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 and businesses 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 Company also provides value-added offerings such as safety and security products, information services and consulting, issuer and acquirer processing, and loyalty and reward programs. The Company’s network is designed to ensure safety and security for the global payments system. A typical transaction on the Company’s network involves four participants in addition to the Company: cardholder (an individual who holds a card or uses another device enabled for payment), merchant, issuer (the cardholder’s financial institution) and acquirer (the merchant’s financial institution). The Company’s customers encompass a vast array of entities, including financial institutions and other entities that act as “issuers” and “acquirers”, as well as merchants, governments and other businesses. The Company does not issue cards, extend credit, determine or receive revenue from interest rates or other fees charged to cardholders by issuers, or establish the rates charged by acquirers in connection with merchants’ acceptance of the Company’s branded cards.
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, 2016 and 2015
, 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 2016 presentation. The Company follows accounting principles generally accepted in the United States of America (“GAAP”).
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
2016, 2015 and 2014
, income from non-controlling interests was de minimis and, as a result, amounts are included in 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 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.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 our systems or reported by our 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 to us by our 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 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. Goodwill is tested for impairment at the reporting unit level. The impairment evaluation utilizes a quantitative assessment using a two-step impairment test. The first step is to compare the reporting unit’s carrying value, including goodwill, to the fair value. If the fair value exceeds the carrying value, then no potential impairment is considered to exist. If the carrying value exceeds the fair value, the second step is performed to determine if the implied fair value of the reporting unit’s goodwill exceeds the carrying value of the reporting unit. An impairment charge would be recorded if the carrying value exceeds the implied fair value. Impairment charges, if any, are recorded in general and administrative expenses.
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.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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.
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 as separate line items on the consolidated balance sheet. In 2015, the Company early adopted accounting guidance issued by the Financial Accounting Standards Board (“FASB”), which requires all deferred income taxes to be recorded as non-current. 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 statement of operations. The Company includes penalties related to income tax matters in the income tax provision. The Company does not provide for U.S. federal income tax and foreign withholding taxes on undistributed earnings from non-U.S. subsidiaries when such earnings are intended to be reinvested indefinitely outside of the U.S.
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”).
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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:
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•
|
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 fair value adjustments in certain circumstances, such as when there is evidence of impairment.
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 discounted cash flows for estimating the fair value of its intangible assets and the Company’s 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.
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.
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 while the non-credit loss would remain in accumulated other comprehensive income (loss).
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, 2016 and 2015
.
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) 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.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Settlement due from/due to customers
- The Company operates systems for clearing and settling payment transactions among Mastercard 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 Mastercard customers.
Restricted security deposits held for Mastercard 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.
The useful lives of the Company’s assets are as follows:
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Asset Category
|
|
Estimated Useful Life
|
Buildings
|
|
30 years
|
Building equipment
|
|
10 - 15 years
|
Furniture and fixtures and equipment
|
|
2 - 5 years
|
Leasehold improvements
|
|
Shorter of life of improvement or lease term
|
Capital leases
|
|
Shorter of life of the asset or lease term
|
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.
Net periodic pension and postretirement benefit cost/(income) is recognized in general and administrative expenses in 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 in 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
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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.
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.
Recent accounting pronouncements
Goodwill impairment
- In January 2017, the FASB issued accounting guidance to simplify how companies are required to test goodwill for impairment. Under this new 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 new guidance, companies will perform their annual, or interim, goodwill impairment test by comparing the reporting unit’s carrying value, including goodwill, to the fair value. An impairment charge would be recorded if the carrying value exceeds the reporting unit’s fair value. The guidance is required to be applied prospectively and is effective for periods beginning after December 15, 2020, with early adoption permitted. The Company expects to early adopt this accounting guidance effective January 1, 2017. The Company does not expect any impact from the adoption of the new accounting guidance on its consolidated financial statements.
Restricted cash
- In December 2016, the FASB issued accounting guidance to address diversity in the classification and presentation of changes in restricted cash on the 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 statement of cash flows. The guidance is required to be applied retrospectively and is effective for periods beginning after December 15, 2017, with early adoption permitted. The Company expects to adopt this accounting guidance effective January 1, 2018. Upon adoption of this standard, the Company will include restricted cash, which currently consists of restricted cash for litigation settlement and restricted security deposits held for customers in its reconciliation of beginning-of-period and end-of-period cash and cash equivalents on the 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. 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 guidance is effective for periods beginning after December 15, 2017 and early adoption is permitted. The Company expects to adopt this accounting 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 any deferred income tax consequence from intra-entity asset transfers occurring before the date of adoption. See Note 17 (Income Taxes) for additional information related to intra-entity asset transfers that will be impacted by this guidance.
Share-based payments
- In March 2016, the FASB
issued accounting guidance related to share-based payments to employees. Under this guidance, companies will be required to recognize the tax effects of exercised or vested awards within the income statement, in the period in which they occur, rather than within additional paid-in-capital. In addition, the guidance changes the limit that companies are allowed to withhold for employees without triggering liability accounting and allows companies to make a policy election to either recognize forfeitures as they occur or estimate them. The guidance is effective for periods beginning after December 15, 2016 and early adoption is permitted. The required transition methods for each aspect of the guidance vary
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
between prospective, retrospective and modified retrospective. The Company will adopt the accounting guidance effective January 1, 2017 and the impact on the tax provision during the period will be dependent upon several factors including, the amount and grant value of equity awards that either vest or are exercised, in addition to, Mastercard’s share price on those dates. The requirement to recognize the tax effects of exercised or vested awards in the income statement, rather than within additional paid-in-capital, will be adopted prospectively. If this aspect of the new guidance had been in effect for each of the periods presented, the Company’s tax provision in 2016, 2015 and 2014 would have been adjusted for a tax benefit of $
48 million
, $
42 million
and $
54 million
, respectively, in its income statement. The Company is in the process of evaluating the other potential effects this guidance will have 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. The guidance requires companies to recognize leased assets and liabilities for both capital and operating leases. The 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 is in the process of evaluating the potential effects this guidance will have on its consolidated financial statements.
Debt issuance costs
- In April 2015, the FASB issued accounting guidance that changed the current presentation of debt issuance costs on the consolidated balance sheet. This guidance moved debt issuance costs from the assets section of the consolidated balance sheet to the liabilities section as a direct deduction from the carrying amount of the debt issued. The Company adopted the accounting guidance effective January 1, 2016. The Company applied the guidance retrospectively and, as such, the December 31, 2015 consolidated balance sheet was adjusted to reflect the effects of the standard. This retrospective adjustment resulted in reductions of prepaid expenses and other current assets, other assets and long-term debt by
$1 million
,
$18 million
and
$19 million
, respectively. As of
December 31, 2016
,
$33 million
of debt issuance costs were classified as an offset to long-term debt.
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 the guidance effective for fiscal years beginning after December 15, 2017. The new revenue guidance will impact the timing of recognition for certain of the Company’s customer incentives. Under the new guidance, the Company will recognize certain customer incentives over the life of the contract as revenue is recognized versus as they are earned by the customer. The Company will adopt the new accounting guidance effective January 1, 2018. The accounting guidance permits either a full retrospective or a modified retrospective transition method. The Company expects to adopt the new guidance with the modified retrospective transition method. The Company is in the process of quantifying the potential effects this guidance will have on its consolidated financial statements.
Note 2.
Acquisitions
On July 21, 2016, Mastercard entered into a definitive agreement to acquire a
92.4%
controlling interest in VocaLink Holdings Limited (“VocaLink”) for approximately
£700 million
(approximately
$860 million
as of
December 31, 2016
) after adjusting for cash and certain other estimated liabilities. VocaLink’s existing shareholders have the potential for an earn-out of up to an additional
£169 million
(approximately
$210 million
as of
December 31, 2016
) if certain performance targets are met. Under the agreement, a majority of VocaLink’s shareholders will retain
7.6%
ownership for at least
three years
. VocaLink operates payments clearing systems and ATM switching platforms in the U.K., as well as several other regions. While the Company anticipates completing the transaction by the middle of 2017, it is subject to regulatory approval and other customary closing conditions.
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. In 2014, the Company acquired
eight
businesses,
two
of which were achieved in stages, with non-controlling interests acquired in previous years.
One
of the business combinations was a transaction for less than 100 percent of the equity interest. The total consideration transferred was
$575 million
, of which
$509 million
was recorded as goodwill.
A portion of the goodwill related to the
2015
and 2014 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.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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:
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2016
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2015
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2014
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(in millions, except per share data)
|
Numerator
|
|
|
|
|
|
Net income
|
$
|
4,059
|
|
|
$
|
3,808
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|
|
$
|
3,617
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|
Denominator
|
|
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|
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|
Basic weighted-average shares outstanding
|
1,098
|
|
|
1,134
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|
|
1,165
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Dilutive stock options and stock units
|
3
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|
|
3
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|
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4
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|
Diluted weighted-average shares outstanding
1
|
1,101
|
|
|
1,137
|
|
|
1,169
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|
Earnings per Share
|
|
|
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Basic
|
$
|
3.70
|
|
|
$
|
3.36
|
|
|
$
|
3.11
|
|
Diluted
|
$
|
3.69
|
|
|
$
|
3.35
|
|
|
$
|
3.10
|
|
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:
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2016
|
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2015
|
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2014
|
|
(in millions)
|
Cash paid for income taxes, net of refunds
|
$
|
1,579
|
|
|
$
|
1,097
|
|
|
$
|
2,036
|
|
Cash paid for interest
|
74
|
|
|
44
|
|
|
24
|
|
Cash paid for legal settlements
|
101
|
|
|
124
|
|
|
28
|
|
Non-cash investing and financing activities
|
|
|
|
|
|
Dividends declared but not yet paid
|
238
|
|
|
212
|
|
|
184
|
|
Assets recorded pursuant to capital lease
|
3
|
|
|
10
|
|
|
8
|
|
Fair value of assets acquired, net of cash acquired
|
—
|
|
|
626
|
|
|
768
|
|
Fair value of liabilities assumed related to acquisitions
|
—
|
|
|
42
|
|
|
141
|
|
Note 5.
Fair Value and Investment Securities
Financial Instruments - Recurring Measurements
The Company classifies its fair value measurements of financial instruments into a three-level hierarchy (the “Valuation Hierarchy”). There were
no
transfers made among the three levels in the Valuation Hierarchy for
2016
.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The distribution of the Company’s financial instruments which are measured at fair value on a recurring basis within the Valuation Hierarchy was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Quoted Prices
in Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Fair
Value
|
|
(in millions)
|
Municipal securities
|
$
|
—
|
|
|
$
|
59
|
|
|
$
|
—
|
|
|
$
|
59
|
|
Government and agency securities
1
|
49
|
|
|
117
|
|
|
—
|
|
|
166
|
|
Corporate securities
|
—
|
|
|
855
|
|
|
—
|
|
|
855
|
|
Asset-backed securities
|
—
|
|
|
80
|
|
|
—
|
|
|
80
|
|
Other
|
2
|
|
|
16
|
|
|
—
|
|
|
18
|
|
Total
|
$
|
51
|
|
|
$
|
1,127
|
|
|
$
|
—
|
|
|
$
|
1,178
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Quoted Prices
in Active
Markets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Fair
Value
|
|
(in millions)
|
Municipal securities
|
$
|
—
|
|
|
$
|
62
|
|
|
$
|
—
|
|
|
$
|
62
|
|
Government and agency securities
1
|
31
|
|
|
64
|
|
|
—
|
|
|
95
|
|
Corporate securities
|
—
|
|
|
645
|
|
|
—
|
|
|
645
|
|
Asset-backed securities
|
—
|
|
|
57
|
|
|
—
|
|
|
57
|
|
Other
|
2
|
|
|
14
|
|
|
—
|
|
|
16
|
|
Total
|
$
|
33
|
|
|
$
|
842
|
|
|
$
|
—
|
|
|
$
|
875
|
|
1
Excludes amounts held in escrow related to the U.S. merchant class litigation settlement of
$543 million
and
$541 million
at
December 31, 2016
and
December 31, 2015
, respectively, which would be included in Level 1 of the Valuation Hierarchy. See
Note 10 (Accrued Expenses and Accrued Litigation)
and
Note 18 (Legal and Regulatory Proceedings)
for further details.
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 quoted prices for similar assets in active markets and are therefore included in Level 2 of the Valuation Hierarchy. The Company’s foreign currency derivative asset and liability contracts have also been classified within Level 2 in the Other category of the Valuation Hierarchy, as the fair value is based on broker quotes for the same or similar derivative instruments. See
Note 20 (Foreign Exchange Risk Management)
for further details. 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.
Financial Instruments - Non-Recurring Measurements
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, time deposits, accounts receivable, settlement due from customers, restricted security deposits held for customers, accounts payable, settlement due to customers and accrued expenses. In addition, nonmarketable equity investments are measured at fair value on a nonrecurring basis for purposes of initial recognition and impairment testing.
Investments on the consolidated balance sheet include both available-for-sale and short-term held-to-maturity securities. Available-for-sale securities are measured at fair value on a recurring basis and are included in the Valuation Hierarchy table above. Short-term held-to-maturity securities are made up of time deposits with maturities of greater than three months and less than one year and are classified as Level 2 of the Valuation Hierarchy, but are not included in the table above due to their fair values not being measured on a recurring basis. At
December 31, 2016
and
December 31, 2015
, the cost, which approximates fair value, of the Company’s short-term held-to-maturity securities was
$452 million
and
$130 million
, respectively. 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 cost of which approximates fair value, which are classified as Level 2 of the Valuation Hierarchy.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Debt
The Company estimates the fair value of its long-term debt based on market quotes for the debt instruments. Long-term debt is classified as Level 2 of the Valuation Hierarchy. At
December 31, 2016
, the carrying value and fair value of long-term debt was
$5.2 billion
and
$5.3 billion
, respectively. At
December 31, 2015
, the carrying value and fair value of long-term debt was
$3.3 billion
.
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, 2016 and 2015
, the carrying value and fair value of settlement and other guarantee liabilities were not material. Settlement and other guarantee liabilities are classified as Level 3 of the Valuation Hierarchy as their valuation requires substantial judgment and estimation of factors that are not currently observable in the market. For additional information regarding the Company’s settlement and other guarantee liabilities, see
Note 19 (Settlement and Other Risk Management)
.
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.
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 on the consolidated statement of comprehensive income, and their respective amortized cost basis and fair values as of
December 31, 2016 and 2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gain
|
|
Gross
Unrealized
Loss
|
|
Fair
Value
|
|
(in millions)
|
Municipal securities
|
$
|
59
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
59
|
|
Government and agency securities
|
165
|
|
|
1
|
|
|
—
|
|
|
166
|
|
Corporate securities
|
853
|
|
|
3
|
|
|
(1
|
)
|
|
855
|
|
Asset-backed securities
|
80
|
|
|
—
|
|
|
—
|
|
|
80
|
|
Other
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Total
|
$
|
1,159
|
|
|
$
|
4
|
|
|
$
|
(1
|
)
|
|
$
|
1,162
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Amortized
Cost
|
|
Gross
Unrealized
Gain
|
|
Gross
Unrealized
Loss
|
|
Fair
Value
|
|
(in millions)
|
Municipal securities
|
$
|
62
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
62
|
|
Government and agency securities
|
94
|
|
|
1
|
|
|
—
|
|
|
95
|
|
Corporate securities
|
646
|
|
|
—
|
|
|
(1
|
)
|
|
645
|
|
Asset-backed securities
|
57
|
|
|
—
|
|
|
—
|
|
|
57
|
|
Other
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Total
|
$
|
861
|
|
|
$
|
1
|
|
|
$
|
(1
|
)
|
|
$
|
861
|
|
The Company’s available-for-sale investment securities held at
December 31, 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
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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, 2016
was as follows:
|
|
|
|
|
|
|
|
|
|
Available-For-Sale
|
|
Amortized
Cost
|
|
Fair Value
|
|
(in millions)
|
Due within 1 year
|
$
|
437
|
|
|
$
|
437
|
|
Due after 1 year through 5 years
|
715
|
|
|
718
|
|
Due after 5 years through 10 years
|
—
|
|
|
—
|
|
Due after 10 years
|
5
|
|
|
5
|
|
No contractual maturity
1
|
2
|
|
|
2
|
|
Total
|
$
|
1,159
|
|
|
$
|
1,162
|
|
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
2016
,
2015
and
2014
were not significant.
Note 6.
Prepaid Expenses and Other Assets
Prepaid expenses and other current assets consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
(in millions)
|
Customer and merchant incentives
|
$
|
479
|
|
|
$
|
345
|
|
Prepaid income taxes
|
118
|
|
|
72
|
|
Other
|
253
|
|
|
246
|
|
Total prepaid expenses and other current assets
|
$
|
850
|
|
|
$
|
663
|
|
Other assets consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
(in millions)
|
Customer and merchant incentives
|
$
|
1,134
|
|
|
$
|
810
|
|
Nonmarketable equity investments
|
132
|
|
|
166
|
|
Prepaid income taxes
|
325
|
|
|
352
|
|
Income taxes receivable
|
175
|
|
|
160
|
|
Other
|
163
|
|
|
92
|
|
Total other assets
|
$
|
1,929
|
|
|
$
|
1,580
|
|
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.
Non-current prepaid income taxes, included in the other asset table above, primarily consists of taxes paid in the fourth quarter of 2014 relating to the deferred charge resulting from the reorganization of our legal entity and tax structure to better align with our business footprint of our non-U.S. operations.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 7.
Property, Plant and Equipment
Property, plant and equipment consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
(in millions)
|
Building, building equipment and land
|
$
|
534
|
|
|
$
|
503
|
|
Equipment
|
606
|
|
|
497
|
|
Furniture and fixtures
|
63
|
|
|
54
|
|
Leasehold improvements
|
133
|
|
|
112
|
|
Property, plant and equipment
|
1,336
|
|
|
1,166
|
|
Less: accumulated depreciation and amortization
|
(603
|
)
|
|
(491
|
)
|
Property, plant and equipment, net
|
$
|
733
|
|
|
$
|
675
|
|
As of
December 31, 2016 and 2015
, capital leases of
$23 million
and
$20 million
, respectively, were included in equipment. Accumulated amortization of these capital leases was
$16 million
and
$9 million
as of
December 31, 2016 and 2015
, respectively.
Depreciation and amortization expense for the above property, plant and equipment was
$152 million
,
$131 million
and
$107 million
for
2016
,
2015
and
2014
, respectively.
Note 8.
Goodwill
The changes in the carrying amount of goodwill for the years ended
December 31, 2016 and 2015
were as follows:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
(in millions)
|
Beginning balance
|
$
|
1,891
|
|
|
$
|
1,522
|
|
Additions
|
8
|
|
|
458
|
|
Foreign currency translation
|
(143
|
)
|
|
(89
|
)
|
Ending balance
|
$
|
1,756
|
|
|
$
|
1,891
|
|
The Company had no accumulated impairment losses for goodwill at
December 31, 2016
or
2015
. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
(in millions)
|
Amortized intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized software
|
$
|
1,210
|
|
|
$
|
(768
|
)
|
|
$
|
442
|
|
|
$
|
1,086
|
|
|
$
|
(625
|
)
|
|
$
|
461
|
|
Trademarks and tradenames
|
26
|
|
|
(22
|
)
|
|
4
|
|
|
30
|
|
|
(23
|
)
|
|
7
|
|
Customer relationships
|
283
|
|
|
(162
|
)
|
|
121
|
|
|
318
|
|
|
(149
|
)
|
|
169
|
|
Other
|
23
|
|
|
(22
|
)
|
|
1
|
|
|
25
|
|
|
(19
|
)
|
|
6
|
|
Total
|
1,542
|
|
|
(974
|
)
|
|
568
|
|
|
1,459
|
|
|
(816
|
)
|
|
643
|
|
Unamortized intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
154
|
|
|
—
|
|
|
154
|
|
|
160
|
|
|
—
|
|
|
160
|
|
Total
|
$
|
1,696
|
|
|
$
|
(974
|
)
|
|
$
|
722
|
|
|
$
|
1,619
|
|
|
$
|
(816
|
)
|
|
$
|
803
|
|
The increase in the gross carrying amount of amortized intangible assets in
2016
was primarily related to capitalized software. Certain intangible assets, including amortizable and unamortizable customer relationships and trademarks and tradenames, are
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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
2016
, it was determined that the Company’s indefinite-lived intangible assets were not impaired.
Amortization on the assets above amounted to
$221 million
,
$235 million
and
$214 million
in
2016, 2015 and 2014
, respectively. The following table sets forth the estimated future amortization expense on amortizable intangible assets on the consolidated balance sheet at
December 31, 2016
for the years ending December 31:
|
|
|
|
|
|
(in millions)
|
2017
|
$
|
213
|
|
2018
|
154
|
|
2019
|
108
|
|
2020
|
24
|
|
2021 and thereafter
|
69
|
|
|
$
|
568
|
|
Note 10.
Accrued Expenses and Accrued Litigation
Accrued expenses consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
(in millions)
|
Customer and merchant incentives
|
$
|
2,286
|
|
|
$
|
1,748
|
|
Personnel costs
|
496
|
|
|
473
|
|
Advertising
|
71
|
|
|
114
|
|
Income and other taxes
|
161
|
|
|
143
|
|
Other
|
304
|
|
|
285
|
|
Total accrued expenses
|
$
|
3,318
|
|
|
$
|
2,763
|
|
As of
December 31, 2016
and
2015
, the Company’s provision for litigation was
$722 million
and
$709 million
, respectively. These amounts are not included in the accrued expenses table above and are separately reported as accrued litigation on the consolidated balance sheet. See
Note 18 (Legal and Regulatory Proceedings)
for further discussion of the U.S. merchant class litigation.
Note 11.
Pension, Postretirement and Savings Plans
Defined Contribution
The Company sponsors defined contribution retirement plans. The primary plan is the Mastercard Savings Plan, a 401(k) plan for substantially all of the 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
$73 million
,
$61 million
and
$57 million
in
2016, 2015 and 2014
, respectively.
Defined Benefit and Other Postretirement Plans
During the third quarter of 2015, the Company terminated its non-contributory, qualified, U.S. defined benefit pension plan (the “U.S. Employee 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 maintains a postretirement plan providing health coverage and life insurance benefits for substantially all of its U.S. employees hired before July 1, 2007 (“U.S. Postretirement Plan”). The U.S. postretirement plan was unfunded and the Company’s obligation was
$59 million
as of
December 31, 2016
and
2015
, and was recorded in Other Liabilities. The Company’s total expense for its U.S. postretirement plan was not material to the Company’s consolidated financial statements.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company sponsors pension and postretirement plans for non-U.S. employees (“non-U.S. plans”) that cover various benefits specific to their country of employment. The Company recognizes the funded status of its defined benefit pension plans and other postretirement benefit plans, measured as the difference between the fair value of the plan assets and the projected benefit obligation, in the Consolidated Balance Sheet. The non-U.S. plans do not have a material impact on the Company’s consolidated financial statements, individually or in the aggregate.
Note 12.
Debt
In November 2016, the Company issued
$2 billion
aggregate principal amount of notes (the “2016 USD Notes”). Interest on the 2016 USD Notes is payable semi-annually.
In December 2015, the Company issued
€1.65 billion
(
$1.74 billion
as translated at the
December 31, 2016
exchange rate) aggregate principal amount of notes (the “2015 Euro Notes”). Interest on the 2015 Euro Notes is payable annually.
In March 2014, the Company issued
$1.5 billion
aggregate principal amount of notes (the “2014 USD Notes”). Interest on the 2014 USD Notes is payable semi-annually.
The net proceeds, after deducting the original issue discount, underwriting discount and offering expenses, from the issuance of the 2016 USD Notes, the 2015 Euro Notes and the 2014 USD Notes, were
$1.969 billion
,
$1.723 billion
and
$1.484 billion
, respectively.
The Company is not subject to any financial covenants under the 2016 USD Notes, the 2015 Euro Notes and the 2014 USD Notes (collectively the “Notes”). The Notes may be redeemed in whole, or in part, at our 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.
Long-term debt consisted of the following at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity
Date
|
|
Aggregate Principal Amount
|
|
Stated Interest Rate
|
|
Effective Interest Rate
|
|
2016
|
|
2015
|
|
|
|
(in millions, except percentages)
|
2016 USD Notes
|
2021
|
|
$650
|
|
2.000
|
%
|
|
2.236
|
%
|
|
$
|
650
|
|
|
$
|
—
|
|
|
2026
|
|
$750
|
|
2.950
|
%
|
|
3.044
|
%
|
|
750
|
|
|
—
|
|
|
2046
|
|
$600
|
|
3.800
|
%
|
|
3.893
|
%
|
|
600
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 Euro Notes
|
2022
|
|
€700
|
|
1.100
|
%
|
|
1.265
|
%
|
|
738
|
|
|
763
|
|
|
2027
|
|
€800
|
|
2.100
|
%
|
|
2.189
|
%
|
|
843
|
|
|
872
|
|
|
2030
|
|
€150
|
|
2.500
|
%
|
|
2.562
|
%
|
|
158
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2014 USD Notes
|
2019
|
|
$500
|
|
2.000
|
%
|
|
2.178
|
%
|
|
500
|
|
|
500
|
|
|
2024
|
|
$1,000
|
|
3.375
|
%
|
|
3.484
|
%
|
|
1,000
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
5,239
|
|
|
3,299
|
|
Less: Unamortized discount and debt issuance costs
|
|
|
|
|
|
|
|
|
(59
|
)
|
|
(31
|
)
|
Long-term debt
|
|
|
|
|
|
|
|
|
$
|
5,180
|
|
|
$
|
3,268
|
|
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Scheduled annual maturities of the principal portion of long-term debt outstanding at
December 31, 2016
are summarized below. Amounts exclude capital lease obligations disclosed in
Note 16 (Commitments)
.
|
|
|
|
|
|
(in millions)
|
2017 - 2018
|
$
|
—
|
|
2019
|
500
|
|
2020
|
—
|
|
2021
|
650
|
|
Thereafter
|
4,089
|
|
Total
|
$
|
5,239
|
|
In November 2015, the Company established a commercial paper program (the “Commercial Paper Program”). Under the Commercial Paper Program, the Company 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”) in October 2015. The Credit Facility amended and restated the Company’s prior credit facility. Borrowings under the Credit Facility are available in U.S. dollars and/or euros. In October 2016, the Company extended the Credit Facility for an additional year to October 2021. The extension did not result in any material changes to the terms and conditions of the Credit Facility. The facility fee and borrowing cost under the Credit Facility are based upon the Company’s credit rating. At
December 31, 2016
, 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, 2016
and
2015
. 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, 2016
and
2015
.
On June 15, 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
|
|
Par Value Per Share
|
|
Authorized Shares
(in millions)
|
|
Dividend and Voting Rights
|
A
|
|
$0.0001
|
|
3,000
|
|
|
One vote per share
Dividend rights
|
B
|
|
$0.0001
|
|
1,200
|
|
|
Non-voting
Dividend rights
|
Preferred
|
|
$0.0001
|
|
300
|
|
|
No shares issued or outstanding at December 31, 2016 and 2015, respectively. Dividend and voting rights are to be determined by the Board of Directors of the Company upon issuance.
|
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Ownership and Governance Structure
Equity ownership and voting power of the Company’s shares were allocated as follows as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Equity Ownership
|
|
General Voting Power
|
|
Equity Ownership
|
|
General Voting Power
|
Public Investors (Class A stockholders)
|
87.7
|
%
|
|
89.3
|
%
|
|
87.7
|
%
|
|
89.4
|
%
|
Principal or Affiliate Customers (Class B stockholders)
|
1.8
|
%
|
|
—
|
%
|
|
1.9
|
%
|
|
—
|
%
|
The MasterCard Foundation (Class A stockholders)
|
10.5
|
%
|
|
10.7
|
%
|
|
10.4
|
%
|
|
10.6
|
%
|
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.
The 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 The MasterCard Foundation (the “Foundation”). The 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, the Foundation became able to resell the donated shares in May 2010 and to the extent necessary to meet charitable disbursement requirements dictated by Canadian tax law. Under Canadian tax law, the Foundation is generally required to disburse at least
3.5%
of its assets not used in administration each year for qualified charitable disbursements. However, the Foundation obtained permission from the Canadian tax authorities to defer the giving requirements for up to
ten
years, which was extended in 2011 to
fifteen
years. The 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. The Foundation will be permitted to sell all of its remaining shares beginning twenty years and eleven months after the consummation of the IPO.
Stock Repurchase Programs
On February 5, 2013, the Company’s Board of Directors approved a share repurchase program authorizing the Company to repurchase up to
$2 billion
of its Class A common stock (the “February 2013 Share Repurchase Program”), which became effective in March 2013.
On December 10, 2013, the Company’s Board of Directors approved a share repurchase program authorizing the Company to repurchase up to
$3.5 billion
of its Class A common stock (the “December 2013 Share Repurchase Program”), which became effective in January 2014.
On December 2, 2014, the Company’s Board of Directors approved a share repurchase program authorizing the Company to repurchase up to
$3.75 billion
of its Class A common stock (the “December 2014 Share Repurchase Program”), which became effective in January 2015.
On December 8, 2015, the Company’s Board of Directors approved a share repurchase program authorizing the Company to repurchase up to
$4 billion
of its Class A common stock (the “December 2015 Share Repurchase Program”), which became effective in February 2016.
On December 6, 2016, the Company’s Board of Directors approved a share repurchase program authorizing the Company to repurchase up to
$4 billion
of its Class A common stock (the “December 2016 Share Repurchase Program”). The December 2016 Share Repurchase Program will become effective after completion of the December 2015 Share Repurchase Program.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The following table summarizes the Company’s share repurchase authorizations of its Class A common stock through
December 31, 2016
, as well as historical purchases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authorization Dates
|
|
December
2016
|
|
December
2015
|
|
December
2014
|
|
December
2013
|
|
February
2013
|
|
Total
|
|
(in millions, except average price data)
|
Board authorization
|
$
|
4,000
|
|
|
$
|
4,000
|
|
|
$
|
3,750
|
|
|
$
|
3,500
|
|
|
$
|
2,000
|
|
|
$
|
17,250
|
|
Dollar-value of shares repurchased in 2014
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,225
|
|
|
$
|
161
|
|
|
$
|
3,386
|
|
Remaining authorization at December 31, 2014
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,750
|
|
|
$
|
275
|
|
|
$
|
—
|
|
|
$
|
4,025
|
|
Dollar-value of shares repurchased in 2015
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,243
|
|
|
$
|
275
|
|
|
$
|
—
|
|
|
$
|
3,518
|
|
Remaining authorization at December 31, 2015
|
$
|
—
|
|
|
$
|
4,000
|
|
|
$
|
507
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,507
|
|
Dollar-value of shares repurchased in 2016
|
$
|
—
|
|
|
$
|
3,004
|
|
|
$
|
507
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,511
|
|
Remaining authorization at December 31, 2016
|
$
|
4,000
|
|
|
$
|
996
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares repurchased in 2014
|
—
|
|
|
—
|
|
|
—
|
|
|
42.6
|
|
|
1.9
|
|
|
44.5
|
|
Average price paid per share in 2014
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
75.81
|
|
|
$
|
83.22
|
|
|
$
|
76.14
|
|
Shares repurchased in 2015
|
—
|
|
|
—
|
|
|
35.1
|
|
|
3.2
|
|
|
—
|
|
|
38.3
|
|
Average price paid per share in 2015
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
92.39
|
|
|
$
|
84.31
|
|
|
$
|
—
|
|
|
$
|
91.70
|
|
Shares repurchased in 2016
|
—
|
|
|
31.2
|
|
|
5.7
|
|
|
—
|
|
|
—
|
|
|
36.9
|
|
Average price paid per share in 2016
|
$
|
—
|
|
|
$
|
96.15
|
|
|
$
|
89.76
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
95.18
|
|
Cumulative shares repurchased through December 31, 2016
|
—
|
|
|
31.2
|
|
|
40.8
|
|
|
45.8
|
|
|
31.1
|
|
|
148.9
|
|
Cumulative average price paid per share
|
$
|
—
|
|
|
$
|
96.15
|
|
|
$
|
92.03
|
|
|
$
|
76.42
|
|
|
$
|
64.26
|
|
|
$
|
82.29
|
|
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, 2013
|
1,148.8
|
|
|
45.4
|
|
Purchases of treasury stock
|
(44.5
|
)
|
|
—
|
|
Share-based payments
|
2.9
|
|
|
—
|
|
Conversion of Class B to Class A common stock
|
8.2
|
|
|
(8.2
|
)
|
Balance at December 31, 2014
|
1,115.4
|
|
|
37.2
|
|
Purchases of treasury stock
|
(38.3
|
)
|
|
—
|
|
Share-based payments
|
2.0
|
|
|
—
|
|
Conversion of Class B to Class A common stock
|
15.9
|
|
|
(15.9
|
)
|
Balance at December 31, 2015
|
1,095.0
|
|
|
21.3
|
|
Purchases of treasury stock
|
(36.9
|
)
|
|
—
|
|
Share-based payments
|
2.3
|
|
|
—
|
|
Conversion of Class B to Class A common stock
|
2.0
|
|
|
(2.0
|
)
|
Balance at December 31, 2016
|
1,062.4
|
|
|
19.3
|
|
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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, 2016 and 2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
1
|
|
Translation Adjustments on Net Investment Hedge
|
|
Defined Benefit Pension and Other Postretirement Plans
2
|
|
Investment Securities Available-for-Sale
3
|
|
Accumulated Other Comprehensive Income (Loss)
|
|
(in millions)
|
Balance at December 31, 2014
|
$
|
(230
|
)
|
|
$
|
—
|
|
|
$
|
(26
|
)
|
|
$
|
(4
|
)
|
|
$
|
(260
|
)
|
Other comprehensive income (loss)
|
(433
|
)
|
|
(26
|
)
|
|
39
|
|
|
4
|
|
|
(416
|
)
|
Balance at December 31, 2015
|
(663
|
)
|
|
(26
|
)
|
|
13
|
|
|
—
|
|
|
(676
|
)
|
Other comprehensive income (loss)
|
(286
|
)
|
|
38
|
|
|
(2
|
)
|
|
2
|
|
|
(248
|
)
|
Balance at December 31, 2016
|
$
|
(949
|
)
|
|
$
|
12
|
|
|
$
|
11
|
|
|
$
|
2
|
|
|
$
|
(924
|
)
|
1
During 2015, the increase in other comprehensive loss related to foreign currency translation adjustments was driven primarily by the devaluation of the euro and Brazilian real. 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.
2
During 2015,
$80 million
of deferred costs (
$51 million
after-tax) related to the Company’s defined benefit pension plan and other post retirement plans were reclassified to general and administrative expenses. The deferred costs were driven primarily by the termination of the Company's U.S. defined benefit plan (See
Note 11 (Pension, Postretirement and Savings Plans)
). 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.
3
During 2015,
$15 million
of an unrealized loss (no tax impact) on a foreign denominated available-for-sale security was reclassified to other income (expense) due to an other-than-temporary impairment. During 2016, 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.
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.
Upon termination of employment, a participant’s unvested awards are forfeited. However, when a participant terminates employment due to disability or retirement more than
six months
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
.
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.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Risk-free rate of return
|
1.3
|
%
|
|
1.5
|
%
|
|
1.5
|
%
|
Expected term (in years)
|
5.00
|
|
|
5.00
|
|
|
5.00
|
|
Expected volatility
|
23.3
|
%
|
|
20.6
|
%
|
|
19.1
|
%
|
Expected dividend yield
|
0.8
|
%
|
|
0.7
|
%
|
|
0.6
|
%
|
Weighted-average fair value per Option granted
|
$
|
18.58
|
|
|
$
|
17.29
|
|
|
$
|
14.29
|
|
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, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average Remaining Contractual Term
|
|
Aggregate Intrinsic Value
|
|
(in millions)
|
|
|
|
(in years)
|
|
(in millions)
|
Outstanding at January 1, 2016
|
8.1
|
|
|
$
|
54
|
|
|
|
|
|
Granted
|
1.7
|
|
|
$
|
90
|
|
|
|
|
|
Exercised
|
(1.3
|
)
|
|
$
|
30
|
|
|
|
|
|
Forfeited/expired
|
(0.2
|
)
|
|
$
|
80
|
|
|
|
|
|
Outstanding at December 31, 2016
|
8.3
|
|
|
$
|
65
|
|
|
6.7
|
|
$
|
321
|
|
Exercisable at December 31, 2016
|
4.3
|
|
|
$
|
47
|
|
|
5.3
|
|
$
|
243
|
|
Options vested and expected to vest at December 31, 2016
|
8.2
|
|
|
$
|
64
|
|
|
6.7
|
|
$
|
319
|
|
As of
December 31, 2016
, there was
$30 million
of total unrecognized compensation cost related to non-vested Options. The cost is expected to be recognized over a weighted-average period of
2.3
years.
Restricted Stock Units
The following table summarizes the Company’s RSU activity for the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units
|
|
Weighted-Average Grant-Date Fair Value
|
|
Weighted-Average Remaining Contractual Term
|
|
Aggregate Intrinsic Value
|
|
(in millions)
|
|
|
|
(in years)
|
|
(in millions)
|
Outstanding at January 1, 2016
|
3.8
|
|
|
$
|
71
|
|
|
|
|
|
Granted
|
1.9
|
|
|
$
|
91
|
|
|
|
|
|
Converted
|
(1.4
|
)
|
|
$
|
52
|
|
|
|
|
|
Forfeited
|
(0.2
|
)
|
|
$
|
84
|
|
|
|
|
|
Outstanding at December 31, 2016
|
4.1
|
|
|
$
|
86
|
|
|
1.4
|
|
$
|
424
|
|
RSUs vested and expected to vest at December 31, 2016
|
3.9
|
|
|
$
|
86
|
|
|
1.4
|
|
$
|
406
|
|
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
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
common stock after the vesting period. As of
December 31, 2016
, there was
$148 million
of total unrecognized compensation cost related to non-vested RSUs. The cost is expected to be recognized over a weighted-average period of
2.0
years.
Performance Stock Units
The following table summarizes the Company’s PSU activity for the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Units
|
|
Weighted-Average
Grant-Date Fair Value
|
|
Weighted-Average Remaining Contractual Term
|
|
Aggregate Intrinsic Value
|
|
(in millions)
|
|
|
|
(in years)
|
|
(in millions)
|
Outstanding at January 1, 2016
|
0.5
|
|
|
$
|
72
|
|
|
|
|
|
Granted
|
0.2
|
|
|
$
|
92
|
|
|
|
|
|
Converted
|
(0.3
|
)
|
|
$
|
56
|
|
|
|
|
|
Outstanding at December 31, 2016
|
0.4
|
|
|
$
|
90
|
|
|
1.3
|
|
$
|
45
|
|
PSUs vested and expected to vest at December 31, 2016
|
0.4
|
|
|
$
|
90
|
|
|
1.3
|
|
$
|
44
|
|
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, 2016
, there was
$11 million
of total unrecognized compensation cost related to non-vested PSUs. The cost is expected to be recognized over a weighted-average period of
1.7
years.
Additional Information
The following table includes additional share-based payment information for each of the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
(in millions, except weighted-average fair value)
|
Share-based compensation expense: Options, RSUs and PSUs
|
$
|
148
|
|
|
$
|
122
|
|
|
$
|
111
|
|
Income tax benefit recognized for equity awards
|
49
|
|
|
41
|
|
|
37
|
|
Income tax benefit related to Options exercised
|
31
|
|
|
19
|
|
|
20
|
|
|
|
|
|
|
|
Options:
|
|
|
|
|
|
Total intrinsic value of Options exercised
|
86
|
|
|
57
|
|
|
60
|
|
RSUs:
|
|
|
|
|
|
Weighted-average grant-date fair value of awards granted
|
91
|
|
|
88
|
|
|
76
|
|
Total intrinsic value of RSUs converted into shares of Class A common stock
|
122
|
|
|
135
|
|
|
173
|
|
PSUs:
|
|
|
|
|
|
Weighted-average grant-date fair value of awards granted
|
92
|
|
|
99
|
|
|
78
|
|
Total intrinsic value of PSUs converted into shares of Class A common stock
|
25
|
|
|
24
|
|
|
28
|
|
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
Note 16.
Commitments
At
December 31, 2016
, the Company had the following future minimum payments due under non-cancelable agreements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
Capital
Leases
|
|
Operating
Leases
|
|
Sponsorship,
Licensing &
Other
|
|
(in millions)
|
2017
|
$
|
1,192
|
|
|
$
|
5
|
|
|
$
|
66
|
|
|
$
|
1,121
|
|
2018
|
234
|
|
|
1
|
|
|
53
|
|
|
180
|
|
2019
|
178
|
|
|
1
|
|
|
40
|
|
|
137
|
|
2020
|
102
|
|
|
—
|
|
|
29
|
|
|
73
|
|
2021
|
56
|
|
|
—
|
|
|
20
|
|
|
36
|
|
Thereafter
|
68
|
|
|
—
|
|
|
39
|
|
|
29
|
|
Total
|
$
|
1,830
|
|
|
$
|
7
|
|
|
$
|
247
|
|
|
$
|
1,576
|
|
Included in the table above are capital leases with a net present value of minimum lease payments of
$7 million
. In addition, at
December 31, 2016
,
$10 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
$62 million
,
$52 million
and
$48 million
for
2016
,
2015
and
2014
, respectively. Consolidated lease expense for automobiles, computer equipment and office equipment was
$19 million
,
$17 million
and
$17 million
for
2016
,
2015
and
2014
, respectively. Included in the Sponsorship, Licensing & Other payments due in 2017 is
£700 million
(approximately
$860 million
as of
December 31, 2016
) related to a definitive agreement for the Company to acquire a controlling interest in VocaLink Holdings Limited (“VocaLink”). See
Note 2 (Acquisitions)
for further discussion.
Note 17.
Income Taxes
The domestic and foreign components of income before income taxes for the years ended December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
(in millions)
|
|
|
United States
|
$
|
3,736
|
|
|
$
|
3,399
|
|
|
$
|
3,378
|
|
Foreign
|
1,910
|
|
|
1,559
|
|
|
1,701
|
|
Income before income taxes
|
$
|
5,646
|
|
|
$
|
4,958
|
|
|
$
|
5,079
|
|
The total income tax provision for the years ended December 31 is comprised of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
|
|
(in millions)
|
|
|
Current
|
|
|
|
|
|
Federal
|
$
|
1,074
|
|
|
$
|
677
|
|
|
$
|
977
|
|
State and local
|
36
|
|
|
45
|
|
|
47
|
|
Foreign
|
497
|
|
|
444
|
|
|
528
|
|
|
1,607
|
|
|
1,166
|
|
|
1,552
|
|
Deferred
|
|
|
|
|
|
Federal
|
(6
|
)
|
|
4
|
|
|
(81
|
)
|
State and local
|
(2
|
)
|
|
(3
|
)
|
|
(3
|
)
|
Foreign
|
(12
|
)
|
|
(17
|
)
|
|
(6
|
)
|
|
(20
|
)
|
|
(16
|
)
|
|
(90
|
)
|
Income tax expense
|
$
|
1,587
|
|
|
$
|
1,150
|
|
|
$
|
1,462
|
|
Mastercard has not provided for U.S. federal income and foreign withholding taxes on approximately
$4.0 billion
of undistributed earnings from non-U.S. subsidiaries as of
December 31, 2016
because such earnings are intended to be reinvested indefinitely outside of the United States. If these earnings were distributed, foreign tax credits may become available under current law to reduce the resulting U.S. income tax liability. However, it is not practicable to determine the amount of the tax and credits. The foreign earnings that the Company may repatriate to the United States in any year is limited to the amount of current year foreign earnings and are not made out of historic undistributed accumulated earnings. The amount of current year foreign earnings
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
that are available for repatriation is determined after consideration of all foreign cash requirements including working capital needs, potential requirements for litigation and regulatory matters, and merger and acquisition activities, among others.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
(in millions, except percentages)
|
Income before income taxes
|
$
|
5,646
|
|
|
|
|
$
|
4,958
|
|
|
|
|
$
|
5,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal statutory tax
|
1,976
|
|
|
35.0
|
%
|
|
1,735
|
|
|
35.0
|
%
|
|
1,778
|
|
|
35.0
|
%
|
State tax effect, net of federal benefit
|
22
|
|
|
0.4
|
%
|
|
27
|
|
|
0.5
|
%
|
|
29
|
|
|
0.6
|
%
|
Foreign tax effect
|
(188
|
)
|
|
(3.3
|
)%
|
|
(144
|
)
|
|
(2.9
|
)%
|
|
(108
|
)
|
|
(2.1
|
)%
|
Impact of foreign tax credits
1
|
(141
|
)
|
|
(2.5
|
)%
|
|
(281
|
)
|
|
(5.7
|
)%
|
|
(183
|
)
|
|
(3.6
|
)%
|
Impact of settlements with tax authorities
|
—
|
|
|
—
|
%
|
|
(147
|
)
|
|
(2.9
|
)%
|
|
—
|
|
|
—
|
%
|
Other, net
|
(82
|
)
|
|
(1.5
|
)%
|
|
(40
|
)
|
|
(0.8
|
)%
|
|
(54
|
)
|
|
(1.1
|
)%
|
Income tax expense
|
$
|
1,587
|
|
|
28.1
|
%
|
|
$
|
1,150
|
|
|
23.2
|
%
|
|
$
|
1,462
|
|
|
28.8
|
%
|
1
Included within the impact of foreign tax credits were repatriation benefits of current year foreign earnings of
$116 million
,
$172 million
and
$177 million
, in addition to other foreign tax credit benefits which become eligible in the United States of
$25 million
,
$109 million
and
$6 million
for
2016
,
2015
and
2014
, respectively.
Effective Income Tax Rate
The effective income tax rates for the years ended
December 31, 2016, 2015 and 2014
were
28.1%
,
23.2%
and
28.8%
, respectively. 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
.
The effective income tax rate for
2015
was lower than the effective income tax rate for
2014
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. In addition, the recognition of other U.S. foreign tax credits and a more favorable geographic mix of taxable earnings also contributed to the lower effective tax rate in 2015.
During the fourth quarter of 2014, the Company implemented an initiative to better align its legal entity and tax structure with its operational footprint outside of the U.S. This initiative resulted in a one-time taxable gain in Belgium relating to the transfer of intellectual property to a related foreign entity in the United Kingdom. Management believes this improved alignment will result 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 our consolidated balance sheet at
December 31, 2016
in the amounts of
$15 million
and
$325 million
, respectively. The comparable amounts included in other current assets and other assets were
$15 million
and
$352 million
, respectively, at
December 31, 2015
, with the difference driven by changes in foreign exchange rates and current period amortization. The future accounting for this transfer will be impacted by the adoption of the recent accounting pronouncement for intra-entity asset transfers. The Company expects to adopt this accounting guidance effective January 1, 2018. The Company is in the process of evaluating the impacts this guidance will have on its consolidated financial statements. 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
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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
2016, 2015 and 2014
, the impact of the incentive grant received from the Ministry of Finance resulted in a reduction of MAPPL’s income tax liability of
$49 million
, or
$0.04
per diluted share,
$47 million
, or
$0.04
per diluted share, and
$40 million
, or
$0.03
per diluted share, respectively.
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:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
(in millions)
|
Deferred Tax Assets
|
|
|
|
Accrued liabilities
|
$
|
174
|
|
|
$
|
169
|
|
Compensation and benefits
|
273
|
|
|
242
|
|
State taxes and other credits
|
41
|
|
|
54
|
|
Net operating and capital losses
|
81
|
|
|
67
|
|
Other items
|
79
|
|
|
90
|
|
Less: Valuation allowance
|
(91
|
)
|
|
(54
|
)
|
Total Deferred Tax Assets
|
557
|
|
|
568
|
|
|
|
|
|
Deferred Tax Liabilities
|
|
|
|
Prepaid expenses and other accruals
|
46
|
|
|
46
|
|
Intangible assets
|
105
|
|
|
136
|
|
Property, plant and equipment
|
155
|
|
|
118
|
|
Other items
|
25
|
|
|
30
|
|
Total Deferred Tax Liabilities
|
331
|
|
|
330
|
|
|
|
|
|
Net Deferred Tax Assets
|
$
|
226
|
|
|
$
|
238
|
|
The increase in the valuation allowance balance at
December 31, 2016
from the
December 31, 2015
balance is attributable to additional foreign losses 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 the capital impairments is dependent upon the recognition of future capital gains in the United States. The
2015
valuation allowance related primarily to the Company’s ability to recognize tax benefits associated with certain foreign net operating losses.
A reconciliation of the beginning and ending balance for the Company’s unrecognized tax benefits for the years ended December 31, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
(in millions)
|
Beginning balance
|
$
|
181
|
|
|
$
|
364
|
|
|
$
|
320
|
|
Additions:
|
|
|
|
|
|
Current year tax positions
|
20
|
|
|
20
|
|
|
61
|
|
Prior year tax positions
|
13
|
|
|
10
|
|
|
19
|
|
Reductions:
|
|
|
|
|
|
Prior year tax positions
|
(28
|
)
|
|
(151
|
)
|
|
(6
|
)
|
Settlements with tax authorities
|
(2
|
)
|
|
(53
|
)
|
|
—
|
|
Expired statute of limitations
|
(15
|
)
|
|
(9
|
)
|
|
(30
|
)
|
Ending balance
|
$
|
169
|
|
|
$
|
181
|
|
|
$
|
364
|
|
The entire unrecognized tax benefits of
$169 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.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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 2009.
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. For
2016
,
2015
and
2014
, the Company recorded tax-related interest income of
$4 million
,
$3 million
and
$2 million
, respectively, in its consolidated statement of operations. At
December 31, 2016 and 2015
, the Company had a net income tax-related interest payable of
$9 million
and
$12 million
, respectively, in its consolidated balance sheet. At
December 31, 2016 and 2015
, the amounts the Company had recognized for penalties payable in its consolidated balance sheet were not significant.
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.
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.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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. Objections to the settlement were filed by both merchants and certain competitors, including Discover. Discover’s objections included a challenge to the settlement on the grounds that certain of the rule changes agreed to in the settlement constitute a restraint of trade in violation of Section 1 of the Sherman Act. 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 one state court action in New Mexico) 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 in these actions and the class action commenced in December 2016.
As of
December 31, 2016
, Mastercard had accrued a liability of
$705 million
as a reserve for both the merchant class litigation and the filed and anticipated opt-out merchant cases. As of
December 31, 2016
and
December 31, 2015
, Mastercard had
$543 million
and
$541 million
, respectively, in a qualified cash settlement fund related to the merchant class litigation and classified as restricted cash on its consolidated balance sheet. Mastercard believes the reserve for both the merchant class litigation and the filed and anticipated opt-out merchants represents its best estimate of its probable liabilities in these matters at
December 31, 2016
. 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. That 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 seeks compensatory damages in unspecified amounts, and the Ontario suit seeks compensatory damages of
$5 billion
on the basis of alleged conspiracy and various alleged breaches of the Canadian Competition Act. The British Columbia and Ontario suits also seek punitive damages in unspecified amounts, as well as injunctive
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
relief, interest and legal costs. The Quebec suit was later amended to include the same defendants and similar claims as in the British Columbia and Ontario suits. Additional purported class action complaints have been commenced in Saskatchewan and Alberta with claims that largely mirror those in the British Columbia, Ontario and Quebec suits. With respect to the status of the proceedings: (1) several of the merchants’ claims in the British Columbia case have been allowed to proceed on a class basis, and a trial date has been set for September 2018, (2) the British Columbia suit plaintiff is seeking to claim significant additional damages for the period subsequent to March 2010 (currently in front of the British Columbia Court of Appeal), (3) the class certification hearing in the Quebec suit is scheduled for November 2017 and (4) the Ontario, Saskatchewan and Alberta suits are temporarily suspended while the British Columbia suit proceeds.
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 anticompetitive effects of these practices. The European Commission has indicated it intends to seek fines if these conclusions are subsequently confirmed. Although the Statement of Objections does not quantify the level of fines, it is possible that they could be substantial. In April 2016, Mastercard submitted a response to the Statement of Objections disputing the Commission’s preliminary conclusions and participated in a related oral hearing in May 2016.
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
. 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. Mastercard has submitted statements of defense to the remaining retailers’ claims disputing liability and damages. 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 sought permission from the court 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. These claimants can request permission to appeal this decision. In light of this favorable judgment, Mastercard is not able to estimate a reasonably possible loss, if any, for settlements or judgments relating to the remaining U.K. Merchant claimant litigations.
In September 2016, a proposed collective action was filed in the United Kingdom on behalf of U.K. consumers seeking damages for intra-EEA and domestic U.K. interchange fees that were allegedly passed on to consumers by merchants between 1992 and 2008. The complaint, which seeks to leverage the European Commission’s 2007 decision on intra-EEA interchange fees, claims damages in an amount that exceeds
£14 billion
(approximately
$18 billion
). In January 2017, the court heard argument on the plaintiffs’ application for collective action, and the parties are awaiting a decision. At this time Mastercard is unable to estimate a probable loss for the matter, if any, and accordingly has not accrued for any loss.
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
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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. In March 2016, certain of the plaintiffs in the ATM Operators Complaint filed a motion seeking a preliminary injunction enjoining the enforcement of the nondiscrimination rules pending the outcome of the litigation. In November 2016, the U.S. Supreme Court dismissed the appeal and returned the matter to the district court for further proceedings. The district court has scheduled briefing on the ATM operators’ motion for a preliminary injunction.
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 the damages would be 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. The case against the Network Defendants is now proceeding with a trial currently scheduled for late 2017.
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 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.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
The Company’s estimated settlement exposure from Mastercard, Cirrus and Maestro branded transactions was as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
December 31,
2015
|
|
(in millions)
|
Gross settlement exposure
|
$
|
37,202
|
|
|
$
|
39,674
|
|
Collateral held for settlement exposure
|
(3,734
|
)
|
|
(3,601
|
)
|
Net uncollateralized settlement exposure
|
$
|
33,468
|
|
|
$
|
36,073
|
|
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
$397 million
and
$420 million
at
December 31, 2016 and 2015
, respectively, of which
$312 million
and
$332 million
at
December 31, 2016 and 2015
, respectively, is mitigated by collateral arrangements. In addition, the Company enters into business 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.
As of
December 31, 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, 2016
|
|
December 31, 2015
|
|
Notional
|
|
Estimated Fair
Value
|
|
Notional
|
|
Estimated Fair
Value
|
|
(in millions)
|
Commitments to purchase foreign currency
|
$
|
37
|
|
|
$
|
(2
|
)
|
|
$
|
232
|
|
|
$
|
1
|
|
Commitments to sell foreign currency
|
777
|
|
|
18
|
|
|
1,430
|
|
|
12
|
|
Options to sell foreign currency
|
—
|
|
|
—
|
|
|
44
|
|
|
1
|
|
Balance sheet location
|
|
|
|
|
|
|
|
Accounts receivable
1
|
|
|
$
|
29
|
|
|
|
|
$
|
23
|
|
Other current liabilities
1
|
|
|
(13
|
)
|
|
|
|
(9
|
)
|
1
The fair values of derivative contracts are determined using a Level 2 Valuation Hierarchy and are presented on a gross basis on the consolidated balance sheet and are subject to enforceable master netting arrangements, which contain various netting and setoff provisions.
MASTERCARD INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
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
|
|
2014
|
|
(in millions)
|
Foreign currency derivative contracts
|
|
|
|
|
|
General and administrative
|
$
|
(6
|
)
|
|
$
|
51
|
|
|
$
|
(78
|
)
|
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, 2016 and 2015
, 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 risk of loss due to the potential change in an instrument’s value caused by fluctuations in 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
$80 million
on the Company’s foreign currency derivative contracts outstanding at
December 31, 2016
related to the hedging program. 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 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). During the fourth quarter of 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, 2016
, the Company had a net foreign currency transaction pre-tax gain of
$20 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
38%
of total revenue in
2016
and
39%
in
2015
and
2014
, respectively. No individual country, other than the U.S., generated more than 10% of total revenue in those periods.
Mastercard did not have any one customer that generated greater than 10% of net revenue in
2016
,
2015
or
2014
. The following table reflects the geographical location of the Company’s property, plant and equipment, net, as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
(in millions)
|
United States
|
$
|
504
|
|
|
$
|
471
|
|
|
$
|
450
|
|
Other countries
|
229
|
|
|
204
|
|
|
165
|
|
Total
|
$
|
733
|
|
|
$
|
675
|
|
|
$
|
615
|
|
MASTERCARD INCORPORATED
SUMMARY OF QUARTERLY DATA (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016 Quarter Ended
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
2016 Total
|
|
(in millions, except per share data)
|
Net revenue
|
$
|
2,446
|
|
|
$
|
2,694
|
|
|
$
|
2,880
|
|
|
$
|
2,756
|
|
|
$
|
10,776
|
|
Operating income
|
1,348
|
|
|
1,380
|
|
|
1,670
|
|
|
1,363
|
|
|
5,761
|
|
Net income
|
959
|
|
|
983
|
|
|
1,184
|
|
|
933
|
|
|
4,059
|
|
Basic earnings per share
|
$
|
0.86
|
|
|
$
|
0.89
|
|
|
$
|
1.08
|
|
|
$
|
0.86
|
|
|
$
|
3.70
|
|
Basic weighted-average shares outstanding
|
1,109
|
|
|
1,098
|
|
|
1,096
|
|
|
1,087
|
|
|
1,098
|
|
Diluted earnings per share
|
$
|
0.86
|
|
|
$
|
0.89
|
|
|
$
|
1.08
|
|
|
$
|
0.86
|
|
|
$
|
3.69
|
|
Diluted weighted-average shares outstanding
|
1,112
|
|
|
1,101
|
|
|
1,099
|
|
|
1,090
|
|
|
1,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 Quarter Ended
|
|
|
|
March 31
|
|
June 30
|
|
September 30
|
|
December 31
|
|
2015 Total
|
|
(in millions, except per share data)
|
Net revenue
|
$
|
2,230
|
|
|
$
|
2,390
|
|
|
$
|
2,530
|
|
|
$
|
2,517
|
|
|
$
|
9,667
|
|
Operating income
|
1,351
|
|
|
1,251
|
|
|
1,369
|
|
|
1,107
|
|
|
5,078
|
|
Net income
|
1,020
|
|
|
921
|
|
|
977
|
|
|
890
|
|
|
3,808
|
|
Basic earnings per share
|
$
|
0.89
|
|
|
$
|
0.81
|
|
|
$
|
0.86
|
|
|
$
|
0.79
|
|
|
$
|
3.36
|
|
Basic weighted-average shares outstanding
|
1,148
|
|
|
1,138
|
|
|
1,130
|
|
|
1,121
|
|
|
1,134
|
|
Diluted earnings per share
|
$
|
0.89
|
|
|
$
|
0.81
|
|
|
$
|
0.86
|
|
|
$
|
0.79
|
|
|
$
|
3.35
|
|
Diluted weighted-average shares outstanding
|
1,152
|
|
|
1,141
|
|
|
1,133
|
|
|
1,124
|
|
|
1,137
|
|
Note: Tables may not sum due to rounding.