Annual Report
2017
Summary Consolidated Financial and Other Data
($ in millions, except per share data)
Statement of Operations
Net Revenue
Operating Expenses:
General and Administrative
Advertising and Marketing
Depreciation and Amortization
Provision for Litigation Settlements
Total Operating Expenses
Operating Income
Total Other Expense
Income before Income Taxes
Income Tax Expense
For the Years Ended December 31
2017
2016
2015
$12,497
$10,776
$9,667
4,526
3,714
3,341
898
436
15
5,875
6,622
(100)
6,522
2,607
811
373
117
5,015
5,761
(115)
5,646
1,587
821
366
61
4,589
5,078
(120)
4,958
1,150
Net Income
$3,915
$4,059
$3,808
Basic Earnings per Share
Diluted Earnings per Share
Balance Sheet Data (at period end)
$3.67
$3.65
$3.70
$3.69
$3.36
$3.35
Cash, Cash Equivalents and Investment Securities – Current
$7,782
Total Assets
Equity
Operating Data Growth (local currency)
Gross Dollar Volume 1
Gross Dollar Volume as Adjusted for EU Regulation 1, 2
Cross-Border Volume
Switched Transactions 3
21,329
5,497
9%
10%
15%
17%
$8,335
18,675
5,684
$6,738
16,250
6,062
9%
11%
12%
16%
13%
13%
16%
12%
1 Gross Dollar Volume (GDV) generated by Maestro and Cirrus cards is not included. The data for GDV are provided by
Mastercard customers and include information with respect to Mastercard-branded transactions that are not processed
by Mastercard and for which Mastercard does not earn significant revenue. All data are subject to revision and
amendment by Mastercard’s customers subsequent to the date of release, of which revisions and amendments may be
material.
2 Adjusted for Article 8 of the EU Interchange Fee Regulation related to card payments. See “Management’s Discussion
and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 for additional information.
3 Data represent all transactions processed by Mastercard, including PIN-based debit transactions, regardless of brand.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
Or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 001-32877
Mastercard Incorporated
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
2000 Purchase Street
Purchase, NY
(Address of principal executive offices)
13-4172551
(IRS Employer
Identification Number)
10577
(Zip Code)
(914) 249-2000
(Registrant’s telephone number, including area code)
Title of each Class
Class A common stock, par value $0.0001 per share
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g): Class B common stock, par value $0.0001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period
No
that the registrant was required to submit and post such files) Yes
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will
not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an
emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company”
in Rule 12b-2 of the Exchange Act. (Check One):
No
No
No
Large accelerated filer
Accelerated filer
Non-accelerated filer
(do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
The aggregate market value of the registrant’s Class A common stock, par value $0.0001 per share, held by non-affiliates (using the New York Stock Exchange
closing price as of June 30, 2017, the last business day of the registrant’s most recently completed second fiscal quarter) was approximately $113.8 billion.
There is currently no established public trading market for the registrant’s Class B common stock, par value $0.0001 per share. As of February 9, 2018,
there were 1,037,246,307 shares outstanding of the registrant’s Class A common stock, par value $0.0001 per share and 14,138,629 shares outstanding
of the registrant’s Class B common stock, par value $0.0001 per share.
Portions of the registrant’s definitive proxy statement for the 2018 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.
No
MASTERCARD INCORPORATED
FISCAL YEAR 2017 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
ITEM 1.
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1A.
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 1B.
UNRESOLVED STAFF COMMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 2.
PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 3.
LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 4.
MINE SAFETY DISCLOSURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART II
ITEM 5.
MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 6.
SELECTED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. . . . . . . . . . . . . . . . . . . .
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9A.
CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 9B. OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART III
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE . . . . . . . . . . . . . . . . . . . . . .
ITEM 11.
EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE . . . .
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ITEM 16.
SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PART IV
Page
4
18
33
33
33
33
34
35
36
55
57
104
104
104
105
105
105
105
105
105
105
2
In this Report on Form 10-K (“Report”), references to the “Company,” “Mastercard,” “we,” “us” or “our” refer to the Mastercard
brand generally, and to the business conducted by Mastercard Incorporated and its consolidated subsidiaries, including our
operating subsidiary, Mastercard International Incorporated.
Forward-Looking Statements
This Report contains forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform
Act of 1995. All statements other than statements of historical facts may be forward-looking statements. When used in this
Report, the words “believe”, “expect”, “could”, “may”, “would”, “will”, “trend” and similar words are intended to identify forward-
looking statements. Examples of forward-looking statements include, but are not limited to, statements that relate to the
Company’s future prospects, developments and business strategies.
Many factors and uncertainties relating to our operations and business environment, all of which are difficult to predict and
many of which are outside of our control, influence whether any forward-looking statements can or will be achieved. Any one
of those factors could cause our actual results to differ materially from those expressed or implied in writing in any forward-
looking statements made by Mastercard or on its behalf, including, but not limited to, the following factors:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
direct regulation of the payments industry (including regulatory, legislative and litigation activity with respect
to interchange fees, surcharging and the extension of current regulatory activity to additional jurisdictions or
products)
the impact of preferential or protective government actions
regulation to which we are directly or indirectly subject based on our participation in the payments industry
(including anti-money laundering and economic sanctions, financial sector oversight, real-time account-based
payment systems, issuer practice regulation and regulation of internet and digital transactions)
the impact of changes in laws, including the recent U.S. tax legislation, regulations and interpretations thereof,
or challenges to our tax positions
regulation of privacy, data protection and security
potential or incurred liability and limitations on business resulting from litigation
the impact of competition in the global payments industry (including disintermediation and pricing pressure)
the challenges relating to rapid technological developments and changes
the challenges relating to operating an account-based payment system in addition to our core network and to
working with new customers and end users
the impact of information security incidents, account data breaches, fraudulent activity or service disruptions
on our business
issues related to our relationships with our financial institution customers (including loss of substantial business
from significant customers, competitor relationships with our customers and banking industry consolidation)
the impact of our relationships with other stakeholders, including merchants and governments
exposure to loss or illiquidity due to settlement guarantees and other significant third-party obligations
the impact of global economic and political events and conditions (including global financial market activity,
declines in cross-border activity, negative trends in consumer spending, the effect of adverse currency
fluctuation and the effects of the U.K.’s proposed withdrawal from the E.U.)
reputational impact, including impact related to brand perception
issues related to acquisition integration, strategic investments and entry into new businesses
issues related to our Class A common stock and corporate governance structure
Please see a complete discussion of these risk factors in Part I, Item 1A - Risk Factors. We caution you that the important factors
referenced above may not contain all of the factors that are important to you. Our forward-looking statements speak only as of
the date of this Report or as of the date they are made, and we undertake no obligation to update our forward-looking statements.
3
PART I
ITEM 1. BUSINESS
Overview
Mastercard is a technology company in the global payments industry that connects consumers, financial institutions, merchants,
governments, digital partners, businesses and other organizations worldwide, enabling them to use electronic forms of payment
instead of cash and checks. Through our global payments processing network, we facilitate the switching (authorization, clearing
and settlement) of payment transactions and deliver related products and services. We make payments easier and more efficient
by creating a wide range of payment solutions and services using our family of well-known brands, including Mastercard®,
Maestro®, Cirrus® and Masterpass®. Our recent acquisition of VocaLink Holdings Limited (“Vocalink”) has expanded our capability
to process automated clearing house (“ACH”) transactions, among other things. As a multi-rail network, we now offer customers
one partner to turn to for their payment needs for both domestic and cross-border transactions. We also provide value-added
offerings such as safety and security products, information services and consulting, loyalty and reward programs and issuer and
acquirer processing. Our networks are designed to ensure safety and security for the global payments system.
A typical transaction on our core network involves four participants in addition to us: account holder (a consumer who holds a
card or uses another device enabled for payment), merchant, issuer (the account holder’s financial institution) and acquirer (the
merchant’s financial institution). We do not issue cards, extend credit, determine or receive revenue from interest rates or other
fees charged to account holders by issuers, or establish the rates charged by acquirers in connection with merchants’ acceptance
of our branded products. In most cases, account holder relationships belong to, and are managed by, our financial institution
customers.
We generate revenues from assessing our customers based on the gross dollar volume (“GDV”) of activity on the products that
carry our brands, from the fees we charge to our customers for providing transaction processing and from other payment-related
products and services.
Our Strategy
We grow, diversify and build our business through a combination of organic growth and strategic investments, including
acquisitions. Our ability to grow our business is influenced by personal consumption expenditure (“PCE”) growth, driving cash
and check transactions toward electronic forms of payment, increasing our share in electronic payments and providing value-
added products and services. In addition, our ability to grow our business extends to other payments flows, such as business to
business (“B2B”), person to person (“P2P”), business to consumer (“B2C”) and government disbursements, among others. We
have enhanced our capabilities to capture these payment flows through a combination of product offerings and expanded
solutions for our customers. As a result, the total market opportunity for our addressable payment flows is approximately $225
trillion.
Grow. We focus on growing our core businesses globally, including growing our consumer credit, debit, prepaid and commercial
products and solutions, thereby increasing the number of payment transactions we switch. We also look to take advantage of
the opportunities presented by the evolving ways people interact and transact in the growing digital economy.
Diversify. We diversify our business by:
•
•
adding new players to our customer base in new and existing markets by working with partners such as governments,
merchants, technology companies (such as digital players and mobile providers) and other businesses
expanding capabilities based on our core network into new areas to provide opportunities for electronic payments and
to capture more payment flows, such as B2C transfers, B2B transfers, P2P transfers, including in the areas of transit
and government disbursements
4
•
•
driving acceptance at merchants of all sizes
broadening financial inclusion for the unbanked and underbanked
Build. We build our business by:
•
creating and acquiring differentiated products to provide unique, innovative solutions that we bring to market, such
as real-time account-based payment, Mastercard B2B Hub™ and Mastercard Send™ platforms
•
providing value-added services across safety and security, consulting, data analytics, processing and loyalty.
Strategic Partners. We work with a variety of stakeholders. We provide financial institutions with solutions to help them increase
revenue by driving preference for Mastercard-branded products. We help merchants, financial institutions and other
organizations by delivering data-driven insights and other services that help them grow and create simple and secure customer
experiences. We partner with technology companies such as digital players and mobile providers to deliver digital payment
solutions powered by our technology, expertise and security protocols. We help national and local governments drive increased
financial inclusion and efficiency, reduce costs, increase transparency to reduce crime and corruption and advance social
programs. For consumers, we provide better, safer and more convenient ways to pay.
Recent Business and Legal/Regulatory Developments
Digital Payments. Numerous trends in the digital economy, such as demand for faster payments and the
application of emerging technology, present opportunities for growth and impetus for change in our business.
We have launched and extended products and platforms that take advantage of the growing digital economy,
where consumers are increasingly using technology to interact with other consumers and merchants. Among
our recent developments in 2017 we:
•
•
•
expanded our use of Masterpass globally, which is live in dozens of markets around the world. Masterpass is a global
digital payment service that allows consumers to make fast, simple and secure transactions on any device and across
any channel. Over the last year, we have enhanced the browser and in-app checkout experience globally and made
significant platform improvements to make it easier and faster for consumers to checkout. We have also launched a
new merchant onboarding experience and a new package of software to make it easier for merchants to integrate with
Masterpass.
continued to expand and scale Mastercard Send™ capabilities, using HomeSend, to connect more people, businesses
and governments to facilitate the transfer of funds quickly and securely both domestically and cross-border in over 100
markets.
broadened our acceptance solutions to offer Quick Response (“QR”) codes under a common set of new global
specifications developed in conjunction with EMVCo and other industry players. Masterpass QR provides people with
mobile phones the ability to safely make in-person purchases without a card and avoids the need for expensive point
of sale equipment.
Real-time Account-based Payment Systems. In 2017, we completed the acquisition of a controlling interest
in Vocalink. Vocalink operates systems for ACH payments and ATM processing platforms in the United Kingdom
and other countries. ACH payments constitute a significant amount of all payments made by consumers,
businesses and governments. Adding ACH payments to our core card-based business will expand our ability
to offer more electronic payment options to consumers, businesses and governments, and help us capture
more payment flows.
Safety and Security. As new technologies and cyber-security threats evolve, including organized cyber-crime
and nation state attacks, there is a growing need to protect transactions and people’s identities regardless of
the device or channel used to make a purchase, while at the same time continuing to improve the payment
experience for all stakeholders. Our focus on security is embedded in our products, our systems and our
networks, as well as our analytics to prevent fraud. In 2017, we:
•
acquired Brighterion, Inc., a software company specializing in Artificial Intelligence (“AI”), that enhances our networks,
improves our existing product suite and helps us build the next generation of solutions to tackle fraud and cybersecurity
threats.
5
•
•
•
•
•
•
acquired NuData Security, a global technology company that helps businesses prevent online and mobile fraud using
session and behavioral biometric indicators, to enhance security of the internet of things (the “IoT”), including device-
level security and authentication.
launched Early Detection System™, a service that provides issuers with a unique predictive capability to identify accounts
with a heightened risk of fraud based on their exposure to security incidents or data breaches. Early Detection System
determines if an account is at risk and sends an alert to the issuer with a quantification of the level of risk. The issuer
then uses the level of risk to more accurately prioritize what action to take; from monitoring transactions more closely
to proactively issuing a replacement card.
embedded AI across our network with Decision Intelligence™, a comprehensive decision and fraud detection solution
that utilizes our networks to increase approvals and reduce false declines. This solution now applies AI scoring to every
processed transaction on our networks and is used by multiple issuers globally.
expanded Safety Net, a technology that intelligently detects and blocks large scale fraud events resulting from cyber-
attacks against our issuers. This technology now features new advanced detection capabilities, and acts as an extra
layer of defense for every issuer we work with globally, monitoring every processed transaction on our networks.
helped stakeholders to increase approvals and reduce declines for consumers with our account continuity solution,
Automated Billing Updater. This solution automatically updates expired card numbers at merchant card-on-file locations
and is increasingly used by major digital merchants.
leveraged MDES to tokenize Masterpass and enable third-party token vaults compliant with EMV® (the global standard
for chip technology) to tokenize Mastercard-branded products and services and extended the utility of MDES to tokenize
credentials-on-file.
Commercial. Our market share in commercial products is growing globally, as we offer solutions with travel
and entertainment, procurement, fleet and virtual cards. We estimate there is $120 trillion in addressable
payment flows in B2B globally, of which approximately $100 trillion is related to accounts payable. To address
this opportunity, we are expanding our capabilities to capture non-carded payment flows with new solutions,
such as the Mastercard B2B Hub, Mastercard Send for cross-border payments, and real-time account-based
payment systems for ACH transactions. We launched the innovative Mastercard B2B Hub platform in 2017 to
enable small and midsized businesses to optimize their invoice and payment processes with automation tools
that improve the speed, ease and security of their commercial payments.
Financial Inclusion. We are focused on addressing financial inclusion, reaching people without access to an
account that allows them to store and use money. In 2015, we made a commitment to reach 500 million
people previously excluded from financial services by 2020. We are more than halfway to delivering on that
commitment. In 2017, we worked with governments across several geographies to develop and roll out
electronic payments solutions, social payment distribution mechanisms and digital identity solutions. We also
worked with merchants globally to help drive acceptance necessary to support these inclusion efforts.
Legal and Regulatory. We operate in a dynamic and rapidly evolving legal and regulatory environment, with
heightened regulatory and legislative scrutiny, expansion of local regulatory schemes and other legal
challenges, particularly with respect to interchange fees (as discussed below under “Our Operations and
Network”). These create both risks and opportunities for our industry. See Part I, Item 1A for a more detailed
discussion of our legal and regulatory developments and risks. Also see Note 18 (Legal and Regulatory
Proceedings) to the consolidated financial statements included in Part II, Item 8. Our recent legal and regulatory
developments include:
•
European Union
In 2015, the European Commission issued a statement of objections related to the interregional interchange
rates we set and our central acquiring rules within the European Economic Area (the “EEA”). The statement
of objections preliminarily concludes that these practices have anticompetitive effects, and the European
Commission has indicated it intends to seek fines if it confirms these conclusions. We submitted a response
in April 2016 and participated in a related oral hearing in May 2016. Since that time, we have remained in
discussions with the European Commission and expect to obtain greater clarity with respect to these issues in
the first half of 2018.
6
E.U. member states were required to finish transposing the EEA’s revised Payment Services Directive (commonly
referred to as “PSD2”) into their national laws by January 2018. This directive requires financial institutions to
provide third party payment processors access to consumer payment accounts, which may enable these
processors to route transactions away from Mastercard products by offering certain services directly to people
who currently use our products. This directive also requires a new standard for authentication of transactions,
which requires additional verification information from consumers to complete transactions. This may increase
the number of transactions that consumers abandon if we are unable to ensure a frictionless authentication
experience under the new standards.
In 2016, the European Parliament passed the General Data Protection Regulation (the “GDPR”), a new data
protection regulation that will increase our compliance burden for using and processing personal and sensitive
data of EEA residents. We have implemented an approach to achieve compliance by the May 2018 deadline.
• United States
Merchant Class Litigation. In June 2016, the U.S. Court of Appeals for the Second Circuit reversed the approval
of a settlement of an antitrust litigation among a class of merchants, Mastercard, Visa and a number of financial
institutions. The court vacated the class action certification and sent the case back to the district court for
further proceedings. The parties are proceeding with discovery while at the same time are involved in
mediation.
Tax Cuts and Jobs Act. On December 22, 2017, the U.S. passed a comprehensive tax legislation commonly
referred to as the Tax Cuts and Jobs Act (the “TCJA”). Among other things, the TCJA reduces the U.S. corporate
income tax rate from 35% to 21% in 2018, puts into effect the migration towards a territorial tax system and
imposes a one-time deemed repatriation tax on accumulated foreign earnings (the “Transition Tax”). The
enactment of the tax legislation has resulted in additional tax expense of $873 million in the fourth quarter
and year ended December 31, 2017, due primarily to provisional amounts recorded for the Transition Tax and
the remeasurement of U.S. deferred tax assets and liabilities at lower enacted corporate tax rates. These
provisional amounts are based on our initial analysis of the TCJA and may be adjusted in 2018. See Note 17
(Income Taxes) to the consolidated financial statements included in Part II, Item 8 for further discussion of the
TCJA.
• United Kingdom
Beginning in May 2012, a number of retailers filed claims or threatened litigation against us seeking damages
for alleged anti-competitive conduct with respect to our cross-border interchange fees and our U.K. and Ireland
domestic interchange fees. In 2016, a tribunal in one of these cases issued a judgment against us for damages,
and we entered into settlements with additional claimants. In January 2017, we received a favorable liability
judgment on all significant matters in a separate action brought by ten of the claimants (who were seeking
over $500 million in damages). Both the negative judgment and positive judgment for us are being appealed
before the U.K. appellate court.
In connection with the Vocalink part of our business, we expect to enter into a period of consultation with the
U.K. Treasury regarding the possible extension of the U.K. payment systems oversight regime to include
Vocalink’s role as a service provider.
•
China - In 2017, People’s Bank of China issued the Service Guidelines for Market Access of Bank Card Clearing Institutions,
providing more guidance and clarity in addition to the 2016 regulations on license application and operational
requirements for network operators, including international networks such as ours, to process domestic payments in
China. We have been engaged with regulators and other stakeholders in connection with steps required to advance an
application. In the meantime, we continue to work to expand issuance and acceptance of Mastercard-branded products
in the Chinese market to support our existing cross-border business and to prepare for potential domestic opportunities.
Our Business
Our Operations and Network
We operate a unique and proprietary global payments network, our core network, that links issuers and acquirers around the
globe to facilitate the switching of transactions, permitting account holders to use a Mastercard product at millions of acceptance
locations worldwide. Our core network facilitates an efficient and secure means for receiving payments, a convenient, quick and
7
secure payment method for consumers to access their funds and a channel for businesses to receive insight through information
that is derived from our network. We authorize, clear and settle transactions through our core network for our issuer customers
in more than 150 currencies and in more than 210 countries and territories. Our acquisition of Vocalink expands our range of
payment capabilities beyond our core network.
Typical Transaction. Our core network supports what is often referred to as a “four-party” payments network. The following
diagram depicts a typical transaction on our core network, and our role in that transaction:
In a typical transaction, an account holder purchases goods or services from a merchant using one of our payment products.
After the transaction is authorized by the issuer, the issuer pays the acquirer an amount equal to the value of the transaction,
minus the interchange fee (described below), and then posts the transaction to the account holder’s account. The acquirer pays
the amount of the purchase, net of a discount (referred to as the “merchant discount” rate, as further described below), to the
merchant.
•
Interchange Fees. Interchange fees reflect the value merchants receive from accepting our products and play a key
role in balancing the costs consumers and merchants incur. We do not earn revenues from interchange fees. Generally,
interchange fees are collected from acquirers and paid to issuers to reimburse the issuers for a portion of the costs
incurred. These costs are incurred by issuers in providing services that benefit all participants in the system, including
acquirers and merchants, whose participation in the network enables increased sales to their existing and new
customers, efficiencies in the delivery of existing and new products, guaranteed payments and improved experience
for their customers. We (or, alternatively, financial institutions) establish “default interchange fees” that apply when
there are no other established settlement terms in place between an issuer and an acquirer. We administer the
collection and remittance of interchange fees through the settlement process.
• Additional Four-Party System Fees. The merchant discount rate is established by the acquirer to cover its costs of
both participating in the four-party system and providing services to merchants. The rate takes into consideration the
amount of the interchange fee which the acquirer generally pays to the issuer. Additionally, acquirers may charge
merchants processing and related fees in addition to the merchant discount rate, and issuers may also charge account
holders fees for the transaction, including, for example, fees for extending revolving credit.
8
Switched Transactions
• Authorization, Clearing and Settlement. Through our core network, we enable the routing of a transaction to the
issuer for its approval, facilitate the exchange of financial transaction information between issuers and acquirers after
a successfully conducted transaction, and help to settle the transaction by facilitating the determination and exchange
of funds between parties via settlement banks chosen by us and our customers.
•
Cross-Border and Domestic. Our core network switches transactions throughout the world when the merchant country
and issuer country are different (“cross-border transactions”), providing account holders with the ability to use, and
merchants to accept, our products and services across country borders. We also provide switched transaction services
to customers where the merchant country and the issuer country are the same (“domestic transactions”). We switch
approximately half of all transactions using Mastercard and Maestro-branded cards, including nearly all cross-border
transactions. We switch the majority of Mastercard and Maestro-branded domestic transactions in the United States,
United Kingdom, Canada, Brazil and a select number of other countries. Outside of these countries, most domestic
transactions on our products are switched without our involvement.
Our Core Network Architecture. Our core network features a globally integrated structure that provides scale for our issuers,
enabling them to expand into regional and global markets. It features an intelligent architecture that enables the network to
adapt to the needs of each transaction by blending two distinct network structures:
•
•
a distributed (peer-to-peer) switching structure for transactions that require fast, reliable switching to ensure they are
switched close to where the transaction occurred; and
a centralized (hub-and-spoke) switching structure for transactions that require value-added switching, such as real-
time access to transaction data for fraud scoring or rewards at the point-of-sale.
Our core network’s architecture enables us to connect all parties regardless of where or how the transaction is occurring. It has
24-hour a day availability and world-class response time.
Real-time Account-based Payment Systems. Augmenting our core network, we now offer real-time account-based payments
through our acquisition of Vocalink, which enables payments between bank accounts in near real-time in countries in which it
has been deployed.
Payments System Security. Our networks and products are designed to ensure safety and security for the global payments
system. The networks incorporate multiple layers of protection, both for continuity purposes and to provide best-in-class security
protection. We engage in many efforts to mitigate information security challenges, including maintaining an information security
program, a business continuity program and insurance coverage, as well as regularly testing our systems to address potential
vulnerabilities.
As part of our multi-layered approach to protect the global payments system, we also work with issuers, acquirers, merchants,
governments and payments industry associations to help develop and put in place standards (e.g., EMV) for safe and secure
transactions.
Digital Payments. Our networks support and enable our digital payment platforms, products and solutions, reflecting the growing
digital economy where consumers are increasingly seeking to use their payment accounts to pay when, where and how they
want.
Customer Risk. We guarantee the settlement of many of the transactions between our issuers and acquirers to ensure the
integrity of our core network. We refer to the amount of this guarantee as our settlement exposure. We do not, however,
guarantee payments to merchants by their acquirers, or the availability of unspent prepaid account holder account balances.
Our Products and Services
We provide a wide variety of integrated products and services that support payment products that customers can offer to their
account holders. These services facilitate transactions on our core network among account holders, merchants, financial
institutions, businesses, governments, and other organizations in markets globally.
9
Core Products
Consumer Credit and Charge. We offer a number of programs that enable issuers to provide consumers with credit that allow
them to defer payment. These programs are designed to meet the needs of our customers around the world and address standard,
premium and affluent consumer segments.
Debit. We support a range of payment products and solutions that allow our customers to provide consumers with convenient
access to funds in deposit and other accounts. Our debit and deposit access programs can be used to make purchases and to
obtain cash in bank branches, at ATMs and, in some cases, at the point of sale. Our branded debit programs consist of Mastercard
(including standard, premium and affluent offerings), Maestro (the only PIN-based solution that operates globally) and Cirrus
(our primary global cash access solution).
Prepaid. Prepaid programs involve a balance that is funded prior to use and can be accessed via one of our payment products.
We offer prepaid payment programs using any of our brands, which we support with processing products and services. Segments
on which we focus include government programs such as Social Security payments, unemployment benefits and others;
commercial programs such as payroll, health savings accounts, employee benefits and others; and reloadable programs for
consumers without formal banking relationships and non-traditional users of electronic payments.
We also provide prepaid program management services, primarily outside of the United States, that manage and enable switching
and issuer processing for consumer and commercial prepaid travel cards for business partners such as financial institutions,
retailers, telecommunications companies, travel agents, foreign exchange bureaus, colleges and universities, airlines and
governments.
Commercial. We offer commercial payment products and solutions that help large corporations, midsized companies, small
businesses and government entities streamline their procurement and payment processes, manage information and expenses
(such as travel and entertainment) and reduce administrative costs. Our offerings and platforms include premium, travel,
purchasing and fleet cards and programs; our SmartData tool that provides information reporting and expense management
capabilities; and credit and debit programs targeted for small businesses.
10
The following chart provides GDV and number of cards featuring our brands in 2017 for select programs and solutions:
Year Ended December 31, 2017
As of December 31, 2017
GDV
Cards
(in billions)
Growth (Local)
% of Total GDV
(in millions)
Percentage
Increase from
December 31,
2016
Mastercard Branded Programs1,2
Consumer Credit . . . . . . . . . . . . . . . . . . . $
Consumer Debit and Prepaid . . . . . . . . .
Commercial Credit and Debit . . . . . . . . .
2,289
2,369
583
8%
12%
15%
44%
45%
11%
768
991
67
6%
14%
16%
1 Excludes Maestro and Cirrus cards and volume generated by those cards.
2 Article 8 of the E.U. Interchange Fee Regulation related to card payments, which became effective in June 2016, states that a network can no longer
charges fees on domestic EEA payment transactions that do not use its payment brand. Prior to that, Mastercard collected a de minimis assessment
fee in a few countries, particularly France, on transactions with Mastercard co-badged cards if the brands of domestic networks (as opposed to
Mastercard) were used. As a result, the non-Mastercard co-badged volume is no longer being included. Please see “Item 7 Management’s Discussion
and Analysis of Financial Condition and Results of Operations” for a further discussion.
Digital. Leveraging our global innovations capability, we are developing platforms, products and solutions in digital payments
that help our customers and partners to offer digital solutions:
• Delivering better digital experiences everywhere. We work to enable digital payment services across all channels and
devices. We are using our technologies and security protocols to develop solutions to make digital shopping and selling
experiences, such as on smartphones and other connected devices, simpler, faster and safer for both consumers and
merchants. We also offer products that make it easier for merchants to accept payments and expand their customer
base and are developing products and practices to facilitate acceptance via mobile devices. The successful
implementation of our loyalty and reward programs is an important part of enabling these digital purchasing
experiences.
•
Securing more transactions. We are leveraging tokenization, biometrics and machine learning technologies in our
push to secure every transaction. These efforts include driving EMV-level security and benefits through all our payment
channels.
• Digitizing personal and business payments. Through Mastercard Send, we provide money transfer and global
remittance solutions to enable our customers to facilitate consumers sending and receiving money quickly and securely
domestically and around the world. These solutions allow our customers to address new payment flows with the goal
of enabling the movement of money from any funding source, such as cash, card, bank account or mobile money
account, to any destination globally, securely and in real time.
•
•
Simplifying access to, and integration of, our digital assets. Our Mastercard Developer platform makes it easy for
customers and partners to leverage our many digital assets and services. By providing a single access point with tools
and capabilities to find what we believe are some of the best in class Application Program Interfaces (“APIs”) across a
broad range of Mastercard services, we enable easy integration of our services into new and existing solutions.
Identifying and experimenting with future technologies, start-ups and trends. Through Mastercard Labs, our global
innovation and development arm, we continue to bring customers and partners access to thought leadership,
innovation methodologies, new technologies and relevant early-stage fintech players.
Additional Platforms. We offer commercial payment products and solutions that utilize additional payment platforms that are
in addition to our core network - for example, Mastercard B2B Hub, which enables small and midsized businesses to optimize
their invoice and payment processes. In addition, through our acquisition of Vocalink, we offer real-time account-based payments
for ACH transactions and will be able to offer commercial solutions utilizing these capabilities. These networks enable payments
between bank accounts in near real-time and have key attributes, including enhanced data and messaging capabilities, making
them particularly well-suited for B2B and bill payment flows. The real-time account-based payment landscape is rapidly evolving
as more markets introduce real-time account-based payment infrastructure.
Value-Added Products and Services
We provide additional integrated products and services to our customers and stakeholders, including financial institutions,
retailers and governments that enhance the value proposition of our products and networks.
11
Safety and Security. We offer integrated products and services to prevent, detect and respond to fraud and cyber-attacks and
to ensure the safety of transactions made using Mastercard products. We do this using a multi-layered safety and security
strategy:
•
•
•
•
The “Prevent” layer protects infrastructure, devices and data from attacks. We have continued to grow global usage
of EMV chip and contactless security technology, helping to reduce fraud. Greater usage of this technology has increased
the number EMV cards issued and the transaction volume on EMV cards. While this technology is prevalent in Europe,
the U.S. market has been adopting this technology in recent years.
The “Identify” layer allows us to help banks and merchants verify genuine consumers during the payment process.
Examples of solutions under this layer include Mastercard Identity Check™, a fingerprint, face and iris scanning biometric
technology to verify online purchases on mobile devices, and our recently launched Biometric Card which has a
fingerprint scanner built in to the card and is compatible with existing EMV payment terminals
The “Detect” layer spots fraudulent behavior and cyber-attacks and takes action to stop these activities once detected.
Examples of our capabilities under this layer include our Early Detection System, Decision Intelligence and Safety Net
services and technologies.
The “Experience” layer improves the security experience for our stakeholders in areas from the speed of transactions,
improving approvals for online and card-on-file payments, to the ability to differentiate good consumers from
fraudsters. Our offerings in this space include Mastercard In Control®, for consumer alerts and controls and our suite
of digital token services available through our Mastercard Digital Enablement Service (“MDES”).
We have also worked with our financial institution customers to provide products to consumers globally with increased confidence
through the benefit of “zero liability”, or no responsibility for counterfeit or lost card losses in the event of fraud.
Loyalty and Rewards. We have built a scalable rewards platform that enables financial institutions to provide consumers with
a variety of benefits and services, such as personalized offers and rewards, access to a global airline lounge network, concierge
services, insurance services, emergency card replacement, emergency cash advances and a 24-hour account holder service center.
For merchants, we provide campaigns with targeted offers and rewards, management services for publishing offers, and
accelerated points programs for co-brand and rewards program members.
Processing. We extend our processing capabilities in the payments value chain in various regions and across the globe with an
expanded suite of offerings, including:
•
•
Issuer solutions designed to provide customers with a complete processing solution to help them create differentiated
products and services and allow quick deployment of payments portfolios across banking channels.
Payment gateways that offer a single interface to provide e-commerce merchants with the ability to process secure
online and in-app payments and offer value-added solutions, including outsourced electronic payments, fraud
prevention and alternative payment options.
• Mobile gateways that facilitate transaction routing and processing for mobile-initiated transactions for our customers.
Mastercard Advisors. Mastercard Advisors is our global professional services group that provides proprietary analysis, data-
driven consulting and marketing services solutions to help clients optimize, streamline and grow their businesses, as well as
deliver value to consumers.
Mastercard Advisors’ capabilities incorporate payments expertise and analytical and executional skills to create end-to-end
solutions which are increasingly delivered via platforms embedded in our customers’ day-to-day operations. By observing patterns
of payments behavior based on billions of transactions switched globally, we leverage anonymized and aggregated information
and a consultative approach to help our customers make better business decisions. Our executional skills such as marketing,
digital implementation and staff augmentation allow us to assist clients implement actions based on these insights.
Increasingly, Mastercard Advisors has been helping financial institutions, retailers and governments innovate. Drawing on rapid
prototyping methodologies from our global innovation and development arm, Mastercard Labs, we offer “Launchpad,” a five
day app prototyping workshop that is one of our fastest growing offerings globally. Through our Applied Predictive Technology
business, a software as a service platform, we can help our customers conduct disciplined business experiments for in-market
tests.
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Brand
Our family of well-known brands includes Mastercard, Maestro, Cirrus and Masterpass. We manage and promote our brands
through advertising, promotions and sponsorships, as well as digital, mobile and social media initiatives, in order to increase
people’s preference for our brands and usage of our products. We sponsor a variety of sporting, entertainment and charity-
related marketing properties to align with consumer segments important to us and our customers. Our advertising plays an
important role in building brand visibility, usage and overall preference among account holders globally. Our “Priceless®”
advertising campaign, which has run in 54 languages in 119 countries worldwide, promotes Mastercard usage benefits and
acceptance, markets Mastercard payment products and solutions and provides Mastercard with a consistent, recognizable
message that supports our brand around the globe. We have extended Priceless to create experiences through four platforms
to drive brand preference: Priceless Cities® provides account holders across all of our regions with access to special experiences
in various cities, Priceless Causes® provides account holders with opportunities to support philanthropic causes, Priceless
SpecialsTM provides account holders with merchant offers and discounts and Priceless Surprises® provides account holders with
unexpected and unique surprises.
Our Revenue Sources
We generate revenues primarily from assessing our customers based on GDV on the products that carry our brands, from the
fees we charge to our customers for providing transaction processing and from other payment-related products and services.
Our net revenues are classified into five categories: domestic assessment fees, cross-border volume fees, transaction processing
fees, other revenues and rebates and incentives (contra-revenue).
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Revenue” in Part II, Item 7 for
more detail about our revenue, GDV, processed transactions and our other payment-related products and services.
Intellectual Property
We own a number of valuable trademarks that are essential to our business, including Mastercard, Maestro and Cirrus, through
one or more affiliates. We also own numerous other trademarks covering various brands, programs and services offered by us
to support our payment programs. Trademark and service mark registrations are generally valid indefinitely as long as they are
used and/or properly maintained. Through license agreements with our customers, we authorize the use of our trademarks in
connection with our customers’ issuing and merchant acquiring businesses. In addition, we own a number of patents and patent
applications relating to payments solutions, transaction processing, smart cards, contactless, mobile, biometrics, AI, security
systems and other matters, many of which are important to our business operations. Patents are of varying duration depending
on the jurisdiction and filing date.
Competition
We compete in the global payments industry against all forms of payment including:
•
•
•
•
cash and checks
card-based payments, including credit, charge, debit, ATM and prepaid products, as well as limited-use products such
as private label
contactless, mobile and e-commerce payments, as well as cryptocurrency
other electronic payments, including ACH payments, wire transfers, electronic benefits transfers and bill payments
We face a number of competitors both within and outside of the global payments industry:
•
Cash, Check and legacy ACH. Cash and checks continue to represent one of the most widely used forms of payment.
However, an even larger share of payments on a U.S. dollar volume basis are made via legacy, or “slow,” ACH platforms.
When combined, cash, checks and legacy ACH payments represent 90 percent of the $225 trillion of addressable
payment flows.
13
• General Purpose Payment Networks. We compete worldwide with payment networks such as Visa, American Express,
JCB, China UnionPay and Discover, among others. Some of the competitors have more market share than we do in
certain jurisdictions. Some also have different business models that may provide an advantage in pricing, regulatory
compliance burdens or otherwise. In addition, several governments are promoting, or considering promoting, local
networks for domestic switching. See “Risk Factors” in Part I, Item 1A for a discussion of the risks related to payments
system regulation and government actions that may prevent us from competing effectively for a more detailed
discussion.
• Debit and Local Networks. We compete with ATM and point-of-sale debit networks in various countries. In addition,
in many countries outside of the United States, local debit brands serve as the main domestic brands, while our brands
are used mostly to enable cross-border transactions (typically representing a small portion of overall transaction
volume). Certain jurisdictions have also created domestic card schemes that are focused mostly on debit (including
MIR in Russia).
•
Competition for Customer Business. We compete intensely with other payments networks for customer business.
Globally, financial institutions typically issue both Mastercard and Visa-branded payment products, and we compete
with Visa for business on the basis of individual portfolios or programs. In addition, a number of our customers issue
American Express and/or Discover-branded payment cards in a manner consistent with a four-party system. We
continue to face intense competitive pressure on the prices we charge our issuers and acquirers, and we seek to enter
into business agreements with them through which we offer incentives and other support to issue and promote our
payment products. We also compete for non-financial institution partners, such as merchants, governments and mobile
providers.
• Real-time Account-based Payment Systems. Through our acquisition of Vocalink, we now face competition in the real-
time account-based payment space from other companies that provide these payment solutions. In addition, real-
time account-based payments face competition from other payment methods, such as cash and checks, credit cards,
electronic, mobile and e-commerce payment platforms, cryptocurrencies and other payments networks.
• Alternative Payments Systems and New Entrants. As the global payments industry becomes more complex, we face
increasing competition from alternative payment systems and emerging payment providers. Many of these providers
have developed payments systems focused on online activity in e-commerce and mobile channels (in some cases,
expanding to other channels), and may process payments using in-house account transfers, real-time account-based
payment networks or global or local networks. Examples include digital wallet providers (such as Paytm, PayPal, Alipay
and Amazon), mobile operator services, mobile phone-based money transfer and microfinancing services (such as
mPesa), handset manufacturers and cryptocurrencies. In some circumstances, these providers can be a partner or
customer, as well as a competitor.
• Value-Added Products and Services. We face competition from companies that provide alternatives to our value-
added products and services, including information services and consulting firms that provide consulting services and
insights to financial institutions, as well as companies that compete against us as providers of loyalty and program
management solutions. In addition, our integrated products and services offerings face competition and potential
displacement from transaction processors throughout the world, which are seeking to enhance their networks that
link issuers directly with point-of-sale devices for payment transaction authorization and processing services. Regulatory
initiatives could also lead to increased competition in this space.
Our competitive advantages include our:
•
•
•
•
globally recognized brands
highly adaptable global acceptance network built over 50 years
expertise in real-time account-based payments through our Vocalink acquisition
adoption of innovative products and digital solutions
• Masterpass global digital payments ecosystem
•
safety and security solutions embedded in our networks
• Mastercard Advisors group dedicated solely to the payments industry
14
•
ability to serve a broad array of participants in global payments due to our expanded on-soil presence in individual
markets and a heightened focus on working with governments
• world class talent
Government Regulation
General. Government regulation impacts key aspects of our business. We are subject to regulations that affect the payments
industry in the many countries in which our integrated products and services are used. See “Risk Factors” in Part I, Item 1A for
more detail and examples.
Payments Oversight. Several central banks or similar regulatory bodies around the world have increased, or are seeking to
increase, their formal oversight of the electronic payments industry. Actions by these organizations could influence other
organizations around the world to adopt or consider adopting similar oversight. As a result, Mastercard could be subject to new
regulation, supervisions and examination requirements. For example, in the U.K., the Bank of England has expanded its oversight
of systemically important payment systems to include service providers, as well. Also, in the EEA, the implementation of the
revised Payment Services Directive (“PSD2”) will require financial institutions to provide third party payment processors access
to consumer payment accounts, which may enable these processors to route transactions away from Mastercard products by
offering certain services directly to people who currently use our products. PSD2 will also require a new standard for
authentication of transactions, which necessitate additional verification information from consumers to complete transactions.
This may increase the number of transactions that consumers abandon if we are unable to ensure a frictionless authentication
experience under the new standards.
Interchange Fees. Interchange fees associated with four-party payments systems like ours are being reviewed or challenged in
various jurisdictions around the world via legislation to regulate interchange fees, competition-related regulatory proceedings,
central bank regulation and litigation. Examples include statutes in the United States that cap debit interchange for certain
regulated activities and European Union legislation capping consumer credit and debit interchange fees on payments issued and
acquired within the EEA. For more detail, see our risk factors in “Risk Factors-Regulations Related to Our Participation in the
Payments Industry” in Part I, Item 1A. Also see Note 18 (Legal and Regulatory Proceedings) to the consolidated financial statements
included in Part II, Item 8.
Preferential or Protective Government Actions. Some governments have taken action to provide resources, preferential
treatment or other protection to selected domestic payments and processing providers, as well as to create their own national
providers.
Payments System Regulation. Regulators in several countries around the world either have, or are seeking to establish, authority
to regulate certain aspects of the payments systems in their countries. Such authority has resulted in regulation of various aspects
of our business. In the European Union, legislation requires us to separate our scheme activities (brand, products, franchise and
licensing) from our switched transactions and other processing in terms of how we go to market, make decisions and organize
our structure. Additionally, several jurisdictions have created or granted authority to create new regulatory bodies that either
have or would have the authority to regulate payment systems, including the United Kingdom’s Payments Systems Regulator
(PSR) (which has designated us (including our Vocalink business) as a payments system subject to regulation) and the National
Bank of Belgium.
Anti-Money Laundering, Counter Terrorist Financing, Economic Sanctions and Anti-Corruption. We are subject to anti-money
laundering (“AML”) and counter terrorist financing (“CTF”) laws and regulations globally, including the U.S. Bank Secrecy Act and
the USA PATRIOT Act, as well as the various economic sanctions programs, including those imposed and administered by the U.S.
Office of Foreign Assets Control (“OFAC”). We have implemented a comprehensive AML/CTF program, comprised of policies,
procedures and internal controls, including the designation of a compliance officer, which is designed to prevent our payment
network from being used to facilitate money laundering and other illicit activity and to address these legal and regulatory
requirements and assist in managing money laundering and terrorist financing risks. The economic sanctions programs
administered by OFAC restrict financial transactions and other dealings with certain countries and geographies (specifically
Crimea, Cuba, Iran, North Korea and Syria) and with persons and entities included in OFAC sanctions lists including its list of
Specially Designated Nationals and Blocked Persons (the “SDN List”). We take measures to prevent transactions that do not
comply with OFAC and other applicable sanctions, including establishing a risk-based compliance program that has policies,
procedures and controls designed to prevent us from having unlawful business dealings with prohibited countries, regions,
individuals or entities. As part of this program, we obligate issuers and acquirers to comply with their local sanctions obligations
and the U.S. sanctions programs, including requiring the screening of account holders and merchants, respectively, against OFAC
sanctions lists (including the SDN List). Iran, Sudan and Syria have been identified by the U.S. State Department as terrorist-
15
sponsoring states, and we have no offices, subsidiaries or affiliated entities located in any of these countries or geographies and
do not license entities domiciled there. We are also subject to anti-corruption laws and regulations globally, including the U.S.
Foreign Corrupt Practices Act and the U.K. Bribery Act, which, among other things, generally prohibit giving or offering payments
or anything of value for the purpose of improperly influencing a business decision or to gain an unfair business advantage. We
have implemented policies, procedures and internal controls to proactively manage corruption risk.
Financial Sector Oversight. We are or may be subject to regulations related to our role in the financial industry and our relationship
with our financial institution customers. In addition, we are or may be subject to regulation by a number of agencies charged
with oversight of, among other things, consumer protection, financial and banking matters. The regulators have supervisory and
independent examination authority as well as enforcement authority that we may be subject to because of the services we
provide to financial institutions that issue and acquire our products.
Issuer Practice Legislation and Regulation. Our customers are subject to numerous regulations and investigations applicable
to banks and other financial institutions in their capacity as issuers and otherwise, impacting us as a consequence. Such regulations
and investigations have been related to payment card add-on products, campus cards, bank overdraft practices, fees issuers
charge to account holders and the transparency of terms and conditions. Additionally, regulations such as PSD2 in the EEA require
financial institutions to provide third-party payment-processors access to consumer payment accounts, enabling them to provide
payment initiation and account information services directly to consumers.
Regulation of Internet and Digital Transactions. Various jurisdictions have enacted or have proposed regulation related to
internet transactions. The legislation applies to payments system participants, including us and our U.S. customers, and is
implemented through a federal regulation. We may also be impacted by evolving laws surrounding gambling, including fantasy
sports. Certain jurisdictions are also considering regulatory initiatives in digital-related areas that could impact us, such as cyber-
security, copyright and trademark infringement and privacy.
Data Protection and Information Security. Aspects of our operations or business are subject to privacy and data protection laws
in the United States, the European Union and elsewhere around the world. For example, in the United States, we and our
customers are respectively subject to Federal Trade Commission and federal banking agency information safeguarding
requirements under the Gramm-Leach-Bliley Act that require the maintenance of a written, comprehensive information security
program. In the European Union, we will be subject to the pending GDPR which goes into effect in May of 2018. This law will
require a comprehensive data protection and privacy program to protect the personal and sensitive data of European citizens
and residents. Due to constant changes to the nature of data, regulations in this area are constantly evolving with regulatory
and legislative authorities in numerous parts of the world considering proposals to protect information. In addition, the
interpretation and application of these privacy and data protection laws are often uncertain and in a state of flux, thus requiring
constant monitoring for compliance.
Additional Regulatory Developments. Various regulatory agencies also continue to examine a wide variety of issues that could
impact us, including evolving laws surrounding marijuana, prepaid payroll cards, virtual currencies, identity theft, account
management guidelines, privacy, disclosure rules, security and marketing that would impact our customers directly.
Seasonality
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Seasonality” in Part II, Item 7.
Financial Information About Geographic Areas
See Note 21 (Segment Reporting) to the consolidated financial statements included in Part II, Item 8 for certain geographic
financial information.
Employees
As of December 31, 2017, we employed approximately 13,400 persons, of whom approximately 7,900 were employed outside
of the United States.
16
Additional Information
Mastercard Incorporated was incorporated as a Delaware corporation in May 2001. We conduct our business principally through
our principal operating subsidiary, Mastercard International Incorporated (“Mastercard International”), a Delaware non-stock
(or membership) corporation that was formed in November 1966. For more information about our capital structure, including
our Class A common stock (our voting stock) and Class B common stock (our non-voting stock), see Note 13 (Stockholders’ Equity)
to the consolidated financial statements included in Part II, Item 8.
Website and SEC Reports
Our internet address is www.mastercard.com. From time to time, we may use our corporate website as a channel of distribution
of material company information. Financial and other material information is routinely posted and accessible on the investor
relations section of our corporate website. In addition, you may automatically receive email alerts and other information about
Mastercard by enrolling your email address by visiting “Investor Alerts” in the investor relations section of our corporate website.
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports
are available for review, without charge, on the investor relations section of our corporate website as soon as reasonably
practicable after they are filed with, or furnished to, the U.S. Securities and Exchange Commission (the “SEC”). The information
contained on our corporate website is not incorporated by reference into this Report.
You may also read and copy any materials that we file with the SEC at its Public Reference Room at 100 F Street N.E., Washington,
D.C. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition,
our filings are available electronically from the SEC at www.sec.gov.
17
ITEM 1A. RISK FACTORS
Legal and Regulatory
Direct Regulation of the Payments Industry
Global regulatory and legislative activity related to the payments industry may have a material adverse impact on our overall
business and results of operations.
Regulators increasingly seek to regulate, or establish or expand their authority to regulate, certain aspects of payments systems
such as ours. Some recent examples of regulatory and legislative activity include:
•
•
The European Union’s adoption of its Interchange Fee Regulation in 2015 regulating electronic payments issued and
acquired within the EEA, including caps on consumer credit and debit interchange fees (described in more detail in the
risk factors below) and the separation of brand and switching (which Mastercard implemented in 2016)
Several jurisdictions’ creation or grant of authority to create new regulations that either have or would enable the
authority to regulate or increase formal oversight over payment systems, including the United Kingdom and India (both
of which have designated us as a payments system subject to regulation), as well as Brazil, Hong Kong, Mexico and Russia
18
•
The EEA’s implementation of the revised PSD2, which requires:
financial institutions to provide third party payment processors access to consumer payment accounts. This
may enable these third party payment processors to route transactions away from Mastercard products by
offering account information or payment initiation services directly to people who currently use our products.
a different standard for authentication of transactions (strong customer authentication (“SCA”), as opposed to
risk-based authentication). The new authentication standard requires additional verification information from
consumers to complete transactions and may increase the number of transactions that consumers abandon if
we are unable to ensure a frictionless authentication experience. An increase in the rate of abandoned
transactions could adversely impact our volumes or other operations metrics.
These regulations have established, and could further expand, obligations or restrictions with respect to the types of products
and services that we may offer to financial institutions for consumers, the countries in which our integrated products and services
may be used, the way we structure and operate our business and the types of consumers and merchants who can obtain or
accept our products or services. New regulations and oversight could also relate to our clearing and settlement activities (including
risk management policies and procedures, collateral requirements, participant default policies and procedures, the ability to
complete timely switching of financial transactions, and capital and financial resource requirements). In addition, several central
banks or similar regulatory bodies around the world that have increased, or are seeking to increase, their formal oversight of the
electronic payments industry and, in some cases, are considering designating certain payments networks as “systemically
important payment systems” or “critical infrastructure.” These obligations, designations and restrictions may further expand
and could conflict with each other as more jurisdictions impose oversight of payment systems.
As a result, increased regulation and oversight of payment systems may result in costly compliance burdens or otherwise increase
our costs. Such laws or compliance burdens could result in issuers being less willing to participate in our payments system, reduce
the benefits offered in connection with the use of our products (making our products less desirable to consumers), reduce the
volume of domestic and cross-border transactions or other operational metrics, disintermediate us, impact our profitability and
limit our ability to innovate or offer differentiated products and services, all of which could materially and adversely impact our
financial performance. Regulators could also require us to obtain prior approval for changes to its system rules, procedures or
operations, or could require customization with regard to such changes, which could impact market participant risk and therefore
risk to us. Such regulatory changes could lead to new or different criteria for participation in and access to our payments system
by financial institutions or other customers. Moreover, failure to comply with the laws and regulations to which we are subject
could result in fines, sanctions, civil damages or other penalties, which could materially and adversely affect our overall business
and results of operations, as well as have an impact on our brand and reputation
Increased regulatory, legislative and litigation activity with respect to interchange rates could have an adverse impact on our
business.
Interchange rates are a significant component of the costs that merchants pay in connection with the acceptance of our products.
Although we do not earn revenues from interchange, interchange rates can impact the volume of transactions we see on our
payment products. If interchange rates are too high, merchants may stop accepting our products or route debit transactions
away from our network. If interchange rates are too low, issuers may stop promoting our integrated products and services,
eliminate or reduce loyalty rewards programs or other account holder benefits (e.g., free checking, low interest rates on balances),
or charge fees to account holders (e.g., annual fees or late payment fees).
Governments and merchant groups in a number of countries have implemented or are seeking interchange rate reductions
through legislation, competition law, central bank regulation and litigation.
Examples of regulatory and legislative activity include:
• A Statement of Objections issued by the European Commission in July 2015 related to our interregional interchange
fees and central acquiring rules within the EEA, to which we have responded and remain in discussions.
•
Legislation regulating the level of domestic interchange rates that has been enacted, or is being considered, in many
jurisdictions (for example, debit interchange in the United States is capped by statute for certain regulated entities).
• Merchants and consumers are also seeking interchange fee reductions and acceptance rule changes through litigation.
See Note 18 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part II, Item 8 for
more details.
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If issuers cannot collect or we are forced to reduce interchange rates, issuers may be less willing to participate in our four-party
payments system, or may reduce the benefits offered in connection with the use of our products, reducing the attractiveness of
our products to consumers. In particular, any changes to interregional interchange fees as a result of the European Commission’s
Statement of Objections could impact our cross-border transaction activity disproportionately versus competitors that are not
subject to similar reductions. These and other impacts could lower transaction volumes, and/or make proprietary three-party
networks or other forms of payment more attractive. Issuers could reduce the benefits associated with our products or choose
to charge higher fees to consumers to attempt to recoup a portion of the costs incurred for their services. In addition, issuers
could seek to decrease the expense of their payment programs by seeking a reduction in the fees that we charge to them,
particularly if regulation has a disproportionate impact on us as compared to our competitors in terms of the fees we can charge.
This could make our products less desirable to consumers, reduce the volume of transactions and our profitability, and limit our
ability to innovate or offer differentiated products.
We are devoting substantial resources to defending our right to establish interchange rates in regulatory proceedings, litigation
and legislative activity. The potential outcome of any of these activities could have a more positive or negative impact on us
relative to our competitors. If we are ultimately unsuccessful in defending our ability to establish interchange rates, any resulting
legislation, regulation and/or litigation may have a material adverse impact on our overall business and results of operations. In
addition, regulatory proceedings and litigation could result in us being fined and/or having to pay civil damages, the amount of
which could be material.
Current regulatory activity could be extended to additional jurisdictions or products, which could materially and adversely
affect our overall business and results of operations.
Regulators around the world increasingly replicate other regulators’ approaches with regard to the regulation of payments and
other industries. Consequently, regulation in any one country, state or region may influence regulatory approaches in other
countries, states or regions. Similarly, new laws and regulations within a country, state or region involving one product may lead
to regulation of similar or related products. For example, regulations affecting debit transactions could lead to regulation of
other products (such as credit).
As a result, the risks to our business created by any one new law or regulation are magnified by the potential it has to be replicated
in other jurisdictions or involve other products within any particular jurisdiction. These include matters like interchange rates,
potential direct regulation of our network fees and pricing, network standards and network exclusivity and routing agreements.
Conversely, if widely varying regulations come into existence worldwide, we may have difficulty adjusting our products, services,
fees and other important aspects of our business to meet the varying requirements. Either of these outcomes could materially
and adversely affect our overall business and results of operations.
Limitations on our ability to restrict merchant surcharging could materially and adversely impact our results of operations.
We have historically implemented policies, referred to as no-surcharge rules, in certain jurisdictions, including the United States,
that prohibit merchants from charging higher prices to consumers who pay using our products instead of other means. Authorities
in several jurisdictions have acted to end or limit the application of these no-surcharge rules (or indicated interest in doing so).
Additionally, we have modified our no-surcharge rules to permit U.S. merchants to surcharge credit cards, subject to certain
limitations. It is possible that over time merchants in some or all merchant categories in these jurisdictions may choose to
surcharge as permitted by the rule change. This could result in consumers viewing our products less favorably and/or using
alternative means of payment instead of electronic products, which could result in a decrease in our overall transaction volumes,
and which in turn could materially and adversely impact our results of operations.
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Preferential or Protective Government Actions
Preferential and protective government actions related to domestic payment services could adversely affect our ability to
maintain or increase our revenues.
Governments in some countries have acted, or in the future may act, to provide resources, preferential treatment or other
protection to selected national payment and switching providers, or have created, or may in the future create, their own national
provider. This action may displace us from, prevent us from entering into, or substantially restrict us from participating in,
particular geographies, and may prevent us from competing effectively against those providers. For example:
• Governments in some countries are considering, or may consider, regulatory requirements that mandate switching of
domestic payments either entirely in that country or by only domestic companies. In particular, we are currently
excluded from domestic switching in China and are seeking market access, which is uncertain and subject to a number
of factors, including receiving regulatory approval. In 2017, People’s Bank of China issued the Service Guidelines for
Market Access of Bank Card Clearing Institutions, which provide some guidance on the 2016 regulations on license
application and operational requirements for network operators to process domestic payments in China. We have
been engaged with regulators, business partners and other stakeholders in connection with steps required to advance
an application. Additionally, Russia has amended its National Payments Systems laws to require all payment systems
to process domestic transactions through a government-owned payment switch. As a result, all of our domestic
transactions in Russia are currently processed by that system instead of by us.
• Geopolitical events and resulting OFAC sanctions, adverse trade policies or other types of government actions could
lead jurisdictions affected by those sanctions to take actions in response that could adversely affect our business.
• Regional groups of countries, such as the Gulf Cooperation Countries in the Middle East and a number of countries in
South East Asia, are considering, or may consider, efforts to restrict our participation in the switching of regional
transactions.
Such developments prevent us from utilizing our global switching capabilities for domestic or regional customers. Our efforts
to effect change in, or work with, these countries may not succeed. This could adversely affect our ability to maintain or increase
our revenues and extend our global brand.
Regulation Related to Our Participation in the Payments Industry
Regulations that directly or indirectly affect the global payments industry may materially and adversely affect our overall
business and results of operations.
We are subject to regulations that affect the payments industry in the many jurisdictions in which our integrated products and
services are used. Many of our customers are also subject to regulations applicable to banks and other financial institutions that,
at times, consequently affect us. Regulation of the payments industry, including regulations applicable to us and our customers,
has increased significantly in the last several years. See “Business-Government Regulation” in Part I, Item 1 for a detailed
description of such regulation and related legislation. Examples include:
• Anti-Money Laundering, Counter Terrorist Financing, Economic Sanctions and Anti-Corruption - We are subject to
AML and CTF laws and regulations globally, including the U.S. Bank Secrecy Act and the USA PATRIOT Act, as well as
the various economic sanctions programs, including those imposed and administered by OFAC. We have implemented
a comprehensive AML/CTF program, comprised of policies, procedures and internal controls, including the designation
of a compliance officer, which is designed to prevent our payment network from being used to facilitate money
laundering and other illicit activity and to address these legal and regulatory requirements and assist in managing
money laundering and terrorist financing risks. The economic sanctions programs administered by OFAC restrict
financial transactions and other dealings with certain countries and geographies (specifically Crimea, Cuba, Iran, North
Korea and Syria) and with persons and entities included in OFAC sanctions lists including the SDN List. We take measures
to prevent transactions that do not comply with OFAC and other applicable sanctions, including establishing a risk-
based compliance program that has policies, procedures and controls designed to prevent us from having unlawful
business dealings with prohibited countries, regions, individuals or entities. As part of this program, we obligate issuers
and acquirers to comply with their local sanctions obligations and the U.S. sanctions programs, including requiring the
screening of account holders and merchants, respectively, against OFAC sanctions lists (including the SDN List). Iran,
Sudan and Syria have been identified by the U.S. State Department as terrorist-sponsoring states, and we have no
offices, subsidiaries or affiliated entities located in any of these countries or geographies and do not license entities
domiciled there. We are also subject to anti-corruption laws and regulations globally, including the U.S. Foreign Corrupt
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Practices Act and the U.K. Bribery Act, which, among other things, generally prohibit giving or offering payments or
anything of value for the purpose of improperly influencing a business decision or to gain an unfair business advantage.
We have implemented policies, procedures and internal controls to proactively manage corruption risk. A violation
and subsequent judgment or settlement against us, or those with whom we may be associated, under these laws could
subject us to substantial monetary penalties, damages, and/or have a significant reputational impact.
•
Financial Sector Oversight - In the United States, we are subject to regulation by a number of agencies charged with
oversight of, among other things, consumer protection, financial and banking matters. These regulators have
supervisory and independent examination authority as well as enforcement authority that we may be subject to because
of the services we provide to financial institutions that issue and acquire our products. It is often not clear whether
and/or to what extent these institutions will regulate broader aspects of payment networks.
• Real-time Account-based Payment Systems – In 2017, we completed the acquisition of a controlling interest in Vocalink.
In the U.K., the Bank of England has expanded its oversight of certain payment system providers that are systemically
important to U.K.’s payment network. As a result of these changes, aspects of our Vocalink business could become
subject to the U.K. payment system oversight regime and be directly overseen by the Bank of England.
•
Issuer Practice Legislation and Regulation - Our financial institution customers are subject to numerous regulations,
which impact us as a consequence. In addition, certain regulations, such as PSD2 in the EEA, may disintermediate
issuers. If our customers are disintermediated in their business, we could face diminished demand for our integrated
products and services. In addition, existing or new regulations in these or other areas may diminish the attractiveness
of our products to our customers.
• Regulation of Internet and Digital Transactions - Proposed legislation in various jurisdictions relating to Internet
gambling and other digital areas such as cyber-security, copyright, trademark infringement and privacy could impose
additional compliance burdens on us and/or our customers, including requiring us or our customers to monitor, filter,
restrict, or otherwise oversee various categories of payment transactions.
Increased regulatory focus on us, such as in connection with the matters discussed above, may result in costly compliance burdens
and/or may otherwise increase our costs. Similarly, increased regulatory focus on our customers may cause such customers to
reduce the volume of transactions processed through our systems. Actions by regulators could influence other organizations
around the world to enact or consider adopting similar measures, amplifying any potential compliance burden. Finally, failure
to comply with the laws and regulations discussed above to which we are subject could result in fines, sanctions or other penalties.
Each may individually or collectively materially and adversely affect our financial performance and/or our overall business and
results of operations, as well as have an impact on our reputation.
We could be subject to adverse changes in tax laws, regulations and interpretations or challenges to our tax positions.
We are subject to tax laws and regulations of the U.S. federal, state and local governments as well as various non-U.S. jurisdictions.
Potential changes in existing tax laws may impact our effective tax rate and tax payments. For example, the recent U.S. tax
legislation enacted on December 22, 2017 represents a significant overhaul of the U.S. federal tax code. This tax legislation
reduced the U.S. statutory corporate tax rate and made other changes that could have a favorable impact on our overall U.S.
federal tax liability in a given period. However, the tax legislation also included a number of provisions that limit or eliminate
various deductions, including interest expense, performance-based compensation for certain executives and the domestic
production activities deduction, among others, that could affect our U.S. federal income tax position. We are continuing to
evaluate the overall impact of this tax legislation on our operations and U.S. federal income tax position. See Note 17 (Income
Taxes) to the consolidated financial statements included in Part II, Item 8 for further discussion of the TCJA. While we expect the
TCJA to be favorable to the Company overall, there can be no assurance that changes in tax laws or regulations, both within the
U.S. and the other jurisdictions in which we operate, will not materially and adversely affect our effective tax rate, tax payments,
financial condition and results of operations. Similarly, changes in tax laws and regulations that impact our customers and
counterparties or the economy generally may also impact our financial condition and results of operations.
In addition, tax laws and regulations are complex and subject to varying interpretations, and any significant failure to comply
with applicable tax laws and regulations in all relevant jurisdictions could give rise to substantial penalties and liabilities. Any
changes in enacted tax laws, rules or regulatory or judicial interpretations; any adverse outcome in connection with tax audits
in any jurisdiction; or any change in the pronouncements relating to accounting for income taxes could materially and adversely
impact our effective tax rate, tax payments, financial condition and results of operations.
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Privacy, Data Protection and Security
Regulation of privacy, data protection, security and the digital economy could increase our costs, as well as negatively impact
our growth.
We are subject to regulations related to privacy, data protection and information security in the jurisdictions in which we do
business. These regulations could result in negative impacts to our business. As we continue to develop integrated products
and services to meet the needs of a changing marketplace, we may expand our information profile through the collection of
additional data across multiple channels. This expansion could amplify the impact of these regulations on our business. Regulation
of privacy and data protection and information security often times require monitoring of and changes to our data practices in
regard to the collection, use, disclosure, storage and/or security of personal and sensitive information. In addition, due to the
European Parliament’s passage of the GDPR and the European Court of Justice’s invalidation of the Safe Harbor treaty, we are
subject to enhanced compliance and operational requirements in the European Union. Failure to comply with these laws,
regulations and requirements could result in fines, sanctions or other penalties, which could materially and adversely affect our
results of operations and overall business, as well as have an impact on our reputation.
New requirements or reinterpretations of existing requirements in these areas, or the development of new regulatory schemes
related to the digital economy in general, may also increase our costs and could impact aspects of our business such as fraud
monitoring, the development of information-based products and solutions and technology operations. In addition, these
requirements may increase the costs to our customers of issuing payment products, which may, in turn, decrease the number
of our payment products that they issue. Moreover, due to account data compromise events, as well as the disclosure of the
monitoring activities by certain governmental agencies, there has been heightened legislative and regulatory scrutiny around
the world that could lead to further regulation and requirements. Any of these developments could materially and adversely
affect our overall business and results of operations.
In addition, fraudulent activity could encourage regulatory intervention, which could damage our reputation and reduce the use
and acceptance of our integrated products and services or increase our compliance costs. Criminals are using increasingly
sophisticated methods to capture consumer account information to engage in illegal activities such as counterfeiting or other
fraud. As outsourcing and specialization become common in the payments industry, there are more third parties involved in
processing transactions using our payment products. While we are taking measures to make card and digital payments more
secure, increased fraud levels involving our integrated products and services, or misconduct or negligence by third parties
switching or otherwise servicing our integrated products and services, could lead to regulatory intervention, such as enhanced
security requirements, as well as damage to our reputation.
Litigation
Liabilities we may incur for any litigation that has been or may be brought against us could materially and adversely affect
our results of operations.
We are a defendant on a number of civil litigations and regulatory proceedings and investigations, including among others, those
alleging violations of competition and antitrust law and those involving intellectual property claims. See Note 18 (Legal and
Regulatory Proceedings) to the consolidated financial statements included in Part II, Item 8 for more details regarding the
allegations contained in these complaints and the status of these proceedings. In the event we are found liable in any material
litigations or proceedings, particularly in the event we may be found liable in a large class-action lawsuit or on the basis of an
antitrust claim entitling the plaintiff to treble damages or under which we were jointly and severally liable, we could be subject
to significant damages, which could have a material adverse impact on our overall business and results of operations.
Limitations on our business resulting from litigation or litigation settlements may materially and adversely affect our overall
business and results of operations.
Certain limitations have been placed on our business in recent years because of litigation and litigation settlements, such as
changes to our no-surcharge rule in the United States. Any future limitations on our business resulting from litigation or litigation
settlements could impact our relationships with our customers, including reducing the volume of business that we do with them,
which may materially and adversely affect our overall business and results of operations.
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Business and Operations
Competition and Technology
Substantial and intense competition worldwide in the global payments industry may materially and adversely affect our overall
business and results of operations.
The global payments industry is highly competitive. Our payment programs compete against all forms of payment, including
cash and checks; electronic, mobile and e-commerce payment platforms; cryptocurrencies; ACH payment services; and other
payments networks, which can have several competitive impacts on our business:
• Within the global general purpose payments industry, we face substantial and increasingly intense competition
worldwide.
•
•
In certain jurisdictions, including the United States, Visa has greater volume, scale and market share than we do, which
may provide significant competitive advantages.
Some of our traditional competitors, as well as alternative payment service providers, may have substantially greater
financial and other resources than we have, may offer a wider range of programs and services than we offer or may
use more effective advertising and marketing strategies to achieve broader brand recognition or merchant acceptance
than we have.
• Our ability to compete may also be affected by the outcomes of litigation, competition-related regulatory proceedings,
central bank activity and legislative activity.
Certain of our competitors, including American Express, Discover, private-label card networks and certain alternative payments
systems, operate three-party payments systems with direct connections to both merchants and consumers and these competitors
may derive competitive advantages from their business models. If we continue to attract more regulatory scrutiny than these
competitors because we operate a four-party system, or we are regulated because of the system we operate in a way in which
our competitors are not, we could lose business to these competitors. See “Business-Competition” in Part I, Item 1.
If we are not able to differentiate ourselves from our competitors, drive value for our customers and/or effectively align our
resources with our goals and objectives, we may not be able to compete effectively against these threats. Our competitors may
also more effectively introduce their own innovative programs and services that adversely impact our growth. We also compete
against new entrants that have developed alternative payments systems, e-commerce payments systems and payments systems
for mobile devices, as well as physical store locations. A number of these new entrants rely principally on the Internet to support
their services and may enjoy lower costs than we do, which could put us at a competitive disadvantage. Our failure to compete
effectively against any of the foregoing competitive threats could materially and adversely affect our overall business and results
of operations.
Disintermediation from stakeholders both within and outside of the payments value chain could harm our business.
As the payments industry continues to develop and change, we face disintermediation and related risks, including:
•
Parties that process our transactions in certain countries may try to eliminate our position as an intermediary in the
payment process. For example, merchants could switch (and in some cases are switching) transactions directly with
issuers. Additionally, processors could process transactions directly between issuers and acquirers. Large scale
consolidation within processors could result in these processors developing bilateral agreements or in some cases
switching the entire transaction on their own network, thereby disintermediating us.
• Regulation in the EEA may disintermediate us by enabling third-party processors opportunities to route payment
transactions away from our networks and towards other forms of payment.
• Although we partner with technology companies (such as digital players and mobile providers) that leverage our
technology, platforms and networks to deliver their products, they could develop platforms or networks that
disintermediate us from digital payments and impact our ability to compete in the digital economy. This risk is
heightened when we have relationships with these entities where we share Mastercard data. While we share this data
in a controlled manner subject to applicable anonymization and data privacy standards, without proper oversight we
could inadvertently share too much data which could give the partner a competitive advantage.
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•
Competitors, customers, technology companies, governments and other industry participants may develop products
that compete with or replace value-added products and services we currently provide to support our switched
transaction and payment offerings. These products could replace our own switching and payments offerings or could
force us to change our pricing or practices for these offerings. In addition, governments that develop national payment
platforms may promote their platforms in such a way that could put us at a competitive disadvantage in those markets.
•
Participants in the payments industry may merge, create joint ventures or form other business combinations that may
strengthen their existing business services or create new payment services that compete with our services.
Our failure to compete effectively against any of the foregoing competitive threats could materially and adversely affect our
overall business and results of operations.
Continued intense pricing pressure may materially and adversely affect our overall business and results of operations.
In order to increase transaction volumes, enter new markets and expand our Mastercard-branded cards and enabled products
and services, we seek to enter into business agreements with customers through which we offer incentives, pricing discounts
and other support that promote our products. In order to stay competitive, we may have to increase the amount of these
incentives and pricing discounts. Over the past several years, we have experienced continued pricing pressure. The demand
from our customers for better pricing arrangements and greater rebates and incentives moderates our growth. We may not be
able to continue our expansion strategy to process additional transaction volumes or to provide additional services to our
customers at levels sufficient to compensate for such lower fees or increased costs in the future, which could materially and
adversely affect our overall business and results of operations. In addition, increased pressure on prices increases the importance
of cost containment and productivity initiatives in areas other than those relating to customer incentives.
In the future, we may not be able to enter into agreements with our customers if they require terms that we are unable or
unwilling to offer, and we may be required to modify existing agreements in order to maintain relationships and to compete with
others in the industry. Some of our competitors are larger and have greater financial resources than we do and accordingly may
be able to charge lower prices to our customers. In addition, to the extent that we offer discounts or incentives under such
agreements, we will need to further increase transaction volumes or the amount of services provided thereunder in order to
benefit incrementally from such agreements and to increase revenue and profit, and we may not be successful in doing so,
particularly in the current regulatory environment. Our customers also may implement cost reduction initiatives that reduce or
eliminate payment product marketing or increase requests for greater incentives or greater cost stability. These factors could
have a material adverse impact on our overall business and results of operations.
Rapid and significant technological developments and changes could negatively impact our overall business and results of
operations or limit our future growth.
The payments industry is subject to rapid and significant technological changes, which can impact our business in several ways:
•
Technological changes, including continuing developments of technologies in the areas of smart cards and devices,
contactless and mobile payments, e-commerce, cryptocurrency and block chain technology, machine learning and AI,
could result in new technologies that may be superior to, or render obsolete, the technologies we currently use in our
programs and services. Moreover, these changes could result in new and innovative payment methods and programs
that could place us at a competitive disadvantage and that could reduce the use of our products.
• We rely in part on third parties, including some of our competitors and potential competitors, for the development of
and access to new technologies. The inability of these companies to keep pace with technological developments, or
the acquisition of these companies by competitors, could negatively impact our offerings.
• Our ability to develop and adopt new services and technologies may be inhibited by industry-wide solutions and
standards (such as those related to EMV, tokenization or other safety and security technologies), and by resistance
from customers or merchants to such changes.
• Our ability to develop evolving systems and products may be inhibited by any difficulty we may experience in attracting
and retaining technology experts.
• Our ability to adopt these technologies can also be inhibited by intellectual property rights of third parties. We have
received, and we may in the future receive, notices or inquiries from patent holders (for example, other operating
companies or non-practicing entities) suggesting that we may be infringing certain patents or that we need to license
the use of their patents to avoid infringement. Such notices may, among other things, threaten litigation against us or
our customers or demand significant license fees.
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• Our ability to develop new technologies and reflect technological changes in our payments offerings will require
resources, which may result in additional expenses.
• We work with technology companies (such as digital players and mobile providers) that use our technology to enhance
payment safety and security and to deliver their payment-related products and services quickly and efficiently to
consumers. Our inability to keep pace technologically could negatively impact the willingness of these customers to
work with us, and could encourage them to use their own technology and compete against us.
We cannot predict the effect of technological changes on our business, and our future success will depend, in part, on our ability
to anticipate, develop or adapt to technological changes and evolving industry standards. Failure to keep pace with these
technological developments or otherwise bring to market products that reflect these technologies could lead to a decline in the
use of our products, which could have a material adverse impact on our overall business and results of operations.
Operating a new real-time account-based payments network in connection with our Vocalink acquisition presents risks that
could materially affect our business.
Our acquisition of Vocalink in 2017 added real-time account-based payment technology to the suite of capabilities we offer.
While expansion into this space presents business opportunities, there are also regulatory and operational risks associated with
administering a new type of payments network and with integrating this acquisition into our business.
Operating a new type of payments system presents new regulatory and operational risks. English regulators have designated
this platform to be “critical national infrastructure” and regulators in other countries may in the future expand their regulatory
oversight of real-time account-based payments systems in similar ways. In addition, any prolonged service outage on this network
could result in quickly escalating impacts, including potential intervention by the Bank of England and significant reputational
risk to Vocalink and us. For a discussion of the regulatory risks related to our real-time account-based payments platform, see
our risk factor in “Risk Factors - Regulation Related to Our Participation in the Payments Industry” in this Part I, Item 1A.
Furthermore, the complexity of this payment technology requires careful management to address security vulnerabilities that
are different from those faced on our core network. While we are leveraging Vocalink’s talent and expertise, we may face
challenges in adapting to the complex requirements of operating a new payments system. Operational difficulties, such as the
temporary unavailability of our services or products, or security breaches on our real-time account-based payments network
could cause a loss of business for these products and services, result in potential liability for us and adversely affect our reputation.
We are also working to embed the new products and technology acquired from Vocalink into our existing markets. This product
convergence requires tight working relationships and integration with the people and corporate culture of Vocalink as a critical
success factor. Not managing the integration successfully could result in larger-than-expected integration costs, which could be
significant. If we fail to successfully embed these new technologies, we may lose existing Vocalink business and may not remain
competitive in our payment technology offerings as compared to our competitors. See our risk factor in “Risk Factors -
Acquisitions” in this Part I, Item 1A for more information on risks relating to the integrating our acquisitions.
Working with new customers and end users as we expand our integrated products and services can present operational
challenges, be costly and result in reputational damage if the new products or services do not perform as intended.
The payments markets in which we compete are characterized by rapid technological change, new product introductions, evolving
industry standards and changing customer and consumer needs. In order to remain competitive and meet the needs of the
payments market, we are continually involved in diversifying our integrated products and services. These efforts carry the risks
associated with any diversification initiative, including cost overruns, delays in delivery and performance problems. These projects
also carry risks associated with working with different types of customers, for example organizations such as corporations that
are not financial institutions and non-governmental organizations (“NGOs”), and end users than those we have traditionally
worked with. These differences may present new operational challenges in the development and implementation of our new
products or services.
Our failure to render these integrated products and services could make our other integrated products and services less desirable
to customers, or put us at a competitive disadvantage. In addition, if there is a delay in the implementation of our products or
services or if our products or services do not perform as anticipated, we could face additional regulatory scrutiny, fines, sanctions
or other penalties, which could materially and adversely affect our overall business and results of operations, as well as negatively
impact our brand and reputation.
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Information Security and Service Disruptions
Information security incidents or account data compromise events could disrupt our business, damage our reputation, increase
our costs and cause losses.
Information security risks for payments and technology companies such as ours have significantly increased in recent years in
part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct
financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists and other external
parties. These threats may derive from fraud or malice on the part of our employees or third parties, or may result from human
error or accidental technological failure. These threats include cyber-attacks such as computer viruses, malicious code, phishing
attacks or information security breaches and could lead to the misappropriation of consumer account and other information
and identity theft.
Our operations rely on the secure processing, transmission and storage of confidential, proprietary and other information in our
computer systems and networks. Our customers and other parties in the payments value chain, as well as account holders, rely
on our digital technologies, computer systems, software and networks to conduct their operations. In addition, to access our
integrated products and services, our customers and account holders increasingly use personal smartphones, tablet PCs and
other mobile devices that may be beyond our control. We, like other financial technology organizations, routinely are subject
to cyber-threats and our technologies, systems and networks have been subject to attempted cyber-attacks. Because of our
position in the payments value chain, we believe that we are likely to continue to be a target of such threats and attacks.
Additionally, geopolitical events and resulting government activity could also lead to information security threats and attacks by
affected jurisdictions and their sympathizers.
To date, we have not experienced any material impact relating to cyber-attacks or other information security breaches. However,
future attacks or breaches could lead to security breaches of the networks, systems or devices that our customers use to access
our integrated products and services, which in turn could result in the unauthorized disclosure, release, gathering, monitoring,
misuse, loss or destruction of confidential, proprietary and other information (including account data information) or data security
compromises. Such attacks or breaches could also cause service interruptions, malfunctions or other failures in the physical
infrastructure or operations systems that support our businesses and customers (such as the lack of availability of our value-
added systems), as well as the operations of our customers or other third parties. In addition, they could lead to damage to our
reputation with our customers and other parties and the market, additional costs to us (such as repairing systems, adding new
personnel or protection technologies or compliance costs), regulatory penalties, financial losses to both us and our customers
and partners and the loss of customers and business opportunities. If such attacks are not detected immediately, their effect
could be compounded.
We maintain an information security program, a business continuity program and insurance coverage (each reviewed by our
Board of Directors and its Audit Committee), and our processing systems incorporate multiple levels of protection, in order to
address or otherwise mitigate these risks. We also continually test our systems to discover and address any potential
vulnerabilities. Despite these mitigation efforts, there can be no assurance that we will be immune to these risks and not suffer
material breaches and resulting losses in the future, or that our insurance coverage would be sufficient to cover all losses. Our
risk and exposure to these matters remain heightened because of, among other things, the evolving nature of these threats, our
prominent size and scale and our role in the global payments and technology industries, our plans to continue to implement our
digital and mobile channel strategies and develop additional remote connectivity solutions to serve our customers and account
holders when and how they want to be served, our global presence, our extensive use of third-party vendors and future joint
venture and merger and acquisition opportunities. As a result, information security and the continued development and
enhancement of our controls, processes and practices designed to protect our systems, computers, software, data and networks
from attack, damage or unauthorized access remain a priority for us. As cyber-threats continue to evolve, we may be required
to expend significant additional resources to continue to modify or enhance our protective measures or to investigate and
remediate any information security vulnerabilities. Any of the risks described above could materially adversely affect our overall
business and results of operations.
In addition to information security risks for our systems, we also routinely encounter account data compromise events involving
merchants and third-party payment processors that process, store or transmit payment transaction data, which affect millions
of Mastercard, Visa, Discover, American Express and other types of account holders. These events, some of which have been
high profile, typically involve external agents hacking the merchants’ or third-party processors’ systems and installing malware
to compromise the confidentiality and integrity of those systems. Further events of this type may subject us to reputational
damage and/or lawsuits involving payment products carrying our brands. Damage to our reputation or that of our brands resulting
from an account data breach of either our systems or the systems of our customers, merchants and other third parties could
decrease the use and acceptance of our integrated products and services. Such events could also slow or reverse the trend
27
toward electronic payments. In addition to reputational concerns, while most of the lawsuits resulting from account data breaches
do not involve direct claims against us and while we have releases from many issuers and acquirers, we could still face damage
claims, which, if upheld, could materially and adversely affect our results of operations. Such events could have a material adverse
impact on our transaction volumes, results of operations and prospects for future growth, or increase our costs by leading to
additional regulatory burdens being imposed on us.
Service disruptions that cause us to be unable to process transactions or service our customers could materially affect our
overall business and results of operations.
Our transaction switching systems and other offerings may experience interruptions as a result of technology malfunctions, fire,
weather events, power outages, telecommunications disruptions, terrorism, workplace violence, accidents or other catastrophic
events. Our visibility in the global payments industry may also put us at greater risk of attack by terrorists, activists, or hackers
who intend to disrupt our facilities and/or systems. Additionally, we rely on third-party service providers for the timely
transmission of information across our global data network. Inadequate infrastructure in lesser-developed markets could also
result in service disruptions, which could impact our ability to do business in those markets. If one of our service providers fails
to provide the communications capacity or services we require, as a result of natural disaster, operational disruptions, terrorism,
hacking or any other reason, the failure could interrupt our services. Although we maintain a business continuity program to
analyze risk, assess potential impacts, and develop effective response strategies, we cannot ensure that our business would be
immune to these risks, because of the intrinsic importance of our switching systems to our business, any interruption or
degradation could adversely affect the perception of the reliability of products carrying our brands and materially adversely affect
our overall business and our results of operations.
Financial Institution Customers and Other Stakeholder Relationships
Losing a significant portion of business from one or more of our largest financial institution customers could lead to significant
revenue decreases in the longer term, which could have a material adverse impact on our business and our results of operations.
Most of our financial institution customer relationships are not exclusive and may be terminated by our customers. Our customers
can reassess their commitments to us at any time in the future and/or develop their own competitive services. Accordingly, our
business agreements with these customers may not reduce the risk inherent in our business that customers may terminate their
relationships with us in favor of relationships with our competitors, or for other reasons, or might not meet their contractual
obligations to us.
In addition, a significant portion of our revenue is concentrated among our five largest financial institution customers. Loss of
business from any of our large customers could have a material adverse impact on our overall business and results of operations.
Exclusive/near exclusive relationships certain customers have with our competitors may have a material adverse impact on
our business.
Certain customers have exclusive, or nearly-exclusive, relationships with our competitors to issue payment products, and these
relationships may make it difficult or cost-prohibitive for us to do significant amounts of business with them to increase our
revenues. In addition, these customers may be more successful and may grow faster than the customers that primarily issue
our payment products, which could put us at a competitive disadvantage. Furthermore, we earn substantial revenue from
customers with nearly-exclusive relationships with our competitors. Such relationships could provide advantages to the customers
to shift business from us to the competitors with which they are principally aligned. A significant loss of our existing revenue or
transaction volumes from these customers could have a material adverse impact on our business.
Consolidation in the banking industry could materially and adversely affect our overall business and results of operations.
The banking industry has undergone substantial, accelerated consolidation in the past. Consolidations have included customers
with a substantial Mastercard portfolio being acquired by institutions with a strong relationship with a competitor. If significant
consolidation among customers were to continue, it could result in the substantial loss of business for us, which could have a
material adverse impact on our business and prospects. In addition, one or more of our customers could seek to merge with,
or acquire, one of our competitors, and any such transaction could also have a material adverse impact on our overall business.
Consolidation could also produce a smaller number of large customers, which could increase their bargaining power and lead to
lower prices and/or more favorable terms for our customers. These developments could materially and adversely affect our
results of operations.
28
Our business significantly depends on the continued success and competitiveness of our issuing and acquiring customers and,
in many jurisdictions, their ability to effectively manage or help manage our brands.
While we work directly with many stakeholders in the payments system, including merchants, governments and large digital
companies and other technology companies, we are, and will continue to be, significantly dependent on our relationships with
our issuers and acquirers and their respective relationships with account holders and merchants to support our programs and
services. Furthermore, we depend on our issuing partners and acquirers to continue to innovate to maintain competitiveness
in the market. We do not issue cards or other payment devices, extend credit to account holders or determine the interest rates
or other fees charged to account holders. Each issuer determines these and most other competitive payment program features.
In addition, we do not establish the discount rate that merchants are charged for acceptance, which is the responsibility of our
acquiring customers. As a result, our business significantly depends on the continued success and competitiveness of our issuing
and acquiring customers and the strength of our relationships with them. In turn, our customers’ success depends on a variety
of factors over which we have little or no influence, including economic conditions in global financial markets or their
disintermediation by competitors or emerging technologies. If our customers become financially unstable, we may lose revenue
or we may be exposed to settlement risk. See our risk factor in “Risk Factors - Settlement and Third-Party Obligations” in this
Part I, Item 1A with respect to how we guarantee certain third-party obligations for further discussion.
With the exception of the United States and a select number of other jurisdictions, most in-country (as opposed to cross-border)
transactions conducted using Mastercard, Maestro and Cirrus cards are authorized, cleared and settled by our customers or
other processors. Because we do not provide domestic switching services in these countries and do not, as described above,
have direct relationships with account holders, we depend on our close working relationships with our customers to effectively
manage our brands, and the perception of our payments system, among consumers in these countries. We also rely on these
customers to help manage our brands and perception among regulators and merchants in these countries, alongside our own
relationships with them. From time to time, our customers may take actions that we do not believe to be in the best interests
of our payments system overall, which may materially and adversely impact our business.
Merchants’ continued focus on acceptance costs may lead to additional litigation and regulatory proceedings and increase
our incentive program costs, which could materially and adversely affect our profitability.
Merchants are important constituents in our payments system. We rely on both our relationships with them, as well as their
relationships with our issuer and acquirer customers, to continue to expand the acceptance of our integrated products and
services. We also work with merchants to help them enable new sales channels, create better purchase experiences, improve
efficiencies, increase revenues and fight fraud. In the retail industry, there is a set of larger merchants with increasingly global
scope and influence. We believe that these merchants are having a significant impact on all participants in the global payments
industry, including Mastercard. Some large merchants have supported the legal, regulatory and legislative challenges to
interchange fees that Mastercard has been defending, including the U.S. merchant litigations. See our risk factor in “Risk Factors
– Risks Related to Our Participation in the Payments Industry” in this Part I, Item 1A with respect to payments industry regulation,
including interchange fees. The continued focus of merchants on the costs of accepting various forms of payment, including in
connection with the growth of digital payments, may lead to additional litigation and regulatory proceedings.
Certain larger merchants are also able to negotiate incentives from us and pricing concessions from our issuer and acquirer
customers as a condition to accepting our products. We also make payments to certain merchants to incentivize them to create
co-branded payment programs with us. As merchants consolidate and become even larger, we may have to increase the amount
of incentives that we provide to certain merchants, which could materially and adversely affect our results of operations.
Competitive and regulatory pressures on pricing could make it difficult to offset the costs of these incentives. Additionally, if the
rate of merchant acceptance growth slows our business could suffer.
Our work with governments exposes us to unique risks that could have a material impact on our business and results of
operations.
As we increase our work with national, state and local governments, both indirectly through financial institutions and with them
directly as our customers, we may face various risks inherent in associating or contracting directly with governments. These risks
include, but are not limited to, the following:
• Governmental entities typically fund projects through appropriated monies. Changes in governmental priorities or
other political developments, including disruptions in governmental operations, could impact approved funding and
result in changes in the scope, or lead to the termination of, the arrangements or contracts we or financial institutions
enter into with respect to our payment products and services.
29
• Our work with governments subjects us to U.S. and international anti-corruption laws, including the U.S. Foreign Corrupt
Practices Act and the U.K. Bribery Act. A violation and subsequent judgment or settlement under these laws could
subject us to substantial monetary penalties and damages and have a significant reputational impact.
• Working or contracting with governments, either directly or via our financial institution customers, can subject us to
heightened reputational risks, including extensive scrutiny and publicity, as well as a potential association with the
policies of a government as a result of a business arrangement with that government. Any negative publicity or negative
association with a government entity, regardless of its accuracy, may adversely affect our reputation.
Settlement and Third-Party Obligations
Our role as guarantor exposes us to risk of loss or illiquidity.
We are a guarantor of certain third-party obligations, including those of:
•
principal customers, which are customers that participate directly in our programs and are responsible for their own
settlement and other activities as well as those of their sponsored affiliate customers
•
affiliate debit licensees
In this capacity, we are exposed to risk of loss or illiquidity:
• We may incur obligations in connection with transaction settlements if an issuer or acquirer fails to fund its daily
settlement obligations due to technical problems, liquidity shortfalls, insolvency or other reasons.
•
If our principal customer or affiliate debit licensee is unable to fulfill its settlement obligations to other customers, we
may bear the loss.
• Although we are not obligated to do so, we may elect to keep merchants whole if an acquirer defaults on its merchant
payment obligations, or to keep prepaid cardholders whole if an issuer defaults on its obligation to safeguard unspent
prepaid funds.
Concurrent settlement failures of more than one of our larger customers or of several of our smaller customers either on a given
day or over a condensed period of time may exceed our available resources and could materially and adversely affect our overall
business and liquidity. Even if we have sufficient liquidity to cover a settlement failure, we may not be able to recover the cost
of such a payment and may therefore be exposed to significant losses, which could materially and adversely affect our results of
operations. Should an event occur that would trigger any significant indemnification obligation which we owe to any customers
or other companies, such an obligation could materially and adversely affect our overall business and results of operations.
We mitigate the contingent risk of a settlement failure using various strategies, including monitoring our customers’ financial
condition, their economic and political operating environments and their compliance with our participation standards. For more
information on our settlement exposure and risk assessment and mitigation practices, see Note 19 (Settlement and Other Risk
Management) to the consolidated financial statements included in Part II, Item 8.
Global Economic and Political Environment
Global financial market activity could result in a material and adverse impact on our overall business and results of operations.
Adverse economic trends (including distress in financial markets, turmoil in specific economies around the world and additional
government intervention) have impacted the environment in which we operate. The condition of the economic environment
may accelerate the timing of or increase the impact of risks to our financial performance. Such impact may include, but is not
limited to, the following:
• Our customers may:
restrict credit lines to account holders or limit the issuance of new Mastercard products to mitigate increasing
account holder defaults
implement cost reduction initiatives that reduce or eliminate payment product marketing or increase requests
for greater incentives or greater cost stability
30
default on their settlement obligations, including as a result of sovereign defaults, causing a liquidity crisis for
our other customers
•
Consumer spending can be negatively impacted by:
declining economies, foreign currency fluctuations and the pace of economic recovery, which can change cross-
border travel patterns, on which a significant portion of our revenues is dependent
low levels of consumer and business confidence typically associated with recessionary environments and those
markets experiencing relatively high unemployment
• Government intervention (including the effect of laws, regulations and/or government investments on or in our financial
institution customers), as well as uncertainty due to changing political regimes in executive, legislative and/or judicial
branches of government, may have potential negative effects on our business and our relationships with customers
or otherwise alter their strategic direction away from our products.
•
Tightening of credit availability could impact the ability of participating financial institutions to lend to us under the
terms of our credit facility.
Any of these developments could have a material adverse impact on our overall business and results of operations.
A decline in cross-border activity could adversely affect our results of operations.
We switch substantially all cross-border transactions using Mastercard, Maestro and Cirrus-branded cards and generate a
significant amount of revenue from cross-border volume fees and fees related to switched transactions. Revenue from switching
cross-border and currency conversion transactions for our customers fluctuates with the levels and destinations of cross-border
travel and our customers’ need for transactions to be converted into their base currency. Cross-border activity may be adversely
affected by world geopolitical, economic, weather and other conditions. These include the threat of terrorism and outbreaks of
flu, viruses and other diseases. Additionally, any regulation of interregional interchange fees could negatively impact our cross-
border activity, which could decrease the revenue we receive. Any such decline in cross-border activity could materially adversely
affect our results of operations.
Negative trends in spending could negatively impact our results of operations.
The global payments industry depends heavily upon the overall level of consumer, business and government spending. General
economic conditions (such as unemployment, housing and changes in interest rates) and other political conditions (such as
devaluation of currencies and government restrictions on consumer spending) in key countries in which we operate may adversely
affect our financial performance by reducing the number or average purchase amount of transactions involving our products.
Adverse currency fluctuations and foreign exchange controls could negatively impact our results of operations.
During 2017, approximately 65% of our revenue was generated from activities outside the United States. This revenue (and the
related expense) could be transacted in a non-functional currency or valued based on a currency other than the functional
currency of the entity generating the revenues. Resulting exchange gains and losses are included in our net income. Our risk
management activities provide protection with respect to adverse changes in the value of only a limited number of currencies
and are based on estimates of exposures to these currencies.
In addition, some of the revenue we generate outside the United States is subject to unpredictable currency fluctuations including
devaluation of currencies where the values of other currencies change relative to the U.S. dollar. If the U.S. dollar strengthens
compared to currencies in which we generate revenue, this revenue may be translated at a materially lower amount than expected.
Furthermore, we may become subject to exchange control regulations that might restrict or prohibit the conversion of our other
revenue currencies into U.S. dollars, such as what we have experienced in Venezuela.
The occurrence of currency fluctuations or exchange controls could have a material adverse impact on our results of operations.
The United Kingdom’s proposed withdrawal from the European Union could harm our business and financial results.
In June 2016, voters in the United Kingdom approved the withdrawal of the U.K. from the E.U. (commonly referred to as “Brexit”).
The U.K. government triggered Article 50 of the Lisbon Treaty on May 29, 2017, which commenced the official E.U. withdrawal
process. Uncertainty over the terms of the U.K.’s departure from the E.U. could cause political and economic uncertainty in the
U.K. and the rest of Europe, which could harm our business and financial results.
31
Brexit could lead to legal uncertainty and potentially divergent national laws and regulations in the U.K. and E.U. We, as well as
our clients who have significant operations in the U.K., may incur additional costs and expenses as we adapt to potentially
divergent regulatory frameworks from the rest of the E.U. In addition, because we conduct business in and have operations in
the U.K., we may need to apply for regulatory authorization and permission in separate E.U. member states. We may also face
additional complexity with regard to immigration and travel rights for our employees located in the U.K. and the E.U. These
factors may impact our ability to operate in the E.U. and U.K. seamlessly. Any of these effects of Brexit, among others, could
harm our business and financial results.
Reputational Impact
Negative brand perception may materially and adversely affect our overall business.
Our brands and their attributes are key assets of our business. The ability to attract consumers to our branded products and
retain them depends upon the external perception of us and our industry. Our business may be affected by actions taken by our
customers, merchants or other organizations that impact the perception of our brands or the payments industry in general. From
time to time, our customers may take actions that we do not believe to be in the best interests of our brands, such as creditor
practices that may be viewed as “predatory”. Additionally, large digital companies and other technology companies who are our
customers use our networks to build their own acceptance brands, which could cause consumer confusion and decrease the
value of our brand. Moreover, adverse developments with respect to our industry or the industries of our customers may also,
by association, impair our reputation, or result in greater regulatory or legislative scrutiny. We have also been pursuing the use
of social media channels at an increasingly rapid pace. Under some circumstances, our use of social media, or the use of social
media by others as a channel for criticism or other purposes, could also cause rapid, widespread reputational harm to our brands
by disseminating rapidly and globally actual or perceived damaging information about us, our products or merchants or other
end users who utilize our products. Also, as we are headquartered in the United States, a negative perception of the United
States could impact the perception of our company, which could adversely affect our business. Such perception and damage to
our reputation could have a material and adverse effect to our overall business.
Acquisitions
Acquisitions, strategic investments or entry into new businesses could disrupt our business and harm our results of operations
or reputation.
Although we may continue to evaluate and/or make strategic acquisitions of, or acquire interests in joint ventures or other entities
related to, complementary businesses, products or technologies, we may not be able to successfully partner with or integrate
them, despite original intentions and focused efforts. In addition, such an integration may divert management’s time and
resources from our core business and disrupt our operations. Moreover, we may spend time and money on acquisitions or
projects that do not meet our expectations or increase our revenue. To the extent we pay the purchase price of any acquisition
in cash, it would reduce our cash reserves available to us for other uses, and to the extent the purchase price is paid with our
stock, it could be dilutive to our stockholders. Furthermore, we may not be able to successfully finance the business following
the acquisition as a result of costs of operations, including any litigation risk which may be inherited from the acquisition.
Any acquisition or entry into a new business could subject us to new regulations with which we would need to comply. This
compliance could increase our costs, and we could be subject to liability or reputational harm to the extent we cannot meet any
such compliance requirements. Our expansion into new businesses could also result in unanticipated issues which may be difficult
to manage.
Class A Common Stock and Governance Structure
Provisions in our organizational documents and Delaware law could be considered anti-takeover provisions and have an impact
on change-in-control.
Provisions contained in our amended and restated certificate of incorporation and bylaws and Delaware law could be considered
anti-takeover provisions, including provisions that could delay or prevent entirely a merger or acquisition that our stockholders
consider favorable. These provisions may also discourage acquisition proposals or have the effect of delaying or preventing
entirely a change in control, which could harm our stock price. For example, subject to limited exceptions, our amended and
restated certificate of incorporation prohibits any person from beneficially owning more than 15% of any of the Class A common
stock or any other class or series of our stock with general voting power, or more than 15% of our total voting power. In addition:
•
our stockholders are not entitled to the right to cumulate votes in the election of directors
32
•
•
•
our stockholders are not entitled to act by written consent
a vote of 80% or more of all of the outstanding shares of our stock then entitled to vote is required for stockholders
to amend any provision of our bylaws
any representative of a competitor of Mastercard or of Mastercard Foundation is disqualified from service on our board
of directors
Mastercard Foundation’s substantial stock ownership, and restrictions on its sales, may impact corporate actions or acquisition
proposals favorable to, or favored by, the other public stockholders.
As of February 9, 2018, Mastercard Foundation owned 112,181,762 shares of Class A common stock, representing approximately
10.8% of our general voting power. Mastercard Foundation may not sell or otherwise transfer its shares of Class A common stock
prior to May 1, 2027, except to the extent necessary to satisfy its charitable disbursement requirements, for which purpose
earlier sales are permitted. Mastercard Foundation is permitted to sell all of its remaining shares after May 1, 2027. The directors
of Mastercard Foundation are required to be independent of us and our customers. The ownership of Class A common stock by
Mastercard Foundation, together with the restrictions on transfer, could discourage or make more difficult acquisition proposals
favored by the other holders of the Class A common stock. In addition, because Mastercard Foundation is restricted from selling
its shares for an extended period of time, it may not have the same interest in short or medium-term movements in our stock
price as, or incentive to approve a corporate action that may be favorable to, our other stockholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
As of December 31, 2017, Mastercard and its subsidiaries owned or leased 167 commercial properties. We own our corporate
headquarters, located in Purchase, New York. The building is approximately 500,000 square feet. There is no outstanding debt
on this building. Our principal technology and operations center, a leased facility located in O’Fallon, Missouri, is also
approximately 500,000 square feet. The term of the lease on this facility is 10 years, which commenced on March 1, 2009. Our
leased properties in the United States are located in 10 states and in the District of Columbia. We also lease and own properties
in 69 other countries. These facilities primarily consist of corporate and regional offices, as well as our operations centers.
We believe that our facilities are suitable and adequate for the business that we currently conduct. However, we periodically
review our space requirements and may acquire or lease new space to meet the needs of our business, or consolidate and dispose
of facilities that are no longer required.
ITEM 3. LEGAL PROCEEDINGS
Refer to Notes 10 (Accrued Expenses and Accrued Litigation) and 18 (Legal and Regulatory Proceedings) to the consolidated
financial statements included in Part II, Item 8.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
33
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Price Range of Common Stock
Our Class A common stock trades on the New York Stock Exchange under the symbol “MA”. The following table sets forth the
intra-day high and low sale prices for our Class A common stock for the four quarterly periods in each of 2017 and 2016. At
February 9, 2018, we had 73 stockholders of record for our Class A common stock. We believe that the number of beneficial
owners is substantially greater than the number of record holders because a large portion of our Class A common stock is held
in “street name” by brokers.
2017
2016
High
Low
High
Low
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
113.50 $
126.19
143.59
154.65
104.01 $
111.01
120.65
140.61
95.83 $
100.00
102.31
108.93
78.52
87.59
86.65
99.51
There is currently no established public trading market for our Class B common stock. There were approximately 307 holders of
record of our non-voting Class B common stock as of February 9, 2018, constituting approximately 1.3% of our total outstanding
equity.
Dividend Declaration and Policy
During the years ended December 31, 2017 and 2016, we paid the following quarterly cash dividends per share on our Class A
common stock and Class B Common stock:
Dividend per Share
2017
2016
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Second Quarter. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.22 $
0.22
0.22
0.22
0.19
0.19
0.19
0.19
On December 4, 2017, our Board of Directors declared a quarterly cash dividend of $0.25 per share paid on February 9, 2018 to
holders of record on January 9, 2018 of our Class A common stock and Class B common stock. On February 5, 2018, our Board
of Directors declared a quarterly cash dividend of $0.25 per share payable on May 9, 2018 to holders of record on April 9, 2018
of our Class A common stock and Class B common stock.
Subject to legally available funds, we intend to continue to pay a quarterly cash dividend on our outstanding Class A common
stock and Class B common stock. However, the declaration and payment of future dividends is at the sole discretion of our Board
of Directors after taking into account various factors, including our financial condition, operating results, available cash and
current and anticipated cash needs.
Issuer Purchases of Equity Securities
On December 6, 2016, our Board of Directors approved a share repurchase program authorizing us to repurchase up to $4 billion
of our Class A common stock (the “December 2016 Share Repurchase Program”). This program became effective in April 2017.
On December 4, 2017, our Board of Directors approved a share repurchase program authorizing us to repurchase up to $4 billion
of our Class A common stock (the “December 2017 Share Repurchase Program”). This program will become effective after
completion of the December 2016 Share Repurchase Program.
34
During the fourth quarter of 2017, we repurchased a total of approximately 6.9 million shares for $1.0 billion at an average price
of $148.44 per share of Class A common stock. Our repurchase activity during the fourth quarter of 2017 consisted of open
market share repurchases and is summarized in the following table:
Period
October 1 – 31 . . . . . . . . . . . . . . . . . . . . . . . .
November 1 – 30 . . . . . . . . . . . . . . . . . . . . . .
December 1 – 31 . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Number
of Shares
Purchased
Average Price
Paid per Share
(including
commission cost)
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
Dollar Value of
Shares that may yet
be Purchased under
the Plans or
Programs 1
2,276,450 $
2,314,860
2,353,069
6,944,379
144.78
150.22
150.22
148.44
2,276,450 $ 1,935,087,778
1,587,353,507
2,314,860
2,353,069
5,233,867,141
6,944,379
1 Dollar value of shares that may yet be purchased under the December 2016 Share Repurchase Program and the December 2017 Share Repurchase
Program are as of the end of each period presented.
ITEM 6. SELECTED FINANCIAL DATA
The statement of operations data and the cash dividends declared per share presented below for the years ended December 31,
2017, 2016 and 2015, and the balance sheet data as of December 31, 2017 and 2016, were derived from the audited consolidated
financial statements of Mastercard Incorporated included in Part II, Item 8. The statement of operations data and the cash
dividends declared per share presented below for the years ended December 31, 2014 and 2013, and the balance sheet data as
of December 31, 2015, 2014 and 2013, were derived from audited consolidated financial statements not included in this Report.
The data set forth below should be read in conjunction with, and are qualified by reference to, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” in Part II, Item 7 and our consolidated financial statements and notes
thereto included in Part II, Item 8.
Years Ended December 31,
2017
2016
2015
2014
2013
(in millions, except per share data)
Statement of Operations Data:
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,497 $ 10,776 $
9,667 $
9,441 $
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,875
6,622
3,915
3.67
3.65
5,015
5,761
4,059
3.70
3.69
4,589
5,078
3,808
3.36
3.35
4,335
5,106
3,617
3.11
3.10
8,312
3,809
4,503
3,116
2.57
2.56
Balance Sheet Data:
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21,329 $ 18,675 $ 16,250 $ 15,329 $ 14,242
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,424
5,497
5,180
5,684
3,268
6,062
1,494
6,824
—
7,495
Cash dividends declared per share. . . . . . . . . . . . . . . . . . . . . . . $
0.91 $
0.79 $
0.67 $
0.49 $
0.29
35
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated financial statements and notes of Mastercard
Incorporated and its consolidated subsidiaries, including Mastercard International Incorporated (“Mastercard International”)
(together, “Mastercard” or the “Company”), included elsewhere in this Report. This change only relates to terminology; no
previously reported amounts have changed. Percentage changes provided throughout “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” were calculated on amounts rounded to the nearest thousand.
Business Overview
Mastercard is a technology company in the global payments industry that connects consumers, financial institutions, merchants,
governments, digital partners, businesses and other organizations worldwide, enabling them to use electronic forms of payment
instead of cash and checks. Through our global payments processing network, we facilitate the switching (authorization, clearing
and settlement) of payment transactions and deliver related products and services. We make payments easier and more efficient
by creating a wide range of payment solutions and services using our family of well-known brands, including Mastercard®,
Maestro®, Cirrus® and Masterpass®. Our recent acquisition of VocaLink Holdings Limited (“Vocalink”) has expanded our capability
to process automated clearing house (“ACH”) transactions, among other things. As a multi-rail network, we now offer customers
one partner to turn to for their payment needs for both domestic and cross-border transactions. We also provide value-added
offerings such as safety and security products, information services and consulting, loyalty and reward programs and issuer and
acquirer processing. Our networks are designed to ensure safety and security for the global payments system.
A typical transaction on our core network involves four participants in addition to us: account holder (a consumer who holds a
card or uses another device enabled for payment), merchant, issuer (the account holder’s financial institution) and acquirer (the
merchant’s financial institution). We do not issue cards, extend credit, determine or receive revenue from interest rates or other
fees charged to account holders by issuers, or establish the rates charged by acquirers in connection with merchants’ acceptance
of our branded products. In most cases, account holder relationships belong to, and are managed by, our financial institution
customers.
We generate revenues from assessing our customers based on the gross dollar volume (the “GDV”) of activity on the products
that carry our brands, from the fees we charge to our customers for providing transaction processing and from other payment-
related products and services.
Business Environment
We authorize, clear and settle transactions in more than 210 countries and territories and in more than 150 currencies. Net
revenue generated in the United States was 35% of total revenue in 2017 and 38% in 2016 and 39% in 2015. No individual
country, other than the United States, generated more than 10% of total net revenue in any such period, but differences in market
growth, economic health and foreign exchange fluctuations in certain countries can have an impact on the proportion of revenue
generated outside the United States over time. While the global nature of our business helps protect our operating results from
adverse economic conditions in a single or a few countries, the significant concentration of our revenue generated in the United
States makes our business particularly susceptible to adverse economic conditions in the United States.
The competitive and evolving nature of the global payments industry provides both challenges to and opportunities for the
continued growth of our business. Adverse economic trends (including distress in financial markets, currency fluctuations, turmoil
in specific economies around the world and additional government intervention) have impacted the environment in which we
operate. Certain of our customers, merchants that accept our brands and account holders who use our brands, have been directly
impacted by these adverse economic conditions.
Our financial results may be negatively impacted by actions taken by individual financial institutions or by governmental or
regulatory bodies. In addition, political instability or a decline in economic conditions in the countries in which we operate may
accelerate the timing of or increase the impact of risks to our financial performance. As a result, our revenue or results of
operations may be negatively impacted. We continue to monitor political and economic conditions around the world to identify
opportunities for the continued growth of our business and to evaluate the evolution of the global payments industry.
Notwithstanding recent encouraging trends, the extent and pace of economic recovery in various regions remains uncertain and
the overall business environment may present challenges for us to grow our business.
For a full discussion of the various legal, regulatory and business risks that could impact our financial results, see “Risk Factors”
in Part I, Item 1A.
36
Financial Results Overview
The following tables provide a summary of our operating results:
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,497
$ 10,776
16%
$ 10,776
$ 9,667
11%
Year ended December 31,
2017
2016
Increase/
(Decrease)
Year ended December 31,
2016
2015
Increase/
(Decrease)
($ in millions, except per share data)
Operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,875
$ 5,015
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,622
$ 5,761
17%
15%
$ 5,015
$ 4,589
$ 5,761
$ 5,078
9%
13%
Operating margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53.0%
53.5% (0.5) ppt
53.5%
52.5% 0.9 ppt
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,607
$ 1,587
64%
$ 1,587
$ 1,150
38%
Effective income tax rate . . . . . . . . . . . . . . . . . . . . . . . .
40.0%
28.1% 11.9 ppt
28.1%
23.2% 4.9 ppt
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,915
$ 4,059
(4)%
$ 4,059
$ 3,808
7%
Diluted earnings per share. . . . . . . . . . . . . . . . . . . . . . . $
3.65
$
3.69
Diluted weighted-average shares outstanding. . . . . . .
1,072
1,101
(1)%
(3)%
$
3.69
$
3.35
1,101
1,137
10%
(3)%
Summary of Non-GAAP Results 1:
Year ended December 31,
Increase/(Decrease)
Year ended December 31,
Increase/(Decrease)
2017
2016
As
adjusted
Currency-
neutral
2016
2015
As
adjusted
Currency-
neutral
($ in millions, except per share data)
Net revenue . . . . . . . . . . . . . . . . . $12,497
$10,776
16%
15%
$10,776
$ 9,667
11%
13%
Adjusted operating expenses . . . $ 5,693
$ 4,898
16%
16%
$ 4,898
$ 4,449
10%
12%
Adjusted operating margin . . . . .
54.4%
54.5% (0.1) ppt
(0.2) ppt
54.5%
54.0% 0.6 ppt
0.6 ppt
Adjusted effective income tax
rate . . . . . . . . . . . . . . . . . . . . . . . .
26.8%
28.1% (1.3) ppt
(1.3) ppt
28.1%
23.4% 4.6 ppt
4.7 ppt
Adjusted net income . . . . . . . . . . $ 4,906
$ 4,144
18%
17%
$ 4,144
$ 3,903
6%
7%
Adjusted diluted earnings per
share . . . . . . . . . . . . . . . . . . . . . . . $
4.58
$
3.77
21%
21%
$
3.77
$
3.43
10%
11%
Note: Tables may not sum due to rounding.
1 The Summary of Non-GAAP Results excludes the impact of Special Items and/or foreign currency. See “Non-GAAP Financial Information” for further
information on the Special Items, the impact of foreign currency and the reconciliation to GAAP reported amounts.
Key highlights for 2017 were as follows:
• Net revenue increased 16%, or 15% on a currency-neutral basis, in 2017 versus 2016, primarily driven by:
Switched transaction growth of 17%
Cross border growth of 15% on a local currency basis
An increase of 10% in gross dollar volume, on a local currency basis and adjusted for the impact of the 2016
EU regulation change
Acquisitions contributed 2 percentage points of growth
37
These increases were partially offset by higher rebates and incentives
• Operating expenses increased 17% in 2017 versus 2016. Excluding the impact of Special Items, adjusted operating
expenses increased 16%, both as adjusted and on a currency-neutral basis, in 2017 versus 2016. The impact of acquisitions
contributed 6 percentage points of growth for the twelve months ended December 31, 2017. Other factors contributing
to the increase were continued investments in strategic initiatives as well as foreign exchange related charges.
•
The effective income tax rate increased 11.9 percentage points to 40.0% in 2017 versus 28.1% in 2016, primarily due to
the Tax Cuts and Jobs Act (the “TCJA”). Excluding the impact of the TCJA and other Special Items, the 2017 adjusted
effective income tax rate improved by 1.3 percentage points to 26.8% from 28.1% in 2016 primarily due to a more
favorable geographical mix of taxable earnings, partially offset by a lower U.S. foreign tax credit benefit.
Other financial highlights for 2017 were as follows:
• We generated net cash flows from operations of $5.6 billion in 2017, versus $4.5 billion in 2016.
• We repurchased 30 million shares of our common stock for $3.8 billion and paid dividends of $942 million in 2017.
• We acquired businesses for total consideration of $1.5 billion in 2017, the largest of which was VocaLink Holdings Limited
(“Vocalink”), which expanded our capability, among other things, to process real-time account-based payment
transactions.
•
The TCJA, enacted in 2017, will reduce the U.S. corporate income tax rate from 35% to 21% beginning in 2018, imposes
a one-time deemed repatriation tax on accumulated foreign earnings (the “Transition Tax”) and puts into effect the
migration towards a territorial tax system. While the enactment of the TCJA resulted in additional tax expense of $873
million in 2017, it is expected to have a favorable impact on our effective tax rate in future periods. See Note 17 (Income
Taxes) to the consolidated financial statements included in Part II, Item 8 for further discussion of the TCJA impact.
Non-GAAP Financial Information
Non-GAAP financial information is defined as a numerical measure of a company’s performance that excludes or includes amounts
so as to be different than the most comparable measure calculated and presented in accordance with accounting principles
generally accepted in the United States (“GAAP”). These non-GAAP financial measures exclude the impact of the following special
items (“Special Items”). We excluded these Special Items as management monitors significant changes in tax law, litigation
judgments and settlements related to interchange and regulation, and significant one-time items separately from ongoing
operations and evaluates ongoing performance without these amounts.
•
•
•
In 2017, due to the passage of the TCJA, we incurred additional tax expense of $873 million, $0.81 per diluted share,
which includes $825 million of provisional charges attributable to the Transition Tax, the remeasurement of our net
deferred tax asset balance in the U.S. and the recognition of a deferred tax liability related to a change in assertion
regarding reinvestment of foreign earnings, as well as $48 million in additional tax expense related to a foregone foreign
tax credit benefit on current year repatriations (collectively the “Tax Act Impact”). See Financial Results of this section
and Note 17 (Income Taxes) to the consolidated financial statements included in Part II, Item 8 for further discussion of
the TCJA.
In 2017, we recorded a pre-tax charge of $167 million ($108 million after tax, or $0.10 per diluted share) in general and
administrative expenses related to the deconsolidation of our Venezuelan subsidiaries (the “Venezuela Charge”). See
Impact of Foreign Currency of this section and Note 1 (Summary of Significant Accounting Policies) to the consolidated
financial statements included in Part II, Item 8 for further discussion of the Venezuela Charge.
In 2017, we recorded a pre-tax charge of $15 million ($10 million after tax, or $0.01 per diluted share) in provision for
litigation settlements expense, related to a litigation settlement with Canadian merchants (the “Canadian Merchant
Litigation Provision”). In 2016 and 2015, we recorded a pre-tax charge of $117 million ($85 million after tax, or $0.08
per diluted share) and $61 million ($45 million after tax, or $0.04 per diluted share), respectively, in provision for litigation
settlements expense, related to separate litigations with merchants in the U.K. (collectively the “U.K. Merchant Litigation
Provision”). See Note 18 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part
II, Item 8 for further discussion of the Canadian Merchant Litigation Provision and the U.K. Merchant Litigation Provision.
•
In 2015, we recorded a settlement charge of $79 million ($50 million after tax, or $0.04 per diluted share) in general
and administrative expenses, relating to the termination of our qualified U.S. defined benefit pension plan (the “U.S.
38
Employee Pension Plan Settlement Charge”). See Note 11 (Pension, Postretirement and Savings Plans) to the
consolidated financial statements included in Part II, Item 8 for further discussion of the U.S. Employee Pension Plan
Settlement Charge.
In addition, we present growth rates adjusted for the impact of foreign currency, which is a non-GAAP financial measure. For
2017 and 2016, we present currency-neutral growth rates, which are calculated by remeasuring the prior period’s results using
the current period’s exchange rates for both the translational and transactional impacts on operating results. The impact of
foreign currency translation represents the effect of translating operating results where the functional currency is different than
our U.S. dollar reporting currency. The impact of the transactional foreign currency represents the effect of converting revenue
and expenses occurring in a currency other than the functional currency. Our management believes the presentation of the
impact of foreign currency provides relevant information.
Our management believes that the non-GAAP financial measures presented facilitate an understanding of our operating
performance and provide a meaningful comparison of our results between periods. Our management uses non-GAAP financial
measures to, among other things, evaluate our ongoing operations in relation to historical results, for internal planning and
forecasting purposes and in the calculation of performance-based compensation.
Net revenue, operating expenses, operating margin, effective income tax rate, net income and diluted earnings per share, adjusted
for Special Items and/or the impact of foreign currency, are non-GAAP financial measures and should not be relied upon as
substitutes for measures calculated in accordance with GAAP. The following tables reconcile our as-reported financial measures
calculated in accordance with GAAP to the respective non-GAAP adjusted financial measures.
Year ended December 31, 2017
Operating
expenses
Operating
margin
Effective
income tax rate
Net income
Diluted
earnings per
share
Reported - GAAP . . . . . . . . . . . . . . . . . . . . . . . . . $
5,875
Tax Act Impact . . . . . . . . . . . . . . . . . . . . . . . . . . .
Venezuela Charge . . . . . . . . . . . . . . . . . . . . . . . .
Canadian Merchant Litigation Provision . . . . . .
**
(167)
(15)
Non-GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5,693
($ in millions, except per share data)
53.0%
40.0 % $
3,915 $
**
1.3%
0.1%
54.4%
(13.4)%
0.2 %
— %
873
108
10
26.8 % $
4,906 $
3.65
0.81
0.10
0.01
4.58
Year ended December 31, 2016
Operating
expenses
Operating
margin
Effective
income tax rate
Net income
Reported - GAAP . . . . . . . . . . . . . . . . . . . . . . . . . $
U.K. Merchant Litigation Provision. . . . . . . . . . .
Non-GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5,015
(117)
4,898
($ in millions, except per share data)
53.5%
28.1% $
—%
4,059 $
85
28.1% $
4,144 $
1.0%
54.5%
Year ended December 31, 2015
Operating
expenses
Operating
margin
Effective
income tax rate
Net income
Diluted
earnings per
share
3.69
0.08
3.77
Diluted
earnings per
share
Reported - GAAP . . . . . . . . . . . . . . . . . . . . . . . . . $
4,589
U.S. Employee Pension Plan Settlement
Charge. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.K. Merchant Litigation Provision. . . . . . . . . . .
(79)
(61)
Non-GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4,449
($ in millions, except per share data)
52.5%
23.2% $
3,808 $
0.8%
0.6%
54.0%
0.1%
0.1%
50
45
23.4% $
3,903 $
3.35
0.04
0.04
3.43
39
The following tables represent the reconciliation of our growth rates reported under GAAP to our Non-GAAP growth
rates, adjusted for Special Items and foreign currency:
Year Ended December 31, 2017 as compared to the Year Ended December 31, 2016
Increase/(Decrease)
Net revenue
Operating
expenses
Operating
margin
Effective
income tax rate
Net income
Diluted
earnings per
share
Reported - GAAP . . . . . . . . . . . .
16 %
Tax Act Impact . . . . . . . . . . . . . .
Venezuela Charge . . . . . . . . . . .
Canadian Merchant Litigation
Provision . . . . . . . . . . . . . . . . . .
U.K. Merchant Litigation
Provision . . . . . . . . . . . . . . . . . .
Non-GAAP . . . . . . . . . . . . . . . . .
Foreign currency 1 . . . . . . . . . . .
Non-GAAP - currency-neutral .
**
**
**
**
16 %
(1)%
15 %
17 %
**
(3)%
— %
3 %
16 %
(1)%
16 %
(0.5) ppt
11.9 ppt
**
(13.4) ppt
1.3 ppt
0.2 ppt
0.1 ppt
– ppt
(1.1) ppt
(0.1) ppt
(0.1) ppt
(0.2) ppt
– ppt
(1.3) ppt
– ppt
(1.3) ppt
(4)%
21 %
3 %
— %
(2)%
18 %
(1)%
17 %
(1)%
22 %
3 %
— %
(3)%
21 %
1 %
21 %
Year Ended December 31, 2016 as compared to the Year Ended December 31, 2015
Increase/(Decrease)
Net revenue
Operating
expenses
Operating
margin
Effective
income tax rate
Net income
Diluted
earnings per
share
Reported - GAAP . . . . . . . . . . . .
U.K. Merchant Litigation
Provision . . . . . . . . . . . . . . . . . .
U.S. Employee Pension Plan
Settlement Charge . . . . . . . . . .
Non-GAAP . . . . . . . . . . . . . . . . .
Foreign currency 1 . . . . . . . . . . .
Non-GAAP - currency-neutral .
11%
**
**
11%
1%
13%
9 %
0.9 ppt
4.9 ppt
(1)%
0.5 ppt
(0.1) ppt
2 %
10 %
1 %
12 %
(0.8) ppt
(0.2) ppt
0.6 ppt
– ppt
0.6 ppt
4.6 ppt
0.1 ppt
4.7 ppt
7 %
1 %
(1)%
6 %
1 %
7 %
10 %
1 %
(1)%
10 %
1 %
11 %
Note: Tables may not sum due to rounding.
** Not meaningful.
1 Represents the foreign currency translational and transactional impact.
Impact of Foreign Currency Rates
Our overall operating results are impacted by foreign currency translation, which represents the effect of translating operating
results where the functional currency is different than our U.S. dollar reporting currency.
Our operating results can also be impacted by transactional foreign currency. The impact of the transactional foreign currency
represents the effect of converting revenue and expense transactions occurring in a currency other than the functional currency.
Changes in foreign currency exchange rates directly impact the calculation of gross dollar volume (“GDV”) and gross euro volume
(“GEV”), which are used in the calculation of our domestic assessments, cross-border volume fees and volume-related rebates
and incentives. In most non-European regions, GDV is calculated based on local currency spending volume converted to U.S.
dollars using average exchange rates for the period. In Europe, GEV is calculated based on local currency spending volume
converted to euros using average exchange rates for the period. As a result, our domestic assessments, cross-border volume
fees and volume-related rebates and incentives are impacted by the strengthening or weakening of the U.S. dollar versus non-
European local currencies and the strengthening or weakening of the euro versus other European local currencies. For example,
our billing in Australia is in the U.S. dollar, however, consumer spend in Australia is in the Australian dollar. The foreign currency
transactional impact of converting Australian dollars to our U.S. dollar billing currency will have an impact on the revenue
generated. The strengthening or weakening of the U.S. dollar is evident when GDV growth on a U.S. dollar-converted basis is
compared to GDV growth on a local currency basis. In 2017, GDV on a U.S. dollar-converted basis increased 8.7%, while GDV on
a local currency basis increased 8.6% versus 2016. In 2016, GDV on a U.S. dollar-converted basis increased 5.5%, while GDV on
a local currency basis increased 9.1% versus 2015. Further, the impact from transactional foreign currency occurs in transaction
40
processing revenue, other revenue and operating expenses when the local currency of these items are different than the functional
currency.
In addition, we incur foreign currency gains and losses from remeasuring monetary assets and liabilities that are in a currency
other than the functional currency and from remeasuring foreign exchange derivative contracts (“Foreign Exchange Activity”).
The impact of Foreign Exchange Activity has not been eliminated in our currency-neutral results (see “Non-GAAP Financial
Information”) and is recorded in general and administrative expenses. We attempt to manage foreign currency balance sheet
remeasurement and cash flow risk through our foreign exchange risk management activities, which are discussed further in Note
20 (Foreign Exchange Risk Management) to the consolidated financial statements included in Part II, Item 8. Since we do not
designate foreign currency derivatives as hedging instruments pursuant to the accounting standards for derivative instruments
and hedging activities, we record gains and losses on foreign exchange derivatives on a current basis, with the associated offset
being recognized as the exposures materialize.
We are exposed to currency devaluation in certain countries. In addition, we are subject to exchange control regulations that
restrict or prohibit the conversion of financial assets into U.S. dollars. While these revenues and assets are not material to us on
a consolidated basis, we can be negatively impacted should there be a continued and sustained devaluation of local currencies
relative to the U.S. dollar and/or a continued and sustained deterioration of economic conditions in these countries. Specifically,
in Venezuela, due to increasing foreign exchange regulations restricting access to U.S. dollars, an other-than-temporary lack of
exchangeability between the Venezuela bolivar and the U.S. dollar has impacted our ability to manage risk, process cross-border
transactions and satisfy U.S. dollar denominated liabilities related to our Venezuelan operations. As a result of these factors, we
concluded that, effective December 31, 2017, we did not meet the accounting criteria for consolidation of these subsidiaries,
and therefore we would transition to the cost method of accounting as of December 31, 2017. This accounting change resulted
in a pre-tax charge of $167 million ($108 million after tax, or $0.10 per diluted share). We continue to operate and serve our
Venezuelan issuers, acquirers, merchants and account holders with our products and services. We do not believe this accounting
change will have a significant impact on our consolidated financial statements in future periods. See Note 1 (Summary of
Significant Accounting Policies) to the consolidated financial statements included in Part II, Item 8 for further discussion.
Financial Results
Revenue
Revenue Description
Our business model involves four participants in addition to us: account holders, merchants, issuers (the account holders’ financial
institutions) and acquirers (the merchants’ financial institutions). We generate revenues from assessing our customers based
on the GDV of activity on the products that carry our brands, from the fees that we charge our customers for providing transaction
processing and from other payment-related products and services. Our revenue is based upon transactional information
accumulated by our systems or reported by our customers. Our primary revenue billing currencies are the U.S. dollar, euro,
Brazilian real and the British pound.
The price structure for our products and services is complex and is dependent on the nature of volumes, types of transactions
and type of products and services we offer to our customers. Our net revenue can be significantly impacted by the following:
•
•
•
•
•
•
•
domestic or cross-border transactions
signature-based or PIN-based transactions
geographic region or country in which the transaction occurs
volumes/transactions subject to tiered rates
processed or not processed by us
amount of usage of our other products or services
amount of rebates and incentives provided to customers
41
We classify our net revenue into the following five categories:
1.
2.
3.
Domestic assessments are fees charged to issuers and acquirers based primarily on the dollar volume of activity
on cards and other devices that carry our brands where the merchant country and the issuer country are the same.
Domestic assessments include items such as card assessments, which are fees charged on the number of cards
issued or assessments for specific purposes, such as acceptance development or market development programs.
Cross-border volume fees are charged to issuers and acquirers based on the dollar volume of activity on cards and
other devices that carry our brands where the merchant country and the issuer country are different. In general,
a cross-border transaction generates higher revenue than a domestic transaction since cross-border fees are higher
than domestic fees, and may include fees for currency conversion.
Transaction processing revenue is earned for both domestic and cross-border transactions and is primarily based
on the number of transactions. Transaction processing includes the following:
•
Switched transactions include 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, on behalf of the issuer approve 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. We
clear transactions among customers through our 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 our 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.
4.
Other revenues: Other revenues consist of other payment-related products and services and are primarily
associated with the following:
•
•
•
•
•
•
Consulting, data analytic and research fees are primarily generated by Mastercard Advisors, our
professional advisory services group.
Safety and security services fees are for products and services we offer to prevent, detect and respond to
fraud and to ensure the safety of transactions made on our products. We work with issuers, merchants
and governments to help deploy standards for safe and secure transactions for the global payments system.
Loyalty and rewards solutions fees are charged to issuers for benefits provided directly to consumers with
Mastercard-branded cards, such as access to a global airline lounge network, global and local concierge
services, individual insurance coverages, emergency card replacement, emergency cash advance services
and a 24-hour cardholder service center. For merchants, we provide targeted offers and rewards campaigns
and management services for publishing offers, as well as opportunities for holders of co-brand or loyalty
cards and rewards program members to obtain rewards points faster.
Program management services provided to prepaid card issuers consist of foreign exchange margin,
commissions, load fees, and ATM withdrawal fees paid by cardholders on the sale and encashment of
prepaid cards.
Real-time account-based payment services relating to ACH and other ACH related services.
We also charge for a variety of other payment-related products and services, including account and
transaction enhancement services, rules compliance and publications.
5.
Rebates and incentives (contra-revenue): Rebates and incentives are provided to certain of our customers and are
recorded as contra-revenue.
42
Revenue Analysis
Gross revenue increased 18% and 14%, or 17% and 15% on a currency neutral basis, in 2017 and 2016, respectively, versus the
prior year. The increase in both 2017 and 2016 was primarily driven by an increase in transactions, dollar volume of activity on
cards carrying our brands for both domestic and cross-border transactions and other payment-related products and services.
Rebates and incentives increased 22% and 20% in 2017 and 2016, respectively, or 22% on a currency neutral basis in both periods.
The increases in rebates and incentives in 2017 and 2016 were primarily due to the impact from new and renewed agreements
and increased volumes.
Our net revenue increased 16% and 11%, or 15% and 13% on a currency neutral basis, respectively, versus the prior year.
The significant components of our net revenue were as follows:
For the Years Ended December 31,
Percent Increase (Decrease)
2017
2016
2015
(in millions, except percentages)
Domestic assessments . . . . . . . . . . . . . . . . $
Cross-border volume . . . . . . . . . . . . . . . . . .
Transaction processing . . . . . . . . . . . . . . . .
Other revenues . . . . . . . . . . . . . . . . . . . . . .
Gross revenue . . . . . . . . . . . . . . . . . . . . . . .
Rebates and incentives (contra-revenue) .
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . $
5,130 $
4,174
6,188
2,853
18,345
(5,848)
12,497 $
4,411 $
3,568
5,143
2,431
15,553
(4,777)
10,776 $
4,086
3,225
4,345
1,991
13,647
(3,980)
9,667
The following table summarizes the primary drivers of net revenue growth:
2017
16%
17%
20%
17%
18%
22%
16%
2016
8%
11%
18%
22%
14%
20%
11%
For the Years Ended December 31,
Volume
Acquisitions
Foreign Currency 1
Other 2
Total
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
Domestic assessments . . . . . . .
Cross-border volume. . . . . . . . .
Transaction processing . . . . . . .
Other revenues . . . . . . . . . . . . .
Rebates and incentives . . . . . . .
10%
14%
15%
**
10%
11%
11%
14%
**
8%
—%
—%
1%
7%
—%
— %
— %
— %
3 %
— %
1%
—%
1%
1%
1%
(2)%
(3)%
— %
— %
(2)%
6%3
3%
4%
9%4
11%5
(1)%3
2 %
5 %
19 %4
14 %5
16%
17%
20%
17%
22%
8%
11%
18%
22%
20%
Net revenue . . . . . . . . . . . . . . . .
11%
11%
2%
1 %
1%
(1)%
2%
1 %
16%
11%
Note: Table may not sum due to rounding
** Not applicable
1 Represents the foreign currency translational and transactional impact versus the prior year.
2 Includes impact from pricing and other non-volume based fees.
3 Includes impact of the allocation of revenue to service deliverables, which are recorded in other revenue when services are performed.
4 Includes impacts from Advisor fees, safety and security fees, loyalty and reward solution fees and other payment-related products and services.
5 Includes the impact from timing of new, renewed and expired agreements.
43
The following table provides a summary of the trend in volume and transaction growth:
Years Ended December 31,
2017
2016
Growth
(USD)
Growth
(Local)
Growth
(USD)
Growth
(Local)
Mastercard-branded GDV 1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asia Pacific/Middle East/Africa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canada. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Latin America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cross-border Volume 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Switched Transactions Growth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9%
9%
13%
10%
18%
5%
9%
10%
10%
10%
16%
5%
15%
17%
6%
7%
6%
5%
2%
6%
9%
11%
10%
10%
15%
6%
12%
16%
1 Excludes volume generated by Maestro and Cirrus cards.
In 2016, our GDV was impacted by the EU Interchange Fee Regulation related to card payments which became effective in June
2016. The regulation requires that we no longer collect fees on domestic European Economic Area payment transactions that
do not use our network brand. Prior to that, we collected a de minimis assessment fee in a few countries, particularly France,
on transactions with Mastercard co-badged cards if the brands of domestic networks (as opposed to Mastercard) were used. As
a result, the non-Mastercard co-badged volume is no longer being included.
The following table reflects GDV growth rates for Europe and Worldwide Mastercard. For comparability purposes, we adjusted
growth rates for the impact of Article 8 of the EU Interchange Fee Regulation related to card payments, to exclude the prior
period co-badged volume processed by other networks.
GDV 1
Worldwide as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Worldwide as adjusted for EU Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Europe as adjusted for EU Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1 Excludes volume generated by Maestro and Cirrus cards.
For the Years Ended December 31,
2017
2016
Growth (Local)
9%
10%
10%
16%
9%
11%
10%
18%
A significant portion of our revenue is concentrated among our five largest customers. In 2017, the net revenue from these
customers was approximately $2.9 billion, or 23%, of total net revenue. The loss of any of these customers or their significant
card programs could adversely impact our revenue. In addition, as part of our business strategy, among other efforts, we enter
into business agreements with customers. These agreements can be terminated in a variety of circumstances. See our risk factor
in “Risk Factor - Business Risks” in Part I, Item 1A for further discussion.
Operating Expenses
Operating expenses increased 17% and 9% in 2017 and 2016, respectively, versus the prior year. Excluding the impact of the
Special Items, adjusted operating expenses increased 16% and 10%, or 16% and 12% on a currency neutral basis, in 2017 and
2016, respectively. Acquisitions contributed 6 percentage points of growth in 2017.
44
The components of operating expenses were as follows:
Year ended December 31,
Increase (Decrease)
2017
2016
2015
2017
2016
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . $
4,526 $
Advertising and marketing
. . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . .
Provision for litigation settlement. . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses
Special Items1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted total operating expenses (excluding Special
Items1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
898
436
15
5,875
(182)
($ in millions)
3,341
3,714 $
811
373
117
5,015
(117)
821
366
61
4,589
(140)
22 %
11 %
17 %
**
17 %
(1)%
16 %
11 %
(1)%
2 %
**
9 %
1 %
10 %
5,693 $
4,898 $
4,449
Note: Table may not sum due to rounding.
** Not meaningful.
1 See “Non-GAAP Financial Information” for further information on Special Items.
The following table summarizes the primary drivers of changes in operating expenses in 2017 and 2016:
For the Years Ended December 31,
Operational
Special Items 1
Acquisitions
Foreign Currency 2
Total
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
General and administrative . . . . . . . .
Advertising and marketing . . . . . . . . .
Depreciation and amortization . . . . .
Provision for litigation settlements . .
Total operating expenses . . . . . . . . . .
11%
9%
—%
**
10%
15%
—%
—%
**
11%
5%
(3)%
—% — %
6%
1%
1%
—%
1 %
1 %
—% — %
17%
4% — %
**
1%
**
(1)%
**
6%
**
1%
**
1 %
(1)%
(1)%
(2)%
**
(1)%
22%
11%
17%
**
17%
11 %
(1)%
2 %
**
9 %
Note: Table may not sum due to rounding.
** Not meaningful.
1 See “Non-GAAP Financial Information” for further information on Special Items.
2.Represents the foreign currency translational and transactional impact versus the prior year.
General and Administrative
General and administrative expenses increased 22% and 11% in 2017 and 2016, respectively, versus the prior year. Excluding
the impact of Special Items, adjusted general and administrative expenses increased 17% and 14% in 2017 and 2016, respectively,
versus the prior year. Acquisitions contributed 6 percentage points and 1 percentage point of growth in 2017 and 2016,
respectively.
45
The significant components of our general and administrative expenses were as follows:
For the Years Ended December 31,
Percent Increase (Decrease)
2017
2016
2015
(in millions, except percentages)
Personnel . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Professional fees . . . . . . . . . . . . . . . . . . . . .
Data processing and telecommunications.
Foreign exchange activity . . . . . . . . . . . . . .
Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative expenses . . . .
Special Item 1 . . . . . . . . . . . . . . . . . . . . . . . .
Adjusted general and administrative
expenses (excluding Special Item) 1 . . . . . . $
2,687 $
355
504
106
874
4,526
(167)
2,225 $
337
420
34
698
3,714
—
2,105
310
362
(82)
646
3,341
(79)
4,359 $
3,714 $
3,262
Note: Table may not sum due to rounding.
** Not meaningful.
1 See “Non-GAAP Financial Information” for further information on Special Items.
The primary drivers of changes in general and administrative expenses in 2017 and 2016 were:
2017
21%
5%
20%
**
25%
22%
(5)%
17%
2016
6%
9%
16%
**
8%
11%
3%
14%
•
•
•
•
•
Personnel expenses increased 21% and 6% in 2017 and 2016, respectively, versus the prior year. Excluding
the impact of U.S. Employee Pension Plan Settlement Charge of $79 million recorded in 2015, personnel
expense grew 10% for 2016 versus 2015. The 2017 and 2016 increases were driven by a higher number
of employees to support our continued investment in the areas of real-time account payments, digital,
services, data analytics and geographic expansion. The impact of acquisitions contributed 6 and 1
percentage points of growth for 2017 and 2016, respectively.
Professional fees consist primarily of third-party services, legal costs to defend our outstanding litigation
and the evaluation of regulatory developments that impact our industry and brand. The increase in 2017
was primarily due to merger and acquisition related consulting costs. The increase in 2016 was primarily
due to higher legal costs to defend litigation.
Data processing and telecommunication charges consist of expenses to support our global payments
network
infrastructure, expenses to operate and maintain our computer systems and other
telecommunication systems. These expenses increased in both 2017 and 2016 due to capacity growth of
our business and higher third-party processing costs.
Foreign exchange activity includes gains and losses on foreign exchange derivative contracts and the impact
of remeasurement of assets and liabilities denominated in foreign currencies. See Note 20 (Foreign
Exchange Risk Management) to the consolidated financial statements included in Part II, Item 8 for further
discussion. During 2017, foreign exchange activity negatively impacted general and administrative expense
growth by 2 percentage points versus the comparable period in 2016, due to greater losses from foreign
exchange derivative contracts versus the prior year. During 2016, foreign exchange activity negatively
impacted general and administrative expense growth by 4 percentage points versus the comparable period
in 2015, due to the impact from foreign exchange derivative contracts and the lapping of balance sheet
remeasurement gains in the prior year.
Other expenses include costs to provide loyalty and rewards solutions, travel and meeting expenses and
rental expense for our facilities and other miscellaneous charges. Other expenses increased 25% and 8%
in 2017 and 2016, respectively, versus the prior year. In 2017, other expenses increased due to the impact
of the Venezuelan Charge of $167 million. In 2016, other expenses increased primarily due to higher
cardholder services and loyalty costs.
Advertising and Marketing
In 2017, advertising and marketing expenses increased 11% versus 2016, mainly due to higher marketing spend primarily related
to Masterpass. Advertising and marketing expenses decreased 1% in 2016, mainly due to lower sponsorship promotions
compared to 2015.
46
Depreciation and Amortization
Depreciation and amortization expenses increased 17% and 2% in 2017 and 2016, respectively, versus the prior year. The increase
in 2017 was primarily due to the impact of acquisitions. In 2016, the increase was primarily due to higher depreciation from
capital investments partially offset by certain intangibles becoming fully amortized.
Provision for Litigation Settlements
During 2017 and 2016, we recorded pre-tax charges of $15 million and $117 million related to litigations with merchants in
Canada and the U.K., respectively. During 2015, we recorded a pre-tax charge of $61 million related to litigations with merchants
in the U.K. See Note 18 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part II, Item 8
for further discussion.
Other Income (Expense)
Other income (expense) is comprised primarily of investment income, interest expense, our share of income (losses) from equity
method investments and other gains and losses. Total other expense decreased $15 million to $100 million in 2017 versus $115
million in 2016 due to lower impairment charges taken on certain investments last year and a gain on an investment in the current
year, partially offset by higher interest expense from debt issued in the fourth quarter of 2016. Total other expense decreased
$5 million to $115 million in 2016 versus $120 million in 2015 due to lower impairment charges taken on certain investments
and higher investment income in 2016, partially offset by higher interest expense from debt issued in 2015 and 2016.
Income Taxes
On December 22, 2017, in the U.S., the TCJA was signed into law. The TCJA, represents significant changes to the U.S. internal
revenue code and, among other things:
•
•
•
•
•
•
•
•
•
•
lowers the corporate income tax rate from 35% to 21%
imposes a one-time deemed repatriation tax on accumulated foreign earnings (the “Transition Tax”)
provides for a 100% dividends received deduction on dividends from foreign affiliates
requires a current inclusion in U.S. federal taxable income of earnings of foreign affiliates that are determined to be
global intangible low taxed income or “GILTI”
creates the base erosion anti-abuse tax, or “BEAT”
provides for an effective tax rate of 13.125% for certain income derived from outside of the U.S. (referred to as foreign
derived intangible income or “FDII”)
introduces further limitations on the deductibility of executive compensation
permits 100% expensing of qualifying fixed assets acquired after September 27, 2017
limits the deductibility of interest expense in certain situations
eliminates the domestic production activities deduction
While the effective date of the law for most of the above provisions is January 1, 2018, GAAP requires the resulting tax effects
be accounted for in the reporting period of enactment. The impact of the TCJA is discussed further below and in Note 17 (Income
Taxes) to the consolidated financial statements included in Part II, Item 8.
The effective income tax rates for the years ended December 31, 2017, 2016 and 2015 were 40.0%, 28.1% and 23.2%, respectively.
The effective income tax rate for 2017 was higher than the effective income tax rate for 2016 primarily due to additional tax
expense of $873 million attributable to the TCJA, which includes $825 million of provisional charges related to the Transition Tax,
the remeasurement of our net deferred tax asset balance in the U.S. and the recognition of a deferred tax liability related to a
change in assertion regarding the reinvestment of foreign earnings, as well as $48 million in additional tax expense due to a
foregone foreign tax credit benefit on current year repatriations. Excluding the impact of the TCJA and other Special Items, the
2017 adjusted effective income tax rate improved by 1.3 percentage points to 26.8% from 28.1% in 2016 primarily due to a more
favorable geographical mix of taxable earnings, partially offset by a lower U.S. foreign tax credit benefit.
The effective income tax rate for 2016 was higher than the effective income tax rate for 2015 primarily due to benefits associated
with the impact of settlements with tax authorities in multiple jurisdictions in 2015, the lapping of a discrete benefit relating to
47
certain foreign taxes that became eligible to be claimed as credits in the United States in 2015, and a higher U.S. foreign tax credit
benefit associated with the repatriation of current year foreign earnings in 2015. These items were partially offset by a more
favorable geographic mix of taxable earnings in 2016.
The provision for income taxes differs from the amount of income tax determined by applying the U.S. federal statutory income
tax rate of 35% to pretax income for the years ended December 31, as a result of the following:
For the Years Ended December 31,
2017
2016
2015
Amount
Percent
Amount
Percent
Amount
Percent
Income before income taxes . . . . . . . . . . . . . . . . $
6,522
(in millions, except percentages)
$
5,646
$
Federal statutory tax . . . . . . . . . . . . . . . . . . . . . . .
State tax effect, net of federal benefit. . . . . . . . .
Foreign earnings . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of foreign tax credits 1 . . . . . . . . . . . . . . .
Impact of settlements with tax authorities. . . . .
Transition Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Remeasurement of U.S. deferred taxes. . . . . . . .
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . $
2,283
43
(380)
(27)
—
629
157
(98)
2,607
35.0 %
0.7 %
(5.8)%
(0.4)%
— %
9.6 %
2.4 %
(1.5)%
40.0 % $
1,976
22
(188)
(141)
—
—
—
(82)
1,587
35.0 %
0.4 %
(3.3)%
(2.5)%
— %
— %
— %
(1.5)%
28.1 % $
4,958
1,735
27
(144)
(281)
(147)
—
—
(40)
1,150
35.0 %
0.5 %
(2.9)%
(5.7)%
(2.9)%
— %
— %
(0.8)%
23.2 %
1 Included within the impact of foreign tax credits are repatriation benefits of current year foreign earnings of $0 million, $116 million and $172 million,
in addition to other foreign tax credit benefits which become eligible in the United States of $27 million, $25 million and $109 million for 2017, 2016
and 2015, respectively.
Our GAAP effective income tax rates for 2017, 2016 and 2015 were affected by the tax benefits related to the Special Items as
previously discussed.
As of December 31, 2017, a provisional amount of the U.S. federal and state and local income taxes of $36 million has been
provided on a substantial amount of our undistributed foreign earnings. This deferred tax charge has been established primarily
on the estimated foreign exchange gain which will be recognized when such earnings are repatriated. We expect that foreign
withholding taxes associated with these future repatriated earnings will not be material. Based upon the ongoing review of
business requirements and capital needs of our non-U.S. subsidiaries, we believe a portion of these undistributed earnings that
have already been subject to tax in the U.S. will be necessary to fund current and future growth of the related businesses and
will remain indefinitely reinvested outside of the U.S. In 2018, we will complete our analysis of global working capital and cash
needs to determine the amount we consider indefinitely reinvested. We will disclose such amount in the period in which such
analysis is completed, as well as, if practicable, any potential tax cost that would arise if the amounts were remitted back to the
U.S.
Our unrecognized tax benefits related to positions taken during the current and prior periods were $183 million and $169 million,
as of December 31, 2017 and 2016, respectively, all of which would reduce our effective tax rate if recognized. See Note 17
(Income Taxes) to the consolidated financial statements included in Part II, Item 8 for further discussion. Within the next twelve
months, we believe that the resolution of certain federal, foreign and state and local tax examinations is reasonably possible and
that a change in estimate, reducing unrecognized tax benefits, may occur. It is not possible to provide a range of the potential
change until the examinations progress further or the related statute of limitations expire. During 2015, our unrecognized tax
benefits related to tax positions taken during the current and prior periods decreased by $183 million. This decrease was primarily
due to settlements with tax authorities in multiple jurisdictions. Further, the information gained related to these matters was
considered in measuring uncertain tax benefits recognized for the periods subsequent to the periods settled.
During 2014, we implemented an initiative to better align our legal entity and tax structure with our operational footprint outside
of the U.S. This initiative resulted in a one-time taxable gain in Belgium relating to the transfer of intellectual property to a related
foreign entity in the United Kingdom. We believe this improved alignment has resulted in greater flexibility and efficiency with
regard to the global deployment of cash, as well as ongoing benefits in our effective income tax rate. See Note 17 (Income Taxes)
to the consolidated financial statements included in Part II, Item 8 for further discussion.
In 2010, in connection with the expansion of our operations in the Asia Pacific, Middle East and Africa region, our subsidiary in
Singapore, Mastercard Asia Pacific Pte. Ltd. (“MAPPL”), received an incentive grant from the Singapore Ministry of Finance. See
Note 17 (Income Taxes) to the consolidated financial statements included in Part II, Item 8 for further discussion.
48
Liquidity and Capital Resources
We rely on existing liquidity, cash generated from operations and access to capital to fund our global operations, credit and
settlement exposure, capital expenditures, investments in our business and current and potential obligations. The following
table summarizes the cash, cash equivalents, investments and credit available to us at December 31:
Cash, cash equivalents and investments 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Unused line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
2016
(in billions)
7.8 $
3.8
8.3
3.8
1 Investments include available-for-sale securities and short-term held-to-maturity securities. At December 31, 2017 and 2016, this amount excludes
restricted cash related to the U.S. merchant class litigation settlement of $546 million and $543 million, respectively. This amount also excludes restricted
security deposits held for customers of $1 billion at December 31, 2017 and 2016.
Cash, cash equivalents and investments held by our foreign subsidiaries was $4.8 billion and $3.8 billion at December 31, 2017
and 2016, respectively, or 62% and 45% as of such dates. As described further in Note 17 (Income Taxes) to the consolidated
financial statements included in Part II, Item 8, as a result of the enactment of the TCJA, among other things, we recorded a
provisional amount of $629 million in tax expense due to the Transition Tax, which is payable over the next 8 years. In addition,
we have changed our assertion regarding the indefinite reinvestment of foreign earnings outside the U.S. for certain of our foreign
affiliates. As a result of this assertion change, we have recognized a provisional deferred tax liability of $36 million. It is our
present intention to indefinitely reinvest a portion of our historic undistributed accumulated earnings associated with certain
foreign subsidiaries outside of the United States. Based upon the ongoing review of business requirements and capital needs
of our non-U.S. subsidiaries, we believe a portion of these undistributed earnings that have already been subject to tax in the
U.S. will be necessary to fund current and future growth of the related businesses and will remain indefinitely reinvested outside
of the U.S. In 2018, we will complete our analysis of global working capital and cash needs to determine the amount we consider
indefinitely reinvested. We will disclose such amount in the period in which such analysis is completed, as well as, if practicable,
any potential tax cost that would arise if the amounts were remitted back to the U.S.
Our liquidity and access to capital could be negatively impacted by global credit market conditions. We guarantee the settlement
of many Mastercard, Cirrus and Maestro-branded transactions between our issuers and acquirers. See Note 19 (Settlement and
Other Risk Management) to the consolidated financial statements in Part II, Item 8 for a description of these guarantees.
Historically, payments under these guarantees have not been significant; however, historical trends may not be an indication of
potential future losses. The risk of loss on these guarantees is specific to individual customers, but may also be driven significantly
by regional or global economic conditions, including, but not limited to the health of the financial institutions in a country or
region.
Our liquidity and access to capital could also be negatively impacted by the outcome of any of the legal or regulatory proceedings
to which we are a party. For additional discussion of these and other risks facing our business, see our risk factor in “Risk Factors
- Legal and Regulatory Risks” in Part I, Item 1A and Note 18 (Legal and Regulatory Proceedings) to the consolidated financial
statements included in Part II, Item 8; and Part II, Item 7 (Business Environment).
Cash Flow
The table below shows a summary of the cash flows from operating, investing and financing activities for the years ended
December 31:
2017
2016
(in millions)
2015
Cash Flow Data:
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,555 $
(1,779)
(4,764)
4,535 $
(1,167)
(2,344)
4,101
(715)
(2,516)
Net cash provided by operating activities increased $1.0 billion in 2017 versus 2016, primarily due to higher net income as adjusted
for non-cash items including deferred payments associated with the TCJA. Net cash provided by operating activities in 2016
versus 2015, increased by $434 million, primarily due to higher net income as adjusted for non-cash items and accrued expenses,
partially offset by higher prepaid taxes.
49
Net cash used in investing activities increased $612 million in 2017 versus 2016, primarily due to acquisitions and investments
in nonmarketable equity investments, partially offset by higher net proceeds of investment securities. Net cash used in investing
activities increased $452 million in 2016 versus 2015, primarily due to lower sales and maturities of our investment securities,
partially offset by cash used for acquisition activities in the prior year.
Net cash used in financing activities increased $2.4 billion in 2017 versus 2016, primarily due to proceeds from debt issued in
the prior year, increased cash used in the repurchases of our Class A common stock and higher dividends paid. Net cash used
in financing activities decreased $172 million in 2016 versus 2015, primarily due to higher proceeds from debt, partially offset
by higher dividends paid.
The table below shows a summary of select balance sheet data at December 31:
Balance Sheet Data:
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
2016
(in millions)
13,797 $
8,793
6,968
5,497
13,228
7,206
5,785
5,684
We believe that our existing cash, cash equivalents and investment securities balances, our cash flow generating capabilities,
our borrowing capacity and our access to capital resources are sufficient to satisfy our future operating cash needs, capital asset
purchases, outstanding commitments and other liquidity requirements associated with our existing operations and potential
obligations.
Debt and Credit Availability
Our long-term debt was $5.4 billion and $5.2 billion at December 31, 2017 and 2016, respectively, with the earliest maturity of
principal occurring in 2019.
We have a commercial paper program (the “Commercial Paper Program”), under which we are authorized to issue up to $3.75
billion in outstanding notes, with maturities up to 397 days from the date of issuance. In conjunction with the Commercial Paper
Program, we have entered into a committed unsecured $3.75 billion revolving credit facility (the “Credit Facility”) which expires
in October 2022.
Borrowings under the Commercial Paper Program and the Credit Facility are to provide liquidity for general corporate purposes,
including providing liquidity in the event of one or more settlement failures by our customers. In addition, we may borrow and
repay amounts under these facilities for business continuity purposes. We had no borrowings outstanding under the Commercial
Paper Program or the Credit Facility at December 31, 2017 and 2016.
See Note 12 (Debt) to the consolidated financial statements included in Part II, Item 8 for further discussion on the Notes, the
Commercial Paper Program and the Credit Facility.
In June 2015, we filed a universal shelf registration statement to provide additional access to capital, if needed. Pursuant to the
shelf registration statement, we may from time to time offer to sell debt securities, preferred stock, Class A common stock,
depository shares, purchase contracts, units or warrants in one or more offerings.
50
Dividends and Share Repurchases
We have historically paid quarterly dividends on our outstanding Class A common stock and Class B common stock. Subject to
legally available funds, we intend to continue to pay a quarterly cash dividend. However, the declaration and payment of future
dividends is at the sole discretion of our Board of Directors after taking into account various factors, including our financial
condition, operating results, available cash and current and anticipated cash needs. The following table summarizes the annual,
per share dividends paid in the years reflected:
Cash dividend, per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Years Ended December 31,
2017
2016
2015
(in millions, except per share data)
0.88 $
942 $
0.76 $
837 $
0.64
727
On December 4, 2017, our Board of Directors declared a quarterly cash dividend of $0.25 per share paid on February 9, 2018 to
holders of record on January 9, 2018 of our Class A common stock and Class B common stock. The aggregate amount of this
dividend was $263 million.
On February 5, 2018, our Board of Directors declared a quarterly cash dividend of $0.25 per share payable on May 9, 2018 to
holders of record on April 9, 2018 of our Class A common stock and Class B common stock. The aggregate amount of this dividend
is estimated to be $263 million.
Repurchased shares of our common stock are considered treasury stock. The timing and actual number of additional shares
repurchased will depend on a variety of factors, including the operating needs of the business, legal requirements, price and
economic and market conditions. In December 2017, our Board of Directors approved a share repurchase program authorizing
us to repurchase up to $4 billion of our Class A common stock. This program is effective after completion of the share repurchase
program authorized in December 2016.
The following table summarizes our share repurchase authorizations of its Class A common stock through December 31, 2017,
as well as historical purchases:
Authorization Dates
December
2017
December
2016
December
2015
Total
(in millions, except average price data)
Board authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
4,000 $
Remaining authorization at December 31, 2016 . . . . . . . . . . . . . $
Dollar-value of shares repurchased in 2017 . . . . . . . . . . . . . . . . . $
— $
— $
Remaining authorization at December 31, 2017 . . . . . . . . . . . . . $
4,000 $
Shares repurchased in 2017. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
4,000 $
4,000 $
2,766 $
1,234 $
21.0
4,000 $
12,000
996 $
996 $
— $
9.1
4,996
3,762
5,234
30.1
Average price paid per share in 2017 . . . . . . . . . . . . . . . . . . . . . . $
— $
131.97 $
109.16 $
125.05
See Note 13 (Stockholders’ Equity) to the consolidated financial statements included in Part II, Item 8 for further discussion.
Off-Balance Sheet Arrangements
We have no off-balance sheet debt, other than lease arrangements and other commitments as presented in the Future Obligations
table that follows.
51
Future Obligations
The following table summarizes our obligations as of December 31, 2017 that are expected to impact liquidity and cash flow in
future periods. We believe we will be able to fund these obligations through cash generated from operations and our cash
balances.
Payments Due by Period
Total
2018
2019 - 2020
2021 - 2022
2023 and
thereafter
(in millions)
Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest on debt . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating leases. . . . . . . . . . . . . . . . . . . . . . . . . .
Other obligations 1
Sponsorship, licensing and other 2 . . . . . . . . . . . .
Employee benefits 3 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transition Tax 4
Redeemable non-controlling interests 5 . . . . . . .
Total 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
5,477 $
1,453
12
201
875
260
629
78
8,985 $
— $
136
4
64
388
83
52
—
727 $
500 $
256
8
77
376
55
100
78
1,450 $
1,489 $
238
—
26
110
41
100
—
2,004 $
3,488
823
—
34
1
81
377
—
4,804
1 The table does not include the $709 million provision as of December 31, 2017 related to litigation in the U.S. and the U.K. since the payments are not
fixed and determinable. See Note 18 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part II, Item 8 for further
discussion. The table also does not include the $219 million provision as of December 31, 2017 related to the contingent consideration attributable to
acquisitions made in 2017 (primarily based on the achievement of 2018 revenue targets) which are not fixed and determinable. See Note 5 (Fair Value
and Investment Securities) to the consolidated financial statements included in Part II, Item 8 for further discussion.
2 Amounts primarily relate to sponsorships to promote the Mastercard brand. Future cash payments that will become due to our customers under
agreements which provide pricing rebates on our standard fees and other incentives in exchange for transaction volumes are not included in the table
because the amounts due are contingent on future performance. We have accrued $3.3 billion as of December 31, 2017 related to customer and
merchant agreements.
3 Amounts relate to severance liabilities along with expected funding requirements for defined benefit pension and postretirement plans.
4 Amounts relate to the provisional U.S. tax liability on the Transition Tax on accumulated non-U.S. earnings of U.S entities. See Note 17 (Income Taxes)
to the consolidated financial statements included in Part II, Item 8 for further discussion.
5 Amount relates to the fixed-price put option for the Vocalink remaining shareholders to sell their ownership interest to Mastercard on the third and
fifth anniversaries of the transaction and quarterly thereafter. See Note 2 (Acquisitions) to the consolidated financial statements included in Part II,
Item 8 for further discussion.
6 We have recorded a liability for unrecognized tax benefits of $183 million at December 31, 2017. Within the next twelve months, we believe that the
resolution of certain federal, foreign and state and local examinations are reasonably possible and that a change in estimate, reducing unrecognized tax
benefits, may occur. It is not possible to provide a range of the potential change until the examinations progress further or the related statute of
limitations expire. These amounts have been excluded from the table since the settlement period of this liability cannot be reasonably estimated. The
timing of these payments will ultimately depend on the progress of tax examinations with the various authorities.
52
Seasonality
We do not experience meaningful seasonality. No individual quarter in 2017, 2016 or 2015 accounted for more than 30% of net
revenue.
Critical Accounting Estimates
The application of GAAP requires us to make estimates and assumptions about certain items and future events that directly affect
our reported financial condition. We have established detailed policies and control procedures to provide reasonable assurance
that the methods used to make estimates and assumptions are well controlled and are applied consistently from period to period.
The accounting estimates and assumptions discussed in this section are those that we consider to be the most critical to its
financial statements. An accounting estimate is considered critical if both (a) the nature of the estimate or assumption is material
due to the levels of subjectivity and judgment involved, and (b) the impact within a reasonable range of outcomes of the estimate
and assumption is material to our financial condition. Senior management has discussed the development, selection and
disclosure of these estimates with the Audit Committee of our Board of Directors. Our significant accounting policies, including
recent accounting pronouncements, are described in Note 1 (Summary of Significant Accounting Policies) to the consolidated
financial statements included in Part II, Item 8.
Revenue Recognition
Application of the various accounting principles in GAAP related to the measurement and recognition of revenue requires us to
make judgments and estimates. Specifically, complex arrangements with nonstandard terms and conditions may require
significant contract interpretation to determine the appropriate accounting. Domestic assessment revenue requires an estimate
of our customers’ performance in order to recognize this revenue. Rebates and incentives are recorded as a reduction to gross
revenue based on these estimates. We consider various factors in estimating customer performance, including a review of
specific transactions, historical experience with that customer and market and economic conditions. Differences between actual
results and our estimates are adjusted in the period the customer reports actual performance. If our customers’ actual
performance is not consistent with our estimates of their performance, net revenue may be materially different.
Loss Contingencies
We are currently involved in various claims and legal proceedings. We regularly review the status of each significant matter and
assesses its potential financial exposure. If the potential loss from any claim or legal proceeding is considered probable and the
amount can be reasonably estimated, we accrue a liability for the estimated loss. Significant judgment is required in both the
determination of probability and whether an exposure is reasonably estimable. Our judgments are subjective based on the
status of the legal or regulatory proceedings, the merits of our defenses and consultation with in-house and outside legal counsel.
Because of uncertainties related to these matters, accruals are based only on the best information available at the time. As
additional information becomes available, we reassess the potential liability related to its pending claims and litigation and may
revise its estimates. Due to the inherent uncertainties of the legal and regulatory process in the multiple jurisdictions in which
we operate, our judgments may be materially different than the actual outcomes. See Note 18 (Legal and Regulatory Proceedings)
to the consolidated financial statements included in Part II, Item 8 for further discussion.
Income Taxes
In calculating our effective income tax rate, we need to make estimates regarding the timing and amount of taxable and deductible
items which will adjust the pretax income earned in various tax jurisdictions. Through our interpretation of local tax regulations,
adjustments to pretax income for income earned in various tax jurisdictions are reflected within various tax filings. Although we
believe that our estimates and judgments discussed herein are reasonable, actual results may be materially different than the
estimated amounts.
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized.
Significant judgment is required in determining the valuation allowance. We consider projected future taxable income and
ongoing tax planning strategies in assessing the need for the valuation allowance. If it is determined that we are able to realize
deferred tax assets in excess of the net carrying value or to the extent we are unable to realize a deferred tax asset, we would
adjust the valuation allowance in the period in which such a determination is made, with a corresponding increase or decrease
to earnings.
We record tax liabilities for uncertain tax positions taken, or expected to be taken, which may not be sustained or may only be
partially sustained, upon examination by the relevant taxing authorities. We consider all relevant facts and current authorities
in the tax law in assessing whether any benefit resulting from an uncertain tax position is more likely than not to be sustained
53
and, if so, how current law impacts the amount reflected within these financial statements. If upon examination, we realize a
tax benefit which is not fully sustained or is more favorably sustained, this would decrease or increase earnings in the period. In
certain situations, we will have offsetting tax credits or taxes in other jurisdictions.
We have changed our assertion regarding the indefinite reinvestment of foreign earnings outside the U.S. for certain of our
foreign affiliates. As a result of the TCJA and the one-time deemed repatriation tax on untaxed accumulated foreign earnings, a
provisional amount of U.S. federal and state and local income taxes have been provided on all of our undistributed foreign
earnings. Future distributions from foreign affiliates from earnings which have not already been taxed in the U.S. will be eligible
for a 100% dividends received deduction. Beginning in 2018, deferred taxes will be established on the estimated foreign exchange
gains or losses for foreign earnings that are not considered permanently reinvested, which will be recognized through cumulative
translation adjustments as incurred. Ultimately, the working capital requirements of foreign affiliates will determine the amount
of cash to be remitted from respective jurisdictions.
On December 22, 2017, SEC staff issued Staff Accounting Bulletin No. 118 - Income Tax Accounting Implications of the Tax Cuts
and Jobs Act (“SAB 118”) which allows registrants to record provisional amounts during a measurement period, which is not to
extend beyond one year. Accordingly, amounts recorded may require further adjustments 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 Treasury, as well as interpretations of how accounting for income
taxes should be applied to the TCJA. Consistent with SAB 118, we were able to make reasonable estimates and we have
incorporated provisional amounts for the impact of the Transition Tax. This tax is on previously untaxed accumulated and current
earnings and profits of our foreign subsidiaries. To compute the tax, we 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. Further, we were able to
make reasonable estimates and have recorded provisional amounts related to the remeasurement of our net deferred tax asset
in the U.S. and the change in assertion regarding the indefinite reinvestment of foreign earnings. As with the Transition Tax,
these amounts may require further adjustments during the measurement period due to evolving analysis and interpretations of
law, including issuance by the IRS and Treasury of Notices and regulations, and, potentially, direct discussions with Treasury, as
well as interpretations of how accounting for income taxes should be applied.
Valuation of Assets
The valuation of assets acquired in a business combination and asset impairment reviews require the use of significant estimates
and assumptions. The acquisition method of accounting for business combinations requires us to estimate the fair value of assets
acquired, liabilities assumed, and any non-controlling interest in the acquiree to properly allocate purchase price consideration.
Impairment testing for assets, other than goodwill and indefinite-lived intangible assets, requires the allocation of cash flows to
those assets or group of assets and if required, an estimate of fair value for the assets or group of assets.
We evaluate goodwill and indefinite-lived intangible assets for impairment on an annual basis or sooner if indicators of impairment
exist. Goodwill is tested for impairment at the reporting unit level utilizing a quantitative assessment. We use the market
capitalization for estimating the fair value of its reporting unit. If the fair value exceeds the carrying value, goodwill is not impaired.
If the carrying value exceeds the fair value, then goodwill is impaired and the excess of the reporting unit’s carrying value over
the fair value is recognized as an impairment charge.
The impairment test for indefinite-lived intangible assets consists of a qualitative assessment to evaluate all relevant events and
circumstances that could affect the significant inputs used to determine the fair value of indefinite-lived intangible assets. In
performing the qualitative assessment, we consider relevant events and conditions, including but not limited to, macroeconomic
trends, industry and market conditions, overall financial performance, cost factors, company-specific events, and legal and
regulatory factors. If the qualitative assessment indicates that it is more likely than not that the fair value of the indefinite-lived
intangible asset is less than their carrying amounts, we must perform a quantitative impairment test.
Our estimates in the valuation of these assets are based upon assumptions believed to be reasonable, but which are inherently
uncertain and unpredictable. These valuations require the use of management’s assumptions, which would not reflect
unanticipated events and circumstances that may occur.
54
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Market risk is the potential for economic losses to be incurred on market risk sensitive instruments arising from adverse changes
in market factors such as interest rates, foreign currency exchange rates and equity price risk. Our exposure to market risk from
changes in interest rates, foreign exchange rates and equity price risk is limited. Management establishes and oversees the
implementation of policies governing our funding, investments and use of derivative financial instruments. We monitor risk
exposures on an ongoing basis. The effect of a hypothetical 10% adverse change in foreign exchange rates could result in a fair
value loss of approximately $109 million on our foreign currency derivative contracts outstanding at December 31, 2017 related
to the hedging program. A 100 basis point adverse change in interest rates would not have a material impact on our investments
at December 31, 2017 and 2016. In addition, there was no material equity price risk at December 31, 2017 or 2016.
Foreign Exchange Risk
Our settlement activities are subject to foreign exchange risk resulting from foreign exchange rate fluctuations. This risk is typically
limited to the one business day between setting the foreign exchange rates and clearing the financial transactions. We enter
into foreign currency contracts to manage risk associated with anticipated receipts and disbursements which are either transacted
in a non-functional currency or valued based on a currency other than the functional currencies of the entity.
We may also enter into foreign currency derivative contracts to offset possible changes in value due to foreign exchange
fluctuations of earnings, assets and liabilities denominated in currencies other than the functional currency of the entity. The
objective of these activities is to reduce our exposure to transaction gains and losses resulting from fluctuations of foreign
currencies against our functional and reporting currencies, principally the U.S. dollar and euro.
Foreign currency exposures are managed together through our foreign exchange risk management activities, which are discussed
further in Note 20 (Foreign Exchange Risk Management) to the consolidated financial statements included in Part II, Item 8. The
terms of the forward contracts are generally less than 18 months.
As of December 31, 2017, the majority of derivative contracts to hedge foreign currency fluctuations had been entered into with
our customers. Our derivative contracts are summarized below:
December 31, 2017
December 31, 2016
Notional
Estimated Fair
Value
Notional
Estimated Fair
Value
Commitments to purchase foreign currency . . . . . . . . . . . . $
Commitments to sell foreign currency . . . . . . . . . . . . . . . . .
Options to sell foreign currency . . . . . . . . . . . . . . . . . . . . . .
27 $
968
27
(in millions)
— $
(26)
2
37 $
777
—
(2)
18
—
We also use foreign currency denominated debt to hedge a portion of our net investment in foreign operations against adverse
movements in exchange rates, with changes in the translated value of the debt recorded within currency translation adjustment
in accumulated other comprehensive income (loss). We have designated our euro-denominated debt as a net investment hedge
for a portion of our net investment in European foreign operations. Our euro-denominated debt is vulnerable to changes in the
euro to U.S. dollar exchange rates. The principal amounts of our euro-denominated debt as well as the effective interest rates
and scheduled annual maturities of the principal is included in Note 12 (Debt) to the consolidated financial statements included
in Part II, Item 8.
55
Interest Rate Risk
Our interest rate sensitive assets are our investments in fixed income securities, which we generally hold as available-for-sale
investments. Our policy is to invest in high quality securities, while providing adequate liquidity and maintaining diversification
to avoid significant exposure. The fair value and maturity distribution of our available-for-sale investments for fixed income
securities as of December 31 was as follows:
Financial Instrument
Summary Terms
Maturity
Fair Market
Value at
December 31,
2017
2018
2019
2020
2021
2022
(in millions)
2023
and
there-
after
Municipal securities . . . . . . . . . . . . . . .
Fixed / Variable Interest
$
17
$
Government and agency securities . . .
Fixed / Variable Interest
Corporate securities . . . . . . . . . . . . . . .
Fixed / Variable Interest
Asset-backed securities . . . . . . . . . . . . .
Fixed / Variable Interest
185
876
70
12
87
212
3
$
5
59
277
24
16
287
35
23
76
8
$ — $ — $ — $ —
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,148
$ 314
$ 365
$ 338
$ 107
$
—
23
—
23
$
—
1
—
1
Financial Instrument
Summary Terms
Maturity
Fair Market
Value at
December 31,
2016
2017
2018
2019
2020
2021
2022
and
there-
after
Municipal securities . . . . . . . . . . . . . . .
Fixed / Variable Interest
$
59
$
Government and agency securities . . .
Fixed / Variable Interest
Corporate securities . . . . . . . . . . . . . . .
Fixed / Variable Interest
Asset-backed securities . . . . . . . . . . . . .
Fixed / Variable Interest
166
855
80
46
72
317
2
64
220
20
3
4
180
49
(in millions)
$
10
$
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
1,160
$ 437
$ 314
$ 236
$ 126
$
$ — $ — $ —
—
119
7
21
19
2
42
$
5
—
—
5
We also have time deposits that are classified as held-to-maturity securities. At December 31, 2017 and 2016, the cost which
approximates fair value, of our short-term held-to-maturity securities was $700 million and $452 million, respectively. In addition,
at December 31, 2016, we held $61 million of long-term held-to-maturity securities. We did not hold any long-term held-to-
maturity securities at December 31, 2017.
At December 31, 2017, we have U.S. dollar-denominated and euro-denominated debt, which is subject to interest rate risk. The
principal amounts of this debt as well as the effective interest rates and scheduled annual maturities of the principal is included
in Note 12 (Debt) to the consolidated financial statements included in Part II, Item 8. See “Future Obligations” for estimated
interest payments due by period relating to the U.S. dollar-denominated and euro-denominated debt.
At December 31, 2017, we have the Commercial Paper Program and the Credit Facility which provide liquidity for general corporate
purposes, including providing liquidity in the event of one or more settlement failures by our customers. Borrowing rates under
the Commercial Paper Program are based on market conditions. Borrowing rates under the Credit Facility are variable rates,
which are applied to the borrowing based on terms and conditions set forth in the agreement. See Note 12 (Debt) to the
consolidated financial statements in Part II, Item 8 for additional information on the Credit Facility and the Commercial Paper
Program. We had no borrowings under the Commercial Paper Program or the Credit Facility at December 31, 2017 and 2016.
Equity Price Risk
We did not have significant equity price risk as of December 31, 2017 and 2016.
56
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MASTERCARD INCORPORATED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Mastercard Incorporated
As of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015
Management’s Report on Internal Control Over Financial Reporting . . . . . . . . . . . . .
Report of Independent Registered Public Accounting Firm. . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheet. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Changes in Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
58
59
60
61
62
63
64
65
57
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Mastercard Incorporated (“Mastercard”) is responsible for establishing and maintaining adequate internal
control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in
accordance with accounting principles generally accepted in the United States of America. Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. As required by Section 404 of the Sarbanes-
Oxley Act of 2002, management has assessed the effectiveness of Mastercard’s internal control over financial reporting as of
December 31, 2017. In making its assessment, management has utilized the criteria set forth in Internal Control - Integrated
Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management
has concluded that, based on its assessment, Mastercard’s internal control over financial reporting was effective as of
December 31, 2017. The effectiveness of Mastercard’s internal control over financial reporting as of December 31, 2017 has
been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which
appears on the next page.
58
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Mastercard Incorporated:
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Mastercard Incorporated and its subsidiaries as of December 31, 2017 and
2016 and the related consolidated statements of operations, comprehensive income, changes in equity and cash flows for each of the three
years in the period ended December 31, 2017, including the related notes (collectively referred to as the “consolidated financial statements”).
We also have audited the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the
Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion,
the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal
Control over Financial Reporting appearing in the 2017 Annual Report under Item 8 on page 58. Our responsibility is to express opinions on
the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are
a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or
fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also
included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation
of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 14, 2018
We have served as the Company’s auditor since 1989.
59
MASTERCARD INCORPORATED
CONSOLIDATED BALANCE SHEET
December 31,
2017
2016
(in millions, except per share data)
ASSETS
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Restricted cash for litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement due from customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted security deposits held for customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill
Other intangible assets, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
5,933
546
1,849
1,969
1,375
1,085
1,040
13,797
829
250
3,035
1,120
2,298
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
21,329
$
LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS AND EQUITY
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Settlement due to customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted security deposits held for customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and Contingencies
Redeemable Non-controlling Interests
Stockholders’ Equity
Class A common stock, $0.0001 par value; authorized 3,000 shares, 1,382 and 1,374 shares issued and
1,040 and 1,062 outstanding, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class B common stock, $0.0001 par value; authorized 1,200 shares, 14 and 19 issued and outstanding,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in-capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Class A treasury stock, at cost, 342 and 312 shares, respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
933
1,343
1,085
709
3,931
792
8,793
5,424
106
1,438
15,761
71
—
—
4,365
(20,764)
22,364
(497)
5,468
29
5,497
6,721
543
1,614
1,416
1,093
991
850
13,228
733
307
1,756
722
1,929
18,675
609
946
991
722
3,318
620
7,206
5,180
81
524
12,991
—
—
—
4,183
(17,021)
19,418
(924)
5,656
28
5,684
Total Liabilities, Redeemable Non-controlling Interests and Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
21,329
$
18,675
The accompanying notes are an integral part of these consolidated financial statements.
60
MASTERCARD INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS
Net Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating Expenses
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for litigation settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Income (Expense)
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Basic Earnings per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Basic Weighted-Average Shares Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted Earnings per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted Weighted-Average Shares Outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Years Ended December 31,
2017
2016
2015
(in millions, except per share data)
12,497
$
10,776
$
4,526
898
436
15
5,875
6,622
56
(154)
(2)
(100)
6,522
2,607
3,915
3.67
1,067
3.65
1,072
$
$
$
3,714
811
373
117
5,015
5,761
43
(95)
(63)
(115)
5,646
1,587
4,059
3.70
1,098
3.69
1,101
$
$
$
9,667
3,341
821
366
61
4,589
5,078
25
(61)
(84)
(120)
4,958
1,150
3,808
3.36
1,134
3.35
1,137
The accompanying notes are an integral part of these consolidated financial statements.
61
MASTERCARD INCORPORATED
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other comprehensive income (loss):
Foreign currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation adjustments, net of income tax effect. . . . . . . . . . . .
Translation adjustments on net investment hedge . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Translation adjustments on net investment hedge, net of income tax effect . . . .
Defined benefit pension and other postretirement plans . . . . . . . . . . . . . . . . . . . .
Income tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Defined benefit pension and other postretirement plans, net of income tax
effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustment for defined benefit pension and other
postretirement plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustment for defined benefit pension and other
postretirement plans, net of income tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities available-for-sale, net of income tax effect . . . . . . . . . . . . .
Reclassification adjustment for investment securities available-for-sale . . . . . . . .
Income tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassification adjustment for investment securities available-for-sale, net of
income tax effect
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
For the Years Ended December 31,
2017
2016
(in millions)
2015
3,915
$
4,059
$
3,808
565
2
567
(236)
83
(153)
17
(2)
15
(2)
1
(1)
(3)
2
(1)
—
—
—
(275)
(11)
(286)
60
(22)
38
(1)
—
(1)
(1)
—
(1)
3
(1)
2
—
—
—
(460)
27
(433)
(40)
14
(26)
(19)
7
(12)
80
(29)
51
(11)
—
(11)
15
—
15
Other comprehensive income (loss), net of income tax effect . . . . . . . . . . . . . . . . . . .
Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
427
4,342
$
(248)
3,811
$
(416)
3,392
The accompanying notes are an integral part of these consolidated financial statements.
62
MASTERCARD INCORPORATED
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Common Stock
Class A
Class B
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Additional
Paid-In
Capital
Class A
Treasury
Stock
Non-
Controlling
Interests
Total
(in millions, except per share data)
Balance at December 31, 2014 . . . . . $ — $
— $ 13,169
$
(260) $
3,876
$
(9,995) $
Net income . . . . . . . . . . . . . . . . . .
Activity related to non-
controlling interests . . . . . . . . . . .
Other comprehensive income
(loss), net of tax . . . . . . . . . . . . . . .
Cash dividends declared on
Class A and Class B common
stock, $0.67 per share. . . . . . . . . .
Purchases of treasury stock . . . . .
Share-based payments . . . . . . . . .
Conversion of Class B to Class A
common stock . . . . . . . . . . . . . . . .
Balance at December 31, 2015 . . . . .
Net income . . . . . . . . . . . . . . . . . .
Activity related to non-
controlling interests . . . . . . . . . . .
Other comprehensive income
(loss), net of tax . . . . . . . . . . . . . . .
Cash dividends declared on
Class A and Class B common
stock, $0.79 per share. . . . . . . . . .
Purchases of treasury stock . . . . .
Share-based payments . . . . . . . . .
Conversion of Class B to Class A
common stock . . . . . . . . . . . . . . . .
Balance at December 31, 2016 . . . . .
Net income . . . . . . . . . . . . . . . . . .
Activity related to non-
controlling interests . . . . . . . . . . .
Other comprehensive income
(loss), net of tax . . . . . . . . . . . . . . .
Cash dividends declared on
Class A and Class B common
stock, $0.91 per share. . . . . . . . . .
Purchases of treasury stock . . . . .
Share-based payments . . . . . . . . .
Conversion of Class B to Class A
common stock . . . . . . . . . . . . . . . .
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
3,808
—
—
(755)
—
—
—
16,222
4,059
—
—
(863)
—
—
—
19,418
3,915
—
—
(969)
—
—
—
—
—
(416)
—
—
—
—
—
—
—
—
—
128
—
—
—
—
—
(3,532)
5
—
(676)
4,004
(13,522)
—
—
(248)
—
—
—
—
—
—
—
—
—
179
—
—
—
—
—
(3,503)
4
—
(924)
4,183
(17,021)
—
—
427
—
—
—
—
—
—
—
—
—
182
—
—
—
—
—
(3,747)
4
—
Balance at December 31, 2017 . . . . . $ — $
— $ 22,364
$
(497) $
4,365
$ (20,764) $
The accompanying notes are an integral part of these consolidated financial statements.
34
—
—
—
—
—
—
—
34
—
(6)
—
—
—
—
—
28
—
1
—
—
—
—
—
29
$
6,824
3,808
—
(416)
(755)
(3,532)
133
—
6,062
4,059
(6)
(248)
(863)
(3,503)
183
—
5,684
3,915
1
427
(969)
(3,747)
186
—
$
5,497
63
MASTERCARD INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOWS
Operating Activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of customer and merchant incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit for share-based payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Venezuela charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement due from customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued litigation and legal settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement due to customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net change in other assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing Activities
Purchases of investment securities available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of investments held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of investment securities available-for-sale . . . . . . . . . . . . . . . . . . . .
Proceeds from maturities of investment securities available-for-sale . . . . . . . . . . . . . . .
Proceeds from maturities of investments held-to-maturity . . . . . . . . . . . . . . . . . . . . . . .
Purchases of property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized software . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of businesses, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in nonmarketable equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing Activities
Purchases of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax benefit for share-based payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax withholdings related to share-based payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . .
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents - beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents - end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
For the Years Ended December 31,
2017
2016
(in millions)
2015
3,915
$
4,059
$
3,808
1,001
437
176
—
86
167
59
(445)
(281)
(1,402)
(15)
290
394
589
577
7
5,555
(714)
(1,145)
304
500
1,020
(300)
(123)
(1,175)
(147)
1
(1,779)
(3,762)
—
(64)
(942)
—
(47)
57
(6)
(4,764)
200
(788)
6,721
5,933
$
860
373
149
(48)
(20)
—
29
(338)
(10)
(1,073)
17
145
66
520
—
(194)
4,535
(957)
(867)
277
339
456
(215)
(167)
—
(31)
(2)
(1,167)
(3,511)
1,972
—
(837)
48
(51)
37
(2)
(2,344)
(50)
974
5,747
6,721
$
764
366
122
(42)
(16)
—
(81)
(35)
(98)
(802)
(63)
49
(186)
325
—
(10)
4,101
(974)
(918)
703
542
857
(177)
(165)
(584)
2
(1)
(715)
(3,518)
1,735
—
(727)
42
(58)
27
(17)
(2,516)
(260)
610
5,137
5,747
The accompanying notes are an integral part of these consolidated financial statements.
64
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The Company
facilitates the switching (authorization, clearing and settlement) of payment transactions, and delivers related products and
services. The Company makes payments easier and more efficient by creating a wide range of payment solutions and services
through a family of well-known brands, including Mastercard®, Maestro® and Cirrus®. The recent acquisition of VocaLink Holdings
Limited (“Vocalink”) has expanded the Company’s capability to process automated clearing house (“ACH”) transactions, among
other things. As a multi-rail network, Mastercard now offers customers one partner to turn to for their payment needs for both
domestic and cross-border transactions. The Company also provides value-added offerings such as safety and security products,
information services and consulting, loyalty and reward programs and issuer and acquirer processing. The Company’s networks
are designed to ensure safety and security for the global payments system.
A typical transaction on the Company’s core network involves four participants in addition to the Company: account holder (an
individual who holds a card or uses another device enabled for payment), merchant, issuer (the account holders’ financial
institution) and acquirer (the merchant’s financial institution). The Company does not issue cards, extend credit, determine or
receive revenue from interest rates or other fees charged to account holders by issuers, or establish the rates charged by acquirers
in connection with merchants’ acceptance of the Company’s branded products. In most cases, account holder relationships
belong to, and are managed by, the Company’s financial institution customers.
Mastercard generates revenues from assessing its customers based on the gross dollar volume (“GDV”) of activity on the products
that carry its brands, from the fees charged to customers for providing transaction processing and from other payment-related
products and services.
Significant Accounting Policies
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. Investments in VIEs for which the Company is not considered the primary beneficiary are not consolidated and are
accounted for as equity method or cost method investments and recorded in other assets on the consolidated balance sheet.
At December 31, 2017 and 2016, there were no significant VIEs which required consolidation and the investments were not
considered material to the consolidated financial statements. Intercompany transactions and balances have been eliminated in
consolidation. Certain prior period amounts have been reclassified to conform to the 2017 presentation. The Company follows
accounting principles generally accepted in the United States of America (“GAAP”).
Prior to December 31, 2017, the Company included the financial results from its Venezuela subsidiaries in the consolidated
financial statements using the consolidation method of accounting. Due to increasing foreign exchange regulations in Venezuela
restricting access to U.S. dollars, an other-than-temporary lack of exchangeability between the Venezuelan bolivar and U.S. dollar
has impacted the ability to manage risk, process cross-border transactions and satisfy U.S. dollar denominated liabilities related
to operations in Venezuela. As a result of these factors, Mastercard concluded that effective December 31, 2017, it did not meet
the accounting criteria for consolidation of these Venezuelan subsidiaries, and therefore would transition to the cost method of
accounting as of December 31, 2017. This accounting change resulted in a pre-tax charge of $167 million ($108 million after tax,
or $0.10 per diluted share) included in general and administrative expenses in the consolidated statement of operations.
Non-controlling interests represent the equity interest not owned by the Company and are recorded for consolidated entities in
which the Company owns less than 100% of the interests. Changes in a parent’s ownership interest while the parent retains its
controlling interest are accounted for as equity transactions, and upon loss of control, retained ownership interests are
remeasured at fair value, with any gain or loss recognized in earnings. For 2017, 2016 and 2015, losses from non-controlling
interests were de minimis and, as a result, amounts are included on the consolidated statement of operations within other income
(expense).
The Company accounts for investments in common stock or in-substance common stock under the equity method of accounting
when it has the ability to exercise significant influence over the investee, generally when it holds between 20% and 50% ownership
65
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
in the entity. In addition, investments in flow-through entities such as limited partnerships and limited liability companies are
also accounted for under the equity method when the Company has the ability to exercise significant influence over the investee,
generally when the investment ownership percentage is equal to or greater than 5% of the outstanding ownership interest. The
excess of the cost over the underlying net equity of investments accounted for under the equity method is allocated to identifiable
tangible and intangible assets and liabilities based on fair values at the date of acquisition. The amortization of the excess of the
cost over the underlying net equity of investments and Mastercard’s share of net earnings or losses of entities accounted for
under the equity method of accounting is included in other income (expense) on the consolidated statement of operations.
The Company accounts for investments in common stock or in-substance common stock under the cost method of accounting
when it does not exercise significant influence, generally when it holds less than 20% ownership in the entity or when the interest
in a limited partnership or limited liability company is less than 5% and the Company has no significant influence over the operation
of the investee. Investments in companies that Mastercard does not control, but that are not in the form of common stock or
in-substance common stock, are also accounted for under the cost method of accounting. Investments for which the equity
method or cost method of accounting is used are recorded in other assets on the consolidated balance sheet.
Use of estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Future
events and their effects cannot be predicted with certainty; accordingly, accounting estimates require the exercise of judgment.
The accounting estimates used in the preparation of the Company’s consolidated financial statements may change as new events
occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes.
Actual results may differ from these estimates.
Revenue recognition - Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred or services
have been rendered, the price is fixed or determinable, and collectibility is reasonably assured. Revenue is generally derived
from transactional information accumulated by Mastercard’s systems or reported by customers. The Company’s revenue is based
on the volume of activity on cards that carry the Company’s brands, the number of transactions processed or the nature of other
payment-related products and services.
Volume-based revenue (domestic assessments and cross-border volume fees) is recorded as revenue in the period it is earned,
which is when the related volume is generated on the cards. Certain volume-based revenue is based upon information reported
by customers. Transaction-based revenue is primarily based on the number and type of transactions and is recognized as revenue
in the same period as the related transactions occur. Other payment-related products and services are recognized as revenue
in the same period as the related transactions occur or services are rendered.
Mastercard has business agreements with certain customers that provide for rebates or other support when the customers meet
certain volume hurdles as well as other support incentives such as marketing, which are tied to performance. Rebates and
incentives are recorded as a reduction of revenue either when the revenue is recognized by the Company or at the time the
rebate or incentive is earned by the customer. Rebates and incentives are calculated based upon estimated performance and
the terms of the related business agreements. In addition, Mastercard may make payments to a customer directly related to
entering into an agreement, which are generally deferred and amortized over the life of the agreement on a straight-line basis.
Business combinations - The Company accounts for business combinations under the acquisition method of accounting. The
Company measures the tangible and intangible identifiable assets acquired, liabilities assumed, and any non-controlling interest
in the acquiree, at their fair values at the acquisition date. Acquisition-related costs are expensed as incurred and are included
in general and administrative expenses. Any excess of purchase price over the fair value of net assets acquired, including
identifiable intangible assets, is recorded as goodwill.
Goodwill and other intangible assets - Indefinite-lived intangible assets consist of goodwill, which represents the synergies
expected to arise after the acquisition date and the assembled workforce, and customer relationships. Finite-lived intangible
assets consist of capitalized software costs, trademarks, tradenames, customer relationships and other intangible assets.
Intangible assets with finite useful lives are amortized over their estimated useful lives, on a straight-line basis, which range from
one to twenty years. Capitalized software includes internal and external costs incurred directly related to the design, development
and testing phases of each capitalized software project.
Impairment of assets - Goodwill and indefinite-lived intangible assets are not amortized and are tested annually for impairment
in the fourth quarter, or sooner when circumstances indicate an impairment may exist. The impairment evaluation for goodwill
utilizes a quantitative assessment. If the fair value of a reporting unit exceeds the carrying value, goodwill is not impaired. If the
66
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
fair value of the reporting unit is less than its carrying value, then goodwill is impaired and the excess of the reporting unit’s
carrying value over the fair value is recognized as an impairment charge. Impairment charges, if any, are recorded in general and
administrative expenses on the consolidated statement of operations.
The impairment test for indefinite-lived intangible assets consists of a qualitative assessment to evaluate relevant events and
circumstances that could affect the significant inputs used to determine the fair value of indefinite-lived intangible assets. If the
qualitative assessment indicates that it is more likely than not that indefinite-lived intangible assets are impaired, then a
quantitative assessment is required.
Long-lived assets, other than goodwill and indefinite-lived intangible assets, are tested for impairment whenever events or
circumstances indicate that their carrying amount may not be recoverable. If the carrying value of the asset cannot be recovered
from estimated future cash flows, undiscounted and without interest, the fair value of the asset is calculated using the present
value of estimated net future cash flows. If the carrying amount of the asset exceeds its fair value, an impairment is recorded.
Litigation - The Company is a party to certain legal and regulatory proceedings with respect to a variety of matters. The Company
evaluates the likelihood of an unfavorable outcome of all legal or regulatory proceedings to which it is a party and accrues a loss
contingency when the loss is probable and reasonably estimable. These judgments are subjective based on the status of the
legal or regulatory proceedings, the merits of its defenses and consultation with in-house and external legal counsel. Legal costs
are expensed as incurred and recorded in general and administrative expenses on the consolidated statement of operations.
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 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. In the event that Mastercard effects a payment on behalf of a failed customer, Mastercard may
seek an assignment of the underlying receivables of the failed customer. Customers may be charged for the amount of any
settlement loss incurred during the ordinary course activities of the Company.
The Company also enters into agreements in the ordinary course of business under which the Company agrees to indemnify
third parties against damages, losses and expenses incurred in connection with legal and other proceedings arising from
relationships or transactions with the Company. As the extent of the Company’s obligations under these agreements depends
entirely upon the occurrence of future events, the Company’s potential future liability under these agreements is not
determinable.
The Company accounts for each of its guarantees by recording the guarantee at its fair value at the inception or modification
date through earnings.
Income taxes - The Company follows an asset and liability based approach in accounting for income taxes as required under GAAP.
Deferred income tax assets and liabilities are recorded to reflect the tax consequences on future years of temporary differences
between the financial statement carrying amounts and income tax bases of assets and liabilities. Deferred income taxes are
displayed separately as noncurrent assets and liabilities on the consolidated balance sheet. Valuation allowances are provided
against assets which are not more likely than not to be realized. The Company recognizes all material tax positions, including
uncertain tax positions in which it is more likely than not that the position will be sustained based on its technical merits and if
challenged by the relevant taxing authorities. At each balance sheet date, unresolved uncertain tax positions are reassessed to
determine whether subsequent developments require a change in the amount of recognized tax benefit. The allowance for
uncertain tax positions is recorded in other current and noncurrent liabilities on the consolidated balance sheet.
The Company records interest expense related to income tax matters as interest expense in its consolidated statement of
operations. The Company includes penalties related to income tax matters in the income tax provision.
On December 22, 2017, in the U.S., “An Act to provide for reconciliation pursuant to titles II and V of the concurrent resolution
on the budget for fiscal year 2018”, a comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the
“TCJA”), was enacted into law. Prior to the enactment of the TCJA, the Company did not historically provide for U.S. federal
income tax and foreign withholding taxes on undistributed earnings from non-U.S. subsidiaries as such earnings were intended
to be reinvested indefinitely outside of the U.S. The foreign earnings that the Company had repatriated to the United States, for
periods prior to the enactment of the TCJA, were limited to the amount of current year foreign earnings and not made out of
historic undistributed accumulated earnings. As of December 31, 2017, the Company has changed its assertion regarding the
indefinite reinvestment of foreign earnings outside the U.S. for certain foreign affiliates. As a result of the TCJA and a one-time
67
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
deemed repatriation tax on untaxed accumulated foreign earnings, a provisional amount of U.S. federal and state and local
income taxes have been provided on all undistributed foreign earnings. Future distributions from foreign affiliates from earnings
which have not already been taxed in the U.S. will be eligible for a 100% dividends received deduction. Beginning in 2018,
deferred taxes will be established on the estimated foreign exchange gains or losses for foreign earnings that are not considered
permanently reinvested, which will be recognized through cumulative translation adjustments as incurred. The working capital
requirements of foreign affiliates will determine the amount of cash to be remitted from respective jurisdictions.
Cash and cash equivalents - Cash and cash equivalents include certain investments with daily liquidity and with a maturity of
three months or less from the date of purchase. Cash equivalents are recorded at cost, which approximates fair value.
Restricted cash - The Company classifies cash and cash equivalents as restricted when the cash is unavailable for withdrawal or
usage for general operations. Restrictions may include legally restricted deposits, contracts entered into with others, or the
Company’s statements of intention with regard to particular deposits.
Fair value - The Company measures certain financial assets and liabilities at fair value on a recurring basis by estimating the price
that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants.
The Company classifies these recurring fair value measurements into a three-level hierarchy (“Valuation Hierarchy”).
The Valuation Hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement
date. A financial instrument’s categorization within the Valuation Hierarchy is based upon the lowest level of input that is
significant to the fair value measurement. The three levels of the Valuation Hierarchy are as follows:
•
•
•
Level 1 - inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active
markets.
Level 2 - inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets,
quoted prices for identical or similar assets and liabilities in inactive markets and inputs that are observable for the asset
or liability.
Level 3 - inputs to the valuation methodology are unobservable and cannot be directly corroborated by observable
market data.
Certain assets are measured at fair value on a nonrecurring basis. The Company’s assets measured at fair value on a nonrecurring
basis include property, plant and equipment, nonmarketable equity investments, goodwill and other intangible assets. These
assets are subject to impairment evaluation and if impaired, would be adjusted to fair value.
The valuation methods for goodwill and other intangible assets acquired in business combinations involve assumptions concerning
comparable company multiples, discount rates, growth projections and other assumptions of future business conditions. The
Company uses various valuation techniques to determine fair value, primarily discounted cash flows analysis, relief-from-royalty,
and multi-period excess earnings for estimating the fair value of its intangible assets. The Company’s uses market capitalization
for estimating the fair value of its reporting unit. As the assumptions employed to measure these assets are based on
management’s judgment using internal and external data, these fair value determinations are classified in Level 3 of the Valuation
Hierarchy.
Contingent consideration - Certain business combinations involve the potential for future payment of consideration that is
contingent upon the achievement of performance milestones. These liabilities are classified within Level 3 of the Valuation
Hierarchy as the inputs used to measure fair value are unobservable and require management’s judgment. The fair value of the
contingent consideration at the acquisition date and subsequent periods is determined utilizing an income approach based on
a Monte Carlo technique and is recorded in other current liabilities and other liabilities on the consolidated balance sheet.
Changes to projected performance milestones of the acquired businesses could result in a higher or lower contingent
consideration liability. Measurement period adjustments, if any, to the preliminary estimated fair value of contingent
consideration as of the acquisition date will be recorded to goodwill, however, changes in fair value as a result of updated
assumptions will be recorded in general and administrative expenses on the consolidated statement of operations.
Investment securities - The Company classifies investments in debt and equity securities as available-for-sale. Available-for-sale
securities that are available to meet the Company’s current operational needs are classified as current assets. Available-for-sale
securities that are not available to meet the Company’s current operational needs are classified as non-current assets on the
consolidated balance sheet.
68
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The investments in debt and equity securities are carried at fair value, with unrealized gains and losses, net of applicable taxes,
recorded as a separate component of accumulated other comprehensive income (loss) on the consolidated statement of
comprehensive income. Net realized gains and losses on debt and equity securities are recognized in investment income on the
consolidated statement of operations. The specific identification method is used to determine realized gains and losses.
The Company evaluates its debt and equity securities for other-than-temporary impairment on an ongoing basis. When there
has been a decline in fair value of a debt or equity security below the amortized cost basis, the Company recognizes an other-
than-temporary impairment if: (1) it has the intent to sell the security; (2) it is more likely than not that it will be required to sell
the security before recovery of the amortized cost basis; or (3) it does not expect to recover the entire amortized cost basis of
the security. The credit loss component of the impairment would be recognized in other income (expense), net on the consolidated
statement of operations while the non-credit loss would remain in accumulated other comprehensive income (loss) until realized
from a sale or an other-than-temporary impairment.
The Company classifies time deposits with maturities greater than 3 months as held-to-maturity. Held-to-maturity securities
that mature within one year are classified as current assets while held-to-maturity securities with maturities of greater than one
year are classified as non-current assets. Time deposits are carried at amortized cost on the consolidated balance sheet and are
intended to be held until maturity.
Derivative financial instruments - The Company records all derivatives at fair value. The Company’s foreign exchange forward
and option contracts are included in Level 2 of the Valuation Hierarchy as the fair value of these contracts are based on inputs,
which are observable based on broker quotes for the same or similar instruments. Changes in the fair value of derivative
instruments are reported in current-period earnings. The Company’s derivative contracts hedge foreign exchange risk and are
not entered into for trading or speculative purposes. The Company did not have any derivative contracts accounted for under
hedge accounting as of December 31, 2017 and 2016.
The Company has numerous investments in its foreign subsidiaries. The net assets of these subsidiaries are exposed to volatility
in foreign currency exchange rates. The Company uses foreign currency denominated debt to hedge a portion of its net investment
in foreign operations against adverse movements in exchange rates. The effective portion of the foreign currency gains and
losses related to the foreign currency denominated debt are reported in accumulated other comprehensive income (loss) on the
consolidated balance sheet as part of the cumulative translation adjustment component of equity. The ineffective portion, if
any, is recognized in earnings in the current period. The Company evaluates the effectiveness of the net investment hedge each
quarter.
Settlement due from/due to customers - The Company operates systems for clearing and settling payment transactions among
customers. Net settlements are generally cleared daily among customers through settlement cash accounts by wire transfer or
other bank clearing means. However, some transactions may not settle until subsequent business days, resulting in amounts
due from and due to customers.
Restricted security deposits held for customers - Mastercard requires collateral from certain customers for settlement of their
transactions. The majority of collateral for settlement is in the form of standby letters of credit and bank guarantees which are
not recorded on the consolidated balance sheet. Additionally, Mastercard 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.
Property, plant and equipment - Property, plant and equipment are stated at cost less accumulated depreciation and amortization.
Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets.
Depreciation of leasehold improvements and amortization of capital leases is included in depreciation and amortization expense
on the consolidated balance sheet.
The useful lives of the Company’s assets are as follows:
Asset Category
Estimated Useful Life
Buildings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building equipment. . . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures and equipment . . . . . . . .
30 years
10 - 15 years
3 - 5 years
Leasehold improvements . . . . . . . . . . . . . . . . . . .
Shorter of life of improvement or lease term
Capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shorter of life of the asset or lease term
69
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Leases - The Company enters into operating and capital leases for the use of premises and equipment. Rent expense related to
lease agreements that contain lease incentives is recorded on a straight-line basis over the term of the lease.
Pension and other postretirement plans - The Company recognizes the funded status of its single-employer defined benefit
pension plans or postretirement plans as assets or liabilities on its consolidated balance sheet and recognizes changes in the
funded status in the year in which the changes occur through accumulated other comprehensive income (loss). The funded
status is measured as the difference between the fair value of plan assets and the benefit obligation at December 31, the
measurement date. The fair value of plan assets represents the current market value of the pension assets. Overfunded plans
are aggregated and recorded in long-term other assets, while underfunded plans are aggregated and recorded as accrued
expenses and long-term other liabilities on the consolidated balance sheet.
Net periodic pension and postretirement benefit cost/(income) is recognized in general and administrative expenses on the
consolidated statement of operations. These costs include service costs, interest cost, expected return on plan assets,
amortization of prior service costs or credits and gains or losses previously recognized as a component of accumulated other
comprehensive income (loss).
Defined contribution plans - The Company’s contributions to defined contribution plans are recorded when employees render
service to the Company. The charge is recorded in general and administrative expenses on the consolidated statement of
operations.
Advertising and marketing - The cost of media advertising is expensed when the advertising takes place. Advertising production
costs are expensed as incurred. Promotional items are expensed at the time the promotional event occurs. Sponsorship costs
are recognized over the period of benefit.
Foreign currency remeasurement and translation - Monetary assets and liabilities are remeasured to functional currencies using
current exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are recorded at historical exchange
rates. Revenue and expense accounts are remeasured at the weighted-average exchange rate for the period. Resulting exchange
gains and losses related to remeasurement are included in general and administrative expenses on the consolidated statement
of operations.
Where a non-U.S. currency is the functional currency, translation from that functional currency to U.S. dollars is performed for
balance sheet accounts using current exchange rates in effect at the balance sheet date and for revenue and expense accounts
using a weighted-average exchange rate for the period. Resulting translation adjustments are reported as a component of
accumulated other comprehensive income (loss).
Treasury stock - The Company records the repurchase of shares of its common stock at cost on the trade date of the transaction.
These shares are considered treasury stock, which is a reduction to stockholders’ equity. Treasury stock is included in authorized
and issued shares but excluded from outstanding shares.
Share-based payments - The Company measures share-based compensation expense at the grant date, based on the estimated
fair value of the award and uses the straight-line method of attribution, net of estimated forfeitures, for expensing awards over
the requisite employee service period. The Company estimates the fair value of its non-qualified stock option awards (“Options”)
using a Black-Scholes valuation model. The fair value of restricted stock units (“RSUs”) is determined and fixed on the grant date
based on the Company’s stock price, adjusted for the exclusion of dividend equivalents. The Monte Carlo simulation valuation
model is used to determine the grant date fair value of performance stock units (“PSUs”) granted. All share-based compensation
expenses are recorded in general and administrative expenses on the consolidated statement of operations.
Redeemable non-controlling interests - The Company’s business combinations may include provisions allowing non-controlling
equity owners the ability to require the Company purchase additional interests in the subsidiary at their discretion. These interests
are initially recorded at fair value and in subsequent reporting periods are accreted or adjusted to their estimated redemption
value. These adjustments to the redemption value will impact retained earnings or additional paid-in capital on the consolidated
balance sheet, but will not impact the consolidated statement of operations. The redeemable non-controlling interests are
considered temporary and reported outside of permanent equity on the consolidated balance sheet at the greater of the carrying
amount adjusted for the non-controlling interest’s share of net income (loss) or its redemption value.
Earnings per share - The Company calculates basic earnings per share (“EPS”) by dividing net income by the weighted-average
number of common shares outstanding during the year. Diluted EPS is calculated by dividing net income by the weighted-average
number of common shares outstanding during the year, adjusted for the potentially dilutive effect of stock options and unvested
stock units using the treasury stock method. The Company may be required to calculate EPS using the two-class method as a
70
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
result of its redeemable non-controlling interests. If redemption value exceeds the fair value of the redeemable non-controlling
interests, the excess would be a reduction to net income for the EPS calculation. For 2017, 2016 and 2015, there was no impact
to EPS for adjustments related to redeemable non-controlling interests.
Recent accounting pronouncements
Derivatives and Hedging - In August 2017, the Financial Accounting Standards Board (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 hedge nonfinancial and financial risk components, eliminates the requirement
to separately measure and recognize hedge ineffectiveness and eases requirements of an entity’s assessment of hedge
effectiveness. This guidance is effective for periods beginning after December 15, 2018 and early adoption is permitted. The
Company currently does not 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 20 (Foreign Exchange Risk Management).
Net periodic pension cost and net periodic postretirement benefit cost - In March 2017, the FASB issued accounting guidance to
improve the presentation of net periodic pension cost and net periodic postretirement benefit cost. Under this guidance, the
service cost component is required to be reported in the same line item as other compensation costs arising from services
rendered by employees during the period. The other components of the net periodic benefit costs are required to be presented
in the consolidated statement of operations separately from the service cost component and outside of operating income. This
guidance is required to be applied retrospectively. This guidance is effective for periods beginning after December 15, 2017, and
interim periods within those years, with early adoption permitted. The Company will adopt this guidance effective January 1,
2018. The Company does not expect the impacts of this standard to be material. Refer to Note 11 (Pension, Postretirement and
Savings Plans) for the components of the Company’s net periodic pension cost and net periodic postretirement benefit costs.
Goodwill impairment - In January 2017, the FASB issued accounting guidance to simplify how companies are required to test
goodwill for impairment. Under this guidance, step 2 of the goodwill impairment test has been eliminated. Step 2 of the goodwill
impairment test required companies to determine the implied fair value of the reporting unit’s goodwill. Under this guidance,
companies will perform their annual, or interim, goodwill impairment test by comparing the reporting unit’s carrying value,
including goodwill, to its fair value. An impairment charge would be recorded if the reporting unit’s carrying value exceeds its
fair value. This guidance is required to be applied prospectively and is effective for periods beginning after December 15, 2019,
with early adoption permitted. The Company adopted this guidance effective January 1, 2017 and there was no impact from
the adoption of the new accounting guidance on its 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 will be 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, with early adoption permitted. The Company
will adopt this guidance effective January 1, 2018. Upon adoption of this standard, the Company will include 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 and early adoption is permitted. The Company will adopt
this guidance effective January 1, 2018. The Company is in the process of evaluating the impacts this guidance will have on its
consolidated financial statements. However, the Company expects that it will recognize a cumulative-effect adjustment to
retained earnings upon adoption of the new guidance related to certain tax activity resulting from intra-entity asset transfers
occurring before the date of adoption. For a more detailed discussion of an intra-entity transfer of intellectual property that
occurred in 2014, refer to Note 17 (Income Taxes).
71
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Share-based payments - In March 2016, the FASB issued accounting guidance related to share-based payments to employees.
The Company adopted this guidance on January 1, 2017. The adoption had the following impacts on the consolidated financial
statements:
•
The Company is required to recognize the excess tax benefits and deficiencies from share-based awards on the
consolidated statement of operations in the period in which they occurred rather than in additional paid-in-capital on
the consolidated balance sheet. For the year ended December 31, 2017, the Company recorded excess tax benefits of
$49 million within income tax expense on the consolidated statement of operations. The Company is also required to
revise its calculation of diluted weighted-average shares outstanding by excluding the tax effects from the assumed
proceeds available to repurchase shares. For the year ended December 31, 2017, diluted weighted-average shares
outstanding included an additional 1 million shares as a result of the change in this calculation. For the year ended
December 31, 2017, the net impact of adoption resulted in an increase of $0.04 to diluted EPS. Lastly, the Company is
required to change the classification of these tax effects on the consolidated statement of cash flows and classify them
as an operating activity rather than as a financing activity. Each of these above items have been adopted prospectively.
• Retrospectively, the Company is required to change its classification of cash paid for employees’ withholding tax related
to equity awards as a financing activity rather than as an operating activity on the consolidated statement of cash flows.
As a result of this change in classification, cash provided by operating activities and cash used in financing activities on
the consolidated statement of cash flows increased by $51 million and $58 million for the years ended December 31,
2016 and 2015, respectively.
•
This guidance allows a company-wide accounting policy election either to continue estimating forfeitures each period
or to account for forfeitures as they occur. The Company elected to continue its existing practice to estimate the number
of awards that will be forfeited. There was no impact on its consolidated financial statements.
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. In August 2015,
the FASB issued accounting guidance that delayed the effective date of this standard by one year, making this guidance effective
for fiscal years beginning after December 15, 2017. The Company will adopt this guidance effective January 1, 2018 under the
modified retrospective transition method by recognizing the cumulative effect of initially applying the new standard as an increase
to the opening balance of retained earnings. The comparative information will not be restated and will be reported under the
accounting standards in effect for those periods. This new revenue guidance will primarily impact the timing of certain incentives
which will be recognized over the life of the contract versus as earned by the customer. In addition, the Company will account
for certain market development fund contributions and expenditures on a gross basis, instead of net, resulting in an increase to
both revenues and expenses. Upon adoption of the standard, the estimated impact on the Company’s consolidated financial
statements is expected to be an increase of approximately $300 million in net revenue and $200 million in operating expenses
in 2018. This estimate could change and is dependent upon how customer deals will be executed throughout 2018.
Note 2. Acquisitions
In 2017, the Company acquired businesses for total consideration of $1.5 billion, representing both cash and contingent
consideration. For the businesses acquired, Mastercard allocated the values associated with the assets, liabilities and redeemable
non-controlling interests based on their respective fair values on the acquisition dates. Refer to Note 1 (Summary of Significant
Accounting Policies), for the valuation techniques Mastercard utilizes to fair value the assets and liabilities acquired in business
combinations. The residual value allocated to goodwill is not expected to be deductible for local tax purposes.
72
For acquisitions occurring in 2017, the Company is evaluating and finalizing the purchase price accounting; however, the
preliminary estimated fair values of the purchase price allocations in aggregate, as of the acquisition dates, are noted below:
Cash consideration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Contingent consideration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Redeemable non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on previously held minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total fair value of businesses acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities:
Short-term debt1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net pension liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(in millions)
1,286
202
69
14
1,571
111
110
488
1,136
91
1,936
64
170
66
65
365
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,571
1 The short-term debt assumed through acquisitions was repaid during the second quarter of 2017.
The following table summarizes the identified intangible assets acquired:
Developed technologies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Acquisition Date
Fair Value
Weighted-Average
Useful Life
(in millions)
319
166
3
488
(Years)
7.5
9.9
1.4
8.3
For the businesses acquired in 2017, the largest acquisition relates to Vocalink, a payment systems and ATM switching platform
operator, located principally in the U.K. On April 28, 2017, Mastercard acquired 92.4% controlling interest in Vocalink for cash
consideration of £719 million ($929 million as of the acquisition date). In addition, the Vocalink sellers have the potential to earn
additional contingent consideration up to £169 million (approximately $228 million as of December 31, 2017) if certain revenue
targets are met in 2018. Refer to Note 5 (Fair Value and Investment Securities) for additional information related to the fair value
of contingent consideration.
A majority of Vocalink’s shareholders have retained a 7.6% ownership for at least three years, which is recorded as redeemable
non-controlling interests on the consolidated balance sheet. These remaining shareholders have a put option to sell their
ownership interest to Mastercard on the third and fifth anniversaries of the transaction and quarterly thereafter (the “Third
Anniversary Option” and “Fifth Anniversary Option”, respectively). The Third Anniversary Option is exercisable at a fixed price
of £58 million (approximately $78 million as of December 31, 2017) (“Fixed Price”). The Fifth Anniversary Option is exercisable
at the greater of the Fixed Price or fair value. Additionally, Mastercard has a call option to purchase the remaining interest from
Vocalink’s shareholders on the fifth anniversary of the transaction and quarterly thereafter, which is exercisable at the greater
of the Fixed Price or fair value. The fair value of the redeemable non-controlling interests was determined utilizing a market
approach, which extrapolated the consideration transferred that was discounted for lack of control and marketability. The
rollforward of redeemable non-controlling interests was not included as the activity was not considered to be material.
73
In 2015, the Company acquired two businesses for $609 million in cash. For these acquisitions, the Company recorded $481
million as goodwill representing the aggregate excess of the purchase consideration over the fair value of the net assets acquired.
A portion of the goodwill related to the 2015 acquisitions is expected to be deductible for local tax purposes.
The consolidated financial statements include the operating results of the acquired businesses from the dates of their respective
acquisition. Pro forma information related to the acquisitions was not included because the impact on the Company’s consolidated
results of operations was not considered to be material.
Note 3. Earnings Per Share
The components of basic and diluted EPS for common shares for each of the years ended December 31 were as follows:
2017
2016
2015
(in millions, except per share data)
Numerator
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3,915 $
4,059 $
3,808
Denominator
Basic weighted-average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dilutive stock options and stock units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted weighted-average shares outstanding 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per Share
1,067
5
1,072
1,098
3
1,101
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3.67 $
3.65 $
3.70 $
3.69 $
1,134
3
1,137
3.36
3.35
Note: Table may not sum due to rounding.
1 For the years presented, the calculation of diluted EPS excluded a minimal amount of anti-dilutive share-based payment awards.
Note 4. Supplemental Cash Flows
The following table includes supplemental cash flow disclosures for each of the years ended December 31:
Cash paid for income taxes, net of refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for legal settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash investing and financing activities
Dividends declared but not yet paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital leases and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of assets acquired, net of cash acquired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of liabilities assumed related to acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
2016
2015
(in millions)
1,893 $
1,579 $
1,097
135
47
263
30
1,825
365
74
101
238
3
—
—
44
124
212
10
626
42
Note 5. Fair Value and Investment Securities
Financial Instruments - Recurring Measurements
The Company classifies its fair value measurements of financial instruments within the Valuation Hierarchy. There were no
transfers made among the three levels in the Valuation Hierarchy for 2017.
74
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The distribution of the Company’s financial instruments measured at fair value on a recurring basis within the Valuation Hierarchy
were as follows:
December 31, 2017
December 31, 2016
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 . . . . . . . . . . . . $ — $
Government and agency
securities . . . . . . . . . . . . . . . . . . . . .
Corporate securities. . . . . . . . . . . .
Asset-backed securities . . . . . . . . .
Equity securities . . . . . . . . . . . . . . .
Derivative instruments 2:
Foreign currency derivative assets
Deferred compensation plan 3:
Deferred compensation assets . . .
81
—
—
1
—
55
Liabilities
Derivative instruments 2:
Foreign currency derivative
liabilities . . . . . . . . . . . . . . . . . . . . . $ — $
Deferred compensation plan 4:
Deferred compensation liabilities .
(54)
17 $
— $
17 $ — $
59 $
— $
59
104
876
70
—
6
—
—
—
—
—
—
—
185
876
70
1
6
55
49
—
—
2
—
—
117
855
80
—
29
—
—
—
—
—
—
—
166
855
80
2
29
—
(30) $
— $
(30) $ — $
(13) $
— $
(13)
—
—
(54)
(43)
—
—
(43)
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 20
(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. The Company had previously invested in corporate-owned life insurance contracts that were recorded at cash surrender value. The
contracts were terminated during the third quarter of 2017.
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. 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 December 31, 2017 and 2016, 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 19 (Settlement and Other Risk Management).
75
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (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 December 31, 2017 and 2016, the Company held $700 million and $452 million, respectively, of short-term held-to-
maturity securities. In addition, at December 31, 2016, the Company held $61 million of long-term held-to-maturity securities
included in other assets on the consolidated balance sheet. The Company did not hold any long-term held-to-maturity securities
at December 31, 2017. 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.
These 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 6 (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 as Level 2 of the Valuation Hierarchy. At December 31, 2017, the carrying value and fair value
of long-term debt was $5.4 billion and $5.7 billion, respectively. At December 31, 2016, the carrying value and fair value of long-
term debt was $5.2 billion and $5.3 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. The activity of the Company’s contingent consideration liability for 2017 was as follows:
Balance at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Preliminary estimated fair value as of acquisition date for businesses acquired . . . . . . . . . . . . . . . . . . . . . . . .
Net change in valuation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(in millions)
—
202
7
10
219
76
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (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 December 31, 2017 and 2016 were as follows:
December 31, 2017
Gross
Unrealized
Gain
Gross
Unrealized
Loss
Amortized
Cost
December 31, 2016
Fair
Value
Amortized
Cost
Gross
Unrealized
Gain
Gross
Unrealized
Loss
Fair
Value
Municipal securities . . . . . . . . . . . . . $
17 $
— $
— $
(in millions)
17 $
59 $
— $
— $
Government and agency securities .
Corporate securities . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . .
Equity securities . . . . . . . . . . . . . . . .
185
875
70
—
—
2
—
1
—
(1)
—
—
185
876
70
1
165
853
80
2
1
3
—
—
—
(1)
—
—
59
166
855
80
2
Total . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,147 $
3 $
(1) $ 1,149 $ 1,159 $
4 $
(1) $ 1,162
The Company’s available-for-sale investment securities held at December 31, 2017 and 2016, 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 December 31, 2017 was as
follows:
Due within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Due after 1 year through 5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after 5 years through 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Due after 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
No contractual maturity 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Available-For-Sale
Amortized
Cost
Fair Value
(in millions)
314 $
832
1
—
—
1,147 $
314
833
1
—
1
1,149
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 Company’s consolidated statement of operations. The gross
realized gains and losses from the sales of available-for-sale securities for 2017, 2016 and 2015 were not significant.
77
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 6. Prepaid Expenses and Other Assets
Prepaid expenses and other current assets consisted of the following at December 31:
Customer and merchant incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Prepaid income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other assets consisted of the following at December 31:
Customer and merchant incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Nonmarketable equity investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2017
2016
(in millions)
464 $
77
499
1,040 $
2017
2016
(in millions)
1,434 $
249
352
178
85
2,298 $
479
118
253
850
1,134
132
325
175
163
1,929
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.
Nonmarketable equity investments represent the Company’s cost and equity method investments. For the year ended December
31, 2017, the Company invested $147 million in nonmarketable cost method equity investments.
Non-current prepaid income taxes, included in the other asset table above, primarily consists of taxes paid in 2014 relating to
the deferred charge resulting from the reorganization of the Company’s legal entity and tax structure to better align with its
business footprint of its non-U.S. operations. See Note 17 (Income Taxes) for further discussion of this deferred charge.
Note 7. Property, Plant and Equipment
Property, plant and equipment consisted of the following at December 31:
Building, building equipment and land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2017
2016
(in millions)
455 $
841
81
166
1,543
(714)
829 $
534
606
63
133
1,336
(603)
733
As of December 31, 2017 and 2016, capital leases of $32 million and $23 million, respectively, were included in equipment.
Accumulated amortization of these capital leases was $18 million and $16 million as of December 31, 2017 and 2016, respectively.
Depreciation and amortization expense for the above property, plant and equipment was $185 million, $151 million and $131
million for 2017, 2016 and 2015, respectively.
78
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 8. Goodwill
The changes in the carrying amount of goodwill for the years ended December 31, 2017 and 2016 were as follows:
2017
2016
(in millions)
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1,756 $
Additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,136
143
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3,035 $
1,891
8
(143)
1,756
The Company had no accumulated impairment losses for goodwill at December 31, 2017. Based on annual impairment testing,
the Company’s goodwill is not impaired.
Note 9. Other Intangible Assets
The following table sets forth net intangible assets, other than goodwill, at December 31:
2017
2016
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Gross Carrying
Amount
Accumulated
Amortization
Net Carrying
Amount
Amortized intangible assets
Capitalized software . . . . . . . . $
Trademarks and tradenames. .
Customer relationships . . . . . .
Other. . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized intangible assets
Customer relationships . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . $
1,572 $
30
473
27
2,102
(888) $
(29)
(214)
(26)
(1,157)
(in millions)
684 $
1
259
1
945
1,210 $
26
283
23
1,542
175
2,277 $
—
(1,157) $
175
1,120 $
154
1,696 $
(768) $
(22)
(162)
(22)
(974)
—
(974) $
442
4
121
1
568
154
722
The increase in the gross carrying amount of amortized intangible assets in 2017 was primarily related to the businesses acquired
in 2017. See Note 2 (Acquisitions) for further details. Certain intangible assets, including amortizable and unamortizable customer
relationships and trademarks and tradenames, are denominated in foreign currencies. As such, the change in intangible assets
includes a component attributable to foreign currency translation. Based on the qualitative assessment performed in 2017, it
was determined that the Company’s indefinite-lived intangible assets were not impaired.
Amortization on the assets above amounted to $252 million, $221 million and $235 million in 2017, 2016 and 2015, respectively.
The following table sets forth the estimated future amortization expense on amortizable intangible assets on the consolidated
balance sheet at December 31, 2017 for the years ending December 31:
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
(in millions)
257
214
147
82
245
945
79
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 10. Accrued Expenses and Accrued Litigation
Accrued expenses consisted of the following at December 31:
2017
2016
(in millions)
Customer and merchant incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Personnel costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income and other taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,648 $
613
88
194
388
3,931 $
2,286
496
71
161
304
3,318
As of December 31, 2017 and 2016, the Company’s provision for litigation was $709 million and $722 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 18 (Legal and Regulatory Proceedings) for further discussion of the U.S. and Canadian
merchant class litigations.
Note 11. Pension, Postretirement and Savings Plans
The Company and certain of its subsidiaries maintain various pension, postretirement, savings and other postemployment benefit
plans that cover substantially all employees worldwide.
Defined Contribution Plans
The Company sponsors defined contribution retirement plans. The primary plan is the Mastercard Savings Plan, a 401(k) plan
for substantially all of the Company’s U.S. employees, which is subject to the provisions of the Employee Retirement Income
Security Act of 1974 (“ERISA”), as amended. In addition, the Company has several defined contribution plans outside of the U.S.
The Company’s total expense for its defined contribution plans was $84 million, $73 million and $61 million in 2017, 2016 and
2015, respectively.
Defined Benefit and Other Postretirement Plans
In 2015, the Company terminated its non-contributory, qualified, U.S. defined benefit pension plan (the “U.S. Employee Pension
Plan”). Participants had the option to receive a lump sum distribution or to participate in an annuity with a third-party insurance
company. As a result of this termination, the Company settled its obligation for $287 million, which resulted in a pension
settlement charge of $79 million recorded in general and administrative expense during 2015.
The Company also sponsors pension and postretirement plans for non-U.S. employees (the “non-U.S. Plans”) that cover various
benefits specific to their country of employment.
In April 2017, the Company acquired a majority interest in Vocalink. Vocalink has a defined benefit pension plan (the “Vocalink
Plan”) which is closed to new entrants and future accruals as of July 21, 2013, however, plan participants’ obligations are adjusted
for future salary changes. The Company has agreed to make contributions of £15 million (approximately $20 million as of
December 31, 2017) annually until March 2020. See Note 2 (Acquisitions) for additional information on the Vocalink acquisition.
The term “Pension Plans” includes the non-U.S. Plans, the Vocalink Plan and the U.S. Employee Pension Plan.
The Company maintains a postretirement plan providing health coverage and life insurance benefits for substantially all of its
U.S. employees hired before July 1, 2007 (the “Postretirement Plan”).
80
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company uses a December 31 measurement date for the Pension Plans and its Postretirement Plan (collectively the “Plans”).
The Company recognizes the funded status of its Plans, measured as the difference between the fair value of the plan assets and
the projected benefit obligation, in the consolidated balance sheet. The following table sets forth the Plans’ funded status, key
assumptions and amounts recognized in the Company’s consolidated balance sheet at December 31:
Pension Plans
Postretirement Plan
2017
2016
2017
2016
(in millions, except percentages)
Change in benefit obligation
Benefit obligation at beginning of year . . . . . . . . . . . . . . . . $
Benefit obligation acquired during the year . . . . . . . . . . . .
Service cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers in . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . .
Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . .
Change in plan assets
Fair value of plan assets at beginning of year . . . . . . . . . . .
Fair value of plan assets acquired during the year . . . . . . .
Actual gain (loss) on plan assets . . . . . . . . . . . . . . . . . . . . . .
Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefits paid. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers in . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets at end of year . . . . . . . . . . . . . . . .
Funded status at end of year . . . . . . . . . . . . . . . . . . . . . . . . $
Amounts recognized on the consolidated balance sheet
consist of:
Other liabilities, short-term. . . . . . . . . . . . . . . . . . . . . . . . . . $
Other liabilities, long-term . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Accumulated other comprehensive income consists of:
Net actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Prior service credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted-average assumptions used to determine end
of year benefit obligations
Discount rate
Non-U.S. Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vocalink Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postretirement Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase
Non-U.S. Plans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vocalink Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postretirement Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
* Not applicable
81
46
410
9
8
(44)
(12)
3
48
468
33
344
(4)
23
(12)
3
40
427
(41)
$
$
— $
(41)
(41)
$
(22)
—
(22)
$
$
1.80%
2.80%
*
2.60%
3.85%
*
36
—
10
1
2
(2)
1
(2)
46
27
—
1
7
(2)
1
(1)
33
(13)
$
$
— $
(13)
(13)
$
— $
—
— $
59
—
1
2
3
(4)
—
—
61
—
—
—
4
(4)
—
—
—
(61)
(3)
(58)
(61)
(5)
(8)
(13)
$
$
$
$
$
$
59
—
1
2
1
(4)
—
—
59
—
—
—
4
(4)
—
—
—
(59)
(3)
(56)
(59)
(10)
(10)
(20)
1.60%
*
*
2.59%
*
*
*
*
3.50%
*
*
3.00%
*
*
4.00%
*
*
3.00%
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Each of the Pension Plans had benefit obligations in excess of plan assets at December 31, 2017 and 2016. Information on the
Pension Plans were as follows:
Projected benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2017
2016
(in millions)
468 $
428
427
46
46
33
Components of net periodic benefit cost recorded in general and administrative expenses were as follows for the Plans for each
of the years ended December 31:
Pension Plans
Postretirement Plan
2017
2016
2015
2017
2016
2015
(in millions)
Service cost . . . . . . . . . . . . . . . . . . . . . . . $
9 $
10 $
9 $
1 $
1 $
Interest cost . . . . . . . . . . . . . . . . . . . . . .
Expected return on plan assets. . . . . . .
Curtailment gain. . . . . . . . . . . . . . . . . . .
Amortization of actuarial loss . . . . . . . .
Amortization of prior service credit . . .
Pension settlement charge . . . . . . . . . .
8
(13)
—
—
—
—
1
(1)
—
—
—
—
1
(1)
1
—
—
79
2
—
—
—
(2)
—
2
—
—
—
(1)
—
Net periodic benefit cost . . . . . . . . . . . . $
4 $
10 $
89 $
1 $
2 $
1
3
—
—
—
—
—
4
Other changes in plan assets and benefit obligations recognized in other comprehensive income for the years ended December 31
were as follows:
Pension Plans
Postretirement Plan
2017
2016
2015
2017
2016
2015
Curtailment gain . . . . . . . . . . . . . . . . . . . $
Current year actuarial (gain) loss. . . . . .
Current year prior service credit . . . . . .
Amortization of prior service credit . . .
Pension settlement charge . . . . . . . . . .
Total recognized in other
comprehensive income (loss) . . . . . . . . $
— $
(22)
—
—
—
(in millions)
— $
(1) $
— $
— $
1
—
—
—
—
—
—
(79)
5
—
2
—
—
—
1
—
(22) $
1 $
(80) $
7 $
1 $
Total recognized in net periodic
benefit cost and other comprehensive
income (loss) . . . . . . . . . . . . . . . . . . . . . .
$
(18) $
11 $
9 $
8 $
3 $
—
8
11
—
—
19
23
The estimated amounts that are expected to be amortized from accumulated other comprehensive income into net periodic
benefit cost in 2018 are as follows:
Prior service credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Pension Plans
Postretirement
Plan
(in millions)
— $
(1)
82
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Assumptions
Weighted-average assumptions used to determine net periodic benefit cost were as follows for the years ended December 31:
Discount rate
Non-U.S. Plans . . . . . . . . . . . . . . . . . .
Vocalink Plan . . . . . . . . . . . . . . . . . . .
Postretirement Plan . . . . . . . . . . . . .
Expected return on plan assets
Non-U.S. Plans . . . . . . . . . . . . . . . . . .
Vocalink Plan . . . . . . . . . . . . . . . . . . .
Postretirement Plan . . . . . . . . . . . . .
Rate of compensation increase
Non-U.S. Plans . . . . . . . . . . . . . . . . . .
Vocalink Plan . . . . . . . . . . . . . . . . . . .
Postretirement Plan . . . . . . . . . . . . .
* Not applicable
Pension Plans
Postretirement Plan
2017
2016
2015
2017
2016
2015
1.60%
2.50%
*
3.25%
4.75%
*
2.59%
3.95%
*
1.85%
2.00%
*
*
*
*
*
*
*
*
*
*
4.00%
4.25%
4.00%
3.25%
3.25%
*
*
*
*
2.64%
2.92%
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
*
3.00%
3.00%
3.00%
The Company’s discount rate assumptions are based on yield curves derived from high quality corporate bonds, which are matched
to the expected cash flows to each of the respective Plans.
The expected return on plan assets assumptions are derived using the current and expected asset allocations of the Pension Plan
assets and considering historical as well as expected returns on various classes of plan assets.
The assumed health care cost trend rates at December 31 for the Postretirement Plan were as follows:
Health care cost trend rate assumed for next year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ultimate trend rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Year that the rate reaches the ultimate trend rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017
2016
6.50%
5.00%
3
7.00%
5.00%
4
The assumed health care cost trend rates have a significant effect on the amounts reported for the Postretirement Plan. A one-
percentage point change in assumed health care cost trend rates for 2017 would have a $5 million increase and $4 million decrease
effect with a one-percentage point increase and decrease, respectively, in the benefit obligation. The effect on total service and
interest cost components would be less than $1 million.
Assets
Plan assets are managed with a long-term perspective intended to ensure that there is an adequate level of assets to support
benefit payments to participants over the life of the Pension Plans. The Vocalink Plan assets are managed within the following
target asset allocations: non-government fixed income 37%, government securities (including U.K. governmental bonds) 28%,
investment funds 25% and other 10%. The investment funds are currently comprised of approximately 40% derivatives, 30%
equity, 15% fixed income and 15% other. For the non-U.S. Plans the assets are concentrated 100% in Insurance Contracts.
The Valuation Hierarchy of the Pension Plans’ assets is determined using a consistent application of the categorization
measurements for the Company’s financial instruments. See Note 1 (Summary of Significant Accounting Policies) for additional
information.
Cash and cash equivalents and other public investment vehicles (including certain mutual funds and government and agency
securities) are valued at quoted market prices, which represent the net asset value of the shares held by the Vocalink Plan, and
are therefore included in Level 1 of the Valuation Hierarchy. Certain other mutual funds (including commingled funds),
83
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
governmental and agency securities and insurance contracts are valued at unit values provided by investment managers, which
are based on the fair value of the underlying investments utilizing public information, independent external valuation from third-
party services or third-party advisors, and are therefore included in Level 2 of the Valuation Hierarchy. Asset-backed securities
are classified as Level 3 due to a lack of observable inputs in measuring fair value. A separate roll-forward of Level 3 plan assets
measured at fair value is not presented as activities during 2017 and 2016 were immaterial.
The following tables set forth by level, within the Valuation Hierarchy, the Pension Plans’ assets at fair value as of December 31,
2017 and 2016:
December 31, 2017
Quoted Prices in
Active Markets
(Level 1)
Significant Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Fair Value
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . $
21 $
Government and agency securities . . . . . . . . . . . . . . . . . . .
Mutual funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Insurance contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Asset-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21
146
—
—
2
(in millions)
— $
— $
95
28
45
—
16
—
—
—
31
22
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
190 $
184 $
53 $
21
116
174
45
31
40
427
December 31, 2016
Quoted Prices in
Active Markets
(Level 1)
Significant Other
Observable
Inputs (Level 2)
Significant
Unobservable
Inputs (Level 3)
Fair Value
Insurance contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
— $
— $
(in millions)
33 $
33 $
— $
— $
33
33
The following table summarizes expected benefit payments through 2026 for the Pension Plans and the Postretirement Plans,
including those payments expected to be paid from the Company’s general assets. Since the majority of the benefit payments
for the Pension Plans are made in the form of lump-sum distributions, actual benefit payments may differ from expected benefit
payments.
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023- 2026 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pension Plans
Postretirement Plan
(in millions)
11 $
15
10
10
11
45
3
3
3
4
4
14
84
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 12. Debt
Long-term debt consisted of the following at December 31:
Notes
Issuance
Date
Interest Payment
Terms
Maturity
Date
Aggregate
Principal
Amount
Stated
Interest
Rate
Effective
Interest
Rate
2017
2016
(in millions, except percentages)
2016 USD Notes .
November 2016
Semi-annually
2015 Euro Notes .
December 2015
Annually
2014 USD Notes .
March 2014
Semi-annually
2021
2026
2046
2022
2027
2030
2019
2024
$
$
€
€
$
$
650
750
600
2,000
700
800
150
1,650
500
1,000
1,500
2.236% $
650 $
2.000%
2.950%
3.800%
3.044%
3.893%
750
600
839
958
180
650
750
600
738
843
158
1.100%
2.100%
2.500%
1.265%
2.189%
2.562%
2.000%
3.375%
2.178%
3.484%
500
1,000
500
1,000
Less: Unamortized discount and debt issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,477
(53)
5,239
(59)
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
5,424 $
5,180
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 (collectively the “Notes”), were $1.969 billion, $1.723
billion and $1.484 billion, respectively.
The Company is not subject to any financial covenants under the Notes. The Notes may be redeemed in whole, or in part, at the
Company’s option at any time for a specified make-whole amount. The Notes are senior unsecured obligations and would rank
equally with any future unsecured and unsubordinated indebtedness. The proceeds of the Notes are to be used for general
corporate purposes.
Scheduled annual maturities of the principal portion of long-term debt outstanding at December 31, 2017 are summarized below.
Amounts exclude capital lease obligations disclosed in Note 16 (Commitments).
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(in millions)
—
500
—
650
839
3,488
5,477
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.
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
85
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
are based upon the Company’s credit rating. At December 31, 2017, 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”). Mastercard was in compliance in all material respects with the covenants of the Credit Facility at
December 31, 2017 and 2016. The majority of Credit Facility lenders are customers or affiliates of customers of Mastercard.
Borrowings under the Commercial Paper Program and the Credit Facility are used to provide liquidity for general corporate
purposes, including providing liquidity in the event of one or more settlement failures by the Company’s customers. The Company
may borrow and repay amounts under the Commercial Paper Program and Credit Facility from time to time. Mastercard had no
borrowings under the Credit Facility and the Commercial Paper Program at December 31, 2017 and 2016.
In June 2015, the Company filed a universal shelf registration statement 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, preferred stock, Class A
common stock, depository shares, purchase contracts, units or warrants in one or more offerings.
Note 13. Stockholders’ Equity
Classes of Capital Stock
Mastercard’s amended and restated certificate of incorporation authorizes the following classes of capital stock:
Class
A
B
Par Value Per
Share
$0.0001
$0.0001
Preferred
$0.0001
Authorized Shares
(in millions)
Dividend and Voting Rights
3,000
1,200
300
One vote per share
Dividend rights
Non-voting
Dividend rights
No shares issued or outstanding at December 31, 2017 and
2016, respectively. Dividend and voting rights are to be
determined by the Board of Directors of the Company upon
issuance.
Ownership and Governance Structure
Equity ownership and voting power of the Company’s shares were allocated as follows as of December 31:
2017
2016
Equity Ownership
General Voting
Power
Equity Ownership
General Voting
Power
Public Investors (Class A stockholders) . . . . . . . . . . . . . .
Principal or Affiliate Customers (Class B stockholders) .
Mastercard Foundation (Class A stockholders). . . . . . . .
88.0%
1.4%
10.6%
89.2%
—%
10.8%
87.7%
1.8%
10.5%
89.3%
—%
10.7%
Class B Common Stock Conversions
Shares of Class B common stock are convertible on a one-for-one basis into shares of Class A common stock. Entities eligible to
hold Mastercard’s Class B common stock are defined in the Company’s amended and restated certificate of incorporation
(generally the Company’s principal or affiliate customers), and they are restricted from retaining ownership of shares of Class A
common stock. Class B stockholders are required to subsequently sell or otherwise transfer any shares of Class A common stock
received pursuant to such a conversion.
86
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Mastercard Foundation
In connection and simultaneously with its 2006 initial public offering (the “IPO”), the Company issued and donated 135 million
newly authorized shares of Class A common stock to Mastercard Foundation. Mastercard Foundation is a private charitable
foundation incorporated in Canada that is controlled by directors who are independent of the Company and its principal customers.
Under the terms of the donation, Mastercard Foundation became able to resell the donated shares in May 2010 to the extent
necessary to meet charitable disbursement requirements dictated by Canadian tax law. Under Canadian tax law, Mastercard
Foundation is generally required to disburse at least 3.5% of its assets not used in administration each year for qualified charitable
disbursements. However, Mastercard Foundation obtained permission from the Canadian tax authorities to defer the giving
requirements until 2021. Mastercard Foundation, at its discretion, may decide to meet its disbursement obligations on an annual
basis or to settle previously accumulated obligations during any given year. Mastercard Foundation will be permitted to sell all
of its remaining shares beginning May 1, 2027.
Stock Repurchase Programs
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
December 31, 2017, as well as historical purchases:
Board authorization dates
December
2017
December
2016
December
2015
December
2014
December
2013
Date program became effective
N/A 1
April 2017
February
2016
January
2015
January
2014
Total
(in millions, except average price data)
Board authorization . . . . . . . . . . . . . . . . . . . . . . . . $
4,000 $
4,000 $
4,000 $
3,750 $
3,500 $ 19,250
Dollar-value of shares repurchased in 2015 . . . . . $
Remaining authorization at December 31, 2015 . $
Dollar-value of shares repurchased in 2016 . . . . . $
Remaining authorization at December 31, 2016 . $
Dollar-value of shares repurchased in 2017 . . . . . $
— $
— $
— $
— $
— $
— $
— $
— $
4,000 $
2,766 $
Remaining authorization at December 31, 2017 . $
4,000 $
1,234 $
— $
3,243 $
275 $
4,000 $
3,004 $
996 $
996 $
— $
507 $
507 $
— $
— $
— $
— $
— $
— $
— $
— $
3,518
4,507
3,511
4,996
3,762
5,234
Shares repurchased in 2015. . . . . . . . . . . . . . . . . .
Average price paid per share in 2015 . . . . . . . . . . $
Shares repurchased in 2016. . . . . . . . . . . . . . . . . .
Average price paid per share in 2016 . . . . . . . . . . $
Shares repurchased in 2017. . . . . . . . . . . . . . . . . .
—
— $
—
— $
—
—
— $
—
—
35.1
3.2
38.3
— $
92.39 $
84.31 $
91.70
31.2
5.7
—
36.9
— $
96.15 $
89.76 $
— $
95.18
21.0
9.1
—
— $
—
30.1
— $ 125.05
Average price paid per share in 2017 . . . . . . . . . . $
— $ 131.97 $ 109.16 $
Cumulative shares repurchased through
December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . .
—
21.0
40.4
40.8
45.8
Cumulative average price paid per share . . . . . . . $
— $ 131.97 $
99.10 $
92.03 $
76.42 $
148.0
94.78
1 The December share repurchase program will become effective after completion of the December 2016 share repurchase program.
87
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table presents the changes in the Company’s outstanding Class A and Class B common stock for the years ended
December 31:
Outstanding Shares
Class A
Class B
(in millions)
Balance at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,115.4
Purchases of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Conversion of Class B to Class A common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Conversion of Class B to Class A common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Conversion of Class B to Class A common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(38.3)
2.0
15.9
1,095.0
(36.9)
2.3
2.0
1,062.4
(30.1)
2.2
5.2
Balance at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,039.7
37.2
—
—
(15.9)
21.3
—
—
(2.0)
19.3
—
—
(5.2)
14.1
Note 14. Accumulated Other Comprehensive Income (Loss)
The changes in the balances of each component of accumulated other comprehensive income (loss), net of tax, for the years
ended December 31, 2017 and 2016 were as follows:
Foreign Currency
Translation
Adjustments1
Translation
Adjustments on
Net Investment
Hedge
Defined Benefit
Pension and
Other
Postretirement
Plans2
(in millions)
Investment
Securities
Available-for-
Sale3
Accumulated
Other
Comprehensive
Income (Loss)
Balance at December 31, 2015 . . . . . . . . . . . $
(663) $
(26) $
13 $
— $
Other comprehensive income (loss). . . . . . .
Balance at December 31, 2016 . . . . . . . . . . .
Other comprehensive income (loss). . . . . . .
(286)
(949)
567
Balance at December 31, 2017 . . . . . . . . . . . $
(382) $
38
12
(153)
(141) $
(2)
11
14
2
2
(1)
25 $
1 $
(676)
(248)
(924)
427
(497)
1 During 2016, the increase in other comprehensive loss related to foreign currency translation adjustments was driven primarily by the devaluation of
the British pound and euro. During 2017, the decrease in other comprehensive loss related to foreign currency translation adjustments was driven
primarily by the appreciation of the euro.
2 During 2016, deferred gains related to the Company’s postretirement plans, reclassified from accumulated other comprehensive income (loss) to
earnings, were $1 million before and after tax. During 2017, the decrease in other comprehensive loss related to the Company’s postretirement plan
was driven by a tax deferred gain primarily related to a defined benefit pension plan, acquired as part of Vocalink. See Note 11 (Pension, Postretirement
and Savings Plans) for additional information. In addition, deferred gains related to the Company’s postretirement plans, reclassified from accumulated
other comprehensive income (loss) to earnings, were $2 million before tax and $1 million after tax.
3 During 2016 and 2017, gains and losses on available-for-sale investment securities, reclassified from accumulated other comprehensive income (loss)
to investment income, were not significant.
Note 15. Share-Based Payments
In May 2006, the Company implemented the Mastercard Incorporated 2006 Long Term Incentive Plan, which was 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.
88
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company has granted Options, RSUs and PSUs under the LTIP. The Options, which expire ten years from the date of grant,
generally vest ratably over four years from the date of grant. The RSUs and PSUs generally vest after three years. The Company
uses the straight-line method of attribution for expensing equity awards. Compensation expense is recorded net of estimated
forfeitures. Estimates are adjusted as appropriate.
For all awards granted prior to March 2017, a participant’s unvested awards are forfeited upon termination of employment. For
all awards granted on or after March 1, 2017, in the event of termination due to job elimination (as defined by the Company), a
participant will retain a pro-rata portion of the unvested awards for services performed through the date of termination. In the
event a participant terminates employment due to disability or retirement more than six months (seven months for those granted
on or after March 1, 2017) after receiving the award, the participant retains all of their awards without providing additional
service to the Company. Retirement eligibility is dependent upon age and years of service. Compensation expense is recognized
over the shorter of the vesting periods stated in the LTIP or the date the individual becomes eligible to retire but not less than
six months (or seven months for grants awarded on or after March 1, 2017).
There are approximately 116 million shares of Class A common stock authorized for equity awards under the LTIP. Although the
LTIP permits the issuance of shares of Class B common stock, no such shares have been authorized for issuance. Shares issued
as a result of Option exercises and the conversions of RSUs and PSUs were funded primarily with the issuance of new shares of
Class A common stock.
Stock Options
The fair value of each Option is estimated on the date of grant using a Black-Scholes option pricing model. The following table
presents the weighted-average assumptions used in the valuation and the resulting weighted-average fair value per option granted
for the years ended December 31:
Risk-free rate of return . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected term (in years) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2.0%
5.00
19.3%
0.8%
1.3%
5.00
23.3%
0.8%
1.5%
5.00
20.6%
0.7%
Weighted-average fair value per Option granted . . . . . . . . . . . . . . . . . . $
21.23
$
18.58
$
17.29
2017
2016
2015
The risk-free rate of return was based on the U.S. Treasury yield curve in effect on the date of grant. The expected term and the
expected volatility were based on historical Mastercard information. The expected dividend yields were based on the Company’s
expected annual dividend rate on the date of grant.
The following table summarizes the Company’s option activity for the year ended December 31, 2017:
Options
(in millions)
Weighted-Average
Exercise Price
Weighted-Average
Remaining
Contractual Term
Aggregate Intrinsic
Value
(in years)
(in millions)
Outstanding at January 1, 2017 . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited/expired . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2017. . . . . . . . . . . . .
Exercisable at December 31, 2017. . . . . . . . . . . . . .
Options vested and expected to vest at
December 31, 2017. . . . . . . . . . . . . . . . . . . . . . . . . .
8.3
1.7
(1.3)
(0.1)
8.6
4.6
8.5
$
$
$
$
$
$
$
65
112
43
98
77
59
77
6.6
5.2
6.6
$
$
$
639
424
634
As of December 31, 2017, there was $32 million of total unrecognized compensation cost related to non-vested Options. The
cost is expected to be recognized over a weighted-average period of 2.2 years.
89
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Restricted Stock Units
The following table summarizes the Company’s RSU activity for the year ended December 31, 2017:
Outstanding at January 1, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Converted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . .
RSUs vested and expected to vest at December 31, 2017. . . . . .
Units
(in millions)
Weighted-Average
Grant-Date Fair Value
Aggregate Intrinsic
Value
(in millions)
4.1
1.4
(1.2)
(0.2)
4.1
4.0
$
$
$
$
$
$
86
112
76
95
97
97
$
$
623
599
The fair value of each RSU is the closing stock price on the New York Stock Exchange of the Company’s Class A common stock on
the date of grant, adjusted for the exclusion of dividend equivalents. Upon vesting, a portion of the RSU award may be withheld
to satisfy the minimum statutory withholding taxes. The remaining RSUs will be settled in shares of the Company’s Class A
common stock after the vesting period. As of December 31, 2017, there was $156 million of total unrecognized compensation
cost related to non-vested RSUs. The cost is expected to be recognized over a weighted-average period of 1.8 years.
Performance Stock Units
The following table summarizes the Company’s PSU activity for the year ended December 31, 2017:
Units
(in millions)
Weighted-Average
Grant-Date Fair Value
Aggregate Intrinsic
Value
(in millions)
Outstanding at January 1, 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Converted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31, 2017 . . . . . . . . . . . . . . . . . . . . . . . .
PSUs vested and expected to vest at December 31, 2017. . . . . .
0.4
0.2
(0.1)
0.5
0.5
$
$
$
$
$
90
126
78
105
105
$
$
74
72
Since 2013, PSUs containing performance and market conditions have been issued. Performance measures used to determine
the actual number of shares that vest after three years include net revenue growth, EPS growth, and relative total shareholder
return (“TSR”). Relative TSR is considered a market condition, while net revenue and EPS growth are considered performance
conditions. The Monte Carlo simulation valuation model is used to determine the grant-date fair value.
Compensation expenses for PSUs are recognized over the requisite service period if it is probable that the performance target
will be achieved and subsequently adjusted if the probability assessment changes. As of December 31, 2017, there was $13
million of total unrecognized compensation cost related to non-vested PSUs. The cost is expected to be recognized over a
weighted-average period of 1.6 years.
90
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Additional Information
The following table includes additional share-based payment information for each of the years ended December 31:
Share-based compensation expense: Options, RSUs and PSUs . . . . . . . $
176
$
148
$
2017
2016
2015
(in millions, except weighted-average fair value)
Income tax benefit recognized for equity awards. . . . . . . . . . . . . . . . . .
Income tax benefit realized related to Options exercised . . . . . . . . . . .
Options:
Total intrinsic value of Options exercised . . . . . . . . . . . . . . . . . . . . . . . .
RSUs:
Weighted-average grant-date fair value of awards granted. . . . . . . . . .
Total intrinsic value of RSUs converted into shares of Class A
common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
PSUs:
Weighted-average grant-date fair value of awards granted. . . . . . . . . .
Total intrinsic value of PSUs converted into shares of Class A
common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 16. Commitments
57
36
106
112
131
126
13
49
31
86
91
122
92
25
122
41
19
57
88
135
99
24
At December 31, 2017, the Company had the following future minimum payments due under non-cancelable agreements:
Total
Capital
Leases
Operating
Leases
Sponsorship,
Licensing &
Other
2018. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2019. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
456 $
265
196
98
38
35
1,088 $
(in millions)
4 $
4
4
—
—
—
12 $
64 $
36
41
20
6
34
201 $
388
225
151
78
32
1
875
Included in the table above are capital leases with a net present value of minimum lease payments of $11 million. In addition,
at December 31, 2017, $20 million of the future minimum payments in the table above for sponsorship, licensing and other
agreements was accrued. Consolidated rental expense for the Company’s leased office space was $77 million, $62 million and
$52 million for 2017, 2016 and 2015, respectively. Consolidated lease expense for automobiles, computer equipment and office
equipment was $22 million, $19 million and $17 million for 2017, 2016 and 2015, respectively.
Note 17. Income Taxes
On December 22, 2017, in the U.S., the TCJA was enacted into law. The TCJA represents significant changes to the U.S. internal
revenue code and, among other things:
•
•
•
•
lowers the corporate income tax rate from 35% to 21%
imposes a one-time deemed repatriation tax on accumulated foreign earnings (the “Transition Tax”)
provides for a 100% dividends received deduction on dividends from foreign affiliates
requires a current inclusion in U.S. federal taxable income of earnings of foreign affiliates that are determined to be
global intangible low taxed income or “GILTI”
•
creates the base erosion anti-abuse tax, or “BEAT”
91
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
provides for an effective tax rate of 13.125% for certain income derived from outside of the U.S. (referred to as foreign
derived intangible income or “FDII”)
introduces further limitations on the deductibility of executive compensation
permits 100% expensing of qualifying fixed assets acquired after September 27, 2017
limits the deductibility of interest expense in certain situations
eliminates the domestic production activities deduction
•
•
•
•
•
While the effective date of the law for most provisions is January 1, 2018, GAAP requires the resulting tax effects be accounted
for in the reporting period of enactment. This includes 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. The impact of the TCJA is discussed further below. Also, on December 22, 2017, SEC staff issued Staff Accounting
Bulletin No. 118 - Income Tax Accounting Implications of the Tax Cuts and Jobs Act (“SAB 118”) which will allow registrants to
record provisional amounts during a measurement period, which is not to extend beyond one year. Accordingly, amounts reflected
below may require further adjustments 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 Treasury, as well as interpretations of how accounting for income taxes should be applied to the TCJA.
The domestic and foreign components of income before income taxes for the years ended December 31 are as follows:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3,482 $
3,040
6,522 $
3,736 $
1,910
5,646 $
3,399
1,559
4,958
The total income tax provision for the years ended December 31 is comprised of the following components:
2017
2016
(in millions)
2015
Current
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
State and local. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and local. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2017
2016
(in millions)
2015
1,704 $
65
752
2,521
134
1
(49)
86
2,607 $
1,074 $
36
497
1,607
(6)
(2)
(12)
(20)
1,587 $
677
45
444
1,166
4
(3)
(17)
(16)
1,150
As of December 31, 2017, a provisional amount of U.S. federal and state and local income taxes of $36 million has been provided
on a substantial amount of the Company’s undistributed foreign earnings. This deferred tax charge has been established primarily
on the estimated foreign exchange gain which will be recognized when such earnings are repatriated. The Company expects that
foreign withholding taxes associated with these future repatriated earnings will not be material. Based upon the ongoing review
of business requirements and capital needs of the Company’s non-U.S. subsidiaries, the Company believes a portion of these
undistributed earnings that have already been subject to tax in the U.S. will be necessary to fund current and future growth of
the related businesses and will remain indefinitely reinvested outside of the U.S. In 2018, the Company will complete its analysis
of global working capital and cash needs to determine the amount it considers indefinitely reinvested. It will disclose such amount
in the period in which such analysis is completed, as well as, if practicable, any potential tax cost that would arise if the amounts
were remitted back to the U.S.
92
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The provision for income taxes differs from the amount of income tax determined by applying the U.S. federal statutory income
tax rate of 35% to pretax income for the years ended December 31, as a result of the following:
2017
2016
2015
Amount
Percent
Amount
Percent
Amount
Percent
Income before income taxes . . . . . . . . . . . . . . . . $
6,522
(in millions, except percentages)
$
5,646
$
Federal statutory tax . . . . . . . . . . . . . . . . . . . . . . .
State tax effect, net of federal benefit. . . . . . . . .
Foreign earnings . . . . . . . . . . . . . . . . . . . . . . . . . .
Impact of foreign tax credits 1 . . . . . . . . . . . . . . .
Impact of settlements with tax authorities. . . . .
Transition Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Remeasurement of U.S. deferred taxes. . . . . . . .
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . $
2,283
43
(380)
(27)
—
629
157
(98)
2,607
35.0 %
0.7 %
(5.8)%
(0.4)%
— %
9.6 %
2.4 %
(1.5)%
40.0 % $
1,976
22
(188)
(141)
—
—
—
(82)
1,587
35.0 %
0.4 %
(3.3)%
(2.5)%
— %
— %
— %
(1.5)%
28.1 % $
4,958
1,735
27
(144)
(281)
(147)
—
—
(40)
1,150
35.0 %
0.5 %
(2.9)%
(5.7)%
(2.9)%
— %
— %
(0.8)%
23.2 %
1 Included within the impact of foreign tax credits are repatriation benefits of current year foreign earnings of $0 million, $116 million and $172 million,
in addition to other foreign tax credit benefits which become eligible in the United States of $27 million, $25 million and $109 million for 2017, 2016
and 2015, respectively.
Effective Income Tax Rate
The effective income tax rates for the years ended December 31, 2017, 2016 and 2015 were 40.0%, 28.1% and 23.2%, respectively.
The effective income tax rate for 2017 was higher than the effective income tax rate for 2016 primarily due to additional tax
expense of $873 million attributable to the TCJA, which includes provisional amounts of $825 million related to the Transition
Tax, the remeasurement of the Company’s net deferred tax asset balance in the U.S. and the recognition of a deferred tax liability
related to a change in assertion regarding the indefinite reinvestment of a substantial amount of the Company’s foreign earnings,
as well as $48 million due to a foregone foreign tax credit benefit on current year repatriations. In addition, the Company’s
effective income tax rate versus the prior year was impacted by a more favorable geographic mix of taxable earnings in 2017,
partially offset by a lower U.S. foreign tax credit benefit.
There are provisional current and noncurrent components of the Company’s liability for the Transition Tax. The Transition Tax
will be paid over 8 annual installments commencing April 15, 2018. Approximately $52 million and $577 million of the total
amount due is recorded in other current liabilities and other liabilities, respectively, on the consolidated balance sheet at
December 31, 2017. Under the TCJA, for purposes of IRS examination of the Transition Tax, the statute of limitations is extended
to six years.
Consistent with SAB 118, the Company was able to make reasonable estimates and has incorporated provisional amounts for
the impact of the Transition Tax. This tax is on previously untaxed accumulated and current earnings and profits of the Company’s
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 was able to make reasonable
estimates and has recorded provisional amounts of $629 million related to the Transition Tax, $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. However, these amounts may require further adjustments during the
measurement period due to evolving analysis and interpretations of law, including issuance by the IRS and Treasury of Notices
and regulations, and, potentially, direct discussions with Treasury, as well as interpretations of how accounting for income taxes
should be applied.
The effective income tax rate for 2016 was higher than the effective income tax rate for 2015 primarily due to benefits associated
with the impact of settlements with tax authorities in multiple jurisdictions in 2015, the lapping of a discrete benefit relating to
certain foreign taxes that became eligible to be claimed as credits in the United States in 2015, and a higher U.S. foreign tax credit
benefit associated with the repatriation of current year foreign earnings in 2015. These items were partially offset by a more
favorable geographic mix of taxable earnings in 2016.
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
93
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
to a related foreign entity in the United Kingdom. Management believes this improved alignment has resulted in greater flexibility
and efficiency with regard to the global deployment of cash, as well as ongoing benefits in the Company’s effective income tax
rate. The Company recorded a deferred charge related to the income tax expense on intercompany profits that resulted from
the transfer. The tax associated with the transfer is deferred and amortized utilizing a 25-year life. This deferred charge is included
in 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. The comparable amounts included in other current assets and other assets were $15 million and
$325 million, respectively, at December 31, 2016, with the difference driven by changes in foreign exchange rates and current
period amortization.
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. 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 will adopt this
accounting guidance on January 1, 2018. The aforementioned deferred charge of $369 million at December 31, 2017, will be
written off to retained earnings as a component of the cumulative-effect adjustment. In addition, deferred taxes will also be a
component of the cumulative-effect adjustment whereby the Company expects to record a $186 million deferred tax asset in
this regard. See Note 1 (Summary of Significant Accounting Policies) for additional information related to this guidance.
In 2010, in connection with the expansion of the Company’s operations in the Asia Pacific, Middle East and Africa region, the
Company’s subsidiary in Singapore, Mastercard Asia Pacific Pte. Ltd. (“MAPPL”) received an incentive grant from the Singapore
Ministry of Finance. The incentive had provided MAPPL with, among other benefits, a reduced income tax rate for the 10-year
period commencing January 1, 2010 on taxable income in excess of a base amount. The Company continued to explore business
opportunities in this region, resulting in an expansion of the incentives being granted by the Ministry of Finance, including a
further reduction to the income tax rate on taxable income in excess of a revised fixed base amount commencing July 1, 2011
and continuing through December 31, 2025. Without the incentive grant, MAPPL would have been subject to the statutory
income tax rate on its earnings. For 2017, 2016 and 2015, the impact of the incentive grant received from the Ministry of Finance
resulted in a reduction of MAPPL’s income tax liability of $104 million, or $0.10 per diluted share, $49 million, or $0.04 per diluted
share, and $47 million, or $0.04 per diluted share, respectively.
94
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Deferred Taxes
Deferred tax assets and liabilities represent the expected future tax consequences of temporary differences between the carrying
amounts and the tax basis of assets and liabilities. The components of deferred tax assets and liabilities at December 31 are as
follows:
2017
2016
(in millions)
Deferred Tax Assets
Accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Compensation and benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State taxes and other credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating and capital losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain/loss - 2015 Euro Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoverable basis of deconsolidated entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Valuation allowance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Deferred Tax Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred Tax Liabilities
Prepaid expenses and other accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property, plant and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized gain/loss - 2015 Euro Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Previously taxed earnings and profits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Deferred Tax Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
158 $
127
28
105
48
35
83
(91)
493
48
151
83
—
36
31
349
Net Deferred Tax Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
144 $
174
273
41
81
—
—
79
(91)
557
46
105
155
7
—
18
331
226
As a result of the TCJA, the December 31, 2017 deferred tax balance has been reduced by $157 million during 2017 through the
provisional remeasurement of the U.S. deferred tax assets and liabilities.
Both the 2017 and 2016 valuation allowances relate primarily to the Company’s ability to recognize tax benefits associated with
certain foreign net operating losses. The net activity related to the valuation allowance balance at December 31, 2017 from the
December 31, 2016 balance is attributable to an increase from additional foreign losses offset by a reduction, due to
remeasurement of the deferred tax attribute, for capital loss and capital asset impairments in the United States. The recognition
of the foreign losses is dependent upon the future taxable income in such jurisdictions and the ability under tax law in these
jurisdictions to utilize net operating losses following a change in control. The recognition of losses with regard to capital loss and
impairments is dependent upon the recognition of future capital gains in the United States.
A reconciliation of the beginning and ending balance for the Company’s unrecognized tax benefits for the years ended
December 31, is as follows:
Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Additions:
Current year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prior year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions:
Prior year tax positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlements with tax authorities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expired statute of limitations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2017
2016
(in millions)
2015
169 $
181 $
21
9
(1)
(4)
(11)
183 $
20
13
(28)
(2)
(15)
169 $
364
20
10
(151)
(53)
(9)
181
95
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The entire unrecognized tax benefit of $183 million, if recognized, would reduce the effective tax rate. During 2015, there was
a reduction to the balance of the Company’s unrecognized tax benefits. This was primarily due to settlements with tax authorities
in multiple jurisdictions. Further, the information gained related to these matters was considered in measuring uncertain tax
benefits recognized for the periods subsequent to the periods settled.
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.
It is the Company’s policy to account for interest expense related to income tax matters as interest expense in its consolidated
statement of operations, and to include penalties related to income tax matters in the income tax provision. The Company
recorded tax-related interest expense of $1 million in 2017 and tax-related interest income of $4 million and $3 million in 2016
and 2015, respectively, in its consolidated statement of operations. At December 31, 2017 and 2016, the Company had a net
income tax-related interest payable of $10 million and $9 million, respectively, in its consolidated balance sheet. At December
31, 2017 and 2016, the amounts the Company had recognized for penalties payable in its consolidated balance sheet were not
material.
Other Impacts of the TCJA
As mentioned above, the TCJA imposes significant changes to U.S. tax law. The Company expects to pay a marginal amount of
GILTI. However, in accordance with FASB guidance, the Company’s policy will be to recognize GILTI in the period it arises and it
will not recognize a deferred charge with regard to GILTI. The Company does not expect to be subject to the BEAT. The Company
expects to recognize income in the U.S. that will qualify as FDII and be taxed at the lower 13.125% effective tax rate. The Company
will be eligible to expense qualifying fixed assets acquired after September 27, 2017, will be impacted by the additional limitations
imposed on the deductibility of executive compensation, and does not expect to be impacted by the limitations placed on the
deductibility of interest expense. Finally, the Company will lose its domestic production activities deduction.
Note 18. Legal and Regulatory Proceedings
Mastercard is a party to legal and regulatory proceedings with respect to a variety of matters in the ordinary course of business.
Some of these proceedings 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.
96
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Interchange Litigation and Regulatory Proceedings
Mastercard’s interchange fees and other practices are subject to regulatory and/or legal review and/or challenges in a number
of jurisdictions, including the proceedings described below. When taken as a whole, the resulting decisions, regulations and
legislation with respect to interchange fees and acceptance practices may have a material adverse effect on the Company’s
prospects for future growth and its overall results of operations, financial position and cash flows.
United States. In June 2005, the first of a series of complaints were filed on behalf of merchants (the majority of the complaints
were styled as class actions, although a few complaints were filed on behalf of individual merchant plaintiffs) against Mastercard
International, Visa U.S.A., Inc., Visa International Service Association and a number of financial institutions. Taken together, the
claims in the complaints were generally brought under both Sections 1 and 2 of the Sherman Act, which prohibit monopolization
and attempts or conspiracies to monopolize a particular industry, and some of these complaints contain unfair competition law
claims under state law. The complaints allege, among other things, that Mastercard, Visa, and certain financial institutions
conspired to set the price of interchange fees, enacted point of sale acceptance rules (including the no surcharge rule) in violation
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.
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 two state court actions) 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. Deposition discovery commenced
in December 2016 and the parties in the class action are in mediation.
As of December 31, 2017, Mastercard had accrued a liability of $708 million as a reserve for both the merchant class litigation
and the filed and anticipated opt-out merchant cases. As of December 31, 2017 and 2016, Mastercard had $546 million and
$543 million, respectively, in a qualified cash settlement fund related to the merchant class litigation and classified as restricted
97
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 December 31, 2017. 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 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 in the first half 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. 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. In June 2015, Mastercard entered into a settlement with one
of the U.K. Merchant claimants for $61 million, recorded as a provision for litigation settlement. Following the conclusion of a
trial for liability and damages for one of the U.K. merchant cases, in July 2016, the tribunal issued a judgment against Mastercard
for damages. Mastercard recorded a litigation provision of $107 million in the second quarter of 2016 that includes the amount
of the judgment and estimated legal fees and costs. Mastercard has been granted permission to appeal this judgment. In the
fourth quarter of 2016, Mastercard recorded a charge of $10 million relating to settlements with multiple 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 six of these claimants to resolve their claims, with no financial payments required by Mastercard. Three of the U.K.
Merchant claimants are appealing the judgment.
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 $19 billion as of December 31, 2017). 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.
98
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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.
Note 19. 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
99
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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:
December 31,
2017
December 31,
2016
Gross settlement exposure1. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Collateral held for settlement exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(in millions)
47,002 $
(4,360)
Net uncollateralized settlement exposure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
42,642 $
39,523
(3,734)
35,789
1. In the second quarter of 2017, Mastercard adjusted the methodology for estimating gross settlement exposure for certain customers whose exposures
are now reported before the impact of potential offsetting positions. The gross settlement exposure as of December 31, 2016 has been updated to
conform to the current year’s methodology.
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 $395 million and $397 million at December 31, 2017 and 2016, respectively, of which $313 million and $312
million at December 31, 2017 and 2016, 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.
Note 20. 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 principal objective of the Company’s risk management strategies is to reduce significant,
unanticipated earnings fluctuations that may arise from volatility in foreign currency exchange rates principally through the use
of derivative instruments.
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.
100
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
As of December 31, 2017 and 2016, 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:
December 31, 2017
December 31, 2016
Notional
Estimated Fair
Value
Notional
Estimated Fair
Value
Commitments to purchase foreign currency . . . . . . . . . . . . $
Commitments to sell foreign currency . . . . . . . . . . . . . . . . .
Options to sell foreign currency. . . . . . . . . . . . . . . . . . . . . . .
Balance sheet location
Accounts receivable 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other current liabilities 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
27 $
968
27
$
(in millions)
— $
(26)
2
6
(30)
37 $
777
—
$
(2)
18
—
29
(13)
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:
Year Ended December 31,
2016
2015
2017
(in millions)
Foreign currency derivative contracts
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(75) $
(6) $
51
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 December 31, 2017 and 2016, 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
foreign currency forward rates could result in a fair value loss of approximately $109 million on the Company’s foreign currency
derivative contracts outstanding at December 31, 2017. 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 foreign operations. As of December 31, 2017, the
Company had a net foreign currency transaction pre-tax loss of $216 million in accumulated other comprehensive income (loss)
associated with hedging activity. There was no ineffectiveness in the current period.
Note 21. Segment Reporting
Mastercard has concluded it has one operating and reportable segment, “Payment Solutions.” Mastercard’s President and Chief
Executive Officer has been identified as the chief operating decision-maker. All of the Company’s activities are interrelated, and
each activity is dependent upon and supportive of the other. Accordingly, all significant operating decisions are based upon
analysis of Mastercard at the consolidated level.
Revenue by geographic market is based on the location of the Company’s customer that issued the card, as well as the location
of the merchant acquirer where the card is being used. Revenue generated in the U.S. was approximately 35% of total revenue
in 2017, 38% in 2016 and 39% in 2015. No individual country, other than the U.S., generated more than 10% of total revenue in
those periods.
101
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Mastercard did not have any one customer that generated greater than 10% of net revenue in 2017, 2016 or 2015. The following
table reflects the geographical location of the Company’s property, plant and equipment, net, as of December 31:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Other countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
572 $
257
829 $
504 $
229
733 $
471
204
675
2017
2016
(in millions)
2015
102
MASTERCARD INCORPORATED
SUMMARY OF QUARTERLY DATA (Unaudited)
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . $
Basic weighted-average shares outstanding . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . $
Diluted weighted-average shares outstanding . . . .
Net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . $
Basic weighted-average shares outstanding . . . . . .
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . $
Diluted weighted-average shares outstanding . . . .
Note: Tables may not sum due to rounding.
March 31
June 30
September 30
December 31
2017 Total
2017 Quarter Ended
2,734 $
1,506
1,081
1.00 $
1,078
(in millions, except per share data)
3,053 $
1,653
1,177
3,398 $
1,941
1,430
1.10 $
1.34 $
1,070
1,063
1.00 $
1.10 $
1.34 $
1,082
1,075
1,068
3,312 $
1,522
227
0.21 $
1,057
0.21 $
1,063
12,497
6,622
3,915
3.67
1,067
3.65
1,072
2016 Quarter Ended
March 31
June 30
September 30
December 31
2016 Total
2,756 $
1,363
933
0.86 $
1,087
0.86 $
1,090
10,776
5,761
4,059
3.70
1,098
3.69
1,101
2,446 $
1,348
959
0.86 $
1,109
(in millions, except per share data)
2,694 $
1,380
983
0.89 $
2,880 $
1,670
1,184
1.08 $
1,098
1,096
0.86 $
0.89 $
1.08 $
1,112
1,101
1,099
103
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended (the “Exchange Act”) are designed to ensure that information required to be disclosed in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules
and forms of the Securities and Exchange Commission and to ensure that information required to be disclosed is accumulated
and communicated to management, including our President and Chief Executive Officer and our Chief Financial Officer, to allow
timely decisions regarding disclosure. The President and Chief Executive Officer and the Chief Financial Officer, with assistance
from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of
December 31, 2017 and, based on their evaluation, have concluded that the disclosure controls and procedures were effective
as of such date.
Internal Control over Financial Reporting
In addition, Mastercard Incorporated’s management assessed the effectiveness of Mastercard’s internal control over financial
reporting as of December 31, 2017. Management’s report on internal control over financial reporting is included in Part II, Item
8. PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the consolidated financial
statements included in this Annual Report on Form 10-K and, as part of their audit, has issued their report, included herein, on
the effectiveness of our internal control over financial reporting.
Changes in Internal Control over Financial Reporting
There was no change in Mastercard’s internal control over financial reporting that occurred during the three months ended
December 31, 2017 that has materially affected, or is reasonably likely to materially affect, Mastercard’s internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, we hereby incorporate by reference
herein the disclosure contained in Exhibit 99.1 of this Report.
104
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item with respect to our directors and executive officers, code of ethics, procedures for
recommending nominees, audit committee, audit committee financial experts and compliance with Section 16(a) of the Exchange
Act will appear in our definitive proxy statement to be filed with the SEC and delivered to stockholders in connection with the
Annual Meeting of Stockholders to be held on June 26, 2018 (the “Proxy Statement”).
The aforementioned information in the Proxy Statement is incorporated by reference into this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item with respect to executive officer and director compensation will appear in the Proxy
Statement and is incorporated by reference into this Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item with respect to security ownership of certain beneficial owners and management equity
and compensation plans will appear in the Proxy Statement and is incorporated by reference into this Report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
The information required by this Item with respect to transactions with related persons, the review, approval or ratification of
such transactions and director independence will appear in the Proxy Statement and is incorporated by reference into this Report.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item with respect to auditors’ services and fees will appear in the Proxy Statement and is
incorporated by reference into this Report.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Report:
PART IV
1 Consolidated Financial Statements
See Index to Consolidated Financial Statements in Part II, Item 8.
2 Consolidated Financial Statement Schedules
None.
3 The following exhibits are filed as part of this Report or, where indicated, were previously filed and are hereby
incorporated by reference:
Refer to the Exhibit Index included herein.
ITEM 16. SUMMARY
None.
105
Exhibit
Number
3.1(a)
3.1(b)
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
EXHIBIT INDEX
Exhibit Description
Amended and Restated Certificate of Incorporation of Mastercard Incorporated (incorporated by
reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed September 29, 2016 (File
No. 001-32877)).
Amended and Restated Bylaws of Mastercard Incorporated (incorporated by reference to Exhibit 3.2
to the Company’s Current Report on Form 8-K filed September 29, 2016 (File No. 001-32877)).
Indenture, dated as of March 31, 2014, between the Company and Deutsche Bank Trust Company
Americas, as trustee (incorporated by reference to Exhibit 4.1 of the Company’s Current Report on
Form 8-K filed on March 31, 2014 (File No. 001-32877)).
Officer’s Certificate of the Company, dated as of March 31, 2014 (incorporated by reference to Exhibit
4.2 of the Company’s Current Report on Form 8-K filed on March 31, 2014 (File No. 001-32877)).
Form of Global Note representing the Company’s 2.000% Notes due 2019 (included in Exhibit 4.2)
(incorporated by reference to Exhibit 4.3 of the Company’s Current Report on Form 8-K filed on March
31, 2014 (File No. 001-32877)).
Form of Global Note representing the Company’s 3.375% Notes due 2024 (included in Exhibit 4.2)
(incorporated by reference to Exhibit 4.4 of the Company’s Current Report on Form 8-K filed on March
31, 2014 (File No. 001-32877)).
Officer’s Certificate of the Company, dated as of December 1, 2015 (incorporated by reference to
Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on December 1, 2015 (File No.
001-32877)).
Form of Global Note representing the Company’s 1.100% Notes due 2022 (included in Exhibit 4.1)
(incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed on
December 1, 2015 (File No. 001-32877)).
Form of Global Note representing the Company’s 2.100% Notes due 2027 (included in Exhibit 4.1)
(incorporated by reference to Exhibit 4.3 of the Company’s Current Report on Form 8-K filed on
December 1, 2015 (File No. 001-32877)).
Form of Global Note representing the Company’s 2.500% Notes due 2030 (included in Exhibit 4.1)
(incorporated by reference to Exhibit 4.4 of the Company’s Current Report on Form 8-K filed on
December 1, 2015 (File No. 001-32877)).
Officer’s Certificate of the Company, dated as of November 21, 2016 (incorporated by reference to
Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on November 21, 2016 (File No.
001-32877)).
Form of Global Note representing the Company’s 2.000% Notes due 2021 (included in Exhibit 4.1)
(incorporated by reference to Exhibit 4.2 of the Company’s Current Report on Form 8-K filed on
November 21, 2016 (File No. 001-32877)).
Form of Global Note representing the Company’s 2.950% Notes due 2026 (included in Exhibit 4.1)
(incorporated by reference to Exhibit 4.3 of the Company’s Current Report on Form 8-K filed on
November 21, 2016 (File No. 001-32877)).
Form of Global Note representing the Company’s 3.800% Notes due 2046 (included in Exhibit 4.1)
(incorporated by reference to Exhibit 4.4 of the Company’s Current Report on Form 8-K filed on
November 21, 2016 (File No. 001-32877)).
106
10.1
10.1.1
10.2+
10.3+
10.3.1+*
10.4+
10.5+
10.5.1+
10.5.2+
10.6+
10.7+
10.8+
10.9+
10.10+
10.11+
10.12+
$3,750,000,000 Amended and Restated Credit Agreement, dated as of October 21, 2015, among
Mastercard Incorporated, the several lenders and agents from time to time party thereto, Citibank,
N.A., as managing administrative agent and JPMorgan Chase Bank, N.A. as administrative agent
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed October
23, 2015 (File No. 001-32877)).
First Amendment to $3,750,000,000 Amended and Restated Credit Agreement, dated as of September
26, 2016, among Mastercard Incorporated, the several lenders and agents from time to time party
thereto, Citibank, N.A., as managing administrative agent and JPMorgan Chase Bank, N.A. as
administrative agent (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report
on Form 10-Q filed October 28, 2016 (File No. 001-32877)).
Employment Agreement between Mastercard International Incorporated and Ajay Banga, dated as
of July 1, 2010 (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form
8-K filed July 8, 2010 (File No. 001-32877)).
Employment Agreement between Martina Hund-Mejean and Mastercard International, amended and
restated as of December 24, 2012 (incorporated by reference to Exhibit 10.5 to the Company’s Annual
Report on Form 10-K filed February 14, 2013 (File No. 001-32877)).
Amendment to Amended and Restated Employment Agreement between Martina Hund-Mejean and
Mastercard International, dated as of December 21, 2017.
Description of Employment Arrangement with Gary Flood (incorporated by reference to Exhibit 10.11
to the Company’s Annual Report on Form 10-K filed February 18, 2010 (File No. 001-32877)).
Offer Letter between Ann Cairns and Mastercard International Incorporated, dated June 15, 2011
(incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form 10-K filed February
16, 2012 (File No. 001-32877)).
Contract of Employment between Mastercard UK Management Services Limited and Ann Cairns, dated
July 6, 2011 (incorporated by reference to Exhibit 10.8.1 to the Company’s Annual Report on Form
10-K filed February 16, 2012 (File No. 001-32877)).
Deed of Employment between Mastercard UK Management Services Limited and Ann Cairns, dated
July 6, 2011 (incorporated by reference to Exhibit 10.8.2 to the Company’s Annual Report on Form
10-K filed February 16, 2012 (File No. 001-32877)).
Description of Employment Arrangement with Robert Reeg (incorporated by reference to Exhibit 10.4
to the Company’s Quarterly Report on Form 10-Q filed May 2, 2017 (File No. 001-32877)).
Mastercard International Senior Executive Annual Incentive Compensation Plan, as amended and
restated effective June 9, 2015 (incorporated by reference to Exhibit 10.1 to the Company’s Current
Report on Form 8-K filed June 10, 2015 (File No. 001-32877)).
Mastercard International Incorporated Restoration Program, as amended and restated January 1,
2007 unless otherwise provided (incorporated by reference to Exhibit 10.22 to the Company’s Annual
Report on Form 10-K filed February 19, 2009 (File No. 001-32877)).
Mastercard Incorporated Deferral Plan, as amended and restated effective December 1, 2008 for
account balances established after December 31, 2004 (incorporated by reference to Exhibit 10.25
to the Company’s Annual Report on Form 10-K filed February 19, 2009 (File No. 001-32877)).
Mastercard Incorporated 2006 Long Term Incentive Plan, amended and restated effective June 5, 2012
(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed
August 1, 2012 (File No. 001-32877)).
Form of Restricted Stock Unit Agreement for awards under 2006 Long Term Incentive Plan (effective
for awards granted on and subsequent to March 1, 2017) (incorporated by reference to Exhibit 10.1
to the Company’s Quarterly Report on Form 10-Q filed May 2, 2017 (File No. 001-32877)).
Form of Stock Option Agreement for awards under 2006 Long Term Incentive Plan (effective for awards
granted on and subsequent to March 1, 2017) (incorporated by reference to Exhibit 10.2 to the
Company’s Quarterly Report on Form 10-Q filed May 2, 2017 (File No. 001-32877)).
107
10.13+
10.14+
10.15+
10.16+
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
Form of Performance Unit Agreement for awards under 2006 Long Term Incentive Plan (effective for
awards granted on and subsequent to March 1, 2017) (incorporated by reference to Exhibit 10.3 to
the Company’s Quarterly Report on Form 10-Q filed May 2, 2017 (File No. 001-32877)).
Form of Mastercard Incorporated Long Term Incentive Plan Non-Competition and Non-Solicitation
Agreement for named executive officers (incorporated by reference to Exhibit 10.17 to the Company’s
Annual Report on Form 10-K filed February 16, 2012 (File No. 001-32877)).
Amended and Restated Mastercard International Incorporated Executive Severance Plan, amended
and restated as of June 5, 2012 (incorporated by reference to Exhibit 10.5 to the Company’s Quarterly
Report on Form 10-Q filed August 1, 2012 (File No. 001-32877)).
Amended and Restated Mastercard International Incorporated Change in Control Severance Plan,
amended and restated as of June 5, 2012 (incorporated by reference to Exhibit 10.6 to the Company’s
Quarterly Report on Form 10-Q filed August 1, 2012 (File No. 001-32877)).
Schedule of Non-Employee Directors’ Annual Compensation effective as of June 9, 2015 (incorporated
by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed July 29, 2015 (File
No. 001-32877)).
2006 Non-Employee Director Equity Compensation Plan, amended and restated effective as of June
5, 2012 (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q
filed August 1, 2012 (File No. 001-32877)).
Form of Deferred Stock Unit Agreement for awards under 2006 Non-Employee Director Equity
Compensation Plan, amended and restated effective June 5, 2012 (effective for awards granted on
and subsequent to June 27, 2017) (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q filed July 27, 2017 (File No. 001-32877)).
Form of Restricted Stock Agreement for awards under 2006 Non-Employee Director Equity
Compensation Plan, amended and restated effective June 5, 2012 (effective for awards granted on
and subsequent to June 27, 2017) (incorporated by reference to Exhibit 10.2 to the Company’s
Quarterly Report on Form 10-Q filed July 27, 2017 (File No. 001-32877)).
Form of Indemnification Agreement between Mastercard Incorporated and certain of its directors
(incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed May
2, 2006 (File No. 000-50250)).
Form of Indemnification Agreement between Mastercard Incorporated and certain of its director
nominees (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-
Q filed May 2, 2006 (File No. 000-50250)).
Deed of Gift between Mastercard Incorporated and Mastercard Foundation (incorporated by
reference to Exhibit 10.28 to Pre-Effective Amendment No. 5 to the Company’s Registration Statement
on Form S-1 filed May 3, 2006 (File No. 333-128337)).
Settlement Agreement, dated as of June 4, 2003, between Mastercard International Incorporated and
Plaintiffs in the class action litigation entitled In Re Visa Check/MasterMoney Antitrust Litigation
(incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q filed
August 8, 2003 (File No. 000-50250)).
Stipulation and Agreement of Settlement, dated July 20, 2006, between Mastercard Incorporated,
the several defendants and the plaintiffs in the consolidated federal class action lawsuit titled In re
Foreign Currency Conversion Fee Antitrust Litigation (MDL 1409), and the California state court action
titled Schwartz v. Visa Int’l Corp., et al. (incorporated by reference to Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q filed November 1, 2006 (File No. 001-32877)).
Omnibus Agreement Regarding Interchange Litigation Judgment Sharing and Settlement Sharing,
dated as of February 7, 2011, by and among Mastercard Incorporated, Mastercard International
Incorporated, Visa Inc., Visa U.S.A. Inc., Visa International Service Association and Mastercard’s
customer banks that are parties thereto (incorporated by reference to Exhibit 10.33 to Amendment
No.1 to the Company’s Annual Report on Form 10-K/A filed on November 23, 2011).
108
10.26.1
10.26.2
10.27**
10.27.1
10.27.2
10.28
12.1*
21*
23.1*
31.1*
31.2*
32.1*
32.2*
99.1*
101.INS*
101.SCH*
101.CAL*
101.DEF*
Amendment to Omnibus Agreement Regarding Interchange Litigation Judgment Sharing and
Settlement Sharing, dated as of August 25, 2014, by and among Mastercard Incorporated, Mastercard
International Incorporated, Visa Inc., Visa U.S.A Inc., Visa International Service Association and
Mastercard’s customer banks that are parties thereto (incorporated by reference to Exhibit 10.1 to
the Company’s Quarterly Report on Form 10-Q filed October 30, 2014 (File No. 001-32877)).
Second Amendment to Omnibus Agreement Regarding Interchange Litigation Judgment Sharing and
Settlement Sharing, dated as of October 22, 2015, by and among Mastercard Incorporated, Mastercard
International Incorporated, Visa Inc., Visa U.S.A Inc., Visa International Service Association and
Mastercard’s customer banks that are parties thereto (incorporated by reference to Exhibit 10.2 to
the Company’s Quarterly Report on Form 10-Q filed October 29, 2015 (File No. 001-32877)).
Mastercard Settlement and Judgment Sharing Agreement, dated as of February 7, 2011, by and among
Mastercard Incorporated, Mastercard International Incorporated and Mastercard’s customer banks
that are parties thereto (incorporated by reference to Exhibit 10.34 to Amendment No.1 to the
Company’s Annual Report on Form 10-K/A filed on November 23, 2011).
Amendment to Mastercard Settlement and Judgment Sharing Agreement, dated as of August 26,
2014, by and among Mastercard Incorporated, Mastercard International Incorporated and
Mastercard’s customer banks that are parties thereto (incorporated by reference to Exhibit 10.2 to
the Company’s Quarterly Report on Form 10-Q filed October 30, 2014 (File No. 001-32877)).
Second Amendment to Mastercard Settlement and Judgment Sharing Agreement, dated as of October
22, 2015, by and among Mastercard Incorporated, Mastercard International Incorporated and
Mastercard’s customer banks that are parties thereto (incorporated by reference to Exhibit 10.3 to
the Company’s Quarterly Report on Form 10-Q filed October 29, 2015 (File No. 001-32877)).
Class Settlement Agreement, dated October 19, 2012, by and among Mastercard Incorporated and
Mastercard International Incorporated; Visa, Inc., Visa U.S.A. Inc. and Visa International Service
Association; the Class Plaintiffs defined therein; and the Customer Banks defined therein (incorporated
by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q filed October 31, 2012
(File No. 001-32877)).
Computation of Ratio of Earnings to Fixed Charges.
List of Subsidiaries of Mastercard Incorporated.
Consent of PricewaterhouseCoopers LLP.
Certification of Ajay Banga, President and Chief Executive Officer, pursuant to Rule 13a-14(a)/
15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Martina Hund-Mejean, Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a),
as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification of Ajay Banga, President and Chief Executive Officer, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Certification of Martina Hund-Mejean, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Disclosure pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012.
XBRL Instance Document
XBRL Taxonomy Extension Schema Document
XBRL Taxonomy Extension Calculation Linkbase Document
XBRL Taxonomy Extension Definition Linkbase Document
109
101.LAB*
101.PRE*
XBRL Taxonomy Extension Label Linkbase Document
XBRL Taxonomy Extension Presentation Linkbase Document
+
*
**
Management contracts or compensatory plans or arrangements.
Filed or furnished herewith.
Exhibit omits certain information that has been filed separately with the U.S. Securities and Exchange Commission and
has been granted confidential treatment.
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other
disclosure other than with respect to the terms of the agreements or other documents themselves, and should not be relied
upon for that purpose. In particular, any representations and warranties made by the Company in these agreements or other
documents were made solely within the specific context of the relevant agreement or document and may not describe the actual
state of affairs as of the date they were made or at any other time.
110
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 14, 2018
By:
MASTERCARD INCORPORATED
(Registrant)
/s/ AJAY BANGA
Ajay Banga
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated:
Date: February 14, 2018
Date: February 14, 2018
Date: February 14, 2018
Date: February 14, 2018
Date: February 14, 2018
Date: February 14, 2018
Date: February 14, 2018
Date: February 14, 2018
/s/ AJAY BANGA
Ajay Banga
President and Chief Executive Officer; Director
(Principal Executive Officer)
/s/ MARTINA HUND-MEJEAN
Martina Hund-Mejean
Chief Financial Officer
(Principal Financial Officer)
/s/ SANDRA ARKELL
Sandra Arkell
Corporate Controller
(Principal Accounting Officer)
/s/ SILVIO BARZI
Silvio Barzi
Director
/s/ DAVID R. CARLUCCI
David R. Carlucci
Director
/s/ STEVEN J. FREIBERG
Steven J. Freiberg
Director
/s/ JULIUS GENACHOWSKI
Julius Genachowski
Director
/s/ RICHARD HAYTHORNTHWAITE
Richard Haythornthwaite
Chairman of the Board; Director
By:
By:
By:
By:
By:
By:
By:
By:
111
Date: February 14, 2018
Date: February 14, 2018
Date: February 14, 2018
Date: February 14, 2018
Date: February 14, 2018
Date: February 14, 2018
By:
By:
By:
By:
By:
By:
/s/ MERIT E. JANOW
Merit E. Janow
Director
/s/ NANCY J. KARCH
Nancy J. Karch
Director
/s/ OKI MATSUMOTO
Oki Matsumoto
Director
/s/ RIMA QURESHI
Rima Qureshi
Director
/s/ JOSÉ OCTAVIO REYES LAGUNES
José Octavio Reyes Lagunes
Director
/s/ JACKSON TAI
Jackson Tai
Director
112
Mastercard Board of Directors
Richard Haythornthwaite 2, 3
Chairman of the Board
Mastercard Incorporated
Non-Executive Chairman
Centrica PLC
Merit E. Janow 1, 2
Dean, School of International and Public Affairs
Columbia University
Ajay Banga
President and Chief Executive Officer
Mastercard Incorporated
Nancy Karch 2 (Chair)
Director Emeritus
McKinsey & Company
Silvio Barzi 1, 3
Former Senior Advisor and Executive Officer
UniCredit Group
Oki Matsumoto 1
Managing Director, Chairman and CEO
Monex Group, Inc.
Rima Qureshi 3
Executive Vice President and
Chief Strategy Officer
Verizon Communications Inc.
José Octavio Reyes Lagunes 1 (Chair)
Former Vice Chairman
The Coca-Cola Export Corporation
The Coca-Cola Company
Jackson Tai 2, 3
Former Vice Chairman and Chief Executive Officer
DBS Group and DBS Bank Ltd.
David R. Carlucci 2, 3
Former Chairman and Chief Executive Officer
IMS Health Incorporated
Steven J. Freiberg 1, 3 (Chair)
Senior Advisor
The Boston Consulting Group
Julius Genachowski 1
Managing Director and Partner
The Carlyle Group
Choon Phong Goh 2
Chief Executive Officer
Singapore Airlines Limited
1 Human Resources and Compensation Committee
2 Nominating and Corporate Governance Committee
3 Audit Committee
Executive Officers
Name
Ajay Banga
Ann Cairns 1
Title
President and Chief Executive Officer
President, International
Michael Fraccaro
Chief Human Resources Officer
Martina Hund-Mejean
Chief Financial Officer
Edward McLaughlin
President, Operations and Technology
Timothy Murphy
General Counsel
Craig Vosburg
President, North America
Additional Management Committee Members
Name
Title
Ajay Bhalla
Chief Enterprise Security Solutions Officer
Gilberto Caldart 1
President, Latin America and Caribbean
Michael Froman
Vice Chairman and President, Strategic Growth
Hai Ling
Garry Lyons 2
Co-President, Asia Pacific
Chief Innovation Officer
Raghu Malhotra
President, Middle East and Africa
Michael Miebach 2
Chief Product Officer
Javier Perez
Raja Rajamannar
Ari Sarker
Andrea Scerch
Raj Seshadri
Kevin Stanton
David Yates
President, Europe
Chief Marketing and Communications Officer and
President, Healthcare
Co-President, Asia Pacific
President, Consumer Products and Processing
President, U.S. Issuers
Chief Services Officer
President, New Payments Platforms
1 Effective June 1, 2018, Mr. Caldart will become President, International. He will succeed Ms. Cairns, who will
become Vice Chairman. Carlo Enrico will join the Management Committee at the same time, succeeding Mr. Caldart
as President, Latin America and Caribbean.
2 Effective April 2, 2018, Mr. Miebach’s role was expanded to include Mr. Lyons' responsibilities. Mr. Lyons' last day
of service will be June 1, 2018, at which time Jorn Lambert will join the Management Committee as President,
Digital Solutions.
Major Offices
Corporate Headquarters
2000 Purchase Street
Purchase, NY 10577 U.S.A.
914.249.2000
Europe Regional Headquarters
Waterloo, Belgium
Mastercard Technologies Headquarters
St. Louis, Missouri, U.S.A.
Latin America and Caribbean Regional Headquarters
Miami, Florida, U.S.A.
Asia Pacific Regional Headquarters
Singapore
Middle East and Africa Regional Headquarters
Dubai, U.A.E.
Canada Regional Headquarters
Toronto, Ontario, Canada
North America Regional Headquarters
Purchase, New York, U.S.A.
Stockholder Information
Investor Relations
914.249.4565
investor.relations@mastercard.com
Stockholder Information
Copies of the company’s Annual Report
on Form 10-K, as well as other periodic
filings by the company with the U.S.
Securities and Exchange Commission,
are available on the Investor Relations
section of our website at
www.mastercard.com.
Visit our website,
www.mastercard.com, for updated
news releases, stock performance,
financial reports, recent investments,
investment community presentations,
corporate governance and other
investor information.
Stock Listing and Symbol
New York Stock Exchange symbol: MA
Contact the Mastercard
Board of Directors
Transfer Agent:
EQ Shareowner Services
To communicate with the Board of
Directors, any individual directors, or
any group or committee of director,
correspondence should be addressed
to the Board of Directors or any such
individual director or group or
committee of directors by either name
or title. All such correspondence can
be sent by email to our Corporate
Secretary at
corporate.secretary@mastercard.com
or by mail to:
Mastercard Incorporated
Board of Directors
2000 Purchase Street
Purchase, NY 10577
Attention: Janet McGinness
Stockholders
The 2018 Annual Meeting of
Stockholders of Mastercard
Incorporated will be held on Tuesday,
June 26, at 8:30 a.m., at Mastercard
corporate headquarters, 2000
Purchase Street, Purchase, New York
Telephone
Toll-free: 800.837.7579
Outside the United States: 651.450.4064
Stockholder Correspondence
EQ Shareowner Services
P.O. Box 64874
St. Paul, MN 55164
Certified and Overnight Delivery
EQ Shareowner Services
1110 Centre Pointe Curve
Suite 101
Mendota Heights, MN 55120
Independent Registered Public
Accounting Firm
PricewaterhouseCoopers LLP
New York, New York
Stock Performance
The graph to the right and the table
below compare the cumulative total
stockholder return of Mastercard
Incorporated Class A common stock,
the S&P 500 Index and the S&P 500
Financials for the five-year period
shown on the graph. The graph
assumes a $100 investment in our
Class A common stock and both of the
indices and the reinvestment of
dividends. Mastercard Incorporated’s
Class B common stock is not publicly
traded or listed on any exchange or
dealer quotation system.
Total Return to Stockholders
(includes reinvestment of dividends)
INDEXED RETURNS
(Years Ended)
Base Period
Company/Index (in $)
12/31/12
12/31/13
12/31/14
12/31/15
12/31/16
12/31/17
Mastercard Incorporated
S&P 500 Index
S&P 500 Financials
Source: S&P Global
100
100
100
170.67
132.39
135.63
177.04
150.51
156.25
201.48
152.59
153.86
215.40
170.84
188.94
318.09
208.14
230.85
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