SEC Info - Mastercard Inc. - ‘10-Q’ for 3/31/21

(in millions, except per share data)

Assets

Current assets:

Cash and cash equivalents

i 7,246

i 10,113

Restricted cash for litigation settlement

i 586

Investments

i 489

i 483

Accounts receivable

i 2,648

i 2,646

Settlement due from customers

i 1,678

i 1,706

Restricted security deposits held for customers

i 1,759

i 1,696

Prepaid expenses and other current assets

i 1,999

i 1,883

Total current assets

i 16,405

i 19,113

Property, equipment and right-of-use assets, net of accumulated depreciation and amortization

of $ i 1,441 and $ i 1,390, respectively

i 1,850

i 1,902

Deferred income taxes

i 459

i 491

Goodwill

i 7,051

i 4,960

Other intangible assets, net of accumulated amortization of $ i 1,551 and $ i 1,489, respectively

i 3,321

i 1,753

Other assets

i 5,714

i 5,365

Total Assets

i 34,800

i 33,584

Liabilities, Redeemable Non-controlling Interests and Equity

Current liabilities:

Accounts payable

i 476

i 527

Settlement due to customers

i 1,297

i 1,475

Restricted security deposits held for customers

i 1,759

i 1,696

Accrued litigation

i 841

i 842

Accrued expenses

i 5,200

i 5,430

Current portion of long-term debt

i 649

Other current liabilities

i 1,253

i 1,228

Total current liabilities

i 11,475

i 11,847

Long-term debt

i 13,221

i 12,023

Deferred income taxes

i 391

i 86

Other liabilities

i 3,260

i 3,111

Total Liabilities

i 28,347

i 27,067

Commitments and Contingencies

Redeemable Non-controlling Interests

i 28

i 29

Stockholders’ Equity

Class A common stock, $ i i 0.0001 / par value; authorized i i 3,000 / shares, i 1,397 and i 1,396 shares issued and i 984 and i 987 shares outstanding, respectively

i —

Class B common stock, $ i i 0.0001 / par value; authorized i i 1,200 / shares, i i i i 8 / / / shares issued and outstanding

i —

Additional paid-in-capital

i 4,949

i 4,982

Class A treasury stock, at cost, i 413 and i 409 shares, respectively

( i 38,024)

( i 36,658)

Retained earnings

i 40,140

i 38,747

Accumulated other comprehensive income (loss)

( i 738)

( i 680)

Mastercard Incorporated Stockholders' Equity

i 6,327

i 6,391

Non-controlling interests

i 98

i 97

Total Equity

i 6,425

i 6,488

Total Liabilities, Redeemable Non-controlling Interests and Equity

i 34,800

i 33,584

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

8 MASTERCARD MARCH 31, 2021 FORM 10-Q

PART I

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Three Months Ended March 31, 2021

Stockholders’ Equity

Common Stock

Additional
Paid-In
Capital

Class A
Treasury
Stock

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Mastercard Incorporated Stockholders' Equity

Non-
Controlling
Interests

Total
Equity

Class A

Class B

(in millions)

Balance at December 31, 2020

i —

i 4,982

( i 36,658)

i 38,747

( i 680)

i 6,391

i 97

i 6,488

Net income

—

i 1,828

—

i 1,828

—

i 1,828

Activity related to non-controlling interests

—

i 1

Redeemable non-controlling interest adjustments

—

( i 1)

—

( i 1)

—

( i 1)

Other comprehensive income (loss)

—

( i 58)

—

( i 58)

Dividends

—

( i 434)

—

( i 434)

—

( i 434)

Purchases of treasury stock

—

( i 1,370)

—

( i 1,370)

—

( i 1,370)

Share-based payments

—

( i 33)

i 4

—

( i 29)

—

( i 29)

Balance at March 31, 2021

i —

i 4,949

( i 38,024)

i 40,140

( i 738)

i 6,327

i 98

i 6,425

Three Months Ended March 31, 2020

Stockholders’ Equity

Common Stock

Additional
Paid-In
Capital

Class A
Treasury
Stock

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Mastercard Incorporated Stockholders' Equity

Non-
Controlling
Interests

Total
Equity

Class A

Class B

(in millions)

Balance at December 31, 2019

i —

i 4,787

( i 32,205)

i 33,984

( i 673)

i 5,893

i 24

i 5,917

Net income

—

i 1,693

—

i 1,693

—

i 1,693

Activity related to non-controlling interests

—

i 1

Redeemable non-controlling interest adjustments

—

( i 2)

—

( i 2)

—

( i 2)

Other comprehensive income (loss)

—

( i 406)

—

( i 406)

Dividends

—

( i 402)

—

( i 402)

—

( i 402)

Purchases of treasury stock

—

( i 1,330)

—

( i 1,330)

—

( i 1,330)

Share-based payments

—

( i 52)

i 4

—

( i 48)

—

( i 48)

Balance at March 31, 2020

i —

i 4,735

( i 33,531)

i 35,273

( i 1,079)

i 5,398

i 25

i 5,423

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

MASTERCARD MARCH 31, 2021 FORM 10-Q 9

PART I

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Consolidated Statement of Cash Flows (Unaudited)

Three Months Ended March 31,

2021

2020

(in millions)

Operating Activities

Net income

i 1,828

i 1,693

Adjustments to reconcile net income to net cash provided by operating activities:

Amortization of customer and merchant incentives

i 338

i 237

Depreciation and amortization

i 163

i 144

(Gains) losses on equity investments, net

( i 94)

i 174

Share-based compensation

i 65

i 52

Deferred income taxes

i 33

i 26

Other

i 11

i 20

Changes in operating assets and liabilities:

Accounts receivable

( i 70)

( i 3)

Settlement due from customers

i 28

i 1,831

Prepaid expenses

( i 562)

( i 331)

Accrued litigation and legal settlements

( i 2)

( i 62)

Restricted security deposits held for customers

i 63

i 148

Accounts payable

( i 15)

( i 102)

Settlement due to customers

( i 178)

( i 1,564)

Accrued expenses

( i 163)

( i 622)

Net change in other assets and liabilities

i 18

i 218

Net cash provided by operating activities

i 1,463

i 1,859

Investing Activities

Purchases of investment securities available-for-sale

( i 155)

( i 74)

Purchases of investments held-to-maturity

( i 38)

( i 45)

Proceeds from sales of investment securities available-for-sale

i 72

i 179

Proceeds from maturities of investment securities available-for-sale

i 23

i 64

Proceeds from maturities of investments held-to-maturity

i 79

i 65

Purchases of property and equipment

( i 65)

( i 131)

Capitalized software

( i 79)

( i 78)

Purchases of equity investments

( i 42)

( i 135)

Acquisition of businesses, net of cash acquired

( i 3,364)

i —

Settlement of interest rate derivative contracts

i —

( i 175)

Other investing activities

i 9

( i 177)

Net cash used in investing activities

( i 3,560)

( i 507)

Financing Activities

Purchases of treasury stock

( i 1,356)

( i 1,383)

Dividends paid

( i 439)

( i 403)

Proceeds from debt, net

i 1,282

i 3,959

Tax withholdings related to share-based payments

( i 121)

( i 131)

Cash proceeds from exercise of stock options

i 23

i 31

Other financing activities

i 5

i 27

Net cash (used in) provided by financing activities

( i 606)

i 2,100

Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents

( i 101)

( i 88)

Net increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents

( i 2,804)

i 3,364

Cash, cash equivalents, restricted cash and restricted cash equivalents - beginning of period

i 12,419

i 8,969

Cash, cash equivalents, restricted cash and restricted cash equivalents - end of period

i 9,615

i 12,333

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

10 MASTERCARD MARCH 31, 2021 FORM 10-Q

PART I

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Notes to consolidated financial statements (unaudited)

Note 1. i Summary of Significant Accounting Policies

Organization

Mastercard Incorporated and its consolidated subsidiaries, including Mastercard International Incorporated (“Mastercard International” and together with Mastercard Incorporated, “Mastercard” or the “Company”), is a technology company in the global payments industry that connects consumers, financial institutions, merchants, governments, digital partners, businesses and other organizations worldwide, enabling them to use electronic forms of payment instead of cash and checks.

Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of Mastercard and its majority-owned and controlled entities, including any variable interest entities (“VIEs”) for which the Company is the primary beneficiary. Investments in VIEs for which the Company is not considered the primary beneficiary are not consolidated and are accounted for as equity method or measurement alternative method investments and recorded in other assets on the consolidated balance sheet. At March 31, 2021 and December 31, 2020, there were no significant VIEs which required consolidation and the investments were not considered material to the consolidated financial statements. The Company consolidates acquisitions as of the date in which the Company has obtained a controlling financial interest. Intercompany transactions and balances have been eliminated in consolidation. The Company follows accounting principles generally accepted in the United States of America (“GAAP”).

The balance sheet as of December 31, 2020 was derived from the audited consolidated financial statements as of December 31, 2020. The consolidated financial statements for the three months ended March 31, 2021 and 2020 and as of March 31, 2021 are unaudited, and in the opinion of management, include all normal recurring adjustments that are necessary to present fairly the results for interim periods. The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the results to be expected for the full year.

The accompanying unaudited consolidated financial statements are presented in accordance with the U.S. Securities and Exchange Commission (“SEC”) requirements for Quarterly Reports on Form 10-Q. Reference should be made to the Mastercard’s Annual Report on Form 10-K for the year ended December 31, 2020 for additional disclosures, including a summary of the Company’s significant accounting policies.

Note 2. i Acquisitions

On March 5, 2021, Mastercard acquired a majority of the Corporate Services business of Nets Denmark A/S for € i 3.0 billion (approximately $ i 3.6 billion as of the date of acquisition) in cash consideration based on a € i 2.85 billion enterprise value, adjusted for cash and net working capital at closing. The business acquired is primarily comprised of clearing and instant payment services and e-billing solutions.

In relation to this acquisition, the Company’s preliminary estimate of net assets acquired has been recorded and primarily relates to intangible assets, including goodwill of $ i 2.1 billion, of which $ i 0.8 billion is expected to be deductible for local tax purposes. The goodwill arising from the acquisition is primarily attributable to the synergies expected to arise through geographic, product and customer expansion, the underlying technology and workforce acquired. Refer to Note 1 (Summary of Significant Accounting Policies) to the consolidated financial statements included in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 for the valuation techniques Mastercard utilizes to fair value the respective components of business combinations.

MASTERCARD MARCH 31, 2021 FORM 10-Q 11

PART I

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company is in the process of obtaining additional information necessary to finalize the valuation of the acquired assets and liabilities assumed as of the acquisition date. i Therefore, the preliminary fair values set forth below use information available as of March 31, 2021 and are subject to adjustment as additional information is obtained and the valuations are completed. The initial purchase price allocation, as of the acquisition date, is noted below:


	(in millions)






Assets:
Cash and cash equivalents	$	i 203
Other current assets	i 15
Other intangible assets	i 1,622
Goodwill	i 2,116


Total assets	i 3,956

Liabilities:

Other current liabilities	i 70
Deferred income taxes	i 319

Total liabilities	i 389

Net assets acquired	$	i 3,567

The following table summarizes the identified intangible assets acquired during the three months ended March 31, 2021:

Acquisition Date Fair Value

Weighted-Average Useful Life

(in millions)

(in years)

Developed technologies

i 208

i 14.7

Customer relationships

i 1,393

i 19.5

Other

i 21

i 8.0

Other intangible assets

i 1,622

i 18.7

Proforma information related to the acquisition was not included because the impact on the Company’s consolidated results of operations was not considered to be material.

In 2020, the Company acquired several businesses in separate transactions for total consideration of $ i 1.1 billion. As of March 31, 2021, the Company had finalized the purchase accounting for $ i 185 million of the businesses acquired and is evaluating and finalizing the purchase accounting for the remainder of businesses acquired during 2020. For the preliminary estimated and final fair values of the purchase price allocations, as of the acquisition dates, refer to Note 2 (Acquisitions) to the consolidated financial statements included in Part II, Item 8 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

Pending Acquisition

In April 2021, Mastercard entered into a definitive agreement to acquire Ekata, Inc. for $ i 850 million. The acquisition will advance our digital identity verification capabilities. Subject to regulatory review and other customary closing conditions, the acquisition is expected to close within the next six months.

12 MASTERCARD MARCH 31, 2021 FORM 10-Q

PART I

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 3. i Revenue

The Company’s disaggregated net revenue by source and geographic region were as follows:

Three Months Ended March 31,

2021

2020

(in millions)

Revenue by source:

Domestic assessments

i 1,798

i 1,683

Cross-border volume fees

i 932

i 1,217

Transaction processing

i 2,351

i 2,200

Other revenues

i 1,347

i 1,062

Gross revenue

i 6,428

i 6,162

Rebates and incentives (contra-revenue)

( i 2,273)

( i 2,153)

Net revenue

i 4,155

i 4,009

Net revenue by geographic region:

North American Markets

i 1,491

i 1,334

International Markets

i 2,618

i 2,633

Other 1

i 46

i 42

Net revenue

i 4,155

i 4,009

1 Includes revenues managed by corporate functions.

The Company’s customers are generally billed weekly, however, the frequency is dependent upon the nature of the performance obligation and the underlying contractual terms. The Company does not typically offer extended payment terms to customers. The following table sets forth the location of the amounts recognized on the consolidated balance sheet from contracts with customers:

(in millions)

Receivables from contracts with customers

Accounts receivable

i 2,480

i 2,505

Contract assets

Prepaid expenses and other current assets

i 72

i 59

Other assets

i 269

i 245

Deferred revenue 1

Other current liabilities

i 432

i 355

Other liabilities

i 169

i 143

1 Revenue recognized from performance obligations satisfied during the three months ended March 31, 2021 and 2020 was $ i 180 million and $ i 189 million, respectively.

MASTERCARD MARCH 31, 2021 FORM 10-Q 13

PART I

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 4. i Earnings Per Share

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

Three Months Ended March 31,

2021

2020

(in millions, except per share data)

Numerator

Net income

i 1,828

i 1,693

Denominator

Basic weighted-average shares outstanding

i 994

i 1,005

Dilutive stock options and stock units

i 4

i 5

Diluted weighted-average shares outstanding 1

i 998

i 1,010

Earnings per Share

Basic

i 1.84

i 1.68

Diluted

i 1.83

i 1.68

1 For the periods presented, the calculation of diluted EPS excluded a minimal amount of anti-dilutive share-based payment awards.

Note 5. i Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents

The following table provides a reconciliation of cash, cash equivalents, restricted cash and restricted cash equivalents reported on the consolidated balance sheet that total to the amounts shown on the consolidated statement of cash flows.

(in millions)

Cash and cash equivalents

i 7,246

i 10,113

Restricted cash and restricted cash equivalents

Restricted cash for litigation settlement

i 586

Restricted security deposits held for customers

i 1,759

i 1,696

Prepaid expenses and other current assets

i 24

Cash, cash equivalents, restricted cash and restricted cash equivalents

i 9,615

i 12,419

Note 6. i Investments

The Company’s investments on the consolidated balance sheet include both available-for-sale and held-to-maturity securities (see Investments section below). The Company classifies its investments in equity securities of publicly traded and privately held companies within other assets on the consolidated balance sheet (see Equity Investments section below).

Investments

Investments on the consolidated balance sheet consisted of the following:

(in millions)

Available-for-sale securities

i 371

i 321

Held-to-maturity securities

i 118

i 162

Total investments

i 489

i 483

14 MASTERCARD MARCH 31, 2021 FORM 10-Q

PART I

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Available-for-Sale-Securities

The major classes of the Company’s available-for-sale investment securities and their respective amortized cost basis and fair values were as follows:

Amortized
Cost

Gross
Unrealized
Gain

Gross
Unrealized
Loss

Fair
Value

Amortized
Cost

Gross
Unrealized
Gain

Gross
Unrealized
Loss

Fair
Value

(in millions)

Municipal securities

i 9

i —

i 9

i 10

i —

i 10

Government and agency securities

i 124

i —

i 124

i 64

i —

i 64

Corporate securities

i 237

i 1

i —

i 238

i 246

i 1

i —

i 247

Total

i 370

i 1

i —

i 371

i 320

i 1

i —

i 321

The Company’s corporate and municipal available-for-sale investment securities held at March 31, 2021 and December 31, 2020 primarily carried a credit rating of A- or better. Corporate securities are comprised of commercial paper and corporate bonds. Municipal securities are comprised of state tax-exempt bonds and are diversified across states and sectors. Government and agency securities include U.S. government bonds, U.S. government sponsored agency bonds and foreign government bonds which are denominated in the national currency of the issuing country. Unrealized gains and losses are recorded as a separate component of other comprehensive income (loss) on the consolidated statement of comprehensive income.

The maturity distribution based on the contractual terms of the Company’s investment securities at March 31, 2021 was as follows:

Available-For-Sale

Amortized Cost

Fair Value

(in millions)

Due within 1 year

i 180

Due after 1 year through 5 years

i 190

i 191

Total

i 370

i 371

Investment income on the consolidated statement of operations primarily consists of interest income generated from cash, cash equivalents, time deposits, and realized gains and losses on the Company’s investment securities. The realized gains and losses from the sales of available-for-sale securities for the three months ended March 31, 2021 and 2020 were not significant.

Held-to-Maturity Securities

The Company classifies time deposits with maturities greater than three months but less than one year as held-to-maturity. Time deposits are carried at amortized cost on the consolidated balance sheet and are intended to be held until maturity. The cost of these securities approximates fair value.

Equity Investments

Included in other assets on the consolidated balance sheet are equity investments with readily determinable fair values (“Marketable securities”) and equity investments without readily determinable fair values (“Nonmarketable securities”). Marketable securities are publicly traded companies and are measured using unadjusted quoted prices in their respective active markets. Nonmarketable securities that do not qualify for equity method accounting are measured at cost, less any impairment and adjusted for changes resulting from observable price changes in orderly transactions for the identical or similar investments of the same issuer (“measurement alternative”).

The following table is a summary of the activity related to the Company’s equity investments:

Balance at December 31, 2020

Purchases (Sales), net

Changes in Fair Value 1

Other 2

Balance at March 31, 2021

(in millions)

Marketable securities

i 476

i —

i 54

i 2

i 532

Nonmarketable securities

i 696

i 40

( i 3)

i 773

Total equity investments

i 1,172

i 40

i 94

( i 1)

i 1,305

1Recorded in gains (losses) on equity investments, net on the consolidated statement of operations.

2Includes translational impact of currency.

MASTERCARD MARCH 31, 2021 FORM 10-Q 15

PART I

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

i The following table sets forth the components of our Nonmarketable securities:

(in millions)

Measurement alternative 1

i 606

i 539

Equity method

i 167

i 157

Total Nonmarketable securities

i 773

i 696

1 Cumulative impairments and downward fair value adjustments on measurement alternative investments were $ i 14 million and cumulative upward fair value adjustments were $ i 117 million as of March 31, 2021.

Note 7. i Fair Value Measurements

The Company classifies its fair value measurements of financial instruments into a three-level hierarchy (the “Valuation Hierarchy”). Financial instruments are categorized for fair value measurement purposes as recurring or non-recurring in nature. There were no transfers made among the three levels in the Valuation Hierarchy for the three months ended March 31, 2021.

Financial Instruments - Recurring Measurements

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

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

i —

i 9

i —

i 9

i —

i 10

i —

i 10

Government and agency securities

i 36

i 88

i —

i 124

i 26

i 38

i —

i 64

Corporate securities

i —

i 238

i —

i 238

i —

i 247

i —

i 247

Derivative instruments 2:

Foreign exchange contracts

i —

i 56

i —

i 56

i —

i 19

i —

i 19

Marketable securities 3:

Equity securities

i 532

i —

i 532

i 476

i —

i 476

Deferred compensation plan 4:

Deferred compensation assets

i 80

i —

i 80

i 78

i —

i 78

Liabilities

Derivative instruments 2:

Foreign exchange derivative liabilities

i —

( i 7)

i —

( i 7)

i —

( i 28)

i —

( i 28)

Deferred compensation plan 5:

Deferred compensation liabilities

( i 79)

i —

( i 79)

( i 81)

i —

( i 81)

16 MASTERCARD MARCH 31, 2021 FORM 10-Q

PART I

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1The Company’s U.S. government securities are classified within Level 1 of the Valuation Hierarchy as the fair values are based on unadjusted quoted prices for identical assets in active markets. The fair value of the Company’s available-for-sale municipal securities, non-U.S. government and agency securities and corporate 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.

2The Company’s foreign exchange 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 exchange for similar derivative instruments. See Note 17 (Derivative and Hedging Instruments) for further details.

3The Company’s Marketable securities are publicly held and classified within Level 1 of the Valuation Hierarchy as the fair values are based on unadjusted quoted prices in their respective active markets.

4The 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.

5The deferred compensation liabilities are measured at fair value based on the quoted prices of identical instruments to the investment vehicles selected by the participants. These are included in other liabilities on the consolidated balance sheet.

Financial Instruments - Non-Recurring Measurements

Nonmarketable Securities

The Company’s Nonmarketable securities are recorded at fair value on a non-recurring basis in periods after initial recognition under the equity method or measurement alternative method. Nonmarketable securities are classified within Level 3 of the Valuation Hierarchy due to the absence of quoted market prices, the inherent lack of liquidity and unobservable inputs used to measure fair value that require management’s judgment. The Company uses discounted cash flows and market assumptions to estimate the fair value of its Nonmarketable securities when certain events or circumstances indicate that impairment may exist. See Note 6 (Investments) for further details.

Debt

The Company estimates the fair value of its long-term debt based on market quotes. These debt securities are classified as Level 2 of the Valuation Hierarchy as they are not traded in active markets. At March 31, 2021, the carrying value and fair value of total long-term debt (including the current portion) was $ i 13.9 billion and $ i 15.1 billion, respectively. At December 31, 2020, the carrying value and fair value of long-term debt (including the current portion) was $ i 12.7 billion and $ i 14.8 billion, respectively. See Note 10 (Debt) for further details.

Other Financial Instruments

Certain other financial instruments are carried on the consolidated balance sheet at cost or amortized cost basis, which approximates fair value due to their short-term, highly liquid nature. These instruments include cash and cash equivalents, restricted cash, time deposits, accounts receivable, settlement due from customers, restricted security deposits held for customers, accounts payable, settlement due to customers and other accrued liabilities.

Note 8. i Prepaid Expenses and Other Assets

Prepaid expenses and other current assets consisted of the following:

(in millions)

Customer and merchant incentives

i 1,148

i 1,086

Prepaid income taxes

i 59

i 78

Other

i 792

i 719

Total prepaid expenses and other current assets

i 1,999

i 1,883

MASTERCARD MARCH 31, 2021 FORM 10-Q 17

PART I

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other assets consisted of the following:

(in millions)

Customer and merchant incentives

i 3,413

i 3,220

Equity investments

i 1,305

i 1,172

Income taxes receivable

i 559

i 553

Other

i 437

i 420

Total other assets

i 5,714

i 5,365

Customer and merchant incentives represent payments made to customers and merchants under business agreements. Costs directly related to entering into such an agreement are generally deferred and amortized over the life of the agreement.

Note 9. i Accrued Expenses and Accrued Litigation

Accrued expenses consisted of the following:

(in millions)

Customer and merchant incentives

i 3,952

i 3,998

Personnel costs

i 441

i 727

Income and other taxes

i 296

i 208

Other

i 511

i 497

Total accrued expenses

i 5,200

i 5,430

Customer and merchant incentives represent amounts to be paid to customers under business agreements. As of March 31, 2021 and December 31, 2020, the Company’s provision for litigation was $ i 841 million and $ i 842 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 15 (Legal and Regulatory Proceedings) for additional information regarding the Company’s accrued litigation.

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ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 10. i Debt

Long-term debt consisted of the following:

Effective
Interest Rate

(in millions)

2021 USD Notes

i 1.900

Senior Notes due March 2031

i i 600 /

i —

i 1.981

i 2.950

Senior Notes due March 2051

i i 700 /

i —

i 3.013

2020 USD Notes

i 3.300

Senior Notes due March 2027

i 1,000

i 3.420

i 3.350

Senior Notes due March 2030

i 1,500

i 3.430

i 3.850

Senior Notes due March 2050

i 1,500

i 3.896

2019 USD Notes

i 2.950

Senior Notes due June 2029

i 1,000

i 3.030

i 3.650

Senior Notes due June 2049

i 1,000

i 3.689

i 2.000

Senior Notes due March 2025

i 750

i 2.147

2018 USD Notes

i 3.500

Senior Notes due February 2028

i 500

i 3.598

i 3.950

Senior Notes due February 2048

i 500

i 3.990

2016 USD Notes

i 2.000

Senior Notes due November 2021

i 650

i 2.236

i 2.950

Senior Notes due November 2026

i 750

i 3.044

i 3.800

Senior Notes due November 2046

i 600

i 3.893

2015 EUR Notes 1

i 1.100

Senior Notes due December 2022

i 822

i 859

i 1.265

i 2.100

Senior Notes due December 2027

i 940

i 982

i 2.189

i 2.500

Senior Notes due December 2030

i 176

i 184

i 2.562

2014 USD Notes

i 3.375

Senior Notes due April 2024

i 1,000

i 3.484

i 13,988

i 12,775

Less: Unamortized discount and debt issuance costs

( i 118)

( i 103)

Total debt outstanding

i 13,870

i 12,672

Less: Current portion2

( i 649)

Long-term debt

i 13,221

i 12,023

1€ i 1.650 billion euro-denominated debt issued in December 2015.

22016 USD Notes due in November 2021 are classified on the consolidated balance sheet as current portion of long-term debt.

In March 2021, the Company issued $ i i 600 / million principal amount of notes due March 2031 and $ i i 700 / million principal amount of notes due March 2051 (collectively the “2021 USD Notes”). The net proceeds from the issuance of the 2021 USD Notes, after deducting the original issue discount, underwriting discount and offering expenses, were $ i 1.282 billion.

The outstanding debt described above is not subject to any financial covenants and it may be redeemed in whole, or in part, at the Company’s option at any time for a specified make-whole amount. These notes are senior unsecured obligations and would rank equally with any future unsecured and unsubordinated indebtedness.

Note 11. i Stockholders' Equity

The Company declared quarterly cash dividends on its Class A and Class B Common Stock during the three months ended March 31, 2021 and 2020 as summarized below:


	Three Months Ended March 31,
		2021		2020
		(in millions, except per share data)
Dividends declared per share		$	i 0.44	$	i 0.40
Total dividends declared		$	i 434	$	i 402

The Company’s Board of Directors has 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.

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The following table summarizes the Company’s share repurchase authorizations of its Class A common stock through March 31, 2021, as well as historical purchases:

Board authorization dates

December 2020

December 2019

December
2018

Date program became effective

Not yet effective

January 2020

January
2019

Total

(in millions, except average price data)

Board authorization

i 6,000

i 8,000

i 6,500

i 20,500

Dollar value of shares repurchased during the three months ended March 31, 2020

—

i 1,079

i 304

i 1,383

Remaining authorization at December 31, 2020

i 6,000

i 3,831

i —

i 9,831

Dollar value of shares repurchased during the three months ended March 31, 2021

i —

i 1,356

i —

i 1,356

Remaining authorization at March 31, 2021

i 6,000

i 2,475

i —

i 8,475

Shares repurchased during the three months ended March 31, 2020

—

i 3.7

i 1.0

i 4.7

Average price paid per share during the three months ended March 31, 2020

—

i 290.86

i 304.89

i 293.83

Shares repurchased during the three months ended March 31, 2021

i —

i 3.9

i —

i 3.9

Average price paid per share during the three months ended March 31, 2021

i —

i 346.49

i —

i 346.49

Cumulative shares repurchased through March 31, 2021

i —

i 17.2

i 25.8

i 43.0

Cumulative average price paid per share

i —

i 320.81

i 251.72

i 279.36

/ i

The following table presents the changes in the Company’s outstanding Class A and Class B common stock for the three months ended March 31, 2021:

Outstanding Shares

Class A

Class B

(in millions)

Balance at December 31, 2020

i 986.9

i 8.3

Purchases of treasury stock

( i 3.9)

i —

Share-based payments

i 0.8

i —

Conversion of Class B to Class A common stock

i 0.1

( i 0.1)

Balance at March 31, 2021

i 983.9

i 8.2

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Note 12. i Accumulated Other Comprehensive Income (Loss)

The changes in the balances of each component of accumulated other comprehensive income (loss), net of tax, for the three months ended March 31, 2021 and 2020 were as follows:

Increase / (Decrease)

Reclassifications

(in millions)

Foreign currency translation adjustments 1

( i 352)

( i 165)

i —

( i 517)

Translation adjustments on net investment hedges 2

( i 175)

i 103

i —

( i 72)

Cash flow hedges

Foreign exchange contracts 3

i —

i 2

i —

i 2

Interest rate contracts 4

( i 133)

i —

i 1

( i 132)

Defined benefit pension and other postretirement plans

( i 20)

i —

( i 20)

Investment securities available-for-sale

i —

i 1

i —

i 1

Accumulated Other Comprehensive Income (Loss)

( i 680)

( i 59)

i 1

( i 738)

December 31, 2019

Increase / (Decrease)

Reclassifications

March 31, 2020

(in millions)

Foreign currency translation adjustments1

( i 638)

( i 267)

i —

( i 905)

Translation adjustments on net investment hedges 2

( i 38)

i 16

i —

( i 22)

Cash flow hedges

Interest rate contracts 4

i 11

( i 150)

i —

( i 139)

Defined benefit pension and other postretirement plans

( i 9)

i —

( i 9)

Investment securities available-for-sale

i 1

( i 5)

i —

( i 4)

Accumulated Other Comprehensive Income (Loss)

( i 673)

( i 406)

i —

( i 1,079)

1.During the three months ended March 31, 2021, the increase in the accumulated other comprehensive loss related for foreign currency translation adjustments was driven primarily by the depreciation of the euro against the U.S. dollar. During the three months ended March 31, 2020, the increase in the accumulated other comprehensive loss related to foreign currency translation adjustments was driven primarily by the depreciation of the euro, British pound and Brazilian real against the U.S. dollar.

2.During the three months ended March 31, 2021 and 2020, the decreases in the accumulated other comprehensive loss related to the net investment hedges were driven by the depreciation of the euro against the U.S. dollar. See Note 17 (Derivative and Hedging Instruments) for additional information.

3.Beginning in 2021, certain foreign exchange derivative contracts are designated as cash flow hedging instruments. Gains and losses resulting from changes in the fair value of these contracts are deferred in accumulated other comprehensive income (loss) and subsequently reclassified to the consolidated statement of operations when the underlying hedged transactions impact earnings. See Note 17 (Derivative and Hedging Instruments) for additional information.

4.In 2019, the Company entered into treasury rate locks which are accounted for as cash flow hedges. In the first quarter of 2020, in connection with the issuance of the 2020 USD Notes, these contracts were settled for a loss of $ i 175 million, or $ i 136 million net of tax, recorded in accumulated other comprehensive income (loss). The cumulative loss will be reclassified as an adjustment to interest expense over the respective terms of the 2020 USD Notes. See Note 17 (Derivative and Hedging Instruments) for additional information.

Note 13. i Share-Based Payments

During the three months ended March 31, 2021, the Company granted the following awards under the Mastercard Incorporated 2006 Long Term Incentive Plan, as amended and restated as of June 5, 2012 (the “LTIP”). The LTIP is a stockholder-approved plan that permits the grant of various types of equity awards to employees.

Grants in 2021

Weighted-Average
Grant-Date
Fair Value

(in millions)

(per option/unit)

Non-qualified stock options

i 0.3

i 92

Restricted stock units

i 0.7

i 358

Performance stock units

i 0.2

i 385

The Company used the Black-Scholes option pricing model to determine the grant-date fair value of stock options and calculated the expected life and the expected volatility based on historical Mastercard information. The expected life of stock options granted in 2021 was

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estimated to be i six years, while the expected volatility was determined to be i 26.1%. Stock options generally vest in i four equal annual installments beginning i one year after the date of grant and expire i ten years from the date of grant.

The fair value of restricted stock units (“RSUs”) is determined and fixed on the grant date based on the Company’s Class A common stock price, adjusted for the exclusion of dividend equivalents. The shares underlying the RSUs will generally vest in i four equal annual installments beginning i one year after the date of grant.

The Company used the Monte Carlo simulation valuation model to determine the grant-date fair value of performance stock units (“PSUs”) granted. Shares underlying the PSUs will vest after i three years from the date of grant and are subject to a mandatory i one-year deferral period, during which vested PSUs are eligible for dividend equivalents.

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

Note 14. i Income Taxes

The effective income tax rates were i 16.5% and i 14.8% for the three months ended March 31, 2021 and 2020, respectively. The higher effective income tax rate for the three months ended March 31, 2021, versus the comparable period in 2020, was primarily due to lower discrete tax benefits related to share-based payments.

The Company is subject to tax in the United States, Belgium, Singapore, the United Kingdom and various other foreign jurisdictions, as well as state and local jurisdictions. Uncertain tax positions are reviewed on an ongoing basis and are adjusted after considering facts and circumstances, including progress of tax audits, developments in case law and closing of statutes of limitation. Within the next twelve months, the Company believes that the resolution of certain federal, foreign and state and local examinations are reasonably possible and that a change in estimate, reducing unrecognized tax benefits, may occur. While such a change may be significant, it is not possible to provide a range of the potential change until the examinations progress further or the related statutes of limitation expire. The Company has effectively settled its U.S. federal income tax obligations through 2011. With limited exception, the Company is no longer subject to state and local or foreign examinations by tax authorities for years before 2010.

Note 15. i Legal and Regulatory Proceedings

Mastercard is a party to legal and regulatory proceedings with respect to a variety of matters in the ordinary course of business. Some of these proceedings are based on complex claims involving substantial uncertainties and unascertainable damages. Accordingly, except as discussed below, it is not possible to determine the probability of loss or estimate damages, and therefore, Mastercard has not established reserves for any of these proceedings. When the Company determines that a loss is both probable and reasonably estimable, Mastercard records a liability and discloses the amount of the liability if it is material. When a material loss contingency is only reasonably possible, Mastercard does not record a liability, but instead discloses the nature and the amount of the claim, and an estimate of the loss or range of loss, if such an estimate can be made. Unless otherwise stated below with respect to these matters, Mastercard cannot provide an estimate of the possible loss or range of loss based on one or more of the following reasons: (1) actual or potential plaintiffs have not claimed an amount of monetary damages or the amounts are unsupportable or exaggerated, (2) the matters are in early stages, (3) there is uncertainty as to the outcome of pending appeals or motions, (4) there are significant factual issues to be resolved, (5) the existence in many such proceedings of multiple defendants or potential defendants whose share of any potential financial responsibility has yet to be determined and/or (6) there are novel legal issues presented. Furthermore, except as identified with respect to the matters below, Mastercard does not believe that the outcome of any individual existing legal or regulatory proceeding to which it is a party will have a material adverse effect on its results of operations, financial condition or overall business. However, an adverse judgment or other outcome or settlement with respect to any proceedings discussed below could result in fines or payments by Mastercard and/or could require Mastercard to change its business practices. In addition, an adverse outcome in a regulatory proceeding could lead to the filing of civil damage claims and possibly result in significant damage awards. Any of these events could have a material adverse effect on Mastercard’s results of operations, financial condition and overall business.

Interchange Litigation and Regulatory Proceedings

Mastercard’s interchange fees and other practices are subject to regulatory, legal review and/or challenges in a number of jurisdictions, including the proceedings described below. When taken as a whole, the resulting decisions, regulations and legislation with respect to interchange fees and acceptance practices may have a material adverse effect on the Company’s prospects for future growth and its overall results of operations, financial position and cash flows.

United States. In June 2005, the first of a series of complaints were filed on behalf of merchants (the majority of the complaints were styled as class actions, although a few complaints were filed on behalf of individual merchant plaintiffs) against Mastercard International, Visa U.S.A., Inc., Visa International Service Association and a number of financial institutions. Taken together, the claims in the complaints were generally brought under both Sections 1 and 2 of the Sherman Act, which prohibit monopolization and attempts or conspiracies to monopolize a particular industry, and some of these complaints contain unfair competition law claims under state law. The complaints

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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, resulting in merchants paying excessive costs for the acceptance of Mastercard and Visa credit and debit cards. 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 merchant litigation cases. 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 i 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 i 36% of the monetary portion of such settlement.

In October 2012, the parties entered into a definitive settlement agreement with respect to the merchant class litigation (including with respect to the claims related to the IPO) and the defendants separately entered into a settlement agreement with the individual merchant plaintiffs. The settlements included cash payments that were apportioned among the defendants pursuant to the omnibus judgment sharing and settlement sharing agreement described above. Mastercard also agreed to provide class members with a short-term reduction in default credit interchange rates and to modify certain of its business practices, including its “no surcharge” rule. The court granted final approval of the settlement in December 2013, and objectors to the settlement appealed that decision to the U.S. Court of Appeals for the Second Circuit. In June 2016, the court of appeals vacated the class action certification, reversed the settlement approval and sent the case back to the district court for further proceedings. The court of appeals’ ruling was based primarily on whether the merchants were adequately represented by counsel in the settlement. As a result of the appellate court ruling, the district court divided the merchants’ claims into two separate classes - monetary damages claims (the “Damages Class”) and claims seeking changes to business practices (the “Rules Relief Class”). The court appointed separate counsel for each class.

In September 2018, the parties to the Damages Class litigation entered into a class settlement agreement to resolve the Damages Class claims. The time period during which Damages Class members were permitted to opt out of the class settlement agreement ended in July 2019 with merchants representing slightly more than i 25% of the Damages Class interchange volume choosing to opt out of the settlement. The district court granted final approval of the settlement in December 2019. The district court’s settlement approval order has been appealed. Mastercard has commenced settlement negotiations with a number of the opt-out merchants and has reached settlements and/or agreements in principle to settle a number of these claims. The Damages Class settlement agreement does not relate to the Rules Relief Class claims. Separate settlement negotiations with the Rules Relief Class are ongoing. In December 2020, the Rules Relief Class filed a motion for class certification. Briefing on summary judgment motions in the Rules Relief Class and opt-out merchant cases was completed in December 2020.

As of March 31, 2021 and December 31, 2020, Mastercard had accrued a liability of $ i i 783 / million as a reserve for both the Damages Class litigation and the opt-out merchant cases. As of March 31, 2021 and December 31, 2020, Mastercard had $ i 586 million in a qualified cash settlement fund related to the Damages Class litigation and classified as restricted cash on its consolidated balance sheet. The reserve as of March 31, 2021 for both the Damages Class litigation and the opt-out merchants represents Mastercard’s best estimate of its probable liabilities in these matters. The portion of the accrued liability relating to both the opt-out merchants and the Damages 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 $ i 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

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class settlement agreement to resolve all of the Canadian class action litigation. The settlement, which required Mastercard to make a cash payment and modify its “no surcharge” rule, received court approval in each Canadian province. All appeals by objectors to the settlement have either been rejected by the Supreme Court or abandoned, and the settlement is now final.

Europe. Since May 2012, a number of United Kingdom (“U.K.”) merchants filed claims or threatened litigation against Mastercard seeking damages for excessive costs paid for acceptance of Mastercard credit and debit cards arising out of alleged anti-competitive conduct with respect to, among other things, Mastercard’s cross-border interchange fees and its U.K. and Ireland domestic interchange fees (the “U.K. Merchant claimants”). In addition, Mastercard, has faced similar filed or threatened litigation by merchants with respect to interchange rates in other countries in Europe (the “Pan-European Merchant claimants”). In aggregate, the alleged damages claims from the U.K. and Pan-European Merchant claimants were in the amount of approximately £ i 3 billion (approximately $ i 5 billion as of March 31, 2021). Mastercard has resolved over £ i 2 billion (approximately $ i 3 billion as of March 31, 2021) of these damages claims through settlement or judgment.

In January 2017, Mastercard received a liability judgment in its favor on all significant matters in a separate action brought by i ten of the U.K. Merchant claimants. i Three of the U.K. Merchant claimants appealed the judgment, and these appeals were combined with Mastercard’s appeal of a 2016 judgment in favor of i one U.K. merchant. In July 2018, the U.K. appellate court heard the appeals of the i four merchant and ruled against both Mastercard and Visa on i two of the i three legal issues being considered. The parties appealed the rulings to the U.K. Supreme Court. In June 2020, the U.K. Supreme Court ruled against Mastercard and Visa with respect to one of the liability issues being considered by the Court related to U.K. domestic interchange fees. Additionally, the U.K Supreme Court set out the legal standard that should be applied by lower trial courts with respect to determining whether interchange was exemptible under applicable law, and provided guidance to lower courts with regard to the legal standard that should be applied in assessing merchants’ damages claims. The U.K. Supreme Court sent i one of the i four merchant cases back to the trial court for a determination of liability and damages issues and sent the remaining i three merchant cases back to the trial court for a determination of damages issues only. A hearing in one of these merchant cases on liability and damages issues is expected to be scheduled for the fourth quarter of 2021, while a trial on damages for the other three merchant claims is not expected to occur until 2023.

Mastercard continues to litigate with the remaining U.K. and Pan-European Merchant claimants and it has submitted statements of defense disputing liability and damages claims. The majority of these merchant claims generally had been stayed pending the decision of the U.K. Supreme Court, and a number of those matters are now progressing with motion practice and discovery. In one of the actions involving multiple merchant plaintiff claims, the court has scheduled for May 2021 argument related to the plaintiffs’ motion for summary judgment on certain liability issues. Mastercard incurred charges of $ i 22 million during the second quarter of 2020 to reflect both the estimated attorneys’ fees incurred by the i four merchant claimants in the U.K. Supreme Court appeal, as well as settlements with a number of Pan-European merchants.

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 £ i 14 billion (approximately $ i 19 billion as of March 31, 2021). In July 2017, the trial court denied the plaintiffs’ application for the case to proceed as a collective action. In April 2019, the U.K. appellate court granted the plaintiffs’ appeal of the trial court’s decision and sent the case back to the trial court for a re-hearing on the plaintiffs’ collective action application. In December 2020, the U.K. Supreme Court rejected Mastercard’s appeal of this ruling. In March 2021, the trial court held a re-hearing on the plaintiffs’ collective action application.

ATM Non-Discrimination Rule Surcharge Complaints

In October 2011, a trade association of independent Automated Teller Machine (“ATM”) operators and i 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.

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.

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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. In September 2019, the plaintiffs filed their motions for class certification in which the plaintiffs, in aggregate, allege over $ i 1 billion in damages against all of the defendants. Mastercard intends to vigorously defend against both the plaintiffs’ liability and damages claims and has opposed class certification. Briefing on class certification is complete.

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 district 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 district court transferred the case to New York so that discovery could be coordinated with the U.S. merchant class interchange litigation described above. In August 2020, the district court issued an order granting the plaintiffs’ request for class certification. In January 2021, the Network Defendants’ request for permission to appeal the district court’s certification decision to the appellate court was denied. The case is proceeding with substantive expert discovery. The plaintiffs’ have submitted expert reports that allege aggregate damages in excess of $ i 1 billion against the i four Network Defendants. The Network Defendants have submitted expert reports rebutting both liability and damages.

Telephone Consumer Protection Class Action

Mastercard is a defendant in a Telephone Consumer Protection Act (“TCPA”) class action pending in Florida. The plaintiffs are individuals and businesses who allege that approximately i 381,000 unsolicited faxes were sent to them advertising a Mastercard co-brand card issued by First Arkansas Bank (“FAB”). The TCPA provides for uncapped statutory damages of $ i 500 per fax. Mastercard has asserted various defenses to the claims, and has notified FAB of an indemnity claim that it has (which FAB has disputed). In June 2018, the district court granted Mastercard’s motion to stay the proceedings until the Federal Communications Commission makes a decision on the application of the TCPA to online fax services. In December 2019, the FCC issued a declaratory ruling clarifying that the TCPA does not apply to faxes sent to online fax services that are received via e-mail. As a result of the ruling, the stay of the litigation was lifted in January 2020. In January 2021, the magistrate judge serving on the district court issued an opinion recommending that the district court judge deny plaintiffs’ class certification motion. In light of an appellate court decision, issued subsequent to the magistrate’s recommendation, the district court judge has instructed the parties to re-brief the motion for class certification.

U.S. Federal Trade Commission Investigation

In June 2020, the U.S. Federal Trade Commission’s Bureau of Competition (“FTC”) informed Mastercard that it has initiated a formal investigation into compliance with the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act. In particular, the investigation focuses on Mastercard’s compliance with the debit routing provisions of the Durbin Amendment. The FTC has issued a subpoena and Mastercard is cooperating with it in the investigation.

U.K. Prepaid Cards Matter

In 2019, Mastercard was informed by the U.K. Payment Systems Regulator (PSR) that Mastercard was a target of its confidential investigation into alleged anti-competitive conduct by public sector prepaid card program managers in the U.K. This matter focused exclusively on historic behavior. In March 2021, the PSR announced the resolution and settlement of this investigation. As part of the resolution, Mastercard has agreed to pay a maximum fine of £ i 32 million. This matter has no prospective impact on Mastercard’s on-going business. In connection with this matter, in the fourth quarter of 2020, Mastercard recorded a litigation charge of $ i 45 million.

Note 16. i Settlement and Other Risk Management

Mastercard’s rules guarantee the settlement of many of the transactions between its customers (“settlement risk”). Settlement exposure is the settlement risk to customers under Mastercard’s rules due to the difference in timing between the payment transaction date and subsequent settlement. While the term and amount of the guarantee are unlimited, the duration of settlement exposure is short term and typically limited to a few days.

Gross settlement exposure is estimated using the average daily payment volume during the three months prior to period end multiplied by the estimated number of days of exposure. The Company has global risk management policies and procedures, which include risk standards, to provide a framework for managing the Company’s settlement risk and exposure. In the event of a failed customer, Mastercard may pursue one or more remedies available under the Company’s rules to recover potential losses. Historically, the Company has experienced a low level of losses from customer failures.

MASTERCARD MARCH 31, 2021 FORM 10-Q 25

PART I

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As part of its policies, Mastercard requires certain customers that are not in compliance with the Company’s risk standards to post collateral, such as cash, letters of credit, guarantees, or other risk mitigating arrangements. This requirement is based on a review of the individual risk circumstances for each customer. Mastercard monitors its credit risk portfolio on a regular basis and the adequacy of collateral on hand. Additionally, from time to time, the Company reviews its risk management methodology and standards. As such, the amounts of estimated settlement exposure are revised as necessary.

The Company’s estimated settlement exposure was as follows:

(in millions)

Gross settlement exposure

i 52,265

i 52,360

Collateral applied to settlement exposure

( i 6,128)

( i 6,021)

Net uncollateralized settlement exposure

i 46,137

i 46,339

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 $ i 368 million and $ i 370 million at March 31, 2021 and December 31, 2020, respectively, of which $ i 292 million and $ i 294 million at March 31, 2021 and December 31, 2020, 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 17. i Derivative and Hedging Instruments

The Company monitors and manages its foreign currency and interest rate exposures as part of its overall risk management program which focuses on the unpredictability of financial markets and seeks to reduce the potentially adverse effects that the volatility of these markets may have on its operating results. A primary objective of the Company’s risk management strategies is to reduce the financial impact that may arise from volatility in foreign currency exchange rates principally through the use of both foreign exchange derivative contracts and foreign currency denominated debt. In addition, the Company may enter into interest rate derivative contracts to manage the effects of interest rate movements on the Company’s aggregate liability portfolio, including potential future debt issuances.

Cash Flow Hedges

The Company may enter into foreign exchange derivative contracts, including forwards and options, to manage the impact of foreign currency variability on anticipated revenues and expenses, which fluctuate based on currencies other than the functional currency of the entity. The objective of these hedging activities is to reduce the effect of movement in foreign exchange rates for a portion of revenues and expenses forecasted to occur. As these contracts are designated as cash flow hedging instruments, gains and losses resulting from changes in fair value of these contracts are deferred in accumulated other comprehensive income (loss) and subsequently reclassified to the consolidated statement of operations when the underlying hedged transactions impact earnings.

In addition, the Company may enter into interest rate derivative contracts to manage the effects of interest rate movements on the Company’s aggregate liability portfolio, including potential future debt issuances, and designate such derivatives as hedging instruments in a cash flow hedging relationship. In 2019, the Company entered into treasury rate locks which are accounted for as cash flow hedges. In the first quarter of 2020, in connection with the issuance of the 2020 USD Notes, these contracts were settled at a loss of $ i 136 million after tax, in accumulated other comprehensive income (loss). As of March 31, 2021, a cumulative loss of $ i 132 million after tax, remains in accumulated other comprehensive income (loss) associated with these contracts and will be reclassified as an adjustment to interest expense over the respective terms of the 2020 USD Notes.

Net Investment Hedges

The Company may use foreign currency denominated debt and/or foreign exchange derivative contracts to hedge a portion of its net investment in foreign subsidiaries against adverse movements in exchange rates. The effective portion of the net investment hedge is recorded as a currency translation adjustment in accumulated other comprehensive income (loss). Forward points are designated as an excluded component and recognized in general and administrative expenses on the consolidated statement of operations over the hedge period.

In 2015, the Company designated its € i 1.65 billion euro-denominated debt as a net investment hedge for a portion of its net investment in its European operations. As of March 31, 2021, the Company had a net foreign currency loss of $ i 72 million after tax, in accumulated other comprehensive income (loss) associated with this hedging activity.

26 MASTERCARD MARCH 31, 2021 FORM 10-Q

PART I

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Non-designated Derivatives

The Company may also enter into foreign exchange derivative contracts to serve as economic hedges, such as to offset possible changes in the value of monetary assets and liabilities due to foreign exchange fluctuations, without designating these derivative contracts as hedging instruments. In addition, the Company is subject to foreign exchange risk as part of its daily settlement activities. This risk is typically limited to a few days between when a payment transaction takes place and the subsequent settlement with customers. To manage this risk, the Company may enter into short duration foreign exchange derivative contracts based upon anticipated receipts and disbursements for the respective currency position. 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. Gains and losses resulting from changes in fair value of these contracts are recorded in general and administrative expenses on the consolidated statement of operations, net, along with the foreign currency gains and losses on monetary assets and liabilities.

The following table summarizes the fair value of the Company’s derivative financial instruments and the related notional amounts: