NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 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
June 30, 2018
and
December 31, 2017
, 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 presentation. The Company follows accounting principles generally accepted in the United States of America (“GAAP”).
The balance sheet as of
December 31, 2017
was derived from the audited consolidated financial statements as of
December 31, 2017
. The consolidated financial statements for the
three and six months ended June 30, 2018
and
2017
and as of
June 30, 2018
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 six months ended June 30, 2018
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
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 six months ended June 30, 2018
and
2017
, activity from non-controlling interests was not material to the respective period results.
Recent Accounting Pronouncements
Income taxes
- In March 2018, the Financial Accounting Standards Board (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. 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 statements 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)
.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
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. For a more detailed discussion, refer to
Note 13 (Income Taxes)
. 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 method. The Company expects to adopt this guidance effective January 1, 2019. 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.
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 six months ended June 30, 2018
and consolidated balance sheet as of
June 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
Six Months Ended June 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
|
$
|
3,560
|
|
|
$
|
105
|
|
|
$
|
3,665
|
|
|
$
|
7,033
|
|
|
$
|
212
|
|
|
$
|
7,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
1,154
|
|
|
—
|
|
|
1,154
|
|
|
2,453
|
|
|
(5
|
)
|
|
2,448
|
|
Advertising and marketing
|
176
|
|
|
59
|
|
|
235
|
|
|
360
|
|
|
99
|
|
|
459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
1,876
|
|
|
46
|
|
|
1,922
|
|
|
3,607
|
|
|
118
|
|
|
3,725
|
|
Income tax expense
|
339
|
|
|
14
|
|
|
353
|
|
|
636
|
|
|
28
|
|
|
664
|
|
Net Income
|
1,537
|
|
|
32
|
|
|
1,569
|
|
|
2,971
|
|
|
90
|
|
|
3,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
Balances excluding revenue standard
|
|
Impact of revenue standard
|
|
As reported
|
|
(in millions)
|
Assets
|
|
|
|
|
|
Accounts receivable
|
$
|
2,094
|
|
|
$
|
70
|
|
|
$
|
2,164
|
|
Prepaid expenses and other current assets
|
1,130
|
|
|
193
|
|
|
1,323
|
|
Deferred income taxes
|
478
|
|
|
(83
|
)
|
|
395
|
|
Other assets
|
2,103
|
|
|
791
|
|
|
2,894
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
Accounts payable
|
963
|
|
|
(618
|
)
|
|
345
|
|
Accrued expenses
|
3,869
|
|
|
549
|
|
|
4,418
|
|
Other current liabilities
|
1,580
|
|
|
(61
|
)
|
|
1,519
|
|
Other liabilities
|
1,086
|
|
|
664
|
|
|
1,750
|
|
|
|
|
|
|
|
Equity
|
|
|
|
|
|
Retained earnings
|
24,649
|
|
|
437
|
|
|
25,086
|
|
For a more detailed discussion on revenue recognition, refer to
Note 3 (Revenue)
.
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, the Company acquired businesses for total consideration of
$1.5 billion
. The Company has finalized the purchase accounting for businesses acquired during the six months ended June 30, 2017 for total consideration of
$1.2 billion
. For the final and preliminary estimated fair values of the purchase price allocations, as of the acquisition dates, refer to Note 2 (Acquisitions) 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 business model involves four participants in addition to the Company: account holders, merchants, issuers (the account holders’ financial institutions) and acquirers (the merchants’ financial institutions). Revenue from contracts with customers is recognized when services are performed in an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those services. Revenue recognized from domestic assessments, cross-border volume fees and transaction processing are derived from Mastercard’s payment network services. Revenue is generated by charging fees to issuers, acquirers and other stakeholders for providing switching services, as well as by assessing customers based primarily on the dollar volume of activity, or gross dollar volume, on the cards and other devices that carry the Company’s brands. Revenue is generally derived from transactional information accumulated by Mastercard’s systems or reported by customers. In addition, the Company recognizes revenue from other payment-related products and services in the period in which the related transactions occur or services are performed.
The price structure for Mastercard’s products and services is dependent on the nature of volumes, types of transactions and type of products and services offered to customers. Net revenue can be impacted by the following:
|
|
•
|
domestic or cross-border transactions
|
|
|
•
|
geographic region or country in which the transaction occurs
|
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
|
|
•
|
volumes/transactions subject to tiered rates
|
|
|
•
|
processed or not processed by the Company
|
|
|
•
|
amount of usage of the Company’s other products or services
|
|
|
•
|
amount of rebates and incentives provided to customers
|
The Company classifies its net revenue into the following five categories:
Domestic assessments
are fees charged to issuers and acquirers based primarily on the dollar volume of activity on cards and other devices that carry the Company’s brands where the acquirer country and the issuer country are the same. Revenue from domestic assessments 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.
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 from
the 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
|
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.
The following table disaggregates the Company’s net revenue by revenue source and geography for the
three and six months ended June 30, 2018
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
Six Months Ended June 30, 2018
|
|
(in millions)
|
Revenue by source:
|
|
|
|
Domestic assessments
|
$
|
1,537
|
|
|
$
|
2,995
|
|
Cross-border volume fees
|
1,198
|
|
|
2,355
|
|
Transaction processing
|
1,830
|
|
|
3,537
|
|
Other revenues
|
785
|
|
|
1,533
|
|
Gross revenue
|
5,350
|
|
|
10,420
|
|
Rebates and incentives (contra-revenue)
|
(1,685
|
)
|
|
(3,175
|
)
|
Net revenue
|
$
|
3,665
|
|
|
$
|
7,245
|
|
|
|
|
|
Net revenue by geography:
|
|
|
|
North American Markets
|
$
|
1,330
|
|
|
$
|
2,579
|
|
International Markets
|
2,275
|
|
|
4,562
|
|
Other
1
|
60
|
|
|
104
|
|
Net revenue
|
$
|
3,665
|
|
|
$
|
7,245
|
|
1
Includes revenues managed by corporate functions.
Receivables from contracts with customers of
$2,005 million
and
$1,873 million
as of
June 30, 2018
and
December 31, 2017
, respectively, are recorded within accounts receivable in the consolidated balance sheet. The Company’s customers are billed quarterly or more frequently dependent upon the nature of the performance obligation and the underlying contractual terms. The Company does not offer extended payment terms to customers.
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
June 30, 2018
in the amounts of
$19 million
and
$94 million
, respectively. The Company did not have contract assets at
December 31, 2017
.
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
June 30, 2018
in the amounts of
$282 million
and
$78 million
, respectively. The comparable amounts included in other current liabilities and other liabilities at
December 31, 2017
were
$230 million
and
$17 million
, respectively. Revenue recognized from performance obligations satisfied during the
three and six months ended June 30, 2018
was
$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 following table summarizes expected revenues for the remaining performance obligations with customers from the Company’s other products and services including real-time account-based payment services, consulting and research fees and loyalty programs. The Company expects to recognize revenue in the future related to these unsatisfied performance obligations for fixed-fee contracts open as of
June 30, 2018
that are greater than one year.
|
|
|
|
|
|
(in millions)
|
Remainder of 2018
|
$
|
156
|
|
2019-2020
|
521
|
|
2021-2022
|
147
|
|
2023 and thereafter
|
21
|
|
Total
|
$
|
845
|
|
Note 4.
Earnings Per Share
The components of basic and diluted earnings per share (“EPS”) for common stock were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(in millions, except per share data)
|
Numerator
|
|
|
|
|
|
|
|
Net income
|
$
|
1,569
|
|
|
$
|
1,177
|
|
|
$
|
3,061
|
|
|
$
|
2,258
|
|
Denominator
|
|
|
|
|
|
|
|
Basic weighted-average shares outstanding
|
1,043
|
|
|
1,070
|
|
|
1,047
|
|
|
1,074
|
|
Dilutive stock options and stock units
|
6
|
|
|
5
|
|
|
6
|
|
|
4
|
|
Diluted weighted-average shares outstanding
1
|
1,049
|
|
|
1,075
|
|
|
1,053
|
|
|
1,078
|
|
Earnings per Share
|
|
|
|
|
|
|
|
Basic
|
$
|
1.50
|
|
|
$
|
1.10
|
|
|
$
|
2.92
|
|
|
$
|
2.10
|
|
Diluted
|
$
|
1.50
|
|
|
$
|
1.10
|
|
|
$
|
2.91
|
|
|
$
|
2.09
|
|
1
For the periods presented, the calculation of diluted EPS excluded a minimal amount of anti-dilutive share-based payment awards.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
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.
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.
|
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
The following table provides a reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents reported within the statement of financial position 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
|
|
|
|
|
|
|
June 30,
|
|
2018
|
|
2017
|
|
(in millions)
|
Cash and cash equivalents
|
$
|
6,210
|
|
|
$
|
5,177
|
|
Restricted cash and restricted cash equivalents
|
|
|
|
Restricted cash for litigation settlement
|
549
|
|
|
544
|
|
Restricted security deposits held for customers
|
992
|
|
|
993
|
|
Prepaid expenses and other current assets
|
17
|
|
|
12
|
|
Other assets
|
—
|
|
|
25
|
|
Cash, cash equivalents, restricted cash and restricted cash equivalents - end of period
1
|
$
|
7,768
|
|
|
$
|
6,751
|
|
1
As shown on the consolidated statement of cash flows.
Note 6.
Fair Value and
Investment Securities
Financial Instruments – Recurring Measurements
The Company classifies its fair value measurements of financial instruments into a three-level hierarchy (the “Valuation Hierarchy”). There were
no
transfers made among the three levels in the Valuation Hierarchy during the
six months ended June 30, 2018
.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
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, 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
|
$
|
—
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
17
|
|
|
$
|
—
|
|
|
$
|
17
|
|
Government and agency securities
|
60
|
|
|
97
|
|
|
—
|
|
|
157
|
|
|
81
|
|
|
104
|
|
|
—
|
|
|
185
|
|
Corporate securities
|
—
|
|
|
917
|
|
|
—
|
|
|
917
|
|
|
—
|
|
|
876
|
|
|
—
|
|
|
876
|
|
Asset-backed securities
|
—
|
|
|
165
|
|
|
—
|
|
|
165
|
|
|
—
|
|
|
70
|
|
|
—
|
|
|
70
|
|
Equity securities
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Derivative instruments
2
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivative assets
|
—
|
|
|
39
|
|
|
—
|
|
|
39
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
6
|
|
Deferred compensation plan
3
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation assets
|
59
|
|
|
—
|
|
|
—
|
|
|
59
|
|
|
55
|
|
|
—
|
|
|
—
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
2
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency derivative liabilities
|
$
|
—
|
|
|
$
|
(6
|
)
|
|
$
|
—
|
|
|
$
|
(6
|
)
|
|
$
|
—
|
|
|
$
|
(30
|
)
|
|
$
|
—
|
|
|
$
|
(30
|
)
|
Deferred compensation plan
4
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation liabilities
|
(60
|
)
|
|
—
|
|
|
—
|
|
|
(60
|
)
|
|
(54
|
)
|
|
—
|
|
|
—
|
|
|
(54
|
)
|
1
The Company’s U.S. government securities and marketable equity securities are classified within Level 1 of the Valuation Hierarchy as the fair values are based on unadjusted quoted prices for identical assets in active markets. The fair value of the Company’s available-for-sale municipal securities, government and agency securities, corporate securities and asset-backed securities are based on observable inputs such as quoted prices, benchmark yields and issuer spreads for similar assets in active markets and are therefore included in Level 2 of the Valuation Hierarchy.
2
The Company’s foreign currency derivative asset and liability contracts have been classified within Level 2 of the Valuation Hierarchy as the fair value is based on observable inputs such as broker quotes relating to foreign currency exchange rates for similar derivative instruments. See
Note 16 (Foreign Exchange Risk Management)
for further details.
3
The Company has a nonqualified deferred compensation plan where assets are invested primarily in mutual funds held in a rabbi trust, which is restricted for payments to participants of the plan. The Company has elected to use the fair value option for these mutual funds, which are measured using quoted prices of identical instruments in active markets and are included in prepaid expenses and other current assets on the consolidated balance sheet.
4
The deferred compensation liabilities are measured at fair value based on the quoted prices of instruments identical to the investment vehicles selected by the participants. They are included in other liabilities on the consolidated balance sheet.
Settlement and Other Guarantee Liabilities
The Company estimates the fair value of its settlement and other guarantees using market assumptions for relevant though not directly comparable undertakings, as the latter are not observable in the market given the proprietary nature of such guarantees. At
June 30, 2018
and
December 31, 2017
, 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. For additional information regarding the Company’s settlement and other guarantee liabilities, see
Note 15 (Settlement and Other Risk Management)
.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
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
June 30, 2018
and
December 31, 2017
, the Company held
$284 million
and
$700 million
, respectively, of short-term held-to-maturity securities. 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 cost method of accounting are adjusted for changes resulting from observable price changes in orderly transactions for the identical or similar investments of the same issuer. Nonmarketable equity investments are classified within Level 3 of the Valuation Hierarchy due to the absence of quoted market prices, the inherent lack of liquidity, and the fact that inputs used to measure fair value are unobservable and require management’s judgment. The Company uses discounted cash flows and market assumptions to estimate the fair value of its nonmarketable equity investments when certain events or circumstances indicate that impairment may exist. These investments are included in other assets on the consolidated balance sheet and in
Note 7 (Prepaid Expenses and Other Assets)
.
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 Level 2 of the Valuation Hierarchy. At
June 30, 2018
, the carrying value and fair value of the total debt outstanding (including the current portion) was
$6.4 billion
and
$6.5 billion
, respectively. At
December 31, 2017
, the carrying value and fair value of long-term debt was
$5.4 billion
and
$5.7 billion
, respectively.
Other Financial Instruments
Certain financial instruments are carried on the consolidated balance sheet at cost, which approximates fair value due to their short-term, highly liquid nature. These instruments include cash and cash equivalents, restricted cash, 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.
The contingent consideration attributable to acquisitions made in 2017 is primarily based on the achievement of 2018 revenue targets. This contingent consideration liability is included in other current liabilities on the consolidated balance sheet and is classified within Level 3 of the Valuation Hierarchy due to the absence of quoted market prices. The activity of the Company’s contingent consideration liability for the
six months ended June 30, 2018
was as follows:
|
|
|
|
|
|
(in millions)
|
Balance at December 31, 2017
|
$
|
219
|
|
Net change in valuation
|
11
|
|
Payments
|
(5
|
)
|
Foreign currency translation
|
(6
|
)
|
Balance at June 30, 2018
|
$
|
219
|
|
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
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
June 30, 2018
and
December 31, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 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
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11
|
|
|
$
|
17
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
17
|
|
Government and agency securities
|
157
|
|
|
—
|
|
|
—
|
|
|
157
|
|
|
185
|
|
|
—
|
|
|
—
|
|
|
185
|
|
Corporate securities
|
917
|
|
|
1
|
|
|
(1
|
)
|
|
917
|
|
|
875
|
|
|
2
|
|
|
(1
|
)
|
|
876
|
|
Asset-backed securities
|
165
|
|
|
—
|
|
|
—
|
|
|
165
|
|
|
70
|
|
|
—
|
|
|
—
|
|
|
70
|
|
Equity securities
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Total
|
$
|
1,250
|
|
|
$
|
2
|
|
|
$
|
(1
|
)
|
|
$
|
1,251
|
|
|
$
|
1,147
|
|
|
$
|
3
|
|
|
$
|
(1
|
)
|
|
$
|
1,149
|
|
The Company’s available-for-sale investment securities held at
June 30, 2018
and
December 31, 2017
primarily carried a credit rating of A- or better. The municipal securities are primarily comprised of tax-exempt bonds and are diversified across states and sectors. 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.
Investment Maturities
The maturity distribution based on the contractual terms of the Company’s investment securities at
June 30, 2018
was as follows:
|
|
|
|
|
|
|
|
|
|
Available-For-Sale
|
|
Amortized
Cost
|
|
Fair Value
|
|
(in millions)
|
Due within 1 year
|
$
|
341
|
|
|
$
|
341
|
|
Due after 1 year through 5 years
|
909
|
|
|
909
|
|
Due after 5 years through 10 years
|
—
|
|
|
—
|
|
Due after 10 years
|
—
|
|
|
—
|
|
No contractual maturity
1
|
—
|
|
|
1
|
|
Total
|
$
|
1,250
|
|
|
$
|
1,251
|
|
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. 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 six months ended June 30, 2018
and
2017
were not significant.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Note 7.
Prepaid Expenses and Other Assets
Prepaid expenses and other current assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
December 31,
2017
|
|
(in millions)
|
Customer and merchant incentives
|
$
|
685
|
|
|
$
|
464
|
|
Prepaid income taxes
|
121
|
|
|
77
|
|
Other
|
517
|
|
|
499
|
|
Total prepaid expenses and other current assets
|
$
|
1,323
|
|
|
$
|
1,040
|
|
Other assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
December 31,
2017
|
|
(in millions)
|
Customer and merchant incentives
|
$
|
2,232
|
|
|
$
|
1,434
|
|
Nonmarketable equity investments
|
268
|
|
|
249
|
|
Prepaid income taxes
|
—
|
|
|
352
|
|
Income taxes receivable
|
173
|
|
|
178
|
|
Other
|
221
|
|
|
85
|
|
Total other assets
|
$
|
2,894
|
|
|
$
|
2,298
|
|
Customer and merchant incentives represent payments made or amounts to be paid to customers and merchants under business agreements. Costs directly related to entering into such an agreement are generally deferred and amortized over the life of the agreement. Amounts to be paid for these incentives and the related liability were included in accrued expenses and other liabilities. The increase in customer and merchant incentives and the decrease in prepaid income taxes at
June 30, 2018
from
December 31, 2017
are primarily due to the impact from the adoption of the new accounting standards pertaining to revenue recognition and intra-entity asset transfers, respectively. See
Note 1 (Summary of Significant Accounting Policies)
for additional information on the cumulative impact of the adoption of these accounting pronouncements.
Nonmarketable equity investments represent the Company’s cost and equity method investments.
Note 8.
Accrued Expenses and Accrued Litigation
Accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 30,
2018
|
|
December 31,
2017
|
|
(in millions)
|
Customer and merchant incentives
|
$
|
3,182
|
|
|
$
|
2,648
|
|
Personnel costs
|
442
|
|
|
613
|
|
Advertising
|
88
|
|
|
88
|
|
Income and other taxes
|
313
|
|
|
194
|
|
Other
|
393
|
|
|
388
|
|
Total accrued expenses
|
$
|
4,418
|
|
|
$
|
3,931
|
|
As of
June 30, 2018
and
December 31, 2017
, the Company’s provision for litigation was
$949 million
and
$709 million
, respectively. These amounts are not included in the accrued expenses table above and are separately reported as accrued litigation on the consolidated balance sheet. See
Note 14 (Legal and Regulatory Proceedings)
for further discussion of the U.S. and Canadian merchant class litigations.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Note 9.
Debt
Total debt outstanding consisted of the following at
June 30, 2018
and
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
|
|
Issuance
Date
|
|
Interest Payment Terms
|
|
Maturity
Date
|
|
Aggregate Principal Amount
|
|
Stated
Interest Rate
|
|
Effective
Interest Rate
|
|
June 30,
2018
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
(in millions, except percentages)
|
2018 USD Notes
|
|
February 2018
|
|
Semi-annually
|
|
2028
|
|
$
|
500
|
|
|
3.500
|
%
|
|
3.598
|
%
|
|
$
|
500
|
|
|
$
|
—
|
|
|
|
|
|
|
|
2048
|
|
500
|
|
|
3.950
|
%
|
|
3.990
|
%
|
|
500
|
|
|
—
|
|
|
|
|
|
|
|
|
|
$
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 USD Notes
|
|
November 2016
|
|
Semi-annually
|
|
2021
|
|
$
|
650
|
|
|
2.000
|
%
|
|
2.236
|
%
|
|
650
|
|
|
650
|
|
|
|
|
|
|
|
2026
|
|
750
|
|
|
2.950
|
%
|
|
3.044
|
%
|
|
750
|
|
|
750
|
|
|
|
|
|
|
|
2046
|
|
600
|
|
|
3.800
|
%
|
|
3.893
|
%
|
|
600
|
|
|
600
|
|
|
|
|
|
|
|
|
|
$
|
2,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 Euro Notes
|
|
December 2015
|
|
Annually
|
|
2022
|
|
€
|
700
|
|
|
1.100
|
%
|
|
1.265
|
%
|
|
813
|
|
|
839
|
|
|
|
|
|
|
|
2027
|
|
800
|
|
|
2.100
|
%
|
|
2.189
|
%
|
|
930
|
|
|
958
|
|
|
|
|
|
|
|
2030
|
|
150
|
|
|
2.500
|
%
|
|
2.562
|
%
|
|
174
|
|
|
180
|
|
|
|
|
|
|
|
|
|
€
|
1,650
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 USD Notes
|
|
March 2014
|
|
Semi-annually
|
|
2019
|
|
$
|
500
|
|
|
2.000
|
%
|
|
2.178
|
%
|
|
500
|
|
|
500
|
|
|
|
|
|
|
|
2024
|
|
1,000
|
|
|
3.375
|
%
|
|
3.484
|
%
|
|
1,000
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
$
|
1,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,417
|
|
|
5,477
|
|
Less: Unamortized discount and debt issuance costs
|
|
(60
|
)
|
|
(53
|
)
|
Total debt outstanding
|
|
6,357
|
|
|
5,424
|
|
Less: Current portion of total debt
1
|
|
(499
|
)
|
|
—
|
|
Long-term debt
|
|
$
|
5,858
|
|
|
$
|
5,424
|
|
1
Relates to the current portion of the 2014 USD Notes, due in April 2019, included in other current liabilities on the consolidated balance sheet.
In February 2018, the Company issued
$500 million
principal amount of notes due February 2028 and
$500 million
principal amount of notes due February 2048 (collectively the “2018 USD Notes”). The net proceeds from the issuance of the 2018 USD Notes, after deducting the original issue discount, underwriting discount and offering expenses, were
$991 million
.
The net proceeds, after deducting the original issue discount, underwriting discount and offering expenses, from the issuance of the 2016 USD Notes, the 2015 Euro Notes and the 2014 USD Notes, were
$1.969 billion
,
$1.723 billion
and
$1.484 billion
, respectively.
None of the outstanding debt, described above, is subject to financial covenants and 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.
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
June 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
June 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
June 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’ Equity
The Company’s Board of Directors has approved share repurchase programs authorizing the Company to repurchase its Class A common stock. These programs become effective after the completion of the previously authorized share repurchase program.
The following table summarizes the Company’s share repurchase authorizations of its Class A common stock through
June 30, 2018
, as well as historical purchases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 six months ended June 30, 2017
|
$
|
—
|
|
|
$
|
897
|
|
|
$
|
996
|
|
|
$
|
1,893
|
|
Remaining authorization at December 31, 2017
|
$
|
4,000
|
|
|
$
|
1,234
|
|
|
$
|
—
|
|
|
$
|
5,234
|
|
Dollar value of shares repurchased during the six months ended June 30, 2018
|
$
|
1,647
|
|
|
$
|
1,234
|
|
|
$
|
—
|
|
|
$
|
2,881
|
|
Remaining authorization at June 30, 2018
|
$
|
2,353
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,353
|
|
|
|
|
|
|
|
|
|
Shares repurchased during the six months ended June 30, 2017
|
—
|
|
|
7.5
|
|
|
9.1
|
|
|
16.6
|
|
Average price paid per share during the six months ended June 30, 2017
|
$
|
—
|
|
|
$
|
118.16
|
|
|
$
|
109.16
|
|
|
$
|
113.25
|
|
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
|
|
Cumulative shares repurchased through June 30, 2018
|
9.0
|
|
|
28.2
|
|
|
40.4
|
|
|
77.6
|
|
Cumulative average price paid per share
|
$
|
183.84
|
|
|
$
|
141.99
|
|
|
$
|
99.10
|
|
|
$
|
124.48
|
|
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
The following table presents the changes in the Company’s outstanding Class A and Class B common stock for the
six months ended June 30, 2018
:
|
|
|
|
|
|
|
|
Outstanding Shares
|
|
Class A
|
|
Class B
|
|
(in millions)
|
Balance at December 31, 2017
|
1,039.7
|
|
|
14.1
|
|
Purchases of treasury stock
|
(16.2
|
)
|
|
—
|
|
Share-based payments
|
2.1
|
|
|
—
|
|
Conversion of Class B to Class A common stock
|
0.7
|
|
|
(0.7
|
)
|
Balance at June 30, 2018
|
1,026.3
|
|
|
13.4
|
|
Note 11.
Accumulated Other Comprehensive Income (Loss)
The changes in the balances of each component of accumulated other comprehensive income (loss), net of tax, for the
six months ended June 30, 2018
and
2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
317
|
|
|
(90
|
)
|
|
(1
|
)
|
|
(1
|
)
|
|
225
|
|
Balance at June 30, 2017
|
$
|
(632
|
)
|
|
$
|
(78
|
)
|
|
$
|
10
|
|
|
$
|
1
|
|
|
$
|
(699
|
)
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
$
|
(382
|
)
|
|
$
|
(141
|
)
|
|
$
|
25
|
|
|
$
|
1
|
|
|
$
|
(497
|
)
|
Other comprehensive income (loss) for the period
3
|
(186
|
)
|
|
53
|
|
|
(1
|
)
|
|
(1
|
)
|
|
(135
|
)
|
Balance at June 30, 2018
|
$
|
(568
|
)
|
|
$
|
(88
|
)
|
|
$
|
24
|
|
|
$
|
—
|
|
|
$
|
(632
|
)
|
|
|
1
|
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 appreciation of the U.S. dollar against the euro and British pound. During the six months ended June 30, 2017, the decrease in other comprehensive loss related to foreign currency translation adjustments was driven primarily by the appreciation of the euro.
|
2
Balances at
June 30, 2018
and
December 31, 2017
include
$28 million
of stranded tax effects as a result of the U.S. Tax Reform.
|
|
3
|
During the
six months ended June 30, 2018
and
2017
, gains and losses reclassified from accumulated other comprehensive income (loss) to the consolidated statement of operations were not significant.
|
Note 12.
Share-Based Payments
During the
six months ended June 30, 2018
, the Company granted the following awards under the Mastercard Incorporated 2006 Long Term Incentive Plan, as amended and restated (“LTIP”). The LTIP is a shareholder-approved plan that permits the grant of various types of equity awards to employees.
|
|
|
|
|
|
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
|
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
Stock options generally vest in
four
equal annual installments beginning
one year
after the date of grant and have a term of
ten years
. The Company used the Black-Scholes option pricing model to estimate the grant-date fair value of stock options and calculated the expected term and the expected volatility based on historical Mastercard information. The expected term of stock options granted in
2018
was determined to be
six years
, while the expected volatility was determined to be
19.7%
.
Vesting of the shares underlying the restricted stock units and performance stock units will generally occur
three years
after the date of grant. 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.
Note 13.
Income Taxes
The effective income tax rates were
18.3%
and
17.8%
for the
three and six months ended June 30, 2018
, respectively, versus
27.7%
and
27.3%
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. 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. The lower effective tax rates for the periods were also attributable to discrete benefits for share-based payments. 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 benefits of the domestic production activities deduction.
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 foreign earnings. Each of these amounts may require further adjustments during the measurement period due to evolving analysis and interpretations of law, including issuance by the Internal Revenue Service (the “IRS”) and The Department of Treasury (“Treasury”) of Notices, regulations and, potentially, direct discussions with both, as well as interpretations of how accounting for income taxes should be applied to the U.S. Tax Reform. The Transition Tax is based upon previously untaxed accumulated and current earnings and profits of our foreign subsidiaries. To compute the tax, the Company must determine 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. The Company expects to complete its accounting within the prescribed measurement period.
On January 19, 2018, the IRS and Treasury issued additional administrative guidance relating to the Transition Tax. It was determined that a single spot rate, as of December 31, 2017, should be used to translate accumulated foreign earnings to U.S. dollars when calculating the Transition Tax liability, compared to the yearly average approach used in the Company’s calculation as of December 31, 2017. This additional administrative guidance has no impact on the Company’s overall effective tax rate. However, it did result in an approximately
$36 million
increase to its Transition Tax liability with an offsetting decrease to the deferred tax liability recorded on the change in assertion with regard to the indefinite reinvestment of certain of the Company’s foreign earnings. These offsetting charges were recorded during the first quarter of
2018
.
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
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
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.
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 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.
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
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
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 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 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 (except for one state court action) 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 June 2018, the parties to the Damages Class litigation reached an agreement in principle to resolve the Damages Class claims. The parties are now negotiating the terms of a formal class settlement agreement, which Mastercard anticipates will be finalized and executed during the third quarter of 2018 and which would be subject to court approval. As a result of the agreement in principle with the Damages Class, Mastercard increased its reserve during the second quarter of 2018 by
$210 million
for both the merchant class litigation and the filed and anticipated opt-out merchant cases. Neither the agreement in principle nor any potential settlement agreement relates to, or will relate to, the Rules Relief Class claims.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
As of
June 30, 2018
, Mastercard had accrued a liability of
$947 million
as a reserve for both the merchant class litigation and the filed and anticipated opt-out merchant cases. As of
June 30, 2018
and
December 31, 2017
, Mastercard had
$549 million
and
$546 million
, respectively, in a qualified cash settlement fund related to the merchant class litigation and classified as restricted cash on its consolidated balance sheet. Mastercard believes the reserve for both the merchant class litigation and the filed and anticipated opt-out merchants represents its best estimate of its probable liabilities in these matters at
June 30, 2018
. 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 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 the first quarter of 2017, the Company recorded a provision for litigation of
$15 million
related to this matter.
Europe.
In July 2015, the European Commission issued a Statement of Objections related to Mastercard’s interregional interchange fees and central acquiring rules within the European Economic Area (the “EEA”). The Statement of Objections, which follows an investigation opened in 2013, includes preliminary conclusions concerning the alleged anticompetitive effects of these practices. The European Commission has indicated it intends 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 amount in the event 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 clarity with respect to these issues before the end of 2018.
In the United Kingdom, beginning in May 2012, a number of 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”), with claimed purported damages exceeding
$1 billion
. The U.K. Merchant claimants (including all resolved matters) represent approximately
40%
of Mastercard’s U.K. interchange volume over the relevant damages period. Mastercard submitted statements of defense to the retailers’ claims disputing liability and damages. Since June 2015, Mastercard has recorded litigation provisions for settlements, judgments and legal fees relating to these claims, including charges of
$15 million
in the second quarter of 2018 and
$19 million
in the first quarter of 2018, each relating to settlements with a number of U.K. Merchant claimants.
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.
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 intends to request permission to appeal the ruling to the U.K. Supreme Court. Mastercard expects the litigation process to continue during the next several years.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
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 statements of defense 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.
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 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
June 30, 2018
). In July 2017, the court denied the plaintiffs’ application for the case to proceed as a collective action. The plaintiffs’ request for permission to appeal 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.
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.
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. In March 2018, the district court denied the plaintiffs’ motion for class certification, while permitting them to re-file.
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.
Note 15.
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 (“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 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 volume during the quarter multiplied by the estimated number of days to settle. The Company has global risk management policies and procedures, which include risk standards, to provide a framework for managing the Company’s settlement risk. Customer-reported transaction data and the transaction clearing data underlying the settlement exposure calculation may be revised in subsequent reporting periods.
In the event that Mastercard effects a payment on behalf of a failed customer, Mastercard may seek an assignment of the underlying receivables of the failed customer. Customers may be charged for the amount of any settlement loss incurred during the ordinary course activities of the Company.
The Company has global risk management policies and procedures aimed at managing the settlement exposure. These risk management procedures include interaction with the bank regulators of countries in which it operates, requiring customers to make adjustments to settlement processes, and requiring collateral from customers. 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 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. 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,
2018
|
|
December 31,
2017
|
|
(in millions)
|
Gross settlement exposure
|
$
|
47,872
|
|
|
$
|
47,002
|
|
Collateral held for settlement exposure
|
(4,494
|
)
|
|
(4,360
|
)
|
Net uncollateralized settlement exposure
|
$
|
43,378
|
|
|
$
|
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
$385 million
and
$395 million
at
June 30, 2018
and
December 31, 2017
, respectively, of which
$305 million
and
$313 million
at
June 30, 2018
and
December 31, 2017
, respectively, is mitigated by collateral arrangements. In addition, the
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
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.
Note 16.
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).
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
June 30, 2018
and
December 31, 2017
, 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, 2018
|
|
December 31, 2017
|
|
Notional
|
|
Estimated Fair
Value
|
|
Notional
|
|
Estimated Fair
Value
|
|
(in millions)
|
Commitments to purchase foreign currency
|
$
|
87
|
|
|
$
|
(2
|
)
|
|
$
|
27
|
|
|
$
|
—
|
|
Commitments to sell foreign currency
|
982
|
|
|
29
|
|
|
968
|
|
|
(26
|
)
|
Options to sell foreign currency
|
32
|
|
|
6
|
|
|
27
|
|
|
2
|
|
Balance sheet location
|
|
|
|
|
|
|
|
Accounts receivable
1
|
|
|
$
|
39
|
|
|
|
|
$
|
6
|
|
Other current liabilities
1
|
|
|
(6
|
)
|
|
|
|
(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 for the contracts to purchase and sell foreign currency is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(in millions)
|
Foreign currency derivative contracts
|
|
|
|
|
|
|
|
General and administrative
|
$
|
56
|
|
|
$
|
(17
|
)
|
|
$
|
35
|
|
|
$
|
(45
|
)
|
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 contracts in accumulated other comprehensive income as of
June 30, 2018
and
December 31, 2017
, 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
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)
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
$102 million
on the Company’s foreign currency derivative contracts outstanding at
June 30, 2018
. Counterparty credit risk is the risk of loss due to failure of the counterparty to perform its obligations in accordance with contractual terms. To mitigate counterparty credit risk, the Company enters into derivative contracts with a diversified group of selected financial institutions based upon their credit ratings and other factors. Generally, the Company does not obtain collateral related to derivatives because of the high credit ratings of the counterparties.
Net Investment 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
debt as a net investment hedge for a portion of its net investment in European foreign operations. As of
June 30, 2018
, the Company had a net foreign currency transaction pre-tax loss of
$148 million
in accumulated other comprehensive income (loss) associated with hedging activity. There was no ineffectiveness in the current period.