance at December 31, 2017 $ 219
Net change in valuation 14
Payments (5 )
Foreign currency translation (7 )
Balance at September 30, 2018 $ 221
2019, the Company paid $219 million to settle the contingent consideration.

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 ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 were as follows:



	June 30, 2019								December 31, 2018
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Fair Value		Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
	(in millions)
Municipal securities	$	3	$	—	$	—	$	3	$	15	$	—	$	—		$	15
Government and agency securities	121		—		—		121		157		—		—			157
Corporate securities	430		1		—		431		1,044		1		(2		)	1,043
Asset-backed securities	102		1		—		103		217		—		—			217
Total	$	656	$	2	$	—	$	658	$	1,433	$	1	$	(2	)	$	1,432

September 30, 2018 December 31, 2017

Amortized
Cost

Gross
Unrealized
Gain

Gross
Unrealized
Loss

Fair
Value

Amortized
Cost

Gross
Unrealized
Gain

Gross
Unrealized
Loss

Fair
Value
(in millions)
Municipal securities $ 16
$ —
$ —
$ 16
$ 17
$ —
$ —
$ 17
Government and agency securities 143
—
—
143
185
—
—
185
Corporate securities 959
1
(1 ) 959
875
2
(1 ) 876
Asset-backed securities 180
—
—
180
70
—
—
70
Equity securities —
1
—
1
—
1
—
1
Total $ 1,298
$ 2
$ (1 ) $ 1,299
$ 1,147
$ 3
$ (1 ) $ 1,149

The Company’s available-for-sale investment securities held at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017~~2018 primarily carried a credit rating of A- or better. The municipal securities are primarily comprised of state tax-exempt ~~bonds and are diversified across states and sectors.~~bonds. Government and agency securities include U.S. government bonds, U.S. government sponsored agency bonds and foreign government bonds with similar credit quality to that of 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.

~~Table of Contents~~

~~MASTERCARD INCORPORATED~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)~~

Investment Maturities

The maturity distribution based on the contractual terms of the Company’s investment securities at ~~September~~June 30, ~~2018~~2019 was as follows:



	Available-For-Sale
	Amortized Cost		Fair Value
	(in millions)
Due within 1 year	$	216	$	217
Due after 1 year through 5 years	440		441
Total	$	656	$	658

Table of Contents

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Available-For-Sale

Amortized
Cost
Fair Value
(in millions)
Due within 1 year $ 356
$ 356
Due after 1 year through 5 years 942
942
Due after 5 years through 10 years —
—
Due after 10 years —
—
No contractual maturity ¹
—
1
Total $ 1,298
$ 1,299

¹~~Equity securities have been included in the no contractual maturity category, as these securities do not have stated maturity dates.~~

Investment Income

Investment income primarily consists of interest income generated from cash, cash equivalents and ~~investments.~~debt securities. Gross realized gains and losses are recorded within investment income on the consolidated statement of operations. The gross realized gains and losses from the sales of available-for-sale securities for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018 were not significant.

Note 7. Prepaid Expenses and Other Assets

Prepaid expenses and other current assets consisted of the following:



	June 30, 2019		December 31, 2018
	(in millions)
Customer and merchant incentives	$	874	$	778
Prepaid income taxes	218		51
Other	694		603
Total prepaid expenses and other current assets	$	1,786	$	1,432

September 30,
2018 December 31,
2017
(in millions)
Customer and merchant incentives $ 700
$ 464
Prepaid income taxes 71
77
Other 604
499
Total prepaid expenses and other current assets $ 1,375
$ 1,040

Other assets consisted of the following:



	June 30, 2019		December 31, 2018
	(in millions)
Customer and merchant incentives	$	2,572	$	2,458
Equity investments	867		337
Income taxes receivable	294		298
Other	251		210
Total other assets	$	3,984	$	3,303

September 30,
2018 December 31,
2017
(in millions)
Customer and merchant incentives $ 2,248
$ 1,434
Nonmarketable equity investments 279
249
Prepaid income taxes —
352
Income taxes receivable 201
178
Other 197
85
Total other assets $ 2,925
$ 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~~

Equity investments represent the Company’s marketable equity securities and nonmarketable equity investments. See Note 6 (Fair Value and Investment Securities) for ~~these incentives~~further details on the Company’s investments in certain marketable equity securities made during the second quarter of 2019.

Table of Contents

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Note 8. Property, Equipment and Right-of-Use Assets

Property, equipment and right-of-use assets consisted of the ~~related liability were included in accrued expenses and other liabilities.~~ following:



	June 30, 2019			December 31, 2018
	(in millions)
Building, building equipment and land	$	493		$	481
Equipment	1,080			987
Furniture and fixtures	86			85
Leasehold improvements	239			215
Operating lease right-of-use assets	420			—
Property, equipment and right-of-use assets	2,318			1,768
Less accumulated depreciation and amortization	(970		)	(847		)
Property, equipment and right-of-use assets, net	$	1,348		$	921

The increase in ~~customer~~property, equipment and ~~merchant incentives and the decrease in prepaid income taxes~~right-of-use assets at ~~September~~June 30, ~~2018~~2019 from December 31, ~~2017 are~~2018 was primarily due to the impact from the adoption of the new accounting ~~standards~~standard pertaining to ~~revenue recognition and intra-entity asset transfers, respectively.~~lease arrangements. See Note 1 (Summary of Significant Accounting Policies) for additional information on the ~~cumulative~~ impact of the adoption of ~~these accounting pronouncements.~~this standard.

The Company determines if a contract is, or contains, a lease at contract inception. The Company’s right-of-use (“ROU”) assets are primarily related to operating leases for office space, automobiles and other equipment. Leases are included in property, equipment and right-of-use assets, other current liabilities and other liabilities on the consolidated balance sheet.

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. In addition, ROU assets include initial direct costs incurred by the lessee as well as any lease payments made at or before the commencement date, and exclude lease incentives. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Lease terms include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Leases with a term of one year or less are generally included in ROU assets and liabilities.

The Company excludes variable lease payments in measuring ROU assets and lease liabilities, other than those that depend on an index, a rate or are in substance fixed payments. Lease and nonlease components are generally accounted for separately. When available, consideration is allocated to the separate lease and nonlease components in a lease contract on a relative standalone price basis using observable standalone prices.

Operating lease ROU assets and operating lease liabilities are recorded on the consolidated balance sheet as follows:



	June 30, 2019
	(in millions)
Balance sheet location
Property, equipment and right-of-use assets, net	$	377
Other current liabilities	82
Other liabilities	336

21Operating lease amortization expense for the three and six months ended June 30, 2019 was $22 million and $43 million, respectively, and recorded within general and administrative expenses on the consolidated statement of operations. As of June 30, 2019, weighted-average remaining lease term of operating leases was 6.5 years and weighted-average discount rate for operating leases was 3.2%.

Table of Contents

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

~~Nonmarketable equity investments represent~~The following table summarizes the maturity of the Company’s ~~cost~~operating lease liabilities at June 30, 2019 based on lease term:



	Operating Leases
	(in millions)
Remainder of 2019	$	47
2020	89
2021	67
2022	60
2023	54
Thereafter	146
Total operating lease payments	463
Less: Interest	(45		)
Present value of operating lease liabilities	$	418

As of June 30, 2019, the Company has entered into additional operating leases as a lessee, primarily for real estate. These leases have not yet commenced and ~~equity method investments.~~will result in ROU assets and corresponding lease liabilities of approximately $315 million. These operating leases are expected to commence between fiscal years 2019 and 2020, with lease terms between one and sixteen years.

The following disclosures relate to periods prior to adoption of the new lease accounting standard, including those operating leases entered into during 2018, but not yet commenced:

At December 31, 2018, the Company had the following future minimum payments due under non‐cancelable leases:



	Operating Leases
	(in millions)
2019	$	72
2020	75
2021	76
2022	68
2023	58
Thereafter	327
Total	$	676

Consolidated rental expense for the Company’s leased office space was $94 million for the year ended December 31, 2018. Consolidated lease expense for automobiles, computer equipment and office equipment was $20 million for the year ended December 31, 2018.

Note 8. 9. Accrued Expenses and Accrued Litigation

Accrued expenses consisted of the following:



	June 30, 2019		December 31, 2018
	(in millions)
Customer and merchant incentives	$	3,425	$	3,275
Personnel costs	404		744
Income and other taxes	358		158
Other	565		570
Total accrued expenses	$	4,752	$	4,747

September 30,
2018 December 31,
2017
(in millions)
Customer and merchant incentives $ 3,367
$ 2,648
Personnel costs 599
613
Advertising 84
88
Income and other taxes 336
194
Other 359
388
Total accrued expenses $ 4,745
$ 3,931

Customer and merchant incentives represent amounts to be paid to customers under business agreements. As of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Company’s provision for litigation was ~~$920~~$935 million and ~~$709~~$1,591 million, respectively. These amounts are not included in the accrued expenses table above and are separately reported as accrued litigation on the consolidated

Table of Contents

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

balance sheet. See Note 1415 (Legal and Regulatory Proceedings) for additional information regarding the Company’s accrued litigation.

~~Table of Contents~~Note 10.Debt

~~MASTERCARD INCORPORATED~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)~~

~~Note 9.~~ ~~Debt~~

~~Total~~Long-term debt ~~outstanding~~ consisted of the following at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017:~~2018:


Notes		Issuance Date	Interest Payment Terms	Maturity Date	Aggregate Principal Amount		Stated Interest Rate		Effective Interest Rate		September 30, 2018			December 31, 2017				Issuance Date	Interest Payment Terms	Maturity Date	Aggregate Principal Amount		Stated Interest Rate		Effective Interest Rate		June 30, 2019			December 31, 2018
																					(in millions, except percentages)
2019 USD Notes																		May 2019	Semi-annually	2029	$	1,000	2.950	%	3.030	%	$	1,000		$	—
																				2049	1,000		3.650	%	3.689	%	1,000			—
																					$	2,000
					(in millions, except percentages)
2018 USD Notes		February 2018	Semi-annually	2028	$	500	3.500	%	3.598	%	$	500		$	—			February 2018	Semi-annually	2028	$	500	3.500	%	3.598	%	500			500
				2048	500		3.950	%	3.990	%	500			—						2048	500		3.950	%	3.990	%	500			500
					$	1,000															$	1,000

2016 USD Notes		November 2016	Semi-annually	2021	$	650	2.000	%	2.236	%	650			650				November 2016	Semi-annually	2021	$	650	2.000	%	2.236	%	650			650
				2026	750		2.950	%	3.044	%	750			750						2026	750		2.950	%	3.044	%	750			750
				2046	600		3.800	%	3.893	%	600			600						2046	600		3.800	%	3.893	%	600			600
					$	2,000															$	2,000

2015 Euro Notes		December 2015	Annually	2022	€	700	1.100	%	1.265	%	813			839				December 2015	Annually	2022	€	700	1.100	%	1.265	%	797			801
				2027	800		2.100	%	2.189	%	929			958						2027	800		2.100	%	2.189	%	910			916
				2030	150		2.500	%	2.562	%	174			180						2030	150		2.500	%	2.562	%	171			172
					€	1,650															€	1,650

2014 USD Notes		March 2014	Semi-annually	2019	$	500	2.000	%	2.178	%	500			500				March 2014	Semi-annually	2019	$	500	2.000	%	2.178	%	—			500
				2024	1,000		3.375	%	3.484	%	1,000			1,000						2024	1,000		3.375	%	3.484	%	1,000			1,000
					$	1,500															$	1,500
											6,416			5,477													7,878			6,389
Less: Unamortized discount and debt issuance costs	Less: Unamortized discount and debt issuance costs										(58		)	(53		)	Less: Unamortized discount and debt issuance costs										(72		)	(55		)
Total debt outstanding	Total debt outstanding										6,358			5,424			Total debt outstanding										7,806			6,334
Less: Current portion¹	Less: Current portion¹										(500		)	—			Less: Current portion¹										—			(500		)
Long-term debt	Long-term debt										$	5,858		$	5,424		Long-term debt										$	7,806		$	5,834

¹Relates to ~~the current portion of~~ the 2014 USD Notes, ~~due~~which was classified in ~~April~~current liabilities as of December 31, 2018, matured and was paid during the second quarter of 2019 ~~classified as current portion of long-term debt on the consolidated balance sheet.~~

In ~~February 2018,~~May 2019, the Company issued ~~$500 million~~$1.0 billion principal amount of notes due ~~February 2028~~June 2029 and ~~$500 million~~$1.0 billion principal amount of notes due ~~February 2048~~June 2049 (collectively the ~~“2018~~“2019 USD Notes”). The net proceeds from the issuance of the ~~2018~~2019 USD Notes, after deducting the original issue discount, underwriting discount and offering expenses, were ~~$991 million.~~$1.980 billion.

The net proceeds, after deducting the original issue discount, underwriting discount and offering expenses, from the issuance of the 2018 USD Notes, 2016 USD Notes, the 2015 Euro Notes and the 2014 USD Notes, were ~~$1.969~~$991 million, $1.969 billion, $1.723 billion and $1.484 billion, respectively.

~~None~~

Table of ~~the~~Contents

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

The outstanding debt, described above, is not subject to any financial covenants and it may be redeemed in whole, or in part, at the Company’s option at any time for a specified make-whole amount. These 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 established a commercial paper program (the “Commercial Paper Program”) under which it is authorized to issue up to $3.75 billion in outstanding notes, with maturities up to 397 days from the date of issuance. The Commercial Paper Program is available in U.S. dollars.

~~Table of Contents~~

~~MASTERCARD INCORPORATED~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)~~

In conjunction with the Commercial Paper Program, the Company entered into a committed unsecured $3.75 billion revolving credit facility (the “Credit Facility”). Borrowings under the Credit Facility are available in U.S. dollars and/or euros. In October 2017, the Company extended the Credit Facility for an additional year to October 2022. The extension did not result in any material changes to the terms and conditions of the Credit Facility. The facility fee and borrowing cost under the Credit Facility are based upon the Company’s credit rating. At September 30, 2018, the applicable facility fee was 8 basis points on the average daily commitment (whether or not utilized). In addition to the facility fee, interest on borrowings under the Credit Facility would be charged at the London Interbank Offered Rate (“LIBOR”) plus an applicable margin of 79.5 basis points, or an alternative base rate. 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”). The Company was in compliance in all material respects with the covenants of the Credit Facility at September 30, 2018. The majority of Credit Facility lenders are customers or affiliates of customers of the Company.

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. The Company had no borrowings under the Credit Facility and the Commercial Paper Program at September 30, 2018 and December 31, 2017.

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.

Note ~~10.~~ ~~Stockholders’~~11. Stockholders' Equity

The Company’s Board of Directors ~~has~~have approved share repurchase programs authorizing the Company to repurchase shares of its Class A ~~common stock.~~Common Stock. These programs become effective after the completion of the previously authorized share repurchase program.

~~Table of Contents~~

~~MASTERCARD INCORPORATED~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)~~

The following table summarizes the Company’s share repurchase authorizations of its Class A common stock through ~~September~~June 30, ~~2018,~~2019, as well as historical purchases:




Board authorization dates	December 2018		December 2017		December 2016

Date program became effective	January 2019		March 2018		April 2017		Total
	(in millions, except average price data)
Board authorization	$	6,500	$	4,000	$	4,000	$	14,500
Dollar value of shares repurchased during the six months ended June 30, 2018	$	—	$	1,647	$	1,234	$	2,881
Remaining authorization at December 31, 2018	$	6,500	$	301	$	—	$	6,801
Dollar value of shares repurchased during the six months ended June 30, 2019	$	3,440	$	301	$	—	$	3,741
Remaining authorization at June 30, 2019	$	3,060	$	—	$	—	$	3,060

Shares repurchased during the six months ended June 30, 2018	—		9.0		7.2		16.2
Average price paid per share during the six months ended June 30, 2018	$	—	$	183.84	$	171.11	$	178.16
Shares repurchased during the six months ended June 30, 2019	14.8		1.6		—		16.4
Average price paid per share during the six months ended June 30, 2019	$	232.42	$	188.38	$	—	$	228.13
Cumulative shares repurchased through June 30, 2019	14.8		20.6		28.2		63.6
Cumulative average price paid per share	$	232.42	$	194.27	$	141.99	$	179.98

Board authorization dates December
2017 December
2016 December
2015

Date program became effective
March
2018

April
2017
February 2016 Total
(in millions, except average price data)
Board authorization $ 4,000
$ 4,000
$ 4,000
$ 12,000
Dollar value of shares repurchased during the nine months ended September 30, 2017 $ —
$ 1,735
$ 996
$ 2,731
Remaining authorization at December 31, 2017 $ 4,000
$ 1,234
$ —
$ 5,234
Dollar value of shares repurchased during the nine months ended September 30, 2018 $ 2,811
$ 1,234
$ —
$ 4,045
Remaining authorization at September 30, 2018 $ 1,189
$ —
$ —
$ 1,189

Shares repurchased during the nine months ended September 30, 2017 —
14.0
9.1
23.1
Average price paid per share during the nine months ended September 30, 2017 $ —
$ 123.81
$ 109.16
$ 118.03
Shares repurchased during the nine months ended September 30, 2018 14.6
7.2
—
21.8
Average price paid per share during the nine months ended September 30, 2018 $ 192.82
$ 171.11
$ —
$ 185.64
Cumulative shares repurchased through September 30, 2018 14.6
28.2
40.4
83.2
Cumulative average price paid per share $ 192.82
$ 141.99
$ 99.10
$ 130.07

The following table presents the changes in the Company’s outstanding Class A and Class B common stock for the ~~nine~~six months ended ~~September~~June 30, ~~2018:~~2019:



	Outstanding Shares
	Class A		Class B
	(in millions)
Balance at December 31, 2018	1,018.6		11.8
Purchases of treasury stock	(16.4	)	—
Share-based payments	2.4		—
Conversion of Class B to Class A common stock	0.3		(0.3	)
Balance at June 30, 2019	1,004.9		11.5

Outstanding Shares
Class A Class B
(in millions)
Balance at December 31, 2017 1,039.7
14.1
Purchases of treasury stock (21.8 ) —
Share-based payments 2.6
—
Conversion of Class B to Class A common stock 2.2
(2.2 )
Balance at September 30, 2018 1,022.7
11.9

2523

Table of Contents

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Note ~~11.~~ 12. Accumulated Other Comprehensive Income (Loss)

The changes in the balances of each component of accumulated other comprehensive income (loss), net of tax, for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017~~2018 were as follows:



	Foreign Currency Translation Adjustments ¹			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, 2018	$	(661	)	$	(66	)	$	10		$	(1	)	$	(718	)
Other comprehensive income (loss) for the period ²	(20		)	6			(1		)	3			(12		)
Balance at June 30, 2019	$	(681	)	$	(60	)	$	9		$	2		$	(730	)

Balance at December 31, 2017	$	(382	)	$	(141	)	$	25		$	1		$	(497	)
Other comprehensive income (loss) for the period ²	(186		)	53			(1		)	(1		)	(135		)
Balance at June 30, 2018	$	(568	)	$	(88	)	$	24		$	—		$	(632	)

Foreign Currency Translation Adjustments ¹

Translation Adjustments on Net Investment Hedge ²
Defined Benefit Pension and Other Postretirement Plans Investment Securities Available-for-Sale Accumulated Other Comprehensive Income (Loss)
(in millions)
Balance at December 31, 2016 $ (949 ) $ 12
$ 11
$ 2
$ (924 )
Other comprehensive income (loss) for the period ³
515
(132 ) (1 ) —
382
Balance at September 30, 2017 $ (434 ) $ (120 ) $ 10
$ 2

$ (542 )

Balance at December 31, 2017 $ (382 ) $ (141 ) $ 25
$ 1
$ (497 )
Other comprehensive income (loss) for the period ³
(224 ) 54
(1 ) (2 ) (173 )
Balance at September 30, 2018 $ (606 ) $ (87 ) $ 24
$ (1 ) $ (670 )

¹During the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019, theincrease in other comprehensive loss related to foreign currency translation adjustments was driven primarily by the strengthening of the U.S. dollar against the Brazilian real, British pound and euro. During the nine months ended September 30, 2017, the decrease in other comprehensive loss related to foreign currency translation adjustments was driven primarily by the ~~appreciation~~depreciation of the ~~euro.~~euro and British pound. During the six months ended June 30, 2018, the increase in other comprehensive loss related to foreign currency translation adjustments was driven primarily by the depreciation of the euro and British pound.

²~~Balances at September 30, 2018 and December 31, 2017 include $28 million of stranded tax effects as a result of the U.S. Tax Reform.~~

³During the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017,~~2018, gains and losses reclassified from accumulated other comprehensive income (loss) to the consolidated statement of operations were not significant.

Note ~~12.~~ 13. Share-Based Payments

During the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, the Company granted the following awards under the Mastercard Incorporated 2006 Long Term Incentive Plan, as amended and restated ~~(“LTIP”~~as of June 5, 2012 (the “LTIP”). The LTIP is a ~~shareholder-approved~~stockholder-approved plan that permits the grant of various types of equity awards to employees.



	Grants in 2019	Weighted-Average Grant-Date Fair Value
	(in millions)	(per option/unit)
Non-qualified stock options	0.9	$53
Restricted stock units	0.9	$224
Performance stock units	0.1	$231

Grants in 2018
Weighted-Average
Grant-Date
Fair Value
(in millions) (per option/unit)
Non-qualified stock options 0.9 $41
Restricted stock units 0.9 $170
Performance stock units 0.1 $226

Stock options generally vest in four equal annual installments beginning one year after the date of grant and ~~have a term~~expire ten years from the date of ~~ten years.~~grant. The Company used the Black-Scholes option pricing model to ~~estimate~~determine the grant-date fair value of stock options and calculated the expected ~~term~~life and the expected volatility based on historical Mastercard information. The expected ~~term~~life of stock options granted in ~~2018~~2019 was ~~determined~~estimated to be six years, while the expected volatility was determined to be ~~19.7%~~19.6%.

Vesting of the shares underlying the restricted stock units and performance stock units (“PSUs”) will generally occur three years after the date of grant. For all PSUs granted on or after March 1, 2019, shares issuable upon vesting are subject to a mandatory one-year deferral period, during which vested PSUs are eligible for dividend equivalents. The fair value of restricted stock units is determined and fixed on the grant date based on the Company’s Class A common stock price, adjusted for the exclusion of dividend equivalents. The Monte Carlo simulation valuation model was used to determine the grant-date fair value of performance stock units granted.

Compensation expense is recorded net of estimated forfeitures over the shorter of the vesting period or the date the individual becomes eligible to retire under the LTIP. The Company uses the straight-line method of attribution over the requisite service period for expensing equity awards.

2624

Table of Contents

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Note ~~13.~~ 14. Income Taxes

The effective income tax rates were ~~16.1%~~18.7% and 17.2% for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, respectively, versus ~~26.0%~~18.3% and ~~26.8%, respectively,~~17.8% for the comparable periods in ~~2017.~~2018. The higher effective tax rate for the three months, versus the comparable period in 2018, was primarily the result of discrete tax items, notably a reduction in the Company’s 2018 liability for uncertain tax positions due to a favorable court decision. The lower effective tax ~~rates,~~rate for the six months, versus the comparable ~~periods~~period in ~~2017, were~~2018, was primarily due to ~~a lower enacted statutory tax rate in the United States and~~ a more favorable geographic mix of ~~taxable earnings.~~earnings and a discrete tax benefit arising from a reduction to the Company’s transition tax liability resulting from final U.S. Department of Treasury and Internal Revenue Service regulations issued on January 15, 2019. These benefits were partially offset by ~~other aspects of~~ the U.S. Tax Reform for which a tax benefit is no longer recognized, including a U.S. foreign tax credit benefit for the repatriation of current year foreign earnings and the domestic production activities deduction. The lower effective tax rates for the periods were also attributable to $65 million of discrete deferred tax benefits, relating primarily to provisions for legal mattersreduction in the United States, which will be realized in the years during which payments are made. See Note 14 (Legal and Regulatory Proceedings) for further discussion of the U.S. merchant class litigation. Additionally, the lower effective tax rate for the nine months ended September 30, 2018 ~~was attributable to discrete benefits related to share-based payments.~~

On December 22, 2017, the U.S. passed comprehensive tax legislation which, among other things, reduces the U.S. corporate income tax rate from 35% to 21% in 2018. While the effective date for most of the U.S. Tax Reform provisions was January 1, 2018, GAAP required the resulting tax effects to be accounted for in the reporting period of enactment. At December 31, 2017, this included a one-time mandatory deemed repatriation tax on accumulated foreign earnings (the “Transition Tax”), the remeasurement of the Company’s net deferred tax asset balance in the U.S., the dilution of foreign tax credit benefits on the repatriation of current year foreign earnings and the recognition of a deferred tax liability resulting from the change in the Company’s indefinite reinvestment assertion for certain foreign affiliates. Also, in December 2017, the SEC staff issued guidance which allows registrants to record provisional amounts for certain aspects of the U.S. Tax Reform during a measurement period, which is not to extend beyond one year.

Consistent with the SEC guidance, the Company was able to make reasonable estimates and had recorded provisional amounts of $629 million related to the Transition Tax, which is payable over eight years, $157 million charge 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 certain of the Company’s foreign earnings. The Transition Tax is based upon previously untaxed accumulated and current earnings and profits of the Company’s foreign subsidiaries. To compute the tax, the Company determines the amount of post-1986 earnings and profits of relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. On January 19, 2018, additional administrative guidance was issued by the Internal Revenue Service (the “IRS”) and the Department of Treasury (“Treasury”), which resulted in approximately $36 million of an increase to the Transition Tax liability, with an offsetting decrease to the deferred tax liability recorded on the change in assertion during the first quarter of 2018. For the three months ended September 30, 2018, the Company has recorded a $15 million reduction to the charge for the remeasurement of a net deferred tax asset. On August 1, 2018, Treasury and the IRS issued proposed regulations with regard to the operation and calculation of the Transition Tax liability. The Company will continue to evaluate the impact of this guidance, as well as any additional guidance issued during the fourth quarter, on all provisional amounts and will complete its accounting for all provisional amounts within the measurement period.

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. This improved alignment has resulted in greater flexibility and efficiency with regard to the global deployment of cash, as well as benefits to the Company’s effective income tax rate. 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 was being amortized utilizing a 25-year life. This deferred charge was included in prepaid expenses and other current assets and other assets on the consolidated balance sheet at December 31, 2017 in the amounts of $17 million and $352 million, respectively. 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 the income tax consequences of an intra-entity asset transfer when the transfer occurs. The guidance must be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the period of adoption. The Company adopted this accounting guidance on January 1, 2018. The aforementioned deferred charge of $369 million at December 31, 2017 has been charged against retained earnings as a component of the cumulative-effect adjustment as of January 1, 2018. In addition, deferred taxes have also been included as a component of the cumulative-effect adjustment whereby the Company has recorded a $186 million deferred tax asset representing the temporary difference in book and tax basis of the intellectual property that was transferred to the United Kingdom. See Note 1 (Summary of Significant Accounting Policies) for additional information on the cumulative impact of the adoption of this accounting pronouncement.

~~Table of Contents~~

~~MASTERCARD INCORPORATED~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)~~

mentioned.

The Company is subject to tax in the United States, 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~~is 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 2010.

Note ~~14.~~ 15. Legal and Regulatory Proceedings

Mastercard is a party to legal and regulatory proceedings with respect to a variety of matters in the ordinary course of business. Some of these proceedings 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, Mastercard has not established reserves for any of these proceedings. When the Company determines that a loss is both probable and reasonably estimable, Mastercard records a liability and discloses the amount of the liability if it is material. When a material loss contingency is only reasonably possible, Mastercard 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, Mastercard 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, Mastercard 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 Mastercard and/or could require Mastercard 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’s results of operations, financial condition and overall business.

Interchange Litigation and Regulatory Proceedings

Mastercard’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 Mastercard 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, 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

Table of Contents

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

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’s initial public offering of its Class A Common Stock in May 2006 (the “IPO”) and certain purported agreements entered into between Mastercard 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’s right

~~Table of Contents~~

~~MASTERCARD INCORPORATED~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)~~

to assess them for Mastercard’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, Mastercard and Mastercard 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 Mastercard settlement and judgment sharing agreement with a number of financial institutions. The agreements provide for the apportionment of certain costs and liabilities which 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, Mastercard would pay 12% of the monetary portion of the settlement. In the event of a settlement involving only Mastercard and the financial institutions with respect to their issuance of Mastercard cards, Mastercard 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. Mastercard 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. The court granted final approval of the settlement in December 2013, and objectors to the settlement appealed that decision to the U.S. Court of Appeals for the Second Circuit. In June 2016, the court of appeals vacated the class action certification, reversed the settlement approval and sent the case back to the district court for further proceedings. The court of appeals’ ruling was based 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 each class.

Prior to the reversal of the settlement approval, merchants representing slightly more than 25% of the Mastercard and Visa purchase volume over the relevant period chose to opt out of the class settlement. Mastercard had anticipated that most of the larger merchants who opted out of the settlement would 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 in front of the same federal district court that approved the merchant 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.

In September 2018, the parties to the Damages Class litigation entered into a class settlement agreement to resolve the Damages Class claims. ~~The Damages Class plaintiffs have filed a motion with the court seeking preliminary approval of the settlement agreement.~~ Mastercard ~~previously~~ increased its reserve by $237 million during ~~the second quarter of~~ 2018 ~~by $210 million~~to reflectboth 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. If more than 25% of the merchant purchase volume opts out of the settlement, the defendants would have the option to terminate the settlement agreement. The court has scheduled a final approval hearing in November 2019. The settlement agreement does not relate to the Rules Relief Class claims. Separate settlement negotiations with the Rules Relief Class are ongoing.

As of ~~September~~June 30, 2019 and December 31, 2018, Mastercard had accrued a liability of ~~$912~~$916 million and $915 million, respectively, as a reserve for both the merchant class litigation and the filed and anticipated opt-out merchant cases. As of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, Mastercard had ~~$550~~$662 million and ~~$546~~$553 million, respectively, in a qualified cash settlement fund related to

Table of Contents

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

the merchant class litigation and classified as restricted cash on its consolidated balance sheet. During the first quarter of 2019, Mastercard increased its qualified cash settlement fund by $108 million in accordance with the January 2019 preliminary approval of the settlement. 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 at September 30, 2018.~~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 matters were litigated to a final outcome. Mastercard cannot estimate the potential liability if that were to occur.

Canada. In December 2010, a proposed class action complaint was commenced against Mastercard in Quebec on behalf of Canadian merchants. The 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’s favor) concerning certain Mastercard rules related to point-of-sale acceptance, including the “honor all cards” and “no surcharge” rules. The Quebec suit sought

~~Table of Contents~~

~~MASTERCARD INCORPORATED~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)~~

compensatory and punitive damages in unspecified amounts, as well as injunctive relief. In the first half of 2011, additional purported class action lawsuits were commenced in British Columbia and Ontario against Mastercard, Visa and a number of large Canadian financial institutions. The British Columbia suit sought compensatory damages in unspecified amounts, and the Ontario suit sought compensatory damages of $5 billion on the basis of alleged conspiracy and various alleged breaches of the Canadian Competition Act. Additional purported class action complaints were commenced in Saskatchewan and Alberta with claims that largely mirror those in the other suits. In June 2017, Mastercard entered into a class settlement agreement to resolve all of the Canadian class action litigation. The settlement, which ~~is subject to court approval in each applicable province,~~ requires Mastercard to make a cash payment and modify its “no surcharge” ~~rule. During~~rule, has received court approval in each Canadian province. Objectors to the ~~first quarter of~~settlement have sought to appeal the approval orders. In 2017, ~~the Company~~Mastercard recorded a provision for litigation of $15 million related to this matter.

Europe. In July 2015, the European Commission (“EC”) issued a Statement of Objections related to Mastercard’s interregional interchange fees and central acquiring ~~rules~~rule within the European Economic Area (the “EEA”). The Statement of Objections, which ~~follows~~followed an investigation opened in 2013, ~~includes~~included 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 Commission has indicated it intends~~EC issued a decision accepting the settlement in April 2019, with changes to seek fines if these conclusions are subsequently confirmed. In April 2016, Mastercard submitted a response to the Statement of Objections disputing the European Commission’s preliminary conclusions and participated in a related oral hearing in May 2016. Since that time, Mastercard has remained in discussions with the European Commission. Although the Statement of Objections does not quantify the level of fines, based upon recent interactions with the European Commission, it is possible that they could be substantial, potentially in excess of $1 billion if the European Commission were to issue a negative decision. Fines may be less than this amountinterregional interchange fees going into effect in the ~~event~~fourth quarter of a negotiated resolution. Due to the uncertainty of numerous legal issues, including the potential for a negotiated resolution, Mastercard cannot estimate a possible range of loss at this time, although Mastercard expects to obtain greater clarity2019. In addition, with respect to ~~these issues~~Mastercard’s historic central acquiring rule, the EC issued a negative decision in January 2019. The EC’s negative decision covers a period of time of less than two years before the ~~end~~rule’s modification. The rule was modified in late 2015 to comply with the requirements of ~~2018.~~the EEA Interchange Fee Regulation. The decision does not require any modification of Mastercard’s current business practices but included a fine of €571 million, which was paid in April 2019. Mastercard incurred a charge of $654 million in 2018 in relation to this matter.

~~In the United Kingdom, beginning in~~Since May 2012, a number of United Kingdom (“U.K.”) retailers filed claims or threatened litigation against Mastercard seeking damages for alleged anti-competitive conduct with respect to Mastercard’s cross-border interchange fees and its U.K. and Ireland domestic interchange fees (the “U.K. Merchant claimants”),. In addition, Mastercard, has faced similar filed or threatened litigation by merchants with ~~claimed purported~~respect to interchange rates in other countries in Europe (the “Pan-European Merchant claimants”). In aggregate, the alleged damages ~~exceeding $1 billion. The~~claims from the U.K. and Pan-European Merchant claimants ~~(including all~~were in the amount of approximately £3 billion (approximately $4 billion as of June 30, 2019). Mastercard has resolved ~~matters) represent approximately 40%~~over £2 billion (approximately $3 billion as of ~~Mastercard’s U.K. interchange volume over the relevant~~June 30, 2019) of these damages ~~period. Mastercard submitted statements of defense to the retailers’~~ claims ~~disputing liability and damages.~~through settlement or judgment. Since June 2015, Mastercard has recorded litigation provisions for settlements, judgments and legal fees relating to these claims, including charges of ~~$23~~$237 million in 2018. As detailed below, Mastercard continues to litigate with the ~~third quarter~~remaining U.K. and Pan-European Merchant claimants and it has submitted statements of ~~2018, $15 million in the second quarter of 2018~~defense disputing liability and ~~$19 million in the first quarter of 2018. Each of these charges relates to settlements with a number of U.K. Merchant claimants.~~damages claims.

In January 2017, Mastercard received a liability judgment in its favor on all significant matters in a separate action brought by ten of the U.K. Merchant ~~claimants, who had been seeking in excess of $500 million in damages. Subsequently, Mastercard settled with seven of these claimants to resolve their claims.~~claimants. Three of the U.K. Merchant claimants appealed the judgment, and these appeals were 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 back to trial for reconsideration on the remaining issue concerning the “lawful” level of interchange. Mastercard ~~has requested~~and Visa have been granted permission to appeal the appellate court ruling to the U.K. Supreme Court. Mastercard expects the litigation process to ~~continue during~~be delayed pending the ~~next several years.~~

Additional merchants have filed or threatened litigation with respect to interchange rates in Europe (the “Pan-European claimants”) for purported damages exceeding $1 billion. Mastercard submitted statementsresolution of ~~defense~~its appeal to the retailers’ claims disputing liability and damages. During the first quarter of 2018, Mastercard recorded a charge of $70 million resulting from settlements with over 70 Pan-European claimants, which represented over 60% of the Pan-European claimants’ merchant damages claims. During the third quarter of 2018, Mastercard recorded a charge of $6 million resulting from settlements with additional Pan-European claimants.U.K. Supreme Court.

In September 2016, a proposed collective action was filed in the 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

Table of Contents

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

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 ~~September~~June 30, ~~2018)~~2019). In July 2017, the trial court denied the plaintiffs’ application for the case to proceed as a collective action. ~~The~~In April 2019, the U.K. appellate court granted the plaintiffs’ ~~request~~appeal of the trial court’s decision and sent the case back to the trial court for a re-hearing on the plaintiffs’ collective action application. Mastercard has been granted permission to appeal

~~Table of Contents~~

~~MASTERCARD INCORPORATED~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)~~

~~this decision was denied, which they have appealed. The plaintiffs have also filed a separate request for judicial review of~~ the ~~court’s denial of their collective action.~~appellate court ruling to the U.K. Supreme Court and expects oral argument on that appeal to occur in 2020.

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 and Visa (the “ATM Operators Complaint”). Plaintiffs seek to represent a class of non-bank operators of ATM terminals that operate in the United States with the discretion to determine the price of the ATM access fee for the terminals they operate. Plaintiffs allege that Mastercard 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’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 Mastercard 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’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. Mastercard expects briefing on class certification to be completed before the end of 2019 in both actions.

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.

Table of Contents

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (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.

~~Table of Contents~~

~~MASTERCARD INCORPORATED~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)~~

Note ~~15.~~ 16. Settlement and Other Risk Management

Mastercard’s rules guarantee the settlement of many of the ~~Mastercard, Cirrus and Maestro branded~~ transactions between its ~~issuers and acquirers~~customers (“settlement risk”). Settlement exposure is the ~~outstanding~~ settlement risk to customers under Mastercard’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 ~~generally~~ 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 ~~card~~payment volume during the ~~quarter~~three months ended June 30, 2019 multiplied by the estimated number of days 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 data~~risk 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, Mastercard may ~~seek an assignment of~~pursue one or more remedies available under the ~~underlying receivables of~~Company’s rules to recover potential losses. Historically, 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 has ~~global risk management policies and procedures aimed at managing the settlement exposure. These risk management procedures include interaction with the bank regulators~~experienced a low level of ~~countries in which it operates, requiring customers to make adjustments to settlement processes, and requiring collateral~~losses from ~~customers.~~ customer failures.

As part of its policies, Mastercard 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’s~~a 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.customer. 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:



	June 30, 2019			December 31, 2018
	(in millions)
Gross settlement exposure	$	51,653		$	49,666
Collateral held for settlement exposure	(5,084		)	(4,711		)
Net uncollateralized settlement exposure	$	46,569		$	44,955

September 30,
2018 December 31,
2017
(in millions)
Gross settlement exposure $ 47,484
$ 47,002
Collateral held for settlement exposure (4,613 ) (4,360 )
Net uncollateralized settlement exposure $ 42,871
$ 42,642

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.

Mastercard 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-branded travelers cheques issued, but not yet cashed of ~~$382~~$372 million and ~~$395~~$377 million at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, of which ~~$302~~$294 million and ~~$313~~$297 million at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively, is mitigated by collateral arrangements. In addition, the Company 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. 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.

~~Table of Contents~~

~~MASTERCARD INCORPORATED~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)~~

Note ~~16.~~ 17. 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).

Table of Contents

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Derivatives

The Company enters into foreign currency derivative contracts to manage risk associated with anticipated receipts and disbursements which are valued based on currencies other than the functional 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. 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.

As of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the majority of derivative contracts to hedge foreign currency fluctuations had been entered into with customers of Mastercard. Mastercard’s derivative contracts are summarized below:



	June 30, 2019					December 31, 2018
	Notional		Estimated Fair Value			Notional		Estimated Fair Value
	(in millions)
Commitments to purchase foreign currency	$	204	$	(2	)	$	34	$	(1	)
Commitments to sell foreign currency	1,347		(7		)	1,066		26
Options to sell foreign currency	18		2			25		4
Balance sheet location
Prepaid expenses and other current assets ¹			12					35
Other current liabilities ¹			(19		)			(6		)

September 30, 2018 December 31, 2017
Notional
Estimated Fair
Value
Notional
Estimated Fair
Value
(in millions)
Commitments to purchase foreign currency $ 51
$ (1 ) $ 27
$ —
Commitments to sell foreign currency 969
24
968
(26 )
Options to sell foreign currency 28
9
27
2
Balance sheet location
Accounts receivable ¹
$ —
$ 6
Prepaid expenses and other current assets ¹
37
—
Other current liabilities ¹
(5 ) (30 )

¹ The derivative contracts are subject to enforceable master netting arrangements, which contain various netting and setoff provisions.

The amount of gain (loss) recognized ~~in income~~on the consolidated statement of operations for the contracts to purchase and sell foreign currency is summarized below:



	Three Months Ended June 30,					Six Months Ended June 30,
	2019			2018		2019			2018
	(in millions)
Foreign currency derivative contracts
General and administrative	$	(15	)	$	56	$	(20	)	$	35

Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017
(in millions)
Foreign currency derivative contracts
General and administrative $ 13
$ (20 ) $ 48
$ (65 )

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. 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 ~~currency derivative~~exchange contracts in accumulated other comprehensive income as of ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017,~~2018, as these contracts were not 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 sensitive instruments arising from adverse changes in market factors such as foreign currency exchange rates, interest rates and other related variables. The effect of a hypothetical 10% adverse change in U.S. dollar forward rates could result in a fair value loss of approximately ~~$108~~$129 million on the Company’s foreign currency derivative contracts outstanding at ~~September~~June 30, ~~2018.~~2019. 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.

~~Table of Contents~~

~~MASTERCARD INCORPORATED~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)~~

Generally, the Company does not obtain collateral related to derivatives because of the high credit ratings of the counterparties.

Net Investment 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). In 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 ~~September~~June 30, ~~2018,~~2019, the Company had a

Table of Contents

MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

net foreign currency transaction pre-tax loss of ~~$146~~$112 million in accumulated other comprehensive income (loss) associated with hedging activity. ~~There was no ineffectiveness in the current period.~~

3431

Table of Contents

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following supplements management's discussion and analysis of Mastercard Incorporated for the year ended December 31, ~~2017~~2018 as contained in the Company's Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on February ~~14, 2018.~~13, 2019. It also should be read in conjunction with the consolidated financial statements and notes of Mastercard Incorporated and its consolidated subsidiaries, including Mastercard International Incorporated (together, “Mastercard” or the “Company”), included elsewhere in this Report. 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. Through our global payments processing network, we facilitate the switching (authorization, clearing and settlement) of payment transactions 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®, Maestro®, Cirrus® and Masterpass®. Our 2017 acquisition of VocaLink Holdings Limited (“Vocalink”) has expanded our capability to process automated clearing house (“ACH”) transactions, among other things. As a multi-rail network, we now offer customers one partner to turn to for their payment needs for both domestic and cross-border transactions. We also provide value-added offerings such as safety and security products, information services and consulting, loyalty and reward programs and issuer and acquirer processing. Our networks 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), merchant, issuer (the account holder’s financial institution) 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.

We generate revenues from assessing our customers based on the gross dollar volume (the “GDV”) of activity on the products that carry our brands, from the fees we charge to our customers for providing switching services and from other payment-related products and services.

~~Our Strategy~~

We grow, diversify and build our business through a combination of organic growth and strategic investments, including acquisitions. Our ability to grow our business is influenced by personal consumption expenditure growth, driving cash and check transactions toward electronic forms of payment, increasing our share in electronic payments and providing value-added products and services. In addition, our growth will be driven by capturing other payments flows, such as business to business (“B2B”), person to person (“P2P”), business to consumer (“B2C”) and government disbursements, among others.

~~Grow~~. We focus on growing our core business globally, including growing our consumer credit, debit, prepaid and commercial products and solutions, thereby increasing the number of payment transactions we switch. We also look to take advantage of the opportunities presented by the evolving ways people interact and transact in the growing digital economy.

~~Diversify~~. ~~We diversify our business by focusing on:~~

adding new players to our customer base in new and existing markets by working with partners such as governments, merchants, technology companies (such as digital players and mobile providers) and other businesses

expanding capabilities based on our core network into new areas to provide opportunities for electronic payments and to capture more payment flows, such as B2C transfers, B2B transfers, P2P transfers, including in the areas of transit and government disbursements

~~driving acceptance at merchants of all sizes~~

~~broadening financial inclusion for the unbanked and underbanked~~

~~Table of Contents~~

~~Build~~. ~~We build our business by:~~

creating and acquiring differentiated products to provide unique, innovative solutions that we bring to market, such as real-time account-based payments, Mastercard B2B Hub™ and Mastercard Send™ platforms

~~providing value-added services across safety and security, consulting, data analytics and loyalty~~

~~Strategic Partners~~. We work with a variety of stakeholders. We provide financial institutions with solutions to help them increase revenue by driving preference for Mastercard-branded products. We help merchants, financial institutions and other organizations by delivering data-driven insights and other services that help them grow and create simple and secure purchase experiences. We partner with technology companies such as digital players and mobile providers to deliver digital payment solutions powered 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, safer and more convenient ways to pay.

~~Business Environment~~

We authorize, clear and settle transactions in more than 210 countries and territories and in more than 150 currencies. Net revenue generated in the United States was 32% of total net revenue for both the three and nine months ended September 30, 2018, and 34% and 35% for the three and nine months ended September 30, 2017, respectively. No individual country, other than the United States, generated more than 10% of total net revenue in each 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. Our primary revenue billing currencies are the U.S. dollar, euro, Brazilian real and the British pound.

The competitive and evolving nature of the global payments industry provides both challenges to and opportunities for the continued growth of our business. Adverse economic trends (including distress in financial markets, currency fluctuations, 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 account holders who use our brands, have been directly impacted by these adverse economic conditions.

Our financial results may be negatively impacted by actions taken by individual financial institutions or by governmental or regulatory bodies. In addition, political instability or a decline in economic conditions in the countries in which we operate may accelerate the timing of or increase the impact of risks to our financial performance. As a result, our revenue or results of operations may be negatively impacted. We continue to monitor political 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 us to grow our business.

~~For a full discussion of the various legal, regulatory and business risks that could impact our financial results, see “Risk Factors” in Part I, Item 1A~~ ~~of our Annual Report on Form 10-K for the year ended December 31, 2017.~~

~~Table of Contents~~

Financial Results Overview

The following ~~tables provide~~table provides a summary of our key operating ~~results:~~

Three Months Ended September 30, Increase/(Decrease) Nine Months Ended September 30, Increase/(Decrease)
2018 2017 2018 2017
($ in millions, except per share data)
Net revenue $ 3,898
$ 3,398
15% $ 11,143
$ 9,185
21%

Operating expenses $ 1,611
$ 1,457
11% $ 5,095
$ 4,085
25%
Operating income $ 2,287
$ 1,941
18% $ 6,048
$ 5,100
19%
Operating margin 58.7 % 57.1 % 1.5 ppt 54.3 % 55.5 % (1.2) ppt

Income tax expense $ 365
$ 502
(27)% $ 1,029
$ 1,350
(24)%
Effective income tax rate 16.1 % 26.0 % (9.9) ppt 17.2 % 26.8 % (9.6) ppt

Net income $ 1,899
$ 1,430
33% $ 4,960
$ 3,688
34%

Diluted earnings per share $ 1.82
$ 1.34
36% $ 4.73
$ 3.43
38%
Diluted weighted-average shares outstanding 1,043
1,068
(2)% 1,050
1,075
(2)%

~~Summary of Non-GAAP Results~~¹:results, as reported:

Three Months Ended September 30, Increase/(Decrease) Nine Months Ended September 30, Increase/(Decrease)
2018 2017 As adjusted Currency-neutral 2018 2017 As adjusted Currency-neutral
($ in millions, except per share data)
Net revenue $ 3,898
$ 3,398
15% 17% $ 11,143
$ 9,185
21% 20%

Adjusted operating expenses $ 1,582
$ 1,457
9% 10% $ 4,724
$ 4,070
16% 15%

Adjusted operating margin 59.4 % 57.1 % 2.3 ppt 2.6 ppt 57.6 % 55.7 % 1.9 ppt 1.9 ppt

Adjusted effective income tax rate 19.1 % 26.0 % (6.9) ppt (6.8) ppt 18.5 % 26.8 % (8.3) ppt (8.2) ppt

Adjusted net income $ 1,856
$ 1,430
30% 33% $ 5,181
$ 3,698
40% 39%

Adjusted diluted earnings per share $ 1.78
$ 1.34
33% 36% $ 4.94
$ 3.44
44% 42%



	Three Months Ended June 30,						Increase/(Decrease)	Six Months Ended June 30,						Increase/(Decrease)
	2019			2018			Increase/(Decrease)	2019			2018			Increase/(Decrease)
	($ in millions, except per share data)
Net revenue	$	4,113		$	3,665		12%	$	8,002		$	7,245		10%

Operating expenses	$	1,716		$	1,729		(1)%	$	3,392		$	3,484		(3)%
Operating income	$	2,397		$	1,936		24%	$	4,610		$	3,761		23%
Operating margin	58.3		%	52.8		%	5.4 ppt	57.6		%	51.9		%	5.7 ppt

Income tax expense	$	471		$	353		34%	$	812		$	664		22%
Effective income tax rate	18.7		%	18.3		%	0.4 ppt	17.2		%	17.8		%	(0.6) ppt

Net income	$	2,048		$	1,569		31%	$	3,910		$	3,061		28%

Diluted earnings per share	$	2.00		$	1.50		33%	$	3.80		$	2.91		31%
Diluted weighted-average shares outstanding	1,025			1,049			(2)%	1,028			1,053			(2)%

The following table provides a summary of our key non-GAAP operating results^1,2, adjusted to exclude the impact of gains and losses on our equity investments, special items (which represent litigation judgments and settlements and certain one-time items) and the related tax impacts on our non-GAAP adjustments. In addition, we have presented growth rates, adjusted for the impact of foreign currency:



	Three Months Ended June 30,						Increase/(Decrease)		Six Months Ended June 30,						Increase/(Decrease)
	2019			2018			As adjusted	Currency-neutral	2019			2018			As adjusted	Currency-neutral
	($ in millions, except per share data)
Net revenue	$	4,113		$	3,665		12%	15%	$	8,002		$	7,245		10%	14%

Adjusted operating expenses	$	1,716		$	1,504		14%	17%	$	3,392		$	3,142		8%	11%

Adjusted operating margin	58.3		%	59.0		%	(0.7) ppt	(0.4) ppt	57.6		%	56.6		%	1.0 ppt	1.4 ppt

Adjusted effective income tax rate²	18.5		%	18.8		%	(0.3) ppt	(0.1) ppt	17.7		%	18.2		%	(0.6) ppt	(0.3) ppt

Adjusted net income²	$	1,937		$	1,744		11%	15%	$	3,765		$	3,325		13%	18%

Adjusted diluted earnings per share²	$	1.89		$	1.66		14%	17%	$	3.66		$	3.16		16%	20%

Note: Tables may not sum due to rounding.

¹~~The Summary of Non-GAAP Results excludes the impact of Special Items (defined below) and/or foreign currency.~~ See “Non-GAAP Financial Information” for further information on ~~the Special Items, the impact of foreign currency~~our non-GAAP adjustments and the reconciliation to GAAP reported amounts.

²For the three and six months ended June 30, 2019, we updated our non-GAAP methodology to exclude the impact of gains and losses on our equity investments. Prior year periods were not restated as the impact of the change was de minimis in relation to our non-GAAP results.

Table of Contents

Key highlights for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 were as follows:


•	Net revenue increased 12% and 10%, or 15% and 14% on a currency-neutral basis, respectively, versus the comparable periods in 2018 primarily driven by:


–	Switched transaction growth of 18% and 17%, respectively


–	Cross-border volume growth of 16% and 15% on a local currency basis, respectively


–	Gross dollar volume growth of 13% and 12% on a local currency basis, respectively


–	Other revenues growth of 23% and 18%, or 24% and 19%, on a currency-neutral basis, respectively, driven by our Cyber & Intelligence and Data & Services solutions


–	These increases were partially offset by higher rebates and incentives, which increased 16% and 17%, or 20% and 21% on a currency-neutral basis, respectively.


•	Operating expenses decreased 1% and 3%, respectively, versus the comparable periods in 2018. Adjusted operating expenses increased 14% and 8%, respectively. On a currency-neutral basis the increase was 17% and 11%, respectively, primarily driven by:


–	2 and 1 percentage points of growth, respectively, from acquisitions,


–	5 and 2 percentage points of growth, respectively, from the impact of losses associated with foreign exchange activity for derivative contracts, as compared to gains in the prior year comparable periods.

~~Net revenue increased~~ ~~15%~~ ~~and~~ ~~21%, or~~ ~~17%~~ ~~and~~ ~~20%~~ ~~on a currency-neutral basis, respectively, versus the comparable~~ ~~periods~~ in ~~2017. Current year results include a combined~~ 3 ~~and~~ 4 ~~percentage points of growth, respectively, from the impact of the adoption of the new revenue standard and our prior year acquisitions.~~ The remaining 1410 and 168 percentage points of respective growth ~~on a currency-neutral basis was primarily driven by:~~

Ø ~~Switched transaction growth of 16% and 17%, adjusted for the impact of the Venezuela deconsolidation, respectively~~

~~Table of Contents~~

Ø ~~Cross border growth of 17% and 19% on a local currency basis, respectively~~

Ø ~~Gross dollar volume growth of 13% and 14% on a local currency basis, respectively~~

Ø ~~These increases were partially offset by higher rebates and incentives, which increased 18% and 19%, or 21% and 19% on a currency-neutral basis, respectively~~

~~Operating expenses increased~~ ~~11%~~ ~~and~~ ~~25%~~ ~~respectively, versus the comparable~~ ~~periods~~ in ~~2017. Excluding the impact of the Special Items (defined below), adjusted operating expenses increased~~ 9% ~~and~~ ~~16%, respectively. On a currency-neutral basis the increase was~~ ~~10%~~ ~~and~~ ~~15%, respectively, primarily driven by:~~

Ø ~~2 and 3 percentage point respective increases from the adoption of the new revenue guidance,~~

Ø ~~3 percentage point increase from acquisitions for the nine months ended September 30, 2018,~~

Ø ~~3 percentage point increase for the nine months ended September 30, 2018 from the contribution to the Mastercard Center for Inclusive Growth in the first quarter of 2018, partially offset by,~~

Ø 2 and 3 percentage point respective benefits from gains associated with foreign exchange activity for derivative contracts net of balance sheet remeasurement losses, as compared to losses in the prior year comparable periods.

~~The remaining 10 percentage points of respective growth for the three and nine months ended September 30, 2018~~ was primarily related to our continued investment in strategic ~~initiatives and higher operating costs.~~initiatives.

~~The effective income tax rate was~~ ~~16.1%~~ ~~and~~ ~~17.2%~~ ~~for the~~ ~~three and nine months ended September 30, 2018, versus~~ ~~26.0%~~ ~~and~~ ~~26.8%, respectively, for the comparable~~ ~~periods~~ in ~~2017~~. The lower effective tax rates, versus the comparable periods in 2017, were primarily due to a lower enacted statutory tax rate in the United States and a more favorable geographic mix of taxable earnings. The lower effective tax rates for the periods were also attributable to ~~$65 million~~ ~~of discrete deferred tax benefits, relating primarily to provisions for legal matters in the United States. Additionally, the lower effective tax rate for the~~ ~~nine months ended September 30, 2018~~ ~~was attributable to discrete benefits for share-based payments.~~


•	The effective income tax rates were 18.7% and 17.2%, versus 18.3% and 17.8%, respectively, for the comparable periods in 2018. Adjusted effective income tax rates were 18.5% and 17.7%, versus 18.8% and 18.2%, for the comparable periods in 2018, primarily due to a more favorable geographic mix of earnings.

Other financial highlights for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 were as follows:


•	We generated net cash flows from operations of $2.8 billion.


•	We completed the acquisitions of businesses for total consideration of $784 million in the second quarter of 2019.


•	We repurchased 16.4 million shares of our common stock for $3.7 billion and paid dividends of $677 million.


•	We completed a debt offering for an aggregate principal amount of $2.0 billion and separately paid $500 million of principal that matured related to our 2014 USD Notes in the second quarter of 2019.

~~We generated net cash flows from operations~~

Table of ~~$4.9 billion~~ ~~compared to~~ ~~$3.8 billion~~ ~~for the comparable period in~~ ~~2017~~.Contents

~~We completed a debt offering for an aggregate principal amount of $1 billion in the first quarter of 2018.~~

~~We repurchased~~ ~~21.8 million~~ ~~shares of our common stock and paid dividends of~~ ~~$785 million~~.

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”). Our non-GAAP financial measures exclude the impact of gains and losses on our equity investments which includes mark-to-market fair value adjustments, impairments and gains and losses upon disposition and the ~~following~~related tax impacts. Our non- GAAP financial measures also exclude the impact of special items which represent litigation judgments and settlements and certain one-time items, as well as the related tax impacts (“Special Items”):. Our non-GAAP financial measures for the comparable periods exclude the impact of the following:

Gains and Losses on Equity Investments


•	For the three and six months ended June 30, 2019, we recorded net gains of $143 million ($111 million after tax, or $0.11 per diluted share) and $148 million ($116 million after tax, or $0.11 per diluted share), respectively, primarily related to unrealized fair market value adjustments on marketable equity securities.

Special Items

Tax act


•	In the first quarter of 2019, we recorded a $30 million tax benefit ($0.03 per diluted share) related to a reduction to our transition tax liability, resulting from final transition tax regulations issued in January 2019.

Litigation provisions


•	In the second quarter of 2018, we recorded provisions for litigation of $225 million ($175 million after tax, or $0.17 per diluted share) related to the U.S. merchant class litigation, the filed and anticipated opt-out U.S. merchant cases and litigation settlements with U.K. merchants.


•	In the first quarter of 2018, we recorded provisions for litigation of $117 million ($89 million after tax, or $0.08 per diluted share) related to litigation settlements with Pan-European and U.K. merchants and an increase in the reserve for our U.S. merchant opt-out cases.

See Note 6 (Fair Value and Investment Securities), Note 14 (Income Taxes) and Note 15 (Legal and Regulatory Proceedings) to the ~~third quarter of 2018, we recorded provisions~~consolidated financial statements included in Part I, Item 1 for ~~litigation of~~ ~~$23 million~~ (~~$17 million~~ ~~after tax, or~~ ~~$0.02~~ ~~per diluted share) related to litigation settlements with U.K. merchants and~~ ~~$6 million~~ (~~$5 million~~ ~~after tax, and a de minimis impact to diluted shares) related to litigation settlements with Pan-European merchants. Additionally, we recorded discrete tax benefits of~~ ~~$65 million~~ (~~$0.06~~ ~~per diluted share) related primarily to provisions for legal matters in the United States.~~

~~In the second quarter of 2018, we recorded provisions for litigation of~~ ~~$210 million~~ (~~$163 million~~ ~~after tax, or~~ ~~$0.16~~ ~~per diluted share) related to both the U.S. merchant class litigation and the filed and anticipated opt-out U.S. merchant cases. Additionally, we recorded provisions for litigation of~~ ~~$15 million~~ (~~$12 million~~ ~~after tax, or~~ ~~$0.01~~ ~~per diluted share) related to litigation settlements with U.K. merchants.~~

~~In the first quarter of 2018, we recorded provisions for litigation of~~ ~~$70 million~~ (~~$53 million~~ ~~after tax, or~~ ~~$0.05~~ ~~per diluted share) related to litigation settlements with Pan-European merchants,~~ ~~$27 million~~ (~~$21 million~~ ~~after tax, or~~ ~~$0.02~~ ~~per~~

~~Table of Contents~~

~~diluted share) related to an increased reserve for our U.S. merchant opt-out cases and~~ ~~$19 million~~ (~~$15 million~~ ~~after tax, or~~ ~~$0.01~~ ~~per diluted share) related to litigation settlements with U.K. merchants.~~

~~In the first quarter of 2017, we recorded provisions for litigation of~~ ~~$15 million~~ (~~$10 million~~ ~~after tax, or~~ ~~$0.01~~ ~~per diluted share) related to a litigation settlement with Canadian merchants.~~

further discussion. We excluded these ~~Special Items~~items because management evaluates the underlying operations and performance of the ~~company~~Company separately from ~~litigation judgments~~these recurring and ~~settlements related to interchange and other one-time items, as well as related tax impacts.~~nonrecurring items.

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 transactional 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. ~~Our management believes~~We believe the presentation of ~~the impact of foreign currency~~currency-neutral growth rates provides relevant ~~information.~~information to facilitate an understanding of our operating results.

~~Our management believes~~We believe that the non-GAAP financial measures presented facilitate an understanding of our operating performance and provide a meaningful comparison of our results between periods. ~~Our management uses~~We use non-GAAP financial measures to, among other things, evaluate our ongoing operations in relation to historical results, for internal planning and forecasting purposes and in the calculation of performance-based compensation.

3934

Table of Contents

Net revenue, operating expenses, operating margin, other income (expense), effective income tax rate, net income and diluted earnings per share adjusted for the impact of gains and losses on our equity investments, Special Items and/or the impact of foreign currency, are non-GAAP financial measures and should not be relied upon as substitutes for measures calculated in accordance with GAAP.

The following tables reconcile our ~~as-reported~~reported financial measures calculated in accordance with GAAP to the respective non-GAAP adjusted financial ~~measures.~~

Three Months Ended September 30, 2018
Operating expenses Operating margin Effective income tax rate Net income Diluted earnings per share

($ in millions, except per share data)

Reported - GAAP $ 1,611
58.7 % 16.1 % $ 1,899
$ 1.82
Special Items - litigation provisions (29 ) 0.8 % 0.1 % 22
0.02
Special Items - discrete tax items —
— % 2.9 % (65 ) (0.06 )
Non-GAAP $ 1,582
59.4 % 19.1 % $ 1,856
$ 1.78

Nine Months Ended September 30, 2018
Operating expenses Operating margin Effective income tax rate Net income Diluted earnings per share

($ in millions, except per share data)

Reported - GAAP $ 5,095
54.3 % 17.2 % $ 4,960
$ 4.73
Special Items - litigation provisions (371 ) 3.3 % 0.3 % 286
0.27
Special Items - discrete tax items —
— % 1.0 % (65 ) (0.06 )
Non-GAAP $ 4,724
57.6 % 18.5 % $ 5,181
$ 4.94

measures:




	Three Months Ended June 30, 2019
	Operating expenses		Operating margin		Other Income (Expense)			Effective income tax rate		Net income			Diluted earnings per share
	($ in millions, except per share data)
Reported - GAAP	$	1,716	58.3	%	$	122		18.7	%	$	2,048		$	2.00
(Gains) losses on equity investments	**		**		(143		)	(0.2	)%	(111		)	(0.11		)
Non-GAAP	$	1,716	58.3	%	$	(21	)	18.5	%	$	1,937		$	1.89


	Nine Months Ended September 30, 2017											Six Months Ended June 30, 2019
	Operating expenses			Operating margin		Effective income tax rate		Net income		Diluted earnings per share		Operating expenses		Operating margin		Other Income (Expense)			Effective income tax rate		Net income			Diluted earnings per share
	($ in millions, except per share data)											($ in millions, except per share data)
Reported - GAAP	$	4,085		55.5	%	26.8	%	$	3,688	$	3.43	$	3,392	57.6	%	$	112		17.2	%	$	3,910		$	3.80
Special Item - litigation provisions	(15		)	0.2	%	—	%	10		0.01
(Gains) losses on equity investments												**		**		(148		)	(0.1	)%	(116		)	(0.11		)
Tax act												**		**		**			0.6	%	(30		)	(0.03		)
Non-GAAP	$	4,070		55.7	%	26.8	%	$	3,698	$	3.44	$	3,392	57.6	%	$	(36	)	17.7	%	$	3,765		$	3.66

Three Months Ended September 30, 2018 as compared to the Three Months Ended September 30, 2017
Increase/(Decrease)
Net revenue Operating expenses Operating margin Effective income tax rate Net income Diluted earnings per share
Reported - GAAP 15 %
11 %
1.5 ppt
(9.9) ppt
33 %
36 %
Special Items - litigation provisions — %
(2 )%
0.8 ppt
0.1 ppt
2 %
2 %
Special Items - discrete tax items — % — % - ppt 2.9 ppt (5 )% (5 )%
Non-GAAP 15 %
9 %
2.3 ppt
(6.9) ppt
30 %
33 %
Foreign currency ¹
2 %
1 %
0.3 ppt
0.1 ppt
3 %
3 %
Non-GAAP - currency-neutral 17 %
10 %
2.6 ppt
(6.8) ppt
33 %
36 %

~~Table of Contents~~




	Three Months Ended June 30, 2018
	Operating expenses			Operating margin		Other Income (Expense)			Effective income tax rate		Net income		Diluted earnings per share
	($ in millions, except per share data)
Reported - GAAP	$	1,729		52.8	%	$	(14	)	18.3	%	$	1,569	$	1.50
Litigation provisions	(225		)	6.2	%	**			0.5	%	175		0.17
Non-GAAP	$	1,504		59.0	%	$	(14	)	18.8	%	$	1,744	$	1.66

Nine Months Ended September 30, 2018 as compared to the Nine Months Ended September 30, 2017
Increase/(Decrease)
Net revenue Operating expenses Operating margin Effective income tax rate Net income Diluted earnings per share
Reported - GAAP 21 %
25 %
(1.2) ppt
(9.6) ppt
34 %
38 %
Special Items - litigation provisions — %
(9 )%
3.1 ppt
0.3 ppt
7 %
8 %
Special Items - discrete tax items — % — % - ppt 1.0 ppt (2 )% (2 )%
Non-GAAP 21 %
16 %
1.9 ppt
(8.3) ppt
40 %
44 %
Foreign currency ¹
(1 )%
(1 )%
- ppt
0.1 ppt
(1 )%
(1 )%
Non-GAAP - currency-neutral 20 %
15 %
1.9 ppt
(8.2) ppt
39 %
42 %



	Six Months Ended June 30, 2018
	Operating expenses			Operating margin		Other Income (Expense)			Effective income tax rate		Net income		Diluted earnings per share
	($ in millions, except per share data)
Reported - GAAP	$	3,484		51.9	%	$	(36	)	17.8	%	$	3,061	$	2.91
Litigation provisions	(342		)	4.7	%	**			0.4	%	264		0.25
Non-GAAP	$	3,142		56.6	%	$	(36	)	18.2	%	$	3,325	$	3.16

Note: Tables may not sum due to rounding.

** Not applicable

Table of Contents

The following tables represent the reconciliation of our growth rates reported under GAAP to our non-GAAP growth rates:




	Three Months Ended June 30, 2019 as compared to the Three Months Ended June 30, 2018
	Increase/(Decrease)
	Net revenue	Operating expenses	Operating margin	Effective income tax rate	Net income	Diluted earnings per share
Reported - GAAP	12%	(1)%	5.4 ppt	0.4 ppt	31%	33%
(Gains) losses on equity investments ¹	**	**	**	(0.2) ppt	(7)%	(7)%
Litigation provisions	**	15%	(6.2) ppt	(0.4) ppt	(12)%	(12)%
Non-GAAP	12%	14%	(0.7) ppt	(0.3) ppt	11%	14%
Foreign currency ²	3%	2%	0.3 ppt	0.2 ppt	4%	4%
Non-GAAP - currency-neutral	15%	17%	(0.4) ppt	(0.1) ppt	15%	17%



	Six Months Ended June 30, 2019 as compared to the Six Months Ended June 30, 2018
	Increase/(Decrease)
	Net revenue	Operating expenses	Operating margin	Effective income tax rate	Net income	Diluted earnings per share
Reported - GAAP	10%	(3)%	5.7 ppt	(0.6) ppt	28%	31%
(Gains) losses on equity investments ¹	**	**	**	(0.2) ppt	(4)%	(4)%
Tax act	**	**	**	0.6 ppt	(1)%	(1)%
Litigation provisions	**	11%	(4.7) ppt	(0.4) ppt	(10)%	(10)%
Non-GAAP	10%	8%	1.0 ppt	(0.6) ppt	13%	16%
Foreign currency ²	4%	3%	0.4 ppt	0.2 ppt	4%	5%
Non-GAAP - currency-neutral	14%	11%	1.4 ppt	(0.3) ppt	18%	20%

Note: Tables may not sum due to rounding.

** Not applicable

¹For the three and six months ended June 30, 2019, we updated our non-GAAP methodology to exclude the impact of gains and losses on our equity investments. Prior year periods were not restated as the impact of the change was de minimis in relation to our non-GAAP results.

² Represents the foreign currency translational and transactional impact.

Table of Contents

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 transactional foreign currency. The impact of the transactional foreign currency represents the effect of converting revenue and expense transactions occurring in a currency other than the functional currency. 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, cross-border volume fees and volume-related rebates and incentives. 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-related rebates and incentives are impacted by the strengthening or weakening of the U.S. dollar versus non-European local currencies and the strengthening or weakening of the euro versus other 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 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-converted basis is compared to GDV growth on a local currency basis. For the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, GDV on a U.S. dollar-converted basis increased 9%8% and ~~14%~~7%, respectively, while GDV on a local currency basis increased 13% and ~~14%~~12%, respectively, versus the comparable periods in ~~2017.~~2018. Further, the impact from transactional foreign currency occurs in transaction processing revenue, other revenue and operating expenses when the local currency of these items ~~are~~is different than the functional currency.

~~In addition, we~~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 impact 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.~~expenses on the consolidated statement of operations. We ~~attempt to~~ manage foreign currency balance sheet remeasurement and cash flow risk through our foreign exchange risk management activities, which are discussed further in Note 1617 (Foreign Exchange Risk Management) to the consolidated financial statements included in Part I, Item ~~1 of this Report.~~1. 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 ~~on a~~immediately in current ~~basis,~~period earnings, with the ~~associated offset~~related hedged item being recognized as the exposures materialize.

We are exposed to currency devaluation in certain countries. In addition, we are subject to exchange control regulations that restrict the conversion of financial assets into U.S. dollars. While these revenues and assets are not material to us on a consolidated basis, we can be negatively impacted should there be a continued and sustained devaluation of local currencies relative to the U.S. dollar and/or a continued and sustained deterioration of economic conditions in these countries.

4137

Table of Contents

Financial Results

Revenue

In the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, gross revenue increased ~~16%~~13% and ~~21%~~12%, or ~~18%~~17% and ~~20%~~16% on a currency-neutral basis, respectively, versus the comparable periods in ~~2017.~~2018. Gross revenue growth in the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 was driven by an increase in transactions, dollar volume of activity on cards carrying our brands and other payment-related products and services.

Rebates and incentives, in the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, increased ~~18%~~16% and ~~19%~~17%, or ~~21%~~20% and ~~19%~~21% on a currency-neutral basis, respectively, versus the comparable periods in ~~2017,~~2018, primarily due to new and renewed deals and increased volumes.

Our net revenue for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, increased 12% and 10%, or 15% and ~~21%, or 17% and 20%~~14% on a currency-neutral basis, respectively, versus the comparable periods in 2017. The adoption of the new revenue guidance and our prior year acquisitions contributed a combined 3 and 4 percentage points of growth for the three and nine months ended September 30, 2018, respectively.

See Note 1 (Summary of Significant Accounting Policies) to the consolidated financial statements included in Part I, Item 1 of this Report for a further discussion of the new revenue guidance. Additionally, see Note 3 (Revenue) to the consolidated financial statements included in Part I, Item 1 of this Report for a further discussion of how we recognize revenue.2018.

The ~~significant~~ components of net revenue were as follows:

Three Months Ended September 30, Increase (Decrease) Nine Months Ended September 30, Increase (Decrease)
2018 2017 2018 2017
($ in millions)
Domestic assessments $ 1,564
$ 1,302
20% $ 4,559
$ 3,751
22%
Cross-border volume fees 1,338
1,157
16% 3,693
3,057
21%
Transaction processing 1,912
1,662
15% 5,449
4,505
21%
Other revenues 819
747
10% 2,352
2,002
17%
Gross revenue 5,633
4,868
16% 16,053
13,315
21%
Rebates and incentives (contra-revenue) (1,735 ) (1,470 ) 18% (4,910 ) (4,130 ) 19%
Net revenue $ 3,898
$ 3,398
15% $ 11,143
$ 9,185
21%

~~Table of Contents~~



	Three Months Ended June 30,						Increase (Decrease)	Six Months Ended June 30,						Increase (Decrease)
	2019			2018			Increase (Decrease)	2019			2018			Increase (Decrease)
	($ in millions)
Domestic assessments	$	1,680		$	1,537		9%	$	3,285		$	2,995		10%
Cross-border volume fees	1,374			1,198			15%	2,637			2,355			12%
Transaction processing	2,053			1,830			12%	3,975			3,537			12%
Other revenues	962			785			23%	1,804			1,533			18%
Gross revenue	6,069			5,350			13%	11,701			10,420			12%
Rebates and incentives (contra-revenue)	(1,956		)	(1,685		)	16%	(3,699		)	(3,175		)	17%
Net revenue	$	4,113		$	3,665		12%	$	8,002		$	7,245		10%

The following table summarizes the primary drivers of net revenue growth in the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, versus the comparable periods in ~~2017:~~2018:


	Three Months Ended September 30, 2018													Three Months Ended June 30, 2019
	Volume		Acquisitions		Revenue standard ¹		Foreign Currency ²		Other ³			Total		Volume	Acquisitions	Foreign Currency ¹	Other ²			Total
Domestic assessments	13	%	—	%	5	%	(4	)%	6	%	⁴	20	%	13%	—%	(4)%	—	%	³	9%
Cross-border volume fees	15	%	—	%	1	%	(3	)%	2	%		16	%	15%	—%	(5)%	4	%		15%
Transaction processing	13	%	—	%	—	%	(2	)%	4	%		15	%	13%	—%	(3)%	2	%		12%
Other revenues	**		(2	)%	—	%	(2	)%	13	%	⁵	10	%	**	2%	(2)%	23	%	⁴	23%
Rebates and incentives (contra-revenue)	10	%	—	%	(1	)%	(3	)%	12	%	⁶	18	%	10%	—%	(3)%	10	%	⁵	16%

Net revenue	12	%	—	%	3	%	(2	)%	2	%		15	%	12%	—%	(3)%	3	%		12%


	Nine Months Ended September 30, 2018													Six Months Ended June 30, 2019
	Volume		Acquisitions		Revenue Standard ¹		Foreign Currency ²		Other ³			Total		Volume	Acquisitions	Foreign Currency ¹	Other ²			Total
Domestic assessments	13	%	—	%	6	%	—	%	3	%	⁴	22	%	12%	—%	(5)%	2	%	³	10%
Cross-border volume fees	18	%	—	%	1	%	2	%	—	%		21	%	14%	—%	(5)%	3	%		12%
Transaction processing	14	%	—	%	—	%	1	%	5	%		21	%	14%	—%	(3)%	2	%		12%
Other revenues	**		2	%	—	%	—	%	16	%	⁵	17	%	**	1%	(2)%	19	%	⁴	18%
Rebates and incentives (contra-revenue)	10	%	—	%	(1	)%	—	%	9	%	⁶	19	%	10%	—%	(4)%	10	%	⁵	17%

Net revenue	14	%	1	%	3	%	1	%	2	%		21	%	12%	—%	(4)%	2	%		10%

Note: Table may not sum due to rounding.

** Not applicable.

¹Represents the impact 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 consolidated financial statements included in Part I, Item 1 of this Report.

²Represents the foreign currency translational and transactional impact versus the ~~prior year period.~~comparable periods in 2018.

³² Includes impact from pricing and other non-volume based fees.

⁴³Includesimpact of the allocation of revenue to service deliverables, which are primarily recorded in other revenue when services are performed.

⁵⁴Includes impacts from ~~Advisor fees,~~ safety and security fees, ~~loyalty and reward solution~~Advisors fees and other payment-related products and services.

⁶⁵Includes the impact from timing of new, renewed and expired agreements.

Table of Contents

The following table provides a summary of the trend in volume and transaction growth.

Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017
Growth (USD) Growth (Local) Growth (USD) Growth (Local) Growth (USD) Growth (Local) Growth (USD) Growth (Local)
Mastercard-branded GDV ¹
9 % 13 % 11 % 10 % 14 % 14 % 6 % 7 %
Asia Pacific/Middle East/Africa 10 % 13 % 8 % 8 % 15 % 13 % 6 % 8 %
Canada 6 % 10 % 13 % 9 % 11 % 10 % 12 % 10 %
Europe 10 % 18 % 18 % 15 % 20 % 19 % 5 % 7 %
Latin America 2 % 16 % 17 % 15 % 9 % 17 % 17 % 15 %
United States 9 % 9 % 6 % 6 % 10 % 10 % 4 % 4 %
Cross-border Volume ¹
14 % 17 % 17 % 15 % 22 % 19 % 13 % 14 %
Switched Transactions 12 % 17 % 13 % 17 %

¹ ~~Excludes~~ The cross-border volume ~~generated by Maestro~~ and ~~Cirrus cards.~~

~~Table of Contents~~

In 2016, 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.

Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017
Growth (Local)
GDV ¹

Worldwide as reported 13% 10% 14% 7%
Worldwide as adjusted for EU Regulation 13% 10% 14% 9%

Europe as reported 18% 15% 19% 7%
Europe as adjusted for EU Regulation 18% 16% 19% 15%

¹ ~~Excludes volume generated by Maestro and Cirrus cards.~~

~~The following table reflects~~ switched transactions growth ~~rates. For comparability purposes,~~rates are adjusted for the effects of differing switching days between periods. Additionally, we adjusted the switched transactions growth ~~rates~~rate in the prior period for the deconsolidation of our Venezuelan ~~subsidiaries. Revenue from these transactions was not material to our consolidated financial results.~~subsidiaries in 2017. For a more detailed discussion of the deconsolidation of our Venezuelan subsidiaries, refer to Note 1 (Summary of Significant Accounting Policies) in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

Three Months Ended September 30, Nine Months Ended September 30,
2018 2017 2018 2017
Growth (Local)
Switched Transactions as reported 12% 17% 13% 17%
Switched Transactions as adjusted for the deconsolidation of Venezuela subsidiaries 16% 15% 17% 16%



	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	Growth (USD)	Growth (Local)	Growth (USD)	Growth (Local)	Growth (USD)	Growth (Local)	Growth (USD)	Growth (Local)
Mastercard-branded GDV ¹	8%	13%	15%	14%	7%	12%	17%	14%
Asia Pacific/Middle East/Africa	5%	11%	17%	14%	5%	10%	18%	14%
Canada	4%	8%	14%	9%	2%	7%	14%	9%
Europe	10%	19%	22%	20%	8%	18%	26%	19%
Latin America	10%	16%	9%	17%	6%	15%	13%	17%
United States	10%	10%	9%	9%	9%	9%	10%	10%
Cross-border volume ¹	10%	16%	24%	19%	8%	15%	27%	20%
Switched Transactions		18%		17%		17%		16%

A significant portion of our revenue is concentrated among our five largest customers. 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” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017.¹ Excludes volume generated by Maestro and Cirrus cards.

Operating Expenses

Operating expenses ~~increased 11%~~decreased 1% and ~~25%~~3% for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, respectively, versus the comparable periods in ~~2017. Excluding the impact of the Special Items, adjusted~~2018. Adjusted operating expenses increased 9%14% and ~~16%~~8%, or ~~10%~~17% and ~~15%~~11% on a currency-neutral basis, ~~for the three and nine months ended September 30, 2018,~~respectively, versus the comparable periods in ~~2017.~~

~~Table of Contents~~

2018.

The components of operating expenses were as follows:


	Three Months Ended September 30,					Increase (Decrease)			Nine Months Ended September 30,								Increase (Decrease)		Three Months Ended June 30,								Increase (Decrease)		Six Months Ended June 30,						Increase (Decrease)
	2018			2017				2018				2017				2019				2018					2019				2018						Increase (Decrease)
	($ in millions)																		($ in millions)
General and administrative	$	1,236		$	1,136	Increase (Decrease)	9	%		$	3,684			$	3,162		Increase (Decrease)			16	%	$	1,369			$	Increase (Decrease)	1,184			16%	$	2,736		$	2,505	9%
Advertising and marketing	235			203		15	%		694				587				18	%	225				205				9%		417			402			4%
Depreciation and amortization	111			118		(6	)%		346				321				8	%	122				115				5%		239			235			2%
Provision for litigation settlements	29			—		**			371				15				**
Provision for litigation																			—				225				**		—			342			**
Total operating expenses	1,611			1,457		11	%		5,095				4,085				25	%	1,716				1,729				(1)%		3,392			3,484			(3)%
Special Items¹	(29		)	—		**			(371		)		(15		)		**		—				(225		)		**		—			(342		)	**
Adjusted total operating expenses (excluding Special Items¹)	$	1,582		$	1,457	9	%		$	4,724			$	4,070			16	%	$	1,716			$	1,504			14%		$	3,392		$	3,142		8%

Note: Table may not sum due to rounding

** Not meaningful.

¹ See “Non-GAAP Financial Information” for further information on our non-GAAP adjustments and the ~~Special Items.~~reconciliation to GAAP reported amounts.

Table of Contents

The following table summarizes the primary drivers of changes in operating expenses infor the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 versus the comparable periods in ~~2017:~~2018:


	Three Months Ended September 30, 2018														Three Months Ended June 30, 2019
	Operational		Special Items ¹		Acquisitions		Revenue Standard ²		Center for Inclusive Growth ³		Foreign Currency ⁴		Total		Operational	Special Items ¹	Acquisitions	Foreign Currency ²	Total
General and administrative	11	%	—	%	(1	)%	—	%	—	%	(1	)%	9	%	16%	—%	2%	(2)%	16%
Advertising and marketing	4	%	—	%	1	%	14	%	—	%	(2	)%	15	%	13%	—%	—%	(4)%	9%
Depreciation and amortization	(9	)%	—	%	3	%	—	%	—	%	—	%	(6	)%	2%	—%	5%	(2)%	5%
Provision for litigation settlements	**		**		**		**		**		**		**
Provision for litigation															**	**	**	**	**
Total operating expenses	8	%	2	%	(1	)%	2	%	—	%	(1	)%	11	%	15%	(15)%	2%	(2)%	(1)%


	Nine Months Ended September 30, 2018														Six Months Ended June 30, 2019
	Operational		Special Items ¹		Acquisitions		Revenue Standard ²		Center for Inclusive Growth ³		Foreign Currency ⁴		Total		Operational	Special Items ¹	Acquisitions	Foreign Currency ²	Total
General and administrative	10	%	—	%	2	%	—	%	3	%	1	%	16	%	11%	—%	1%	(2)%	9%
Advertising and marketing	(4	)%	—	%	—	%	21	%	—	%	1	%	18	%	8%	—%	—%	(4)%	4%
Depreciation and amortization	(5	)%	—	%	12	%	—	%	—	%	1	%	8	%	1%	—%	3%	(2)%	2%
Provision for litigation settlements	**		**		**		**		**		**		**
Provision for litigation															**	**	**	**	**
Total operating expenses	7	%	9	%	3	%	3	%	3	%	1	%	25	%	10%	(11)%	1%	(3)%	(3)%

Note: Tables may not sum due to rounding.

** Not meaningful.

¹See “Non-GAAP Financial Information” for further information on our non-GAAP adjustments and the ~~Special Items.~~reconciliation to GAAP reported amounts.

²Represents the impact 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 consolidated financial statements included in Part I, Item 1 of this report.

³ ~~Represents contribution to the Mastercard Center for Inclusive Growth, a non-profit charitable organization, made in the first quarter of 2018.~~

⁴Represents the foreign currency translational and transactional impact versus the prior ~~year~~ period.

~~Table of Contents~~

General and Administrative

The significant components of our general and administrative expenses were as follows:


	Three Months Ended September 30,				Increase (Decrease)			Nine Months Ended September 30,								Increase (Decrease)		Three Months Ended June 30,								Increase (Decrease)		Six Months Ended June 30,						Increase (Decrease)
	2018		2017				2018				2017				2019				2018					2019				2018						Increase (Decrease)
	($ in millions)																	($ in millions)
Personnel	$	822	$	723	Increase (Decrease)	14	%		$	2,371			$	1,961		Increase (Decrease)			21	%	$	853			$	Increase (Decrease)	797		7	%	$	1,664		$	1,549	7%
Professional fees	88		85		2	%		253				240				5	%	102				84				21	%	188			165			14%
Data processing and telecommunications	154		135		14	%		437				366				19	%	162				142				14	%	317			283			12%
Foreign exchange activity	2		23		**			(29		)		93				**
Foreign exchange activity¹																		13				(59		)		**		14			(31		)	**
Other	170		170		1	%		652				502				30	%	239				220				11	%	553			539			3%
General and administrative expenses	$	1,236	$	1,136	9	%		$	3,684			$	3,162			16	%	$	1,369			$	1,184			16	%	$	2,736		$	2,505		9%

Note: Table may not sum due to rounding.

** Not meaningful.

¹Foreign 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 17 (Foreign Exchange Risk Management) to the consolidated financial statements included in Part I, Item 1 for further discussion.

The primary drivers of general and administrative expenses for three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 versus the comparable periods in ~~2017 are~~2018 were as follows:

•

Personnel expenses increased 7% for both periods, or 9% and 10% on a currency-neutral basis, respectively. The increase was due to a higher number of employees to support our continued investment in the areas of digital infrastructure, safety and security platforms and data analytics as well as geographic expansion. Acquisitions contributed 1 percentage point to personnel expense growth for both periods.

~~Personnel~~

Table of Contents


•	Data processing and telecommunication expenses increased 14% and 12%, or 16% and 14% on a currency-neutral basis, respectively, primarily due to higher software licensing costs as well as software and hardware maintenance. Acquisitions contributed 1 percentage point to expense growth for the three months ended June 30, 2019.


•	Foreign exchange activity contributed 6 and 2 percentage points to growth , respectively. For the three and six months ended June 30, 2019, we recorded losses from our foreign exchange derivative contracts compared to net gains from our foreign exchange derivative contracts and balance sheet remeasurement in the prior year comparable periods.


•	Other expenses increased 11% and 3%, or 14% and 6% on a currency-neutral basis, respectively, primarily due to costs to support our strategic development efforts. Other expenses include charitable contribution costs, travel and meeting expenses, costs to provide value added service offerings, rental expense for our facilities and other costs associated with our business.

Advertising and Marketing

Advertising and marketing expenses ~~increase~~d ~~14%~~for the three and ~~21%~~six months ended June 30, 2019, increased 9% and 4%, or ~~15%~~13% and ~~20%~~8% on a currency-neutral basis, respectively. The increase was due to a higher number of employees to support our continued investment in the areas of digital infrastructure, safety and security platforms and data analytics as well as geographic expansion. The impact from acquisitions was de minimis for the ~~three months ended September 30, 2018~~ ~~and contributed~~ 3 ~~percentage points to expense growth for the~~ ~~nine months ended September 30, 2018~~.

~~Data processing and telecommunication expenses increased~~ ~~14%~~ ~~and~~ ~~19%, or~~ ~~14%~~ ~~and~~ ~~18%~~ ~~on a currency-neutral basis, respectively, due to capacity growth of our business. The impact from acquisitions was de minimis for the~~ ~~three months ended September 30, 2018~~ ~~and contributed~~ 5 ~~percentage points to expense growth for the~~ ~~nine months ended September 30, 2018~~.

~~Foreign exchange activity contributed a benefit of~~ 2 ~~and~~ 4 ~~percentage points, respectively. For the~~ ~~three months ended September 30, 2018, we recorded gains from our foreign exchange derivative contracts primarily related to the strengthening of the U.S. dollar, fully offset by balance sheet remeasurement losses. For the~~ ~~nine months ended September 30, 2018~~ we recorded gains from our foreign exchange derivative contracts primarily related to the strengthening of the U.S. dollar, partially offset by balance sheet remeasurement losses. This compares to losses from both our foreign exchange derivative contracts and balance sheet remeasurement in the prior year comparable periods.

~~Other expenses remained relatively flat for the~~ ~~three months ended September 30, 2018. For the~~ ~~nine months ended September 30, 2018~~ other expenses increased 20 percentage points primarily due to the contribution to the Mastercard Center for Inclusive Growth, a non-profit charitable organization. The remaining increase was due to costs to support our strategic development efforts. Other expenses include costs to provide loyalty and rewards solutions, travel and meeting expenses, rental expense for our facilities and other costs associated with our business.

~~Advertising and Marketing~~

~~Advertising and marketing expenses increased 15% and 18%, or 18% and 17% on a currency-neutral basis, for the three and nine months ended September 30, 2018,~~ respectively, versus the comparable periods in ~~2017,~~2018, primarily due to ~~a change in accounting for certain marketing fund arrangements as a result~~timing of ~~our adoption of the new revenue guidance, partially offset by a net decrease in~~ spending on certain marketing ~~campaigns. For a more detailed discussion on the impact of the new revenue guidance, refer to Note 1 (Summary of Significant Accounting Policies).~~initiatives.

Depreciation and Amortization

Depreciation and amortization expenses ~~decreased 6% or 5% on a currency- neutral basis,~~ for the three and six months ended ~~September~~June 30, ~~2018 versus the comparable period in 2017, primarily due to the full amortization of certain intangible assets. Depreciation~~2019, increased 5% and ~~amortization expenses increased 8%~~2%, or 7% and 4% on a currency-neutral basis, ~~for the nine months ended September 30, 2018~~respectively, versus the comparable ~~period~~periods in ~~2017,~~2018, primarily due to the impact of ~~acquisitions partially offset by the full amortization of certain intangible assets.~~acquisitions.

~~Table of Contents~~

Provision for Litigation ~~Settlements~~

In the three and ~~nine~~six months ended ~~September~~June 30, ~~2018, we~~2019, there were no litigation provisions recorded ~~$29~~versus $225 million and ~~$371~~$342 million, respectively, in provisions for various ~~litigations, respectively, versus $15 million~~litigation settlements recorded in the ~~first quarter of 2017. See section entitled “Non-GAAP Financial Information”~~comparable periods in ~~this section and Note 14 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part I, Item 1 of this Report for further discussion.~~2018.

Other Income (Expense)

~~Other~~Total other income (expense) is comprised primarily of investment income, gains (losses) on equity investments, interest expense and our share of income (losses) from equity method ~~investments, certain~~investments. Total other income (expense) ~~from our defined benefit plans~~increased $136 million and ~~other gains and losses. Total other expense increased $14~~$148 million for the three and six months ended ~~September~~June 30, ~~2018~~2019, respectively, versus the comparable ~~period~~periods in ~~2017,~~2018, primarily due to higher interest expense related to our debt issuance in February 2018 and the lapping of a gain relating to an investment we had in a company that we acquired in the third quarter of 2017, partially offset by higher investment income. For the nine months ended September 30, 2018 total other income (expense) remained relatively flat.net unrealized gains recorded on marketable equity securities.

Income Taxes

The effective income tax rates were ~~16.1%~~18.7% and 17.2% for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019, respectively, versus ~~26.0%~~18.3% and ~~26.8%, respectively,~~17.8% for the comparable periods in ~~2017.~~2018. The higher effective tax rate for the three months, versus the comparable period in 2018, was primarily the result of discrete tax items, notably a reduction in our 2018 liability for uncertain tax positions due to a favorable court decision. The lower effective tax ~~rates,~~rate for the six months, versus the comparable ~~periods~~period in ~~2017, were~~2018, was primarily due to ~~a lower enacted statutory tax rate in the United States and~~ a more favorable geographic mix of ~~taxable earnings. On December 22, 2017, the~~earnings and a discrete tax benefit arising from a reduction to our transition tax liability resulting from final U.S. ~~passed comprehensive tax legislation (the “U.S. Tax Reform”) which, among other things, reduces the U.S. corporate income tax rate from 35% to 21% in 2018.~~Department of Treasury and Internal Revenue Service regulations issued on January 15, 2019. These benefits were partially offset by ~~other aspects of~~ the U.S. Tax Reform for which a tax benefit is no longer recognized, including a U.S. foreign tax credit benefit for the repatriation of current year foreign earnings and the domestic production activities deduction. The lower effective tax rates for the periods were also attributable to $65 million of discrete deferred tax benefits, relating primarily to provisions for legal mattersreduction in the United States. See Note 14 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part I, Item 1 of this Report for further discussion of the U.S. merchant class litigation. Additionally, the lower effective tax rate for the nine months ended September 30, 2018 ~~was attributable to discrete benefits related to share-based payments.~~liability previously mentioned.

Liquidity and Capital Resources

We rely 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 following table summarizes the cash, cash equivalents, investments and credit available to us at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017:~~2018:


	September 30, 2018		December 31, 2017		June 30, 2019		December 31, 2018
	(in billions)				(in billions)
Cash, cash equivalents and investments ¹	$	8.5	$	7.8	$	6.5	$	8.4
Unused line of credit	3.8		3.8		4.5		4.5

¹Investments include available-for-sale securities and short-term held-to-maturity securities. ~~At September 30, 2018 and December 31, 2017, this~~This amount excludes restricted cash ~~related to the U.S. merchant class litigation settlement~~and restricted cash equivalents of ~~$550 million~~$1.8 billion and ~~$546 million, respectively. This amount also excludes restricted security deposits held for customers of $1.0~~$1.7 billion at ~~September~~June 30, ~~2018~~2019 and ~~$1.1 billion at~~ December 31, ~~2017.~~2018, respectively.

~~As a result~~

Table of the enactment of the U.S. Tax Reform, among other things, we have changed our assertion regarding the indefinite reinvestment of foreign earnings outside the U.S. for certain of our foreign affiliates. See Note 13 (Income Taxes) to the consolidated financial statements included in Part I, Item 1 of this Report for further discussion. It is our present intention to indefinitely reinvest a portion of our historic undistributed accumulated earnings associated with certain foreign subsidiaries outside of the United States. Based upon the ongoing review of business requirements and capital needs of our non-U.S. subsidiaries, we believe a portion of these undistributed earnings that have already been subject to tax in the U.S. will be necessary to fund current and future growth of the related businesses and will remain indefinitely reinvested outside of the U.S. In 2018, we continue to review our global working capital and cash needs to determine the amount we consider indefinitely reinvested. We will disclose such amount in the period in which such analysis is completed.Contents

Our liquidity and access to capital could be negatively impacted by global credit market conditions. We guarantee the settlement of many ~~Mastercard, Cirrus and Maestro-branded~~of the transactions between our ~~issuers and acquirers.~~customers. See Note 1516 (Settlement and

~~Table of Contents~~

Other Risk Management) to the consolidated financial statements in Part I, Item 1 ~~of this Report~~ for a description of these guarantees. Historically, payments under these guarantees have not been significant; however, historical trends may not be an indication of 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. For additional discussion of these and other risks facing our business, see Part I, Item 1A - Risk Factors of our Annual Report on Form 10-K for the year ended December 31, ~~2017;~~2018 and Note 1415 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part I, Item ~~1 of this Report; and “Business Environment” within this section of this Report.~~1.

Cash Flow

The table below shows a summary of the cash flows from operating, investing and financing activities for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019 and ~~2017:~~2018:


	Nine Months Ended September 30,						Six Months Ended June 30,
	2018			2017			2019			2018
	(in millions)						(in millions)
Cash Flow Data:
Net cash provided by operating activities	$	4,891		$	3,841		$	2,848		$	2,524
Net cash used in investing activities	(237		)	(1,623		)	(554		)	(6		)
Net cash used in financing activities	(3,833		)	(3,494		)	(3,160		)	(2,416		)

Net cash provided by operating activities increased ~~$1,050~~$324 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, versus the comparable period in ~~2017,~~2018, primarily due to higher net income adjusted for non-cash items and the timing of settlement activity, partially offset by ~~refund~~the decrease in accrued litigation provisions driven by the payment of ~~restricted security deposits and timing of settlement with customers.~~

~~Net cash used in investing activities decreased $1,386 million for~~ the ~~nine months ended September 30, 2018, versus the comparable period in 2017, primarily due to prior year acquisitions and higher net proceeds from investment securities~~European Commission fine in the current period.

Net cash used in ~~financing~~investing activities increased ~~$339~~$548 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, versus the comparable period in ~~2017,~~2018, primarily due to acquisitions and purchases of equity investments, partially offset by higher net proceeds from our investments in available-for-sale and held-to-maturity securities.

Net cash used in financing activities increased $744 million for the six months ended June 30, 2019, versus the comparable period in 2018, primarily due to higher repurchases of our Class A common stock, the settlement of the contingent consideration attributable to our 2017 acquisitions and dividends paid, partially offset by ~~the~~higher net debt proceeds ~~from the issuance of debt~~ in the current period.

The table below shows a summary of select balance sheet data at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017:~~2018:


	September 30, 2018		December 31, 2017		June 30, 2019		December 31, 2018
	(in millions)				(in millions)
Balance Sheet Data:
Current assets	$	15,064	$	13,797	$	14,165	$	16,171
Current liabilities	9,709		8,793		9,497		11,593
Long-term liabilities	7,764		6,968		10,125		7,778
Equity	5,796		5,497		5,035		5,418

We believe that our existing cash, cash equivalents and investment securities balances, ~~our~~ cash flow generating capabilities, ~~our~~ borrowing capacity and ~~our~~ access to capital resources are sufficient to satisfy our future operating cash needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with our existing operations and potential obligations.

4842

Table of Contents

Debt and Credit Availability

In ~~February 2018,~~May 2019, we issued ~~$500 million~~$1.0 billion principal amount of notes due ~~in 2028~~June 2029 and ~~an additional $500 million~~$1.0 billion principal amount of notes due ~~in 2048.~~June 2049. Additionally, during the second quarter of 2019, $500 million of principal related to the 2014 USD Notes matured and was paid. Our total debt outstanding (including the current portion) was ~~$6.4~~$7.8 billion and ~~$5.4~~$6.3 billion at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017, respectively, with the earliest maturity of $500 million of principal occurring in April 2019.~~2018, respectively.

We have a commercial paper program (the “Commercial Paper Program”), 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, we entered into a committed unsecured ~~$3.75~~$4.5 billion revolving credit facility (the “Credit Facility”) which expires in ~~October 2022.~~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 our customers. In addition, we may borrow and repay amounts under these facilities for business continuity purposes. We had no borrowings outstanding under the Commercial Paper Program or the Credit Facility at ~~September~~June 30, ~~2018~~2019 and December 31, ~~2017.~~

In March 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, we 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.2018.

See Note 910 (Debt) to the consolidated financial statements included in Part I, Item ~~1 of this Report~~I for further discussion of long-term ~~debt, the Commercial Paper Program and the Credit Facility.~~debt.

Dividends and Share Repurchases

We have historically paid quarterly dividends on our 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.

Aggregate payments for quarterly dividends totaled ~~$785~~$677 million for the ~~nine~~six months ended ~~September~~June 30, ~~2018.~~2019.

On December 4, ~~2017,~~2018, our Board of Directors declared a quarterly cash dividend of ~~$0.25~~$0.33 per share paid on February ~~9, 2018~~8, 2019 to holders of record on January 9, ~~2018~~2019 of our Class A common stock and Class B common stock. The aggregate amount of this dividend was ~~$263~~$340 million.

On February 5, ~~2018,~~2019, our Board of Directors declared a quarterly cash dividend of ~~$0.25~~$0.33 per share payable on May 9, ~~2018~~2019 to holders of record on April 9, ~~2018~~2019 of our Class A common stock and Class B common stock. The aggregate amount of this dividend was ~~$262~~$337 million.

On June 25, ~~2018,~~2019, our Board of Directors declared a quarterly cash dividend of ~~$0.25~~$0.33 per share payable on August 9, ~~2018~~2019 to holders of record on July 9, ~~2018 of our Class A common stock and Class B common stock. The aggregate amount of this dividend was $260 million.~~

~~On September 17, 2018, our Board of Directors declared a quarterly cash dividend of $0.25 per share payable on November 9, 2018 to holders of record on October 9, 2018~~2019 of our Class A common stock and Class B common stock. The aggregate amount of this dividend will be ~~$259~~$335 million.

~~Table of Contents~~

Repurchased shares of our common stock 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 ~~2017~~2018 and ~~December 2016,~~2017, our Board of Directors approved share repurchase programs authorizing us to repurchase up to $6.5 billion and $4 billion, respectively, of our Class A common stock under each plan. The program approved in ~~2017~~2018 became effective in ~~March 2018~~January 2019 after completion of the share repurchase program authorized in ~~December 2016.~~ 2017.

The following table summarizes our share ~~repurchases,~~repurchase authorizations of our Class A common stock through ~~September~~June 30, ~~2018,~~2019, under the plans approved in ~~2017~~2018 and ~~2016:~~2017:

(in millions, except average price data)
Remaining authorization at December 31, 2017 $ 5,234
Dollar value of shares repurchased during the nine months ended September 30, 2018 $ 4,045
Remaining authorization at September 30, 2018 $ 1,189
Shares repurchased during the nine months ended September 30, 2018 21.8
Average price paid per share during the nine months ended September 30, 2018 $ 185.64



	(in millions, except average price data)
Remaining authorization at December 31, 2018	$	6,801
Dollar value of shares repurchased during the six months ended June 30, 2019	$	3,741
Remaining authorization at June 30, 2019	$	3,060
Shares repurchased during the six months ended June 30, 2019	16.4
Average price paid per share during the six months ended June 30, 2019	$	228.13

See Note ~~10 (Stockholders’~~11 (Stockholders' Equity) to the consolidated financial statements included in Part I, Item 1 ~~of this Report~~ for further discussion.

Table of Contents

Off-Balance Sheet Arrangements

~~We have~~There was no off-balance sheet debt, other than lease arrangements and other commitments as presented in the future obligations table in Part II, Item 7 ~~(Liquidity~~- Liquidity and Capital ~~Resources) in Part II~~Resources of our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~

~~Recent Accounting Pronouncements~~

~~Refer~~2018. As of June 30, 2019, lease arrangements that have commenced are recognized on the consolidated balance sheet and leases entered into but not yet commenced are disclosed in Note 8 (Property, Equipment and Right-of-Use Assets). For a more detailed discussion on lease arrangements, refer to Note 1 (Summary of Significant Accounting Policies) and Note 8 (Property, Equipment and Right-of-Use Assets) to the consolidated financial statements included in Part I, Item ~~1 of this Report.~~1.

Recent Accounting Pronouncements

Refer to Note 1 (Summary of Significant Accounting Policies) to the consolidated financial statements included in Part I, Item 1.

ITEM 3. 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 ~~U.S. dollar forward~~foreign exchange rates could result in a fair value loss of approximately ~~$108~~$129 million on our foreign currency derivative contracts outstanding at ~~September~~June 30, ~~2018~~2019 related to the hedging program. A 100 basis point adverse change in interest rates would not have a material impact on our investments at ~~September~~June 30, 2018. Our euro-denominated debt is vulnerable to changes in the euro to U.S. dollar exchange rates. We use the euro-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). In addition to euro-denominated debt, we have U.S. dollar-denominated debt, both of which carry a fixed interest rate and thus the fair value of our debt is subject to interest rate risk. There was no material equity price risk at September 30, 2018.2019.

ITEM 4. 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 that is required to be disclosed in the reports 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

~~Table of Contents~~

other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.

Changes in Internal Control over Financial Reporting

There was no change in Mastercard’s internal control over financial reporting that occurred during the three months ended ~~September~~June 30, ~~2018~~2019 that has materially affected, or is reasonably likely to materially affect, Mastercard's internal control over financial reporting.

~~Other Financial Information~~

With respect to the unaudited consolidated financial information of Mastercard Incorporated and its subsidiaries as of September 30, 2018 and for the three and nine months ended September 30, 2018 and 2017, PricewaterhouseCoopers LLP reported that they have applied limited procedures in accordance with professional standards for a review of such information. However, their report dated October 30, 2018 appearing below, states that they did not audit and they do not express an opinion on that unaudited financial information. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. PricewaterhouseCoopers LLP is not subject to the liability provisions of Section 11 of the Securities Act of 1933 (the “Act”) for their report on the unaudited consolidated financial information because that report is not a “report” or a “part” of a registration statement prepared or certified by PricewaterhouseCoopers LLP within the meaning of Sections 7 and 11 of the Act.

5144

Table of Contents

~~REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM~~

~~To the Board of Directors and Stockholders of Mastercard Incorporated:~~

~~Results of Review of Interim Financial Statements~~

We have reviewed the consolidated balance sheet of Mastercard Incorporated and its subsidiaries (the “Company”) as of September 30, 2018, and the related consolidated statements of operations and of comprehensive income for the three-month and nine-month periods ended September 30, 2018 and 2017, the consolidated statement of changes in equity for the nine-month period ended 2017 and the consolidated statement of cash flows for the nine-month periods ended September 30, 2018 and September 30, 2017, including the related notes, appearing under Part I, Item 1 of this Form 10-Q (collectively referred to as the “interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the interim financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2017, and the related consolidated statements of operations, of comprehensive income, of changes in equity, and of cash flows for the year then ended (not presented herein), and in our report dated February 14, 2018, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the consolidated balance sheet information as of December 31, 2017, is fairly stated in all material respects, in relation to the consolidated balance sheet from which it has been derived.

~~Basis for Review Results~~

These interim financial statements are the responsibility of the Company’s management. 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 review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

~~/s/ PricewaterhouseCoopers LLP~~

~~New York, New York~~

~~October 30, 2018~~

~~Table of Contents~~

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Refer to Note 1415 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part I, Item ~~1 of this Report.~~1.

ITEM 1A. RISK FACTORS

For a discussion of our risk factors, see Part I, Item 1A ~~(Risk Factors) in Part I~~- Risk Factors of our Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER PURCHASES OF EQUITY SECURITIES

During the ~~third~~second quarter of ~~2018,~~2019, we repurchased a total of approximately ~~5.6~~7.7 million shares for ~~$1.2~~$1.9 billion at an average price of ~~$207.14~~$249.82 per share of Class A common stock. See Note ~~10 (Stockholders’~~11 (Stockholders' Equity) to the consolidated financial statements included in Part I, Item 1 ~~of this Report~~ for further discussion with respect to our share repurchase programs. Our repurchase activity during the ~~third~~second quarter of ~~2018~~2019 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
July 1 - 31 1,909,197
$ 203.43
1,909,197
$ 1,965,014,604
August 1 - 31 2,190,133
$ 203.77
2,190,133
$ 1,518,740,332
September 1 - 30 1,522,040
$ 216.64
1,522,040
$ 1,189,010,441
Total 5,621,370
$ 207.14
5,621,370



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
April 1 - 30	2,276,713	$	239.03	2,276,713	$	4,432,723,177
May 1 - 31	2,718,974	$	249.94	2,718,974	$	3,753,140,111
June 1 - 30	2,678,354	$	258.87	2,678,354	$	3,059,782,259
Total	7,674,041	$	249.82	7,674,041

¹Dollar value of shares that may yet be purchased under the repurchase programs is as of the end of the period.

ITEM 5. OTHER INFORMATION

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.~~99.1.

ITEM 6. EXHIBITS

Refer to the Exhibit Index included herein.

5345

Table of Contents

EXHIBIT INDEX




Exhibit Number		Exhibit Description

~~10.1~~4.1		~~Superseding and Amended Class Settlement Agreement,~~Officer’s Certificate of the Company, dated September 17, 2018, by and among Mastercard Incorporated and Mastercard International Incorporated; Visa, Inc., Visa U.S.A. Inc. and Visa International Service Association; the Class Plaintiffs defined therein; and the Customer Banks defined thereinas of May 31, 2019 (incorporated by reference to Exhibit ~~10.1 to~~4.1 of the Company’s Current Report on Form 8-K filed ~~September 18, 2018 (File~~on May 31, 2019 (Filed No. 001-32877)).

15*4.2		~~Awareness Letter from~~Form of Global Note representing the Company’s ~~Independent Registered Public Accounting Firm.~~2.950% Notes due 2029 (included in Officer’s Certificate of the Company, dated as of May 31, 2019) (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on May 31, 2019 (Filed No. 001-32877)).

31.1*4.3		Form of Global Note representing the Company’s 3.650% Notes due 2049 (included in Officer’s Certificate of the Company, dated as of May 31, 2019)(incorporated by reference to Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on May 31, 2019 (Filed No. 001-32877)).

10.1*		Schedule of Non-Employee Directors’ Annual Compensation effective as of June 25, 2019.

10.2*		Form of Deferred Stock Unit Agreement for awards under 2006 Non-Employee Director Equity Compensation Plan, amended and restated effective June 5, 2012 (effective for awards granted on and subsequent to June 25, 2019).

10.3*		Form of Restricted Stock Agreement for awards under 2006 Non-Employee Director Equity Compensation Plan, amended and restated effective June 5, 2012 (effective for awards granted on and subsequent to June 25, 2019).

10.4*		First Amendment to $4,500,000,000 Amended and Restated Credit Agreement, dated as of November 15, 2018, among Mastercard Incorporated, the several lenders and agents from time to time party thereto, Citibank, N.A., as managing administrative agent and JPMorgan Chase Bank, N.A. as administrative agent.

31.1*		Certification of Ajay Banga, President and Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2*		Certification of ~~Martina Hund-Mejean,~~Sachin Mehra, Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification of Ajay Banga, President and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification of ~~Martina Hund-Mejean,~~Sachin Mehra, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.1*		Disclosure pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012.

101.INS*101.INS		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH*		XBRL Taxonomy Extension Schema Document

101.CAL*		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*		XBRL Taxonomy Extension Label Linkbase Document

101.PRE*		XBRL Taxonomy Extension Presentation Linkbase Document


*	Filed or furnished herewith.

The agreements and other documents filed as exhibits to this ~~report~~Report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and should not be relied upon for that purpose. In particular, any representations and warranties made by the Company in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.

5446

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



		MASTERCARD INCORPORATED
		(Registrant)

Date:	~~October~~July 30, ~~2018~~2019	By:	/S/ AJAY BANGA
			Ajay Banga
			President and Chief Executive Officer
			(Principal Executive Officer)

Date:	~~October~~July 30, ~~2018~~2019	By:	/S/ ~~MARTINA HUND-MEJEAN~~SACHIN MEHRA
			~~Martina Hund-Mejean~~Sachin Mehra
			Chief Financial Officer
			(Principal Financial Officer)

Date:	~~October~~July 30, ~~2018~~2019	By:	/S/ SANDRA ARKELL
			Sandra Arkell
			Corporate Controller
			(Principal Accounting Officer)

5547



	Three Months Ended September 30, 2018						Nine Months Ended September 30, 2018
	Balances excluding revenue standard		Impact of revenue standard		As reported		Balances excluding revenue standard		Impact of revenue standard			As reported
	(in millions)
Net Revenue	$	3,798	$	100	$	3,898	$	10,831	$	312		$	11,143

Operating Expenses
General and administrative	1,235		1		1,236		3,688		(4		)	3,684
Advertising and marketing	208		27		235		568		126			694

Income before income taxes	2,192		72		2,264		5,799		190			5,989
Income tax expense	351		14		365		987		42			1,029
Net Income	1,841		58		1,899		4,812		148			4,960



	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



	December 31,
	2017		2016
	(in millions)
Cash and cash equivalents	$	5,933	$	6,721
Restricted cash and restricted cash equivalents
Restricted cash for litigation settlement	546		543
Restricted security deposits held for customers	1,085		991
Prepaid expenses and other current assets	28		3
Other assets	—		15
Cash, cash equivalents, restricted cash and restricted cash equivalents - beginning of period ¹	$	7,592	$	8,273

	September 30,
	2018		2017
	(in millions)
Cash and cash equivalents	$	6,871	$	5,559
Restricted cash and restricted cash equivalents
Restricted cash for litigation settlement	550		545
Restricted security deposits held for customers	1,034		1,026
Prepaid expenses and other current assets	23		61
Cash, cash equivalents, restricted cash and restricted cash equivalents - end of period ¹	$	8,478	$	7,191



	(in millions)
Balance at December 31, 2017	$	219
Net change in valuation	14
Payments	(5		)
Foreign currency translation	(7		)
Balance at September 30, 2018	$	221



	Grants in 2018	Weighted-Average Grant-Date Fair Value
	(in millions)	(per option/unit)
Non-qualified stock options	0.9	$41
Restricted stock units	0.9	$170
Performance stock units	0.1	$226



	(in millions, except average price data)
Remaining authorization at December 31, 2017	$	5,234
Dollar value of shares repurchased during the nine months ended September 30, 2018	$	4,045
Remaining authorization at September 30, 2018	$	1,189
Shares repurchased during the nine months ended September 30, 2018	21.8
Average price paid per share during the nine months ended September 30, 2018	$	185.64