Edgar Filing: Mastercard Inc

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-32877

Mastercard Incorporated

(Exact name of registrant as specified in its charter)



Delaware	13-4172551
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)

2000 Purchase Street	10577
Purchase, NY	(Zip Code)
(Address of principal executive offices)

(914) 249-2000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check One):



Large accelerated filer	x	Accelerated filer	o

Non-accelerated filer	o	Smaller reporting company	o

		Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13 (a) of the Exchange Act.			o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

As of April 25, 2019, there were 1,009,964,059 shares outstanding of the registrant’s Class A common stock, par value $0.0001 per share; and 11,557,994 shares outstanding of the registrant’s Class B common stock, par value $0.0001 per share.

MASTERCARD INCORPORATED

FORM 10-Q

TABLE OF CONTENTS



	Page
PART I — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)	4
Consolidated Balance Sheet — March 31, 2019 and December 31, 2018	4
Consolidated Statement of Operations — Three Months Ended March 31, 2019 and 2018	5
Consolidated Statement of Comprehensive Income — Three Months Ended March 31, 2019 and 2018	6
Consolidated Statement of Changes in Equity — Three Months Ended March 31, 2019 and 2018	7
Consolidated Statement of Cash Flows — Three Months Ended March 31, 2019 and 2018	8
Notes to Consolidated Financial Statements	9
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	27
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	37
ITEM 4. CONTROLS AND PROCEDURES	37

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS	38
ITEM 1A. RISK FACTORS	38
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	38
ITEM 5. OTHER INFORMATION	38
ITEM 6. EXHIBITS	38
SIGNATURES	40

Table of Contents

In this Report on Form 10-Q (“Report”), references to the “Company,” “Mastercard,” “we,” “us” or “our” refer to the business conducted by Mastercard Incorporated and its consolidated subsidiaries, including our operating subsidiary, Mastercard International Incorporated, and to the Mastercard brand.

Forward-Looking Statements

This Report contains forward-looking statements pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical facts may be forward-looking statements. When used in this Report, the words “believe”, “expect”, “could”, “may”, “would”, “will”, “trend” and similar words are intended to identify forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements that relate to the Company’s future prospects, developments and business strategies.

Many factors and uncertainties relating to our operations and business environment, all of which are difficult to predict and many of which are outside of our control, influence whether any forward-looking statements can or will be achieved. Any one of those factors could cause our actual results to differ materially from those expressed or implied in writing in any forward-looking statements made by Mastercard or on its behalf, including, but not limited to, the following factors:


•	regulation directly related to the payments industry (including regulatory, legislative and litigation activity with respect to interchange rates, surcharging and the extension of current regulatory activity to additional jurisdictions or products)


•	the impact of preferential or protective government actions


•	regulation of privacy, data protection, security and the digital economy


•	regulation that directly or indirectly applies to us based on our participation in the global payments industry (including anti-money laundering, counter terrorist financing, economic sanctions and anti-corruption; account-based payment systems; issuer practice regulation; and regulation of internet and digital transactions)


•	the impact of changes in tax laws, as well as regulations and interpretations of such laws or challenges to our tax positions


•	potential or incurred liability and limitations on business related to any litigation or litigation settlements


•	the impact of competition in the global payments industry (including disintermediation and pricing pressure)


•	the challenges relating to rapid technological developments and changes


•	the challenges relating to operating real-time account-based payment system and to working with new customers and end users


•	the impact of information security incidents, account data breaches, fraudulent activity or service disruptions


•	issues related to our relationships with our financial institution customers (including loss of substantial business from significant customers, competitor relationships with our customers and banking industry consolidation)


•	the impact of our relationships with other stakeholders, including merchants and governments


•	exposure to loss or illiquidity due to our role as guarantor, as well as other contractual obligations


•	the impact of global economic, political, financial and societal events and conditions


•	reputational impact, including impact related to brand perception


•	the inability to attract, hire and retain a highly qualified and diverse workforce, or maintain our corporate culture


•	issues related to acquisition integration, strategic investments and entry into new businesses


•	issues related to our Class A common stock and corporate governance structure

Please see a complete discussion of these risk factors in Part I, Item 1A - Risk Factors of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. We caution you that the important factors referenced above may not contain all of the factors that are important to you. Our forward-looking statements speak only as of the date of this Report or as of the date they are made, and we undertake no obligation to update our forward-looking statements.

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PART I — FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MASTERCARD INCORPORATED

CONSOLIDATED BALANCE SHEET

(UNAUDITED)



	March 31, 2019			December 31, 2018
	(in millions, except per share data)
ASSETS
Cash and cash equivalents	$	5,857		$	6,682
Restricted cash for litigation settlement	662			553
Investments	1,317			1,696
Accounts receivable	2,577			2,276
Settlement due from customers	1,426			2,452
Restricted security deposits held for customers	1,044			1,080
Prepaid expenses and other current assets	1,513			1,432
Total Current Assets	14,396			16,171
Property, equipment and right-of-use assets, net of accumulated depreciation of $905 and $847, respectively	1,305			921
Deferred income taxes	504			570
Goodwill	2,944			2,904
Other intangible assets, net of accumulated amortization of $1,228 and $1,175, respectively	1,025			991
Other assets	3,346			3,303
Total Assets	$	23,520		$	24,860
LIABILITIES, REDEEMABLE NON-CONTROLLING INTERESTS AND EQUITY
Accounts payable	$	508		$	537
Settlement due to customers	1,189			2,189
Restricted security deposits held for customers	1,044			1,080
Accrued litigation	1,575			1,591
Accrued expenses	4,329			4,747
Current portion of long-term debt	500			500
Other current liabilities	1,101			949
Total Current Liabilities	10,246			11,593
Long-term debt	5,799			5,834
Deferred income taxes	61			67
Other liabilities	2,151			1,877
Total Liabilities	18,257			19,371

Commitments and Contingencies

Redeemable Non-controlling Interests	73			71

Stockholders’ Equity
Class A common stock, $0.0001 par value; authorized 3,000 shares, 1,389 and 1,387 shares issued and 1,012 and 1,019 outstanding, respectively	—			—
Class B common stock, $0.0001 par value; authorized 1,200 shares, 12 and 12 issued and outstanding, respectively	—			—
Additional paid-in-capital	4,569			4,580
Class A treasury stock, at cost, 377 and 368 shares, respectively	(27,534		)	(25,750		)
Retained earnings	28,806			27,283
Accumulated other comprehensive income (loss)	(673		)	(718		)
Total Stockholders’ Equity	5,168			5,395
Non-controlling interests	22			23
Total Equity	5,190			5,418
Total Liabilities, Redeemable Non-controlling Interests and Equity	$	23,520		$	24,860

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

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MASTERCARD INCORPORATED

CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)



	Three Months Ended March 31,
	2019			2018
	(in millions, except per share data)
Net Revenue	$	3,889		$	3,580
Operating Expenses
General and administrative	1,367			1,321
Advertising and marketing	192			197
Depreciation and amortization	117			120
Provision for litigation	—			117
Total operating expenses	1,676			1,755
Operating income	2,213			1,825
Other Income (Expense)
Investment income	32			17
Interest expense	(46		)	(43		)
Other income (expense), net	4			4
Total other income (expense)	(10		)	(22		)
Income before income taxes	2,203			1,803
Income tax expense	341			311
Net Income	$	1,862		$	1,492

Basic Earnings per Share	$	1.81		$	1.42
Basic weighted-average shares outstanding	1,026			1,051
Diluted Earnings per Share	$	1.80		$	1.41
Diluted weighted-average shares outstanding	1,032			1,057

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

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MASTERCARD INCORPORATED

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)



	Three Months Ended March 31,
	2019			2018
	(in millions)
Net Income	$	1,862		$	1,492
Other comprehensive income (loss):
Foreign currency translation adjustments	11			161
Income tax effect	3			(2		)
Foreign currency translation adjustments, net of income tax effect	14			159

Translation adjustments on net investment hedge	36			(45		)
Income tax effect	(8		)	12
Translation adjustments on net investment hedge, net of income tax effect	28			(33		)

Defined benefit pension and other postretirement plans	—			(1		)
Income tax effect	—			—
Defined benefit pension and other postretirement plans, net of income tax effect	—			(1		)

Investment securities available-for-sale	4			(1		)
Income tax effect	(1		)	—
Investment securities available-for-sale, net of income tax effect	3			(1		)

Other comprehensive income (loss), net of tax	45			124
Comprehensive Income	$	1,907		$	1,616

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

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MASTERCARD INCORPORATED

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(UNAUDITED)




	Stockholders’ Equity
	Common Stock				Additional Paid-In Capital			Class A Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Non- Controlling Interests			Total Equity
	Class A		Class B		Additional Paid-In Capital			Class A Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Non- Controlling Interests			Total Equity
	(in millions, except per share data)
Balance at December 31, 2018	$	—	$	—	$	4,580		$	(25,750	)	$	27,283		$	(718	)	$	23		$	5,418
Net income	—		—		—			—			1,862			—			—			1,862
Activity from non-controlling interests	—		—		—			—			—			—			(1		)	(1		)
Other comprehensive income, net of tax	—		—		—			—			—			45			—			45
Cash dividends declared on Class A and Class B common stock, $0.33 per share	—		—		—			—			(339		)	—			—			(339		)
Purchases of treasury stock	—		—		—			(1,790		)	—			—			—			(1,790		)
Share-based payments	—		—		(11		)	6			—			—			—			(5		)
Balance at March 31, 2019	$	—	$	—	$	4,569		$	(27,534	)	$	28,806		$	(673	)	$	22		$	5,190




	Stockholders’ Equity
	Common Stock				Additional Paid-In Capital		Class A Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Non- Controlling Interests			Total Equity
	Class A		Class B		Additional Paid-In Capital		Class A Treasury Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Non- Controlling Interests			Total Equity
	(in millions, except per share data)
Balance at December 31, 2017	$	—	$	—	$	4,365	$	(20,764	)	$	22,364		$	(497	)	$	29		$	5,497
Adoption of revenue standard	—		—		—		—			366			—			—			366
Adoption of intra-entity asset transfers standard	—		—		—		—			(183		)	—			—			(183		)
Net income	—		—		—		—			1,492			—			—			1,492
Activity related to non-controlling interests	—		—		—		—			—			—			(1		)	(1		)
Other comprehensive income, net of tax	—		—		—		—			—			124			—			124
Cash dividends declared on Class A and Class B common stock, $0.25 per share	—		—		—		—			(262		)	—			—			(262		)
Purchases of treasury stock	—		—		—		(1,383		)	—			—			—			(1,383		)
Share-based payments	—		—		2		4			—			—			—			6
Balance at March 31, 2018	$	—	$	—	$	4,367	$	(22,143	)	$	23,777		$	(373	)	$	28		$	5,656

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

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MASTERCARD INCORPORATED

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)



	Three Months Ended March 31,
	2019			2018
	(in millions)
Operating Activities
Net income	$	1,862		$	1,492
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of customer and merchant incentives	345			287
Depreciation and amortization	117			120
Share-based compensation	57			43
Deferred income taxes	38			(46		)
Other	6			1
Changes in operating assets and liabilities:
Accounts receivable	(320		)	(80		)
Settlement due from customers	1,026			(156		)
Prepaid expenses	(497		)	(336		)
Accrued litigation and legal settlements	1			111
Restricted security deposits held for customers	(35		)	(141		)
Accounts payable	(22		)	(62		)
Settlement due to customers	(1,000		)	(63		)
Accrued expenses	(483		)	(50		)
Net change in other assets and liabilities	217			(85		)
Net cash provided by operating activities	1,312			1,035
Investing Activities
Purchases of investment securities available-for-sale	(305		)	(108		)
Purchases of investments held-to-maturity	(99		)	(123		)
Proceeds from sales of investment securities available-for-sale	476			198
Proceeds from maturities of investment securities available-for-sale	139			108
Proceeds from maturities of investments held-to-maturity	155			430
Purchases of property and equipment	(83		)	(82		)
Capitalized software	(59		)	(44		)
Other investing activities	(11		)	(12		)
Net cash provided by investing activities	213			367
Financing Activities
Purchases of treasury stock	(1,824		)	(1,352		)
Dividends paid	(340		)	(263		)
Proceeds from debt	—			991
Tax withholdings related to share-based payments	(116		)	(77		)
Cash proceeds from exercise of stock options	54			40
Other financing activities	3			(4		)
Net cash used in financing activities	(2,223		)	(665		)
Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents	(54		)	95
Net (decrease) increase in cash, cash equivalents, restricted cash and restricted cash equivalents	(752		)	832
Cash, cash equivalents, restricted cash and restricted cash equivalents - beginning of period	8,337			7,592
Cash, cash equivalents, restricted cash and restricted cash equivalents - end of period	$	7,585		$	8,424

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

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MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Summary of Significant Accounting Policies

Organization

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

Consolidation and Basis of Presentation

The consolidated financial statements include the accounts of Mastercard and its majority-owned and controlled entities, including any variable interest entities (“VIEs”) for which the Company is the primary beneficiary. At March 31, 2019 and December 31, 2018, there were no significant VIEs which required consolidation. The Company consolidates acquisitions as of the date in which the Company has obtained a controlling financial interest. Intercompany transactions and balances have been eliminated in consolidation. Certain prior period amounts have been reclassified to conform to the 2019 presentation. The Company follows accounting principles generally accepted in the United States of America (“GAAP”).

The balance sheet as of December 31, 2018 was derived from the audited consolidated financial statements as of December 31, 2018. The consolidated financial statements for the three months ended March 31, 2019 and 2018 and as of March 31, 2019 are unaudited, and in the opinion of management, include all normal recurring adjustments that are necessary to present fairly the results for interim periods. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the full year.

The accompanying unaudited consolidated financial statements are presented in accordance with the U.S. Securities and Exchange Commission (“SEC”) requirements for Quarterly Reports on Form 10-Q. Reference should be made to the Mastercard Incorporated Annual Report on Form 10-K for the year ended December 31, 2018 for additional disclosures, including a summary of the Company’s significant accounting policies.

Non-controlling interest amounts are included in the consolidated statement of operations within other income (expense). For the three months ended March 31, 2019 and 2018, activity from non-controlling interests was not material to the respective period results.

Recently adopted accounting pronouncements

Comprehensive income - In February 2018, the Financial Accounting Standards Board (the “FASB”) issued accounting guidance that allows for a one-time reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from U.S. tax reform. The Company adopted this guidance effective January 1, 2019, electing to retain the stranded tax effects in accumulated other comprehensive income (loss). The adoption did not result in a material impact on the Company’s consolidated financial statements.

Leases - In February 2016, the FASB issued accounting guidance that changed how companies account for and present lease arrangements. This guidance requires companies to recognize lease assets and liabilities for both financing and operating leases on the consolidated balance sheet. The Company adopted this guidance effective January 1, 2019, under the modified retrospective transition method with the available practical expedients.

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MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

The following table summarizes the impact of the changes made to the January 1, 2019 consolidated balance sheet for the adoption of the new accounting standard pertaining to leases. The prior periods have not been restated and have been reported under the accounting standard in effect for those periods.



	Balance at December 31, 2018		Impact of lease standard		Balance at January 1, 2019
	(in millions)
Assets
Property, equipment and right-of-use assets, net	$	921	$	375	$	1,296
Liabilities
Other current liabilities	949		72		1,021
Other liabilities	1,877		303		2,180

For a more detailed discussion on lease arrangements, refer to Note 8 (Property, Equipment and Right-of-Use Assets).

Recent accounting pronouncements not yet adopted

Implementation costs incurred in a hosting arrangement that is a service contract - In August 2018, the FASB issued accounting guidance which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for periods beginning after December 15, 2019 and early adoption is permitted. Companies are required to adopt this guidance either retrospectively or by prospectively applying the guidance to all implementation costs incurred after the date of adoption. The Company expects to adopt this guidance effective January 1, 2020 by applying the prospective approach as of the date of adoption and is in the process of evaluating the potential effects this guidance will have on its consolidated financial statements.

Disclosure requirements for fair value measurement - In August 2018, the FASB issued accounting guidance which modifies disclosure requirements for fair value measurements by removing, modifying and adding certain disclosures. This guidance is effective for periods beginning after December 15, 2019. Companies are permitted to early adopt the removed or modified disclosures and delay adoption of added disclosures until the effective date. Companies are required to adopt the guidance for certain added disclosures prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption and all other amendments retrospectively to all periods presented upon their effective date. The Company expects to adopt this guidance effective January 1, 2020 and does not expect the impacts to be material.

Note 2. Acquisitions

During the first quarter of 2019, the Company entered into definitive agreements to acquire businesses for aggregate consideration of approximately $975 million, which includes contingent consideration of $25 million (subject to customary purchase price adjustments). Subject to regulatory approvals and closing conditions, all acquisitions are expected to close in 2019. The Company will begin consolidating these acquisitions as of the date acquired.

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MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Note 3. Revenue

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



	Three Months Ended March 31,
	2019			2018
	(in millions)
Revenue by source:
Domestic assessments	$	1,605		$	1,458
Cross-border volume fees	1,263			1,157
Transaction processing	1,922			1,707
Other revenues	842			748
Gross revenue	5,632			5,070
Rebates and incentives (contra-revenue)	(1,743		)	(1,490		)
Net revenue	$	3,889		$	3,580

Net revenue by geographic region:
North American Markets	$	1,347		$	1,248
International Markets	2,506			2,300
Other ¹	36			32
Net revenue	$	3,889		$	3,580

¹Includes revenues managed by corporate functions.

Receivables from contracts with customers of $2.4 billion and $2.1 billion as of March 31, 2019 and December 31, 2018, respectively, are recorded within accounts receivable on the consolidated balance sheet. The Company’s customers are billed quarterly or more frequently dependent upon the nature of the performance obligation and the underlying contractual terms. The Company does not typically offer extended payment terms to customers.

Contract assets are included in prepaid expenses and other current assets and other assets on the consolidated balance sheet at March 31, 2019 in the amounts of $44 million and $90 million, respectively. The comparable amounts included in prepaid expenses and other current assets and other assets at December 31, 2018 were $40 million and $92 million, respectively.

Deferred revenue is included in other current liabilities and other liabilities on the consolidated balance sheet at March 31, 2019 in the amounts of $265 million and $109 million, respectively. The comparable amounts included in other current liabilities and other liabilities at December 31, 2018 were $218 million and $101 million, respectively. Revenue recognized from performance obligations satisfied during the three months ended March 31, 2019 and 2018 was $185 million and $161 million, respectively.

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MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Note 4. Earnings Per Share

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



	Three Months Ended March 31,
	2019		2018
	(in millions, except per share data)
Numerator
Net income	$	1,862	$	1,492
Denominator
Basic weighted-average shares outstanding	1,026		1,051
Dilutive stock options and stock units	6		6
Diluted weighted-average shares outstanding¹	1,032		1,057
Earnings per Share
Basic	$	1.81	$	1.42
Diluted	$	1.80	$	1.41

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

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

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



	December 31,
	2018		2017
	(in millions)
Cash and cash equivalents	$	6,682	$	5,933
Restricted cash and restricted cash equivalents
Restricted cash for litigation settlement	553		546
Restricted security deposits held for customers	1,080		1,085
Prepaid expenses and other current assets	22		28
Cash, cash equivalents, restricted cash and restricted cash equivalents - beginning of period	$	8,337	$	7,592

	March 31,
	2019		2018
	(in millions)
Cash and cash equivalents	$	5,857	$	6,890
Restricted cash and restricted cash equivalents
Restricted cash for litigation settlement	662		548
Restricted security deposits held for customers	1,044		965
Prepaid expenses and other current assets	22		21
Cash, cash equivalents, restricted cash and restricted cash equivalents - end of period	$	7,585	$	8,424

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MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Note 6. Fair Value and Investment Securities

Financial Instruments – Recurring Measurements

The Company classifies its fair value measurements of financial instruments into a three level hierarchy (the “Valuation Hierarchy”). There were no transfers made among the three levels in the Valuation Hierarchy during the three months ended March 31, 2019.

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



	March 31, 2019											December 31, 2018
	Quoted Prices in Active Markets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total			Quoted Prices in Active Markets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)		Total
	(in millions)
Assets
Investment securities available for sale ¹:
Municipal securities	$	—		$	8		$	—	$	8		$	—		$	15		$	—	$	15
Government and agency securities	48			88			—		136			65			92			—		157
Corporate securities	—			838			—		838			—			1,043			—		1,043
Asset-backed securities	—			130			—		130			—			217			—		217
Derivative instruments ²:
Foreign currency derivative assets	—			24			—		24			—			35			—		35
Deferred compensation plan ³:
Deferred compensation assets	55			—			—		55			54			—			—		54

Liabilities
Derivative instruments ²:
Foreign currency derivative liabilities	$	—		$	(9	)	$	—	$	(9	)	$	—		$	(6	)	$	—	$	(6	)
Deferred compensation plan ⁴:
Deferred compensation liabilities	(64		)	—			—		(64		)	(54		)	—			—		(54		)

¹The Company’s U.S. government securities are classified within Level 1 of the Valuation Hierarchy as the fair values are based on unadjusted quoted prices for identical assets in active markets. The fair value of the Company’s available-for-sale municipal securities, government and agency securities, corporate securities and asset-backed securities are based on observable inputs such as quoted prices, benchmark yields and issuer spreads for similar assets in active markets and are therefore included in Level 2 of the Valuation Hierarchy.

² The Company’s foreign currency derivative asset and liability contracts have been classified within Level 2 of the Valuation Hierarchy as the fair value is based on observable inputs such as broker quotes relating to foreign currency exchange rates for similar derivative instruments. See Note 16 (Foreign Exchange Risk Management) for further details.

³ The Company has a nonqualified deferred compensation plan where assets are invested primarily in mutual funds held in a rabbi trust, which is restricted for payments to participants of the plan. The Company has elected to use the fair value option for these mutual funds, which are measured using quoted prices of identical instruments in active markets and are included in prepaid expenses and other current assets on the consolidated balance sheet.

⁴ The deferred compensation liabilities are measured at fair value based on the quoted prices of identical instruments to the investment vehicles selected by the participants. These are included in other liabilities on the consolidated balance sheet.

Marketable Equity Investments

In April 2019, the Company invested approximately $340 million in certain marketable equity investments. These investments will be measured at fair value with unrealized gains or losses recognized on the consolidated statement of operations.

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Settlement and Other Guarantee Liabilities

The Company estimates the fair value of its settlement and other guarantees using market assumptions for relevant though not directly comparable undertakings, as the latter are not observable in the market given the proprietary nature of such guarantees. At March 31, 2019 and December 31, 2018, the carrying value and fair value of settlement and other guarantee liabilities were not material and accordingly are not included in the Valuation Hierarchy table above. Settlement and other guarantee liabilities are classified within Level 3 of the Valuation Hierarchy as their valuation requires substantial judgment and estimation of factors that are not observable in the market. See Note 15 (Settlement and Other Risk Management) for additional information regarding the Company’s settlement and other guarantee liabilities.

Financial Instruments - Non-Recurring Measurements

Held-to-Maturity Securities

Investments on the consolidated balance sheet include both available-for-sale and short-term held-to-maturity securities. Held-to-maturity securities are not measured at fair value on a recurring basis and are not included in the Valuation Hierarchy table above. At March 31, 2019 and December 31, 2018, the Company held $205 million and $264 million, respectively, of held-to-maturity securities due within one year. The cost of these securities approximates fair value.

Nonmarketable Equity Investments

The Company’s nonmarketable equity investments are measured at fair value at initial recognition. In addition, nonmarketable equity investments which are not accounted for under the equity method of accounting are adjusted for changes resulting from identifiable price changes in orderly transactions for the identical or similar investments of the same issuer. Nonmarketable equity investments are classified within Level 3 of the Valuation Hierarchy due to the absence of quoted market prices, the inherent lack of liquidity, and unobservable inputs used to measure fair value that require management’s judgment. The Company uses discounted cash flows and market assumptions to estimate the fair value of its nonmarketable equity investments when certain events or circumstances indicate that impairment may exist. These investments are included in other assets on the consolidated balance sheet. See Note 7 (Prepaid Expenses and Other Assets) for further details.

Debt

The Company estimates the fair value of its long-term debt based on market quotes. These debt instruments are not traded in active markets and are classified as Level 2 of the Valuation Hierarchy. At March 31, 2019, the carrying value and fair value of total long-term debt outstanding (including the current portion) was $6.3 billion and $6.6 billion, respectively. At December 31, 2018, the carrying value and fair value of total long-term debt outstanding (including the current portion) was $6.3 billion and $6.5 billion, respectively. In April 2019, $500 million of principal related to the 2014 USD Notes, which was classified in current liabilities as of March 31, 2019, matured and was paid.

Other Financial Instruments

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Contingent Consideration

The contingent consideration attributable to acquisitions made in 2017 is primarily based on the achievement of 2018 revenue targets and is measured at fair value on a recurring basis. This contingent consideration liability is included in other current liabilities on the consolidated balance sheet and is classified within Level 3 of the Valuation Hierarchy due to the absence of quoted market prices and unobservable inputs used to measure fair value that require management’s judgment. The activity of the Company’s contingent consideration liability for the three months ended March 31, 2019 was as follows:



	(in millions)
Balance at December 31, 2018	$	219
Net change in valuation	—
Payments	(5		)
Foreign currency translation	7
Balance at March 31, 2019	$	221

Amortized Costs and Fair Values – Available-for-Sale Investment Securities

The major classes of the Company’s available-for-sale investment securities, for which unrealized gains and losses are recorded as a separate component of other comprehensive income (loss) on the consolidated statement of comprehensive income, and their respective amortized cost basis and fair values as of March 31, 2019 and December 31, 2018 were as follows:



	March 31, 2019								December 31, 2018
	Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss		Fair Value		Amortized Cost		Gross Unrealized Gain		Gross Unrealized Loss			Fair Value
	(in millions)
Municipal securities	$	8	$	—	$	—	$	8	$	15	$	—	$	—		$	15
Government and agency securities	136		—		—		136		157		—		—			157
Corporate securities	835		3		—		838		1,044		1		(2		)	1,043
Asset-backed securities	130		—		—		130		217		—		—			217
Total	$	1,109	$	3	$	—	$	1,112	$	1,433	$	1	$	(2	)	$	1,432

The Company’s available-for-sale investment securities held at March 31, 2019 and December 31, 2018 primarily carried a credit rating of A- or better. The municipal securities are primarily comprised of state tax-exempt bonds and are diversified across states and sectors. Government and agency securities include U.S. government bonds, U.S. government sponsored agency bonds and foreign government bonds with similar credit quality to that of the U.S. government bonds. Corporate securities are comprised of commercial paper and corporate bonds. The asset-backed securities are investments in bonds which are collateralized primarily by automobile loan receivables.

Investment Maturities

The maturity distribution based on the contractual terms of the Company’s investment securities at March 31, 2019 was as follows:



	Available-For-Sale
	Amortized Cost		Fair Value
	(in millions)
Due within 1 year	$	238	$	238
Due after 1 year through 5 years	870		873
Due after 5 years through 10 years	1		1
Total	$	1,109	$	1,112

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

Investment Income

Investment income primarily consists of interest income generated from cash, cash equivalents and investments. Gross realized gains and losses are recorded within investment income on the consolidated statement of operations. The gross realized gains and losses from the sales of available-for-sale securities for the three months ended March 31, 2019 and 2018 were not significant.

Note 7. Prepaid Expenses and Other Assets

Prepaid expenses and other current assets consisted of the following:



	March 31, 2019		December 31, 2018
	(in millions)
Customer and merchant incentives	$	808	$	778
Other	705		654
Total prepaid expenses and other current assets	$	1,513	$	1,432

Other assets consisted of the following:



	March 31, 2019		December 31, 2018
	(in millions)
Customer and merchant incentives	$	2,492	$	2,458
Nonmarketable equity investments	348		337
Income taxes receivable	284		298
Other	222		210
Total other assets	$	3,346	$	3,303

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

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Note 8. Property, Equipment and Right-of-Use Assets

Property, equipment and right-of-use assets consisted of the following:



	March 31, 2019			December 31, 2018
	(in millions)
Building, building equipment and land	$	484		$	481
Equipment	1,025			987
Furniture and fixtures	87			85
Leasehold improvements	223			215
Operating lease right-of-use assets	391			—
Property, equipment and right-of-use assets	2,210			1,768
Less accumulated depreciation and amortization	(905		)	(847		)
Property, equipment and right-of-use assets, net	$	1,305		$	921

The increase in property, equipment and right-of-use assets at March 31, 2019 from December 31, 2018 was primarily due to the impact from the adoption of the new accounting standard pertaining to lease arrangements. See Note 1 (Summary of Significant Accounting Policies) for additional information on the impact of the adoption of this standard.

The Company determines if a contract is, or contains, a lease at contract inception. The Company’s right-of-use (“ROU”) assets are primarily related to operating leases for office space, automobiles and other equipment. Leases are included in property, equipment and right-of-use assets, other current liabilities and other liabilities on the consolidated balance sheet.

ROU assets represent the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. In addition, ROU assets include initial direct costs incurred by the lessee as well as any lease payments made at or before the commencement date, and exclude lease incentives. As most of the Company's leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Lease terms include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Leases with a term of one year or less are generally included in ROU assets and liabilities.

The Company excludes variable lease payments in measuring ROU assets and lease liabilities, other than those that depend on an index, a rate or are in substance fixed payments. Lease and nonlease components are generally accounted for separately. When available, consideration is allocated to the separate lease and nonlease components in a lease contract on a relative standalone price basis using observable standalone prices.

Operating lease ROU assets and operating lease liabilities are recorded on the consolidated balance sheet as follows:



	March 31, 2019
	(in millions)
Balance sheet location
Property, equipment and right-of-use assets, net	$	369
Other current liabilities	79
Other liabilities	327

Operating lease amortization expense for the three months ended March 31, 2019 was $22 million and recorded within general and administrative expenses on the consolidated statement of operations. As of March 31, 2019, weighted-average remaining lease term of operating leases was 6.5 years and weighted-average discount rate for operating leases was 3.2%.

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MASTERCARD INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

The following table summarizes maturities of operating lease liabilities based on lease term:



	Operating Leases
	(in millions)
Remainder of 2019	$	68
2020	81
2021	61
2022	55
2023	49
Thereafter	134
Total operating lease payments	448
Less: Interest	(42		)
Present value of operating lease liabilities	$	406

As of March 31, 2019, the Company has entered into additional operating leases as a lessee, primarily for real estate. These leases have not yet commenced and will result in ROU assets and corresponding lease liabilities of approximately $279 million. These operating leases are expected to commence between fiscal years 2019 and 2020, with lease terms between one and sixteen years.

Disclosures related to periods prior to adoption of the new accounting standard, including those operating leases entered into during 2018, but not yet commenced

At December 31, 2018, the Company had the following future minimum payments due under non‐cancelable leases:



	Operating Leases
	(in millions)
2019	$	72
2020	75
2021	76
2022	68
2023	58
Thereafter	327
Total	$	676

Consolidated rental expense for the Company’s leased office space was $94 million for the year ended December 31, 2018. Consolidated lease expense for automobiles, computer equipment and office equipment was $20 million for the year ended December 31, 2018.

Note 9. Accrued Expenses and Accrued Litigation

Accrued expenses consisted of the following:



	March 31, 2019		December 31, 2018
	(in millions)
Customer and merchant incentives	$	3,226	$	3,275
Personnel costs	292		744
Income and other taxes	291		158
Other	520		570
Total accrued expenses	$	4,329	$	4,747

Customer and merchant incentives represent amounts to be paid to customers under business agreements. As of March 31, 2019 and December 31, 2018, the Company’s provision for litigation was $1,575 million and $1,591 million, respectively. These amounts are not included in the accrued expenses table above and are separately reported as accrued litigation on the

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) – (Continued)

consolidated balance sheet. See Note 14 (Legal and Regulatory Proceedings) for additional information regarding the Company’s accrued litigation.

Note 10. Stockholders' Equity

The Company’s Board of Directors have approved share repurchase programs authorizing the Company to repurchase shares of its Class A Common Stock. These programs become effective after the completion of the previously authorized share repurchase program.

The following table summarizes the Company’s s