MASTERCARD INC, 10-Q filed on 4/30/2019
Quarterly Report
v3.19.1
Document and Entity Information - shares
3 Months Ended
Mar. 31, 2019
Apr. 25, 2019
Entity Registrant Name Mastercard Inc  
Trading Symbol MA  
Entity Central Index Key 0001141391  
Current Fiscal Year End Date --12-31  
Entity Filer Category Large Accelerated Filer  
Document Type 10-Q  
Document Period End Date Mar. 31, 2019  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q1  
Amendment Flag false  
Entity Small Business false  
Entity Emerging Growth Company false  
Class A Common Stock    
Entity Common Stock, Shares Outstanding   1,009,964,059
Class B Common Stock    
Entity Common Stock, Shares Outstanding   11,557,994
v3.19.1
Consolidated Balance Sheet - USD ($)
$ in Millions
Mar. 31, 2019
Dec. 31, 2018
ASSETS    
Cash and cash equivalents $ 5,857 $ 6,682
Restricted cash for litigation settlement 662 553
Investments 1,317 1,696
Accounts receivable 2,577 2,276
Settlement due from customers 1,426 2,452
Restricted security deposits held for customers 1,044 1,080
Prepaid expenses and other current assets 1,513 1,432
Total Current Assets 14,396 16,171
Property, equipment and right-of-use assets, net of accumulated depreciation of $905 and $847, respectively 1,305 921
Deferred income taxes 504 570
Goodwill 2,944 2,904
Other intangible assets, net of accumulated amortization of $1,228 and $1,175, respectively 1,025 991
Other assets 3,346 3,303
Total Assets 23,520 24,860
LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS AND EQUITY    
Accounts payable 508 537
Settlement due to customers 1,189 2,189
Restricted security deposits held for customers 1,044 1,080
Accrued litigation 1,575 1,591
Accrued expenses 4,329 4,747
Current portion of long-term debt 500 500
Other current liabilities 1,101 949
Total Current Liabilities 10,246 11,593
Long-term debt 5,799 5,834
Deferred income taxes 61 67
Other liabilities 2,151 1,877
Total Liabilities 18,257 19,371
Commitments and Contingencies
Redeemable Non-controlling Interests 73 71
Stockholders’ Equity    
Additional paid-in-capital 4,569 4,580
Class A treasury stock, at cost, 377 and 368 shares, respectively (27,534) (25,750)
Retained earnings 28,806 27,283
Accumulated other comprehensive income (loss) (673) (718)
Total Stockholders’ Equity 5,168 5,395
Non-controlling interests 22 23
Total Equity 5,190 5,418
Total Liabilities, Redeemable Non-controlling Interests and Equity 23,520 24,860
Class A Common Stock    
Stockholders’ Equity    
Common stock 0 0
Class B Common Stock    
Stockholders’ Equity    
Common stock $ 0 $ 0
v3.19.1
Consolidated Balance Sheet (Parenthetical) - USD ($)
$ in Millions
Mar. 31, 2019
Dec. 31, 2018
Less accumulated depreciation and amortization $ 905 $ 847
Other intangible assets, accumulated amortization $ 1,228 $ 1,175
Class A treasury stock, shares 377,000,000 368,000,000
Class A Common Stock    
Common stock, par value $ 0.0001 $ 0.0001
Common stock, authorized 3,000,000,000 3,000,000,000
Common stock, issued 1,389,000,000 1,387,000,000
Common stock, outstanding 1,012,000,000 1,019,000,000
Class B Common Stock    
Common stock, par value $ 0.0001 $ 0.0001
Common stock, authorized 1,200,000,000 1,200,000,000
Common stock, issued 12,000,000 12,000,000
Common stock, outstanding 12,000,000 12,000,000
v3.19.1
Consolidated Statement of Operations - USD ($)
shares in Millions, $ in Millions
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Income Statement [Abstract]    
Net Revenue $ 3,889 $ 3,580
Operating Expenses    
General and administrative 1,367 1,321
Advertising and marketing 192 197
Depreciation and amortization 117 120
Provision for litigation 0 117
Total operating expenses 1,676 1,755
Operating income 2,213 1,825
Other Income (Expense)    
Investment income 32 17
Interest expense (46) (43)
Other income (expense), net 4 4
Total other income (expense) (10) (22)
Income before income taxes 2,203 1,803
Income tax expense 341 311
Net Income $ 1,862 $ 1,492
Basic Earnings per Share $ 1.81 $ 1.42
Basic weighted-average shares outstanding 1,026 1,051
Diluted Earnings per Share $ 1.80 $ 1.41
Diluted weighted-average shares outstanding 1,032 1,057
v3.19.1
Consolidated Statement of Comprehensive Income - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Statement of Comprehensive Income [Abstract]    
Net Income $ 1,862 $ 1,492
Other comprehensive income (loss):    
Foreign currency translation adjustments 11 161
Income tax effect 3 (2)
Foreign currency translation adjustments, net of income tax effect 14 159
Translation adjustments on net investment hedge 36 (45)
Income tax effect (8) 12
Translation adjustments on net investment hedge, net of income tax effect 28 (33)
Defined benefit pension and other postretirement plans 0 (1)
Income tax effect 0 0
Defined benefit pension and other postretirement plans, net of income tax effect 0 (1)
Investment securities available-for-sale 4 (1)
Income tax effect (1) 0
Investment securities available-for-sale, net of income tax effect 3 (1)
Other comprehensive income (loss), net of tax 45 124
Comprehensive Income $ 1,907 $ 1,616
v3.19.1
Consolidated Statement of Changes in Equity - USD ($)
$ in Millions
Total
Common Stock
Class A
Common Stock
Class B
Additional Paid-In Capital
Class A Treasury Stock
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Non- Controlling Interests
Balance at beginning of period at Dec. 31, 2017 $ 5,497 $ 0 $ 0 $ 4,365 $ (20,764) $ 22,364 $ (497) $ 29
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Net income 1,492         1,492    
Activity from non-controlling interests (1)             (1)
Other comprehensive income, net of tax 124           124  
Cash dividends declared on Class A and Class B common stock (262)         (262)    
Purchases of treasury stock (1,383)       (1,383)      
Share-based payments 6     2 4      
Balance at end of period at Mar. 31, 2018 5,656 0 0 4,367 (22,143) 23,777 (373) 28
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Adoption of new accounting principle | Adoption of revenue standard 366         366    
Adoption of new accounting principle | Adoption of intra-entity asset transfers standard (183)         (183)    
Balance at beginning of period at Dec. 31, 2018 5,418 0 0 4,580 (25,750) 27,283 (718) 23
Increase (Decrease) in Stockholders' Equity [Roll Forward]                
Net income 1,862         1,862    
Activity from non-controlling interests (1)             (1)
Other comprehensive income, net of tax 45           45  
Cash dividends declared on Class A and Class B common stock (339)         (339)    
Purchases of treasury stock (1,790)       (1,790)      
Share-based payments (5)     (11) 6      
Balance at end of period at Mar. 31, 2019 $ 5,190 $ 0 $ 0 $ 4,569 $ (27,534) $ 28,806 $ (673) $ 22
v3.19.1
Consolidated Statement of Changes in Equity (Parenthetical) - Common Stock - $ / shares
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Class A    
Cash dividends declared on Class A and Class B common stock (USD per share) $ 0.33 $ 0.25
Class B    
Cash dividends declared on Class A and Class B common stock (USD per share) $ 0.33 $ 0.25
v3.19.1
Consolidated Statement of Cash Flows - USD ($)
$ in Millions
3 Months Ended
Mar. 31, 2019
Mar. 31, 2018
Operating Activities    
Net income $ 1,862 $ 1,492
Adjustments to reconcile net income to net cash provided by operating activities:    
Amortization of customer and merchant incentives 345 287
Depreciation and amortization 117 120
Share-based compensation 57 43
Deferred income taxes 38 (46)
Other 6 1
Changes in operating assets and liabilities:    
Accounts receivable (320) (80)
Settlement due from customers 1,026 (156)
Prepaid expenses (497) (336)
Accrued litigation and legal settlements 1 111
Restricted security deposits held for customers (35) (141)
Accounts payable (22) (62)
Settlement due to customers (1,000) (63)
Accrued expenses (483) (50)
Net change in other assets and liabilities 217 (85)
Net cash provided by operating activities 1,312 1,035
Investing Activities    
Purchases of investment securities available-for-sale (305) (108)
Purchases of investments held-to-maturity (99) (123)
Proceeds from sales of investment securities available-for-sale 476 198
Proceeds from maturities of investment securities available-for-sale 139 108
Proceeds from maturities of investments held-to-maturity 155 430
Purchases of property and equipment (83) (82)
Capitalized software (59) (44)
Other investing activities (11) (12)
Net cash provided by investing activities 213 367
Financing Activities    
Purchases of treasury stock (1,824) (1,352)
Dividends paid (340) (263)
Proceeds from debt 0 991
Tax withholdings related to share-based payments (116) (77)
Cash proceeds from exercise of stock options 54 40
Other financing activities 3 (4)
Net cash used in financing activities (2,223) (665)
Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents (54) 95
Net (decrease) increase in cash, cash equivalents, restricted cash and restricted cash equivalents (752) 832
Cash, cash equivalents, restricted cash and restricted cash equivalents - beginning of period 8,337 7,592
Cash, cash equivalents, restricted cash and restricted cash equivalents - end of period $ 7,585 $ 8,424
v3.19.1
Summary of Significant Accounting Policies
3 Months Ended
Mar. 31, 2019
Accounting Policies [Abstract]  
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 March 31, 2019 and December 31, 2018, there were no significant VIEs which required consolidation. The Company consolidates acquisitions as of the date in which the Company has obtained a controlling financial interest. Intercompany transactions and balances have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the 2019 presentation. The Company follows accounting principles generally accepted in the United States of America (“GAAP”).
The balance sheet as of December 31, 2018 was derived from the audited consolidated financial statements as of December 31, 2018. The consolidated financial statements for the three months ended March 31, 2019 and 2018 and as of March 31, 2019 are unaudited, and in the opinion of management, include all normal recurring adjustments that are necessary to present fairly the results for interim periods. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the full year.
The accompanying unaudited consolidated financial statements are presented in accordance with the U.S. Securities and Exchange Commission (“SEC”) requirements for Quarterly Reports on Form 10-Q. Reference should be made to the Mastercard Incorporated Annual Report on Form 10-K for the year ended December 31, 2018 for additional disclosures, including a summary of the Company’s significant accounting policies.
Non-controlling interest amounts are included in the consolidated statement of operations within other income (expense). For the three months ended March 31, 2019 and 2018, activity from non-controlling interests was not material to the respective period results.
Recently adopted accounting pronouncements
Comprehensive income - In February 2018, the Financial Accounting Standards Board (the “FASB”) issued accounting guidance that allows for a one-time reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from U.S. tax reform. The Company adopted this guidance effective January 1, 2019, electing to retain the stranded tax effects in accumulated other comprehensive income (loss). The adoption did not result in a material impact on the Company’s consolidated financial statements.
Leases - In February 2016, the FASB issued accounting guidance that changed how companies account for and present lease arrangements. This guidance requires companies to recognize lease assets and liabilities for both financing and operating leases on the consolidated balance sheet. The Company adopted this guidance effective January 1, 2019, under the modified retrospective transition method with the available practical expedients.
The following table summarizes the impact of the changes made to the January 1, 2019 consolidated balance sheet for the adoption of the new accounting standard pertaining to leases. The prior periods have not been restated and have been reported under the accounting standard in effect for those periods.
 
Balance at December 31, 2018
 
Impact of lease standard
 
Balance at
January 1, 2019
 
(in millions)
Assets
 
 
 
 
 
Property, equipment and right-of-use assets, net
$
921

 
$
375

 
$
1,296

Liabilities
 
 
 
 
 
Other current liabilities
949

 
72

 
1,021

Other liabilities
1,877

 
303

 
2,180


For a more detailed discussion on lease arrangements, refer to Note 8 (Property, Equipment and Right-of-Use Assets).
Recent accounting pronouncements not yet adopted
Implementation costs incurred in a hosting arrangement that is a service contract - In August 2018, the FASB issued accounting guidance which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for periods beginning after December 15, 2019 and early adoption is permitted. Companies are required to adopt this guidance either retrospectively or by prospectively applying the guidance to all implementation costs incurred after the date of adoption. The Company expects to adopt this guidance effective January 1, 2020 by applying the prospective approach as of the date of adoption and is in the process of evaluating the potential effects this guidance will have on its consolidated financial statements.
Disclosure requirements for fair value measurement - In August 2018, the FASB issued accounting guidance which modifies disclosure requirements for fair value measurements by removing, modifying and adding certain disclosures. This guidance is effective for periods beginning after December 15, 2019. Companies are permitted to early adopt the removed or modified disclosures and delay adoption of added disclosures until the effective date. Companies are required to adopt the guidance for certain added disclosures prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption and all other amendments retrospectively to all periods presented upon their effective date. The Company expects to adopt this guidance effective January 1, 2020 and does not expect the impacts to be material.
v3.19.1
Acquisitions
3 Months Ended
Mar. 31, 2019
Business Combinations [Abstract]  
Business Combination Disclosure During the first quarter of 2019, the Company entered into definitive agreements to acquire businesses for aggregate consideration of approximately $975 million, which includes contingent consideration of $25 million (subject to customary purchase price adjustments). Subject to regulatory approvals and closing conditions, all acquisitions are expected to close in 2019. The Company will begin consolidating these acquisitions as of the date acquired.
v3.19.1
Revenue
3 Months Ended
Mar. 31, 2019
Revenue from Contract with Customer [Abstract]  
Revenue
The Company’s disaggregated net revenue by source and geographic region were as follows:
 
Three Months Ended March 31,
 
2019
 
2018
 
(in millions)
Revenue by source:
 
 
 
Domestic assessments
$
1,605

 
$
1,458

Cross-border volume fees
1,263

 
1,157

Transaction processing
1,922

 
1,707

Other revenues
842

 
748

Gross revenue
5,632

 
5,070

Rebates and incentives (contra-revenue)
(1,743
)
 
(1,490
)
Net revenue
$
3,889

 
$
3,580

 
 
 
 
Net revenue by geographic region:
 
 
 
North American Markets
$
1,347

 
$
1,248

International Markets
2,506

 
2,300

Other 1
36

 
32

Net revenue
$
3,889

 
$
3,580

1 Includes revenues managed by corporate functions.
Receivables from contracts with customers of $2.4 billion and $2.1 billion as of March 31, 2019 and December 31, 2018, respectively, are recorded within accounts receivable on the consolidated balance sheet. The Company’s customers are billed quarterly or more frequently dependent upon the nature of the performance obligation and the underlying contractual terms. The Company does not typically offer extended payment terms to customers.
Contract assets are included in prepaid expenses and other current assets and other assets on the consolidated balance sheet at March 31, 2019 in the amounts of $44 million and $90 million, respectively. The comparable amounts included in prepaid expenses and other current assets and other assets at December 31, 2018 were $40 million and $92 million, respectively.
Deferred revenue is included in other current liabilities and other liabilities on the consolidated balance sheet at March 31, 2019 in the amounts of $265 million and $109 million, respectively. The comparable amounts included in other current liabilities and other liabilities at December 31, 2018 were $218 million and $101 million, respectively. Revenue recognized from performance obligations satisfied during the three months ended March 31, 2019 and 2018 was $185 million and $161 million, respectively.
v3.19.1
Earnings Per Share
3 Months Ended
Mar. 31, 2019
Earnings Per Share [Abstract]  
Earnings Per Share
The components of basic and diluted earnings per share (“EPS”) for common shares were as follows:
 
Three Months Ended March 31,
 
2019
 
2018
 
(in millions, except per share data)
Numerator
 
 
 
Net income
$
1,862

 
$
1,492

Denominator
 
 
 
Basic weighted-average shares outstanding
1,026

 
1,051

Dilutive stock options and stock units
6

 
6

Diluted weighted-average shares outstanding 1
1,032

 
1,057

Earnings per Share
 
 
 
Basic
$
1.81

 
$
1.42

Diluted
$
1.80

 
$
1.41



1 For the periods presented, the calculation of diluted EPS excluded a minimal amount of anti-dilutive share-based payment awards.
v3.19.1
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents
3 Months Ended
Mar. 31, 2019
Cash and Cash Equivalents [Abstract]  
Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents
The following table provides a reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents reported on the consolidated balance sheet that total to the amounts shown on the consolidated statement of cash flows.
 
December 31,
 
2018
 
2017
 
(in millions)
Cash and cash equivalents
$
6,682

 
$
5,933

Restricted cash and restricted cash equivalents
 
 
 
Restricted cash for litigation settlement
553

 
546

Restricted security deposits held for customers
1,080

 
1,085

Prepaid expenses and other current assets
22

 
28

Cash, cash equivalents, restricted cash and restricted cash equivalents -
     beginning of period
$
8,337

 
$
7,592

 
 
 
 
 
March 31,
 
2019
 
2018
 
(in millions)
Cash and cash equivalents
$
5,857

 
$
6,890

Restricted cash and restricted cash equivalents
 
 
 
Restricted cash for litigation settlement
662

 
548

Restricted security deposits held for customers
1,044

 
965

Prepaid expenses and other current assets
22

 
21

Cash, cash equivalents, restricted cash and restricted cash equivalents -
     end of period
$
7,585

 
$
8,424

v3.19.1
Fair Value and Investment Securities
3 Months Ended
Mar. 31, 2019
Fair Value Disclosures [Abstract]  
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 three months ended March 31, 2019.
The distribution of the Company’s financial instruments measured at fair value on a recurring basis within the Valuation Hierarchy were as follows:
 
March 31, 2019
 
December 31, 2018
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
Quoted Prices
in Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment securities available for sale 1:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities
$

 
$
8

 
$

 
$
8

 
$

 
$
15

 
$

 
$
15

Government and agency securities
48

 
88

 

 
136

 
65

 
92

 

 
157

Corporate securities

 
838

 

 
838

 

 
1,043

 

 
1,043

Asset-backed securities

 
130

 

 
130

 

 
217

 

 
217

Derivative instruments 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency derivative assets

 
24

 

 
24

 

 
35

 

 
35

Deferred compensation plan 3:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred compensation assets
55

 

 

 
55

 
54

 

 

 
54

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments 2:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency derivative liabilities
$

 
$
(9
)
 
$

 
$
(9
)
 
$

 
$
(6
)
 
$

 
$
(6
)
Deferred compensation plan 4:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred compensation liabilities
(64
)
 

 

 
(64
)
 
(54
)
 

 

 
(54
)

1 The Company’s U.S. government 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 identical instruments to the investment vehicles selected by the participants. These are included in other liabilities on the consolidated balance sheet.
Marketable Equity Investments
In April 2019, the Company invested approximately $340 million in certain marketable equity investments. These investments will be measured at fair value with unrealized gains or losses recognized on the consolidated statement of operations.
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 March 31, 2019 and December 31, 2018, the carrying value and fair value of settlement and other guarantee liabilities were not material and accordingly are not included in the Valuation Hierarchy table above. Settlement and other guarantee liabilities are classified within Level 3 of the Valuation Hierarchy as their valuation requires substantial judgment and estimation of factors that are not observable in the market. See Note 15 (Settlement and Other Risk Management) for additional information regarding the Company’s settlement and other guarantee liabilities.
Financial Instruments - Non-Recurring Measurements
Held-to-Maturity Securities
Investments on the consolidated balance sheet include both available-for-sale and short-term held-to-maturity securities. Held-to-maturity securities are not measured at fair value on a recurring basis and are not included in the Valuation Hierarchy table above. At March 31, 2019 and December 31, 2018, the Company held $205 million and $264 million, respectively, of held-to-maturity securities due within one year. The cost of these securities approximates fair value.
Nonmarketable Equity Investments
The Company’s nonmarketable equity investments are measured at fair value at initial recognition. In addition, nonmarketable equity investments which are not accounted for under the equity method of accounting are adjusted for changes resulting from identifiable price changes in orderly transactions for the identical or similar investments of the same issuer. Nonmarketable equity investments are classified within Level 3 of the Valuation Hierarchy due to the absence of quoted market prices, the inherent lack of liquidity, and unobservable inputs used to measure fair value that require management’s judgment. The Company uses discounted cash flows and market assumptions to estimate the fair value of its nonmarketable equity investments when certain events or circumstances indicate that impairment may exist. These investments are included in other assets on the consolidated balance sheet. See Note 7 (Prepaid Expenses and Other Assets) for further details.
Debt
The Company estimates the fair value of its long-term debt based on market quotes. These debt instruments are not traded in active markets and are classified as Level 2 of the Valuation Hierarchy. At March 31, 2019, the carrying value and fair value of total long-term debt outstanding (including the current portion) was $6.3 billion and $6.6 billion, respectively. At December 31, 2018, the carrying value and fair value of total long-term debt outstanding (including the current portion) was $6.3 billion and $6.5 billion, respectively. In April 2019, $500 million of principal related to the 2014 USD Notes, which was classified in current liabilities as of March 31, 2019, matured and was paid.
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.
Contingent Consideration
The contingent consideration attributable to acquisitions made in 2017 is primarily based on the achievement of 2018 revenue targets and is measured at fair value on a recurring basis. 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 and unobservable inputs used to measure fair value that require management’s judgment. The activity of the Company’s contingent consideration liability for the three months ended March 31, 2019 was as follows:
 
(in millions)
Balance at December 31, 2018
$
219

Net change in valuation

Payments
(5
)
Foreign currency translation
7

Balance at March 31, 2019
$
221


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 March 31, 2019 and December 31, 2018 were as follows:
 
 
March 31, 2019
 
December 31, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair
Value
 
Amortized
Cost
 
Gross
Unrealized
Gain
 
Gross
Unrealized
Loss
 
Fair
Value
 
(in millions)
Municipal securities
$
8

 
$

 
$

 
$
8

 
$
15

 
$

 
$

 
$
15

Government and agency securities
136

 

 

 
136

 
157

 

 

 
157

Corporate securities
835

 
3

 

 
838

 
1,044

 
1

 
(2
)
 
1,043

Asset-backed securities
130

 

 

 
130

 
217

 

 

 
217

Total
$
1,109

 
$
3

 
$

 
$
1,112

 
$
1,433

 
$
1

 
$
(2
)
 
$
1,432


The Company’s available-for-sale investment securities held at March 31, 2019 and December 31, 2018 primarily carried a credit rating of A- or better. The municipal securities are primarily comprised of state tax-exempt bonds and are diversified across states and sectors. 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 March 31, 2019 was as follows:
 
Available-For-Sale
 
Amortized
Cost
 
Fair Value
 
(in millions)
Due within 1 year
$
238

 
$
238

Due after 1 year through 5 years
870

 
873

Due after 5 years through 10 years
1

 
1

Total
$
1,109

 
$
1,112


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 months ended March 31, 2019 and 2018 were not significant.
v3.19.1
Prepaid Expenses and Other Assets
3 Months Ended
Mar. 31, 2019
Prepaid Expense and Other Assets [Abstract]  
Prepaid Expenses and Other Assets
Prepaid expenses and other current assets consisted of the following:
 
March 31,
2019
 
December 31,
2018
 
(in millions)
Customer and merchant incentives
$
808

 
$
778

Other
705

 
654

Total prepaid expenses and other current assets
$
1,513

 
$
1,432


Other assets consisted of the following:
 
March 31,
2019
 
December 31,
2018
 
(in millions)
Customer and merchant incentives
$
2,492

 
$
2,458

Nonmarketable equity investments
348

 
337

Income taxes receivable
284

 
298

Other
222

 
210

Total other assets
$
3,346

 
$
3,303


Customer and merchant incentives represent payments made 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.
v3.19.1
Property, Equipment and Right-of-Use Assets
3 Months Ended
Mar. 31, 2019
Property, Plant and Equipment [Abstract]  
Property, Equipment and Right-of-Use Assets Property, equipment and right-of-use assets consisted of the following:
 
March 31,
2019
 
December 31,
2018
 
(in millions)
Building, building equipment and land
$
484

 
$
481

Equipment
1,025

 
987

Furniture and fixtures
87

 
85

Leasehold improvements
223

 
215

Operating lease right-of-use assets
391

 

Property, equipment and right-of-use assets
2,210

 
1,768

Less accumulated depreciation and amortization
(905
)
 
(847
)
Property, equipment and right-of-use assets, net
$
1,305

 
$
921


The increase in property, equipment and right-of-use assets at March 31, 2019 from December 31, 2018 was primarily due to the impact from the adoption of the new accounting standard pertaining to lease arrangements. See Note 1 (Summary of Significant Accounting Policies) for additional information on the impact of the adoption of this standard.
The Company determines if a contract is, or contains, a lease at contract inception. The Company’s right-of-use (“ROU”) assets are primarily related to operating leases for office space, automobiles and other equipment. Leases are included in property, equipment and right-of-use assets, other current liabilities and other liabilities on the consolidated balance sheet.
ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. In addition, ROU assets include initial direct costs incurred by the lessee as well as any lease payments made at or before the commencement date, and exclude lease incentives. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Lease terms include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Leases with a term of one year or less are generally included in ROU assets and liabilities.
The Company excludes variable lease payments in measuring ROU assets and lease liabilities, other than those that depend on an index, a rate or are in substance fixed payments. Lease and nonlease components are generally accounted for separately. When available, consideration is allocated to the separate lease and nonlease components in a lease contract on a relative standalone price basis using observable standalone prices.
Operating lease ROU assets and operating lease liabilities are recorded on the consolidated balance sheet as follows:
 
March 31,
2019
 
(in millions)
Balance sheet location
 
Property, equipment and right-of-use assets, net
$
369

Other current liabilities
79

Other liabilities
327


Operating lease amortization expense for the three months ended March 31, 2019 was $22 million and recorded within general and administrative expenses on the consolidated statement of operations. As of March 31, 2019, weighted-average remaining lease term of operating leases was 6.5 years and weighted-average discount rate for operating leases was 3.2%.
The following table summarizes maturities of operating lease liabilities based on lease term:
 
Operating Leases
 
(in millions)
Remainder of 2019
$
68

2020
81

2021
61

2022
55

2023
49

Thereafter
134

Total operating lease payments
448

Less: Interest
(42
)
Present value of operating lease liabilities
$
406


As of March 31, 2019, the Company has entered into additional operating leases as a lessee, primarily for real estate. These leases have not yet commenced and will result in ROU assets and corresponding lease liabilities of approximately $279 million. These operating leases are expected to commence between fiscal years 2019 and 2020, with lease terms between one and sixteen years.
Disclosures related to periods prior to adoption of the new accounting standard, including those operating leases entered into during 2018, but not yet commenced
At December 31, 2018, the Company had the following future minimum payments due under non‐cancelable leases:
 
Operating Leases
 
(in millions)
2019
$
72

2020
75

2021
76

2022
68

2023
58

Thereafter
327

Total
$
676


Consolidated rental expense for the Company’s leased office space was $94 million for the year ended December 31, 2018. Consolidated lease expense for automobiles, computer equipment and office equipment was $20 million for the year ended December 31, 2018.
v3.19.1
Accrued Expenses
3 Months Ended
Mar. 31, 2019
Accrued Liabilities, Current [Abstract]  
Accrued Expenses and Accrued Litigation
Accrued expenses consisted of the following:
 
March 31,
2019
 
December 31,
2018
 
(in millions)
Customer and merchant incentives
$
3,226

 
$
3,275

Personnel costs
292

 
744

Income and other taxes
291

 
158

Other
520

 
570

Total accrued expenses
$
4,329

 
$
4,747


Customer and merchant incentives represent amounts to be paid to customers under business agreements. As of March 31, 2019 and December 31, 2018, the Company’s provision for litigation was $1,575 million and $1,591 million, respectively. These amounts are not included in the accrued expenses table above and are separately reported as accrued litigation on the
consolidated balance sheet. See Note 14 (Legal and Regulatory Proceedings) for additional information regarding the Company’s accrued litigation.
v3.19.1
Stockholders' Equity
3 Months Ended
Mar. 31, 2019
Equity [Abstract]  
Stockholders' Equity
The Company’s Board of Directors have approved share repurchase programs authorizing the Company to repurchase shares of 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 March 31, 2019, as well as historical purchases:
 
 
 
 
 
 
 
 
Board authorization dates
December
2018
 
December
2017
 
December
2016
 
 
 
 
 
 
 
 
 
 
Date program became effective
January
2019
 
March
2018
 
April
2017
 
Total
 
(in millions, except average price data)
Board authorization
$
6,500

 
$
4,000

 
$
4,000

 
$
14,500

Dollar value of shares repurchased during the three months ended March 31, 2018
$

 
$
118

 
$
1,234

 
$
1,352

Remaining authorization at December 31, 2018
$
6,500

 
$
301

 
$

 
$
6,801

Dollar value of shares repurchased during the three months ended March 31, 2019
$
1,523

 
$
301

 
$

 
$
1,824

Remaining authorization at March 31, 2019
$
4,977

 
$

 
$

 
$
4,977

 
 
 
 
 
 
 
 
Shares repurchased during the three months ended March 31, 2018

 
0.7

 
7.2

 
7.9

Average price paid per share during the three months ended March 31, 2018
$

 
$
175.87

 
$
171.11

 
$
171.52

Shares repurchased during the three months ended March 31, 2019
7.1

 
1.6

 

 
8.7

Average price paid per share during the three months ended March 31, 2019
$
213.68

 
$
188.38

 
$

 
$
209.05

Cumulative shares repurchased through March 31, 2019
7.1

 
20.6

 
28.2

 
55.9

Cumulative average price paid per share
$
213.68

 
$
194.27

 
$
141.99

 
$
170.39


The following table presents the changes in the Company’s outstanding Class A and Class B common stock for the three months ended March 31, 2019:
 
Outstanding Shares
 
Class A
 
Class B
 
(in millions)
Balance at December 31, 2018
1,018.6

 
11.8

Purchases of treasury stock
(8.7
)
 

Share-based payments
1.7

 

Conversion of Class B to Class A common stock
0.1

 
(0.1
)
Balance at March 31, 2019
1,011.7

 
11.7

v3.19.1
Accumulated Other Comprehensive Income (Loss)
3 Months Ended
Mar. 31, 2019
Accumulated Other Comprehensive Income (Loss), Net of Tax [Abstract]  
Accumulated Other Comprehensive Income (Loss)
The changes in the balances of each component of accumulated other comprehensive income (loss), net of tax, for the three months ended March 31, 2019 and 2018 were as follows:
 
Foreign Currency Translation Adjustments 1
 
Translation Adjustments on Net Investment Hedge
 
Defined Benefit Pension and Other Postretirement Plans
 
Investment Securities Available-for-Sale
 
Accumulated Other Comprehensive Income (Loss)
 
(in millions)
Balance at December 31, 2018
$
(661
)
 
$
(66
)
 
$
10

 
$
(1
)
 
$
(718
)
Other comprehensive income (loss) for the period 2
14

 
28

 

 
3

 
45

Balance at March 31, 2019
$
(647
)
 
$
(38
)
 
$
10

 
$
2

 
$
(673
)
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2017
$
(382
)
 
$
(141
)
 
$
25

 
$
1

 
$
(497
)
Other comprehensive income (loss) for the period 2
159

 
(33
)
 
(1
)
 
(1
)
 
124

Balance at March 31, 2018
$
(223
)
 
$
(174
)
 
$
24

 
$


$
(373
)

1 During the three months ended March 31, 2019, the decrease in other comprehensive loss related to foreign currency translation adjustments was driven primarily by the appreciation of the British pound. During the three months ended March 31, 2018, the decrease in other comprehensive loss related to foreign currency translation adjustments was driven primarily by the appreciation of the euro.
2 During the three months ended March 31, 2019 and 2018, gains and losses reclassified from accumulated other comprehensive income (loss) to the consolidated statement of operations were not significant.
v3.19.1
Share-Based Payments
3 Months Ended
Mar. 31, 2019
Employee Service Share-based Compensation, Aggregate Disclosures [Abstract]  
Share-Based Payments
During the three months ended March 31, 2019, the Company granted the following awards under the Mastercard Incorporated 2006 Long Term Incentive Plan, as amended and restated as of June 5, 2012 (the “LTIP”). The LTIP is a stockholder-approved plan that permits the grant of various types of equity awards to employees.
 
Grants in 2019
 
Weighted-Average
Grant-Date
Fair Value
 
(in millions)
 
(per option/unit)
Non-qualified stock options
0.9
 
$53
Restricted stock units
0.9
 
$223
Performance stock units
0.1
 
$230

Stock options generally vest in four equal annual installments beginning one year after the date of grant and expire ten years from the date of grant. The Company used the Black-Scholes option pricing model to determine the grant-date fair value of stock options and calculated the expected life and the expected volatility based on historical Mastercard information. The expected life of stock options granted in 2019 was estimated to be six years, while the expected volatility was determined to be 19.6%.
Vesting of the shares underlying the restricted stock units and performance stock units (“PSUs”) will generally occur three years after the date of grant. For all PSUs granted on or after March 1, 2019, shares issuable upon vesting are subject to a mandatory one-year deferral period, during which vested PSUs are eligible for dividend equivalents. The fair value of restricted stock units is determined and fixed on the grant date based on the Company’s Class A common stock price, adjusted for the exclusion of dividend equivalents. The Monte Carlo simulation valuation model was used to determine the grant-date fair value of performance stock units granted.
Compensation expense is recorded net of estimated forfeitures over the shorter of the vesting period or the date the individual becomes eligible to retire under the LTIP. The Company uses the straight-line method of attribution over the requisite service period for expensing equity awards.
v3.19.1
Income Taxes
3 Months Ended
Mar. 31, 2019
Income Tax Disclosure [Abstract]  
Income Taxes
The effective income tax rate was 15.5% and 17.3% for the three months ended March 31, 2019 and 2018, respectively. The lower effective tax rate, as compared to the prior year, was primarily due to a reduction to the Company’s transition tax liability resulting from final U.S. Department of Treasury and Internal Revenue Service regulations issued on January 15, 2019 and discrete benefits related to share-based payments.
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 2011. With limited exception, the Company is no longer subject to state and local or foreign examinations by tax authorities for years before 2010.
v3.19.1
Legal and Regulatory Proceedings
3 Months Ended
Mar. 31, 2019
Legal and Regulatory Proceedings [Abstract]  
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, legal review and/or challenges in a number of jurisdictions, including the proceedings described below. When taken as a whole, the resulting decisions, regulations and legislation with respect to interchange fees and acceptance practices may have a material adverse effect on the Company’s prospects for future growth and its overall results of operations, financial position and cash flows.
United States. In June 2005, the first of a series of complaints were filed on behalf of merchants (the majority of the complaints were styled as class actions, although a few complaints were filed on behalf of individual merchant plaintiffs) against Mastercard International, Visa U.S.A., Inc., Visa International Service Association and a number of financial institutions. Taken together, the claims in the complaints were generally brought under both Sections 1 and 2 of the Sherman Act, which prohibit monopolization and attempts or conspiracies to monopolize a particular industry, and some of these complaints contain unfair competition law claims under state law. The complaints allege, among other things, that Mastercard, Visa, and certain financial institutions conspired to set the price of interchange fees, enacted point of sale acceptance rules (including the no surcharge rule) in violation 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 in front of the same federal district court that approved the merchant class settlement. In July 2014, the district court denied the defendants’ motion to dismiss the opt-out merchant complaints for failure to state a claim.
In September 2018, the parties to the Damages Class litigation entered into a class settlement agreement to resolve the Damages Class claims. Mastercard increased its reserve by $237 million during 2018 to reflect both its expected financial obligation under the Damages Class settlement agreement and the filed and anticipated opt-out merchant cases. In January 2019, the district court issued an order granting preliminary approval of the settlement and authorized notice of the settlement to class members. Damages Class members will now have the opportunity to opt out of the class settlement agreement. If more than 25% of the merchant purchase volume opts out of the settlement, the defendants would have the option to terminate the settlement agreement. The court has scheduled a final approval hearing in November 2019. The settlement agreement does not relate to the Rules Relief Class claims. Separate settlement negotiations with the Rules Relief Class are ongoing.
As of March 31, 2019 and December 31, 2018, Mastercard had accrued a liability of $916 million and $915 million, respectively, as a reserve for both the merchant class litigation and the filed and anticipated opt-out merchant cases. As of March 31, 2019 and December 31, 2018, Mastercard had $662 million and $553 million, respectively, in a qualified cash settlement fund related to the merchant class litigation and classified as restricted cash on its consolidated balance sheet. During the first quarter of 2019, Mastercard increased its qualified cash settlement fund by $108 million in accordance with the January 2019 preliminary approval of the settlement. Mastercard believes the reserve for both the merchant class litigation and the filed and anticipated opt-out merchants represents its best estimate of its probable liabilities in these matters. 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 requires Mastercard to make a cash payment and modify its “no surcharge” rule, has received court approval in each Canadian province. Objectors to the settlement have sought to appeal the approval orders. In 2017, Mastercard recorded a provision for litigation of $15 million related to this matter.
Europe. In July 2015, the European Commission (“EC”) issued a Statement of Objections related to Mastercard’s interregional interchange fees and central acquiring rule within the European Economic Area (the “EEA”). The Statement of Objections, which followed an investigation opened in 2013, included preliminary conclusions concerning the alleged anticompetitive effects of these practices. In December 2018, Mastercard announced the anticipated resolution of the EC’s investigation. With respect to interregional interchange fees, Mastercard made a settlement proposal whereby it would make changes to its interregional interchange fees. The EC issued a decision accepting the settlement in April 2019, with changes to interregional interchange fees going into effect in the fourth quarter of 2019. In addition, with respect to Mastercard’s historic central acquiring rule, the EC issued a negative decision in January 2019. The EC’s negative decision covers a period of time of less than two years before the rule’s modification. The rule was modified in late 2015 to comply with the requirements of the EEA Interchange Fee Regulation. The decision does not require any modification of Mastercard’s current business practices but includes a fine of €571 million (approximately $641 million as of March 31, 2019), which was paid in April 2019. Mastercard incurred a charge of $654 million in 2018 in relation to this matter.
Since May 2012, a number of United Kingdom (“U.K.”) retailers filed claims or threatened litigation against Mastercard seeking damages for alleged anti-competitive conduct with respect to Mastercard’s cross-border interchange fees and its U.K. and Ireland domestic interchange fees (the “U.K. Merchant claimants”). In addition, Mastercard, has faced similar filed or threatened litigation by merchants with respect to interchange rates in other countries in Europe (the “Pan-European Merchant claimants”). In aggregate, the alleged damages claims from the U.K. and Pan-European Merchant claimants were in the amount of approximately £3 billion (approximately $4 billion as of March 31, 2019). Mastercard has resolved over £2 billion (approximately $3 billion as of March 31, 2019) of these damages claims through settlement or judgment. Since June 2015, Mastercard has recorded litigation provisions for settlements, judgments and legal fees relating to these claims, including charges of $237 million in 2018. As detailed below, Mastercard continues to litigate with the remaining U.K. and Pan-European Merchant claimants and it has submitted statements of defense disputing liability and damages claims.
In January 2017, Mastercard received a liability judgment in its favor on all significant matters in a separate action brought by ten of the U.K. Merchant claimants. 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 and Visa have been granted permission to appeal the appellate court ruling to the U.K. Supreme Court. Mastercard expects the litigation process to be delayed pending the resolution of its appeal to the U.K. Supreme Court.
In September 2016, a proposed collective action was filed in the United Kingdom on behalf of U.K. consumers seeking damages for intra-EEA and domestic U.K. interchange fees that were allegedly passed on to consumers by merchants between 1992 and 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 March 31, 2019). In July 2017, the trial court denied the plaintiffs’ application for the case to proceed as a collective action. In April 2019, the U.K. appellate court granted
the plaintiffs’ appeal of the trial court’s decision and sent the case back to the trial court for a re-hearing on the plaintiffs’ collective action application. Mastercard intends to seek permission to appeal the appellate court ruling to the U.K. Supreme Court.
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. The plaintiffs have filed a renewed motion for class certification, following the district court’s denial of their initial motion.
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.
v3.19.1
Settlement and Other Risk Management
3 Months Ended
Mar. 31, 2019
Settlement and Other Risk Management [Abstract]  
Settlement and Other Risk Management
Mastercard’s rules guarantee the settlement of many of the transactions between its customers (“settlement risk”). Settlement exposure is the 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 payment volume during the three months ended March 31, 2019 multiplied by the estimated number of days of exposure. The Company has global risk management policies and procedures, which include risk standards, to provide a framework for managing the Company’s settlement risk and exposure. In the event of a failed customer, Mastercard may pursue one or more remedies available under the Company’s rules to recover potential losses. Historically, the Company has experienced a low level of losses from customer failures.
As part of its policies, Mastercard requires certain customers that are not in compliance with the Company’s risk standards to post collateral, typically in the form of cash, letters of credit, or guarantees. This requirement is based on a review of the individual risk circumstances for each customer. Mastercard monitors its credit risk portfolio on a regular basis and the adequacy of collateral on hand. Additionally, from time to time, the Company reviews its risk management methodology and standards. As such, the amounts of estimated settlement exposure are revised as necessary.
The Company’s estimated settlement exposure was as follows:
 
March 31,
2019
 
December 31,
2018
 
(in millions)
Gross settlement exposure
$
48,403

 
$
49,666

Collateral held for settlement exposure
(4,731
)
 
(4,711
)
Net uncollateralized settlement exposure
$
43,672

 
$
44,955


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 $375 million and $377 million at March 31, 2019 and December 31, 2018, respectively, of which $296 million and $297 million at March 31, 2019 and December 31, 2018, respectively, is mitigated by collateral arrangements. In addition, the Company enters into agreements in the ordinary course of business under which the Company agrees to indemnify third parties against damages, losses and expenses incurred in connection with legal and other proceedings arising from relationships or transactions with the Company. Certain indemnifications do not provide a stated maximum exposure. As the extent of the Company’s obligations under these agreements depends entirely upon the occurrence of future events, the Company’s potential future liability under these agreements is not determinable. Historically, payments made by the Company under these types of contractual arrangements have not been material.
v3.19.1
Foreign Exchange Risk Management
3 Months Ended
Mar. 31, 2019
Foreign Currency Derivatives [Abstract]  
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 March 31, 2019 and December 31, 2018, the majority of derivative contracts to hedge foreign currency fluctuations had been entered into with customers of Mastercard. Mastercard’s derivative contracts are summarized below:
 
March 31, 2019
 
December 31, 2018
 
Notional
 
Estimated Fair
Value
 
Notional
 
Estimated Fair
Value
 
(in millions)
Commitments to purchase foreign currency
$
196

 
$
(1
)
 
$
34

 
$
(1
)
Commitments to sell foreign currency
1,399

 
12

 
1,066

 
26

Options to sell foreign currency
23

 
4

 
25

 
4

Balance sheet location
 
 
 
 
 
 
 
Prepaid expenses and other current assets 1
 
 
24

 
 
 
35

Other current liabilities 1
 
 
(9
)
 
 
 
(6
)

1 The derivative contracts are subject to enforceable master netting arrangements, which contain various netting and setoff provisions.
The amount of gain (loss) recognized on the consolidated statement of operations for the contracts to purchase and sell foreign currency is summarized below: 
 
Three Months Ended March 31,
 
2019
 
2018
 
(in millions)
Foreign currency derivative contracts
 
 
 
General and administrative
$
(5
)
 
$
(21
)

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 exchange contracts in accumulated other comprehensive income as of March 31, 2019 and December 31, 2018, as these contracts were not accounted for under hedge accounting.
The Company’s derivative financial instruments are subject to both market and counterparty credit risk. Market risk is the potential for economic losses to be incurred on market risk sensitive instruments arising from adverse changes in market factors such as foreign currency exchange rates, interest rates and other related variables. The effect of a hypothetical 10% adverse change in U.S. dollar forward rates could result in a fair value loss of approximately $134 million on the Company’s foreign currency derivative contracts outstanding at March 31, 2019. Counterparty credit risk is the risk of loss due to failure of the counterparty to perform its obligations in accordance with contractual terms. To mitigate counterparty credit risk, the Company enters into derivative contracts with a diversified group of selected financial institutions based upon their credit ratings and other factors. Generally, the Company does not obtain collateral related to derivatives because of the high credit ratings of the counterparties.
Net Investment Hedge
The Company uses foreign currency denominated debt to hedge a portion of its net investment in foreign operations against adverse movements in exchange rates, with changes in the value of the debt recorded within currency translation adjustment in accumulated other comprehensive income (loss). In 2015, the Company designated its €1.65 billion euro-denominated debt as a net investment hedge for a portion of its net investment in European operations. As of March 31, 2019, the Company had a net foreign currency transaction pre-tax loss of $83 million in accumulated other comprehensive income (loss) associated with hedging activity. There was no ineffectiveness in the current period.
v3.19.1
Summary of Significant Accounting Policies (Policy)
3 Months Ended
Mar. 31, 2019
Accounting Policies [Abstract]  
Organization 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 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 March 31, 2019 and December 31, 2018, there were no significant VIEs which required consolidation. The Company consolidates acquisitions as of the date in which the Company has obtained a controlling financial interest. Intercompany transactions and balances have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the 2019 presentation. The Company follows accounting principles generally accepted in the United States of America (“GAAP”).
The balance sheet as of December 31, 2018 was derived from the audited consolidated financial statements as of December 31, 2018. The consolidated financial statements for the three months ended March 31, 2019 and 2018 and as of March 31, 2019 are unaudited, and in the opinion of management, include all normal recurring adjustments that are necessary to present fairly the results for interim periods. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the full year.
The accompanying unaudited consolidated financial statements are presented in accordance with the U.S. Securities and Exchange Commission (“SEC”) requirements for Quarterly Reports on Form 10-Q. Reference should be made to the Mastercard Incorporated Annual Report on Form 10-K for the year ended December 31, 2018 for additional disclosures, including a summary of the Company’s significant accounting policies.
Non-controlling interest amounts are included in the consolidated statement of operations within other income (expense). For the three months ended March 31, 2019 and 2018, activity from non-controlling interests was not material to the respective period results.
Recent Accounting Pronouncements Recently adopted accounting pronouncements
Comprehensive income - In February 2018, the Financial Accounting Standards Board (the “FASB”) issued accounting guidance that allows for a one-time reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from U.S. tax reform. The Company adopted this guidance effective January 1, 2019, electing to retain the stranded tax effects in accumulated other comprehensive income (loss). The adoption did not result in a material impact on the Company’s consolidated financial statements.
Leases - In February 2016, the FASB issued accounting guidance that changed how companies account for and present lease arrangements. This guidance requires companies to recognize lease assets and liabilities for both financing and operating leases on the consolidated balance sheet. The Company adopted this guidance effective January 1, 2019, under the modified retrospective transition method with the available practical expedients.
The following table summarizes the impact of the changes made to the January 1, 2019 consolidated balance sheet for the adoption of the new accounting standard pertaining to leases. The prior periods have not been restated and have been reported under the accounting standard in effect for those periods.
 
Balance at December 31, 2018
 
Impact of lease standard
 
Balance at
January 1, 2019
 
(in millions)
Assets
 
 
 
 
 
Property, equipment and right-of-use assets, net
$
921

 
$
375

 
$
1,296

Liabilities
 
 
 
 
 
Other current liabilities
949

 
72

 
1,021

Other liabilities
1,877

 
303

 
2,180


For a more detailed discussion on lease arrangements, refer to Note 8 (Property, Equipment and Right-of-Use Assets).
Recent accounting pronouncements not yet adopted
Implementation costs incurred in a hosting arrangement that is a service contract - In August 2018, the FASB issued accounting guidance which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for periods beginning after December 15, 2019 and early adoption is permitted. Companies are required to adopt this guidance either retrospectively or by prospectively applying the guidance to all implementation costs incurred after the date of adoption. The Company expects to adopt this guidance effective January 1, 2020 by applying the prospective approach as of the date of adoption and is in the process of evaluating the potential effects this guidance will have on its consolidated financial statements.
Disclosure requirements for fair value measurement - In August 2018, the FASB issued accounting guidance which modifies disclosure requirements for fair value measurements by removing, modifying and adding certain disclosures. This guidance is effective for periods beginning after December 15, 2019. Companies are permitted to early adopt the removed or modified disclosures and delay adoption of added disclosures until the effective date. Companies are required to adopt the guidance for certain added disclosures prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption and all other amendments retrospectively to all periods presented upon their effective date. The Company expects to adopt this guidance effective January 1, 2020 and does not expect the impacts to be material.
v3.19.1
Summary of Significant Accounting Policies (Tables)
3 Months Ended
Mar. 31, 2019
Accounting Policies [Abstract]  
Schedule of New Accounting Pronouncements and Changes in Accounting Principles The following table summarizes the impact of the changes made to the January 1, 2019 consolidated balance sheet for the adoption of the new accounting standard pertaining to leases. The prior periods have not been restated and have been reported under the accounting standard in effect for those periods.
 
Balance at December 31, 2018
 
Impact of lease standard
 
Balance at
January 1, 2019
 
(in millions)
Assets
 
 
 
 
 
Property, equipment and right-of-use assets, net
$
921

 
$
375

 
$
1,296

Liabilities
 
 
 
 
 
Other current liabilities
949

 
72

 
1,021

Other liabilities
1,877

 
303

 
2,180

v3.19.1
Revenue (Tables)
3 Months Ended
Mar. 31, 2019
Revenue from Contract with Customer [Abstract]  
Disaggregation of Revenue Note 3. Revenue
The Company’s disaggregated net revenue by source and geographic region were as follows:
 
Three Months Ended March 31,
 
2019
 
2018
 
(in millions)
Revenue by source:
 
 
 
Domestic assessments
$
1,605

 
$
1,458

Cross-border volume fees
1,263

 
1,157

Transaction processing
1,922

 
1,707

Other revenues
842

 
748

Gross revenue
5,632

 
5,070

Rebates and incentives (contra-revenue)
(1,743
)
 
(1,490
)
Net revenue
$
3,889

 
$
3,580

 
 
 
 
Net revenue by geographic region:
 
 
 
North American Markets
$
1,347

 
$
1,248

International Markets
2,506

 
2,300

Other 1
36

 
32

Net revenue
$
3,889

 
$
3,580

1 Includes revenues managed by corporate
v3.19.1
Earnings Per Share (Tables)
3 Months Ended
Mar. 31, 2019
Earnings Per Share [Abstract]  
Schedule of Basic and Diluted Earnings Per Share The components of basic and diluted earnings per share (“EPS”) for common shares were as follows: