What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-11 compared with 2021-02-12 · 77 added, 81 removed, 232 unchanged (41% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Switched Transactions 2 measures the number of transactions switched by Mastercard.

We define transactions switched as the number of transactions initiated and switched through our network during the period.

Operating Margin measures how much profit we make on each dollar of sales after our operating costs but before other income (expense) and income tax expense.

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All data is subject to revision and amendment by Mastercard or Mastercard’s customers.

2 Normalized to eliminate the effects of differing switching and carryover days between periods.

2 Growth rates are normalized to eliminate the effects of differing switching and carryover days between periods.

Carryover days are those where transactions and volumes from days where the Company does not clear and settle are processed.

In the fourth quarter of 2021, we began clearing and settling transactions and volumes on a daily basis.

Foreign Currency

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In 2021, GDV on a U.S.

dollar-converted basis decreased 2.0%, while GDV on a local currency basis increased 0.1% versus 2019.

In 2019, GDV on a U.S.

dollar-converted basis increased 21.9%, while GDV on a local currency basis increased 20.5% versus 2020.

In 2020, GDV on a U.S.

dollar-converted basis decreased 1.9%, while GDV on a local currency basis increased 0.1% versus 2019.

Further, the impact from transactional currency occurs in transaction processing revenue, other revenue and operating expenses when the local currency of these items is different than the functional currency of the entity.

The translational and transactional impact of currency (“Currency impact”) has been identified in our drivers of change tables and has been excluded from our currency-neutral growth rates, which are non-GAAP financial measures.

See “Financial Results - Revenue and Operating Expenses” for our drivers of change impact tables and “Non-GAAP Financial Information” for further information on our non-GAAP adjustments.

2021 Hedge Accounting Designation

Through December 31, 2020, our approach to manage our transactional currency exposure consisted of hedging a portion of anticipated revenues impacted by transactional currencies by entering into foreign exchange derivative contracts, and recording the related changes in fair value in general and administrative expenses on the consolidated statement of operations.

Beginning in January 2021, we started to formally designate certain newly-executed foreign exchange derivative contracts, which meet the established accounting criteria, as cash flow hedges.

Starting in the first quarter of 2021, gains and losses resulting from changes in fair value of these designated contracts will be deferred in accumulated other comprehensive income (loss) and subsequently recognized in the respective component of net revenue when the underlying forecasted transactions impact earnings.

The related impact of our foreign exchange cash flow hedging activities will be excluded from our currency-neutral growth rates as part of our Currency impact.

Through December 31, 2020, our approach to managing transactional currency exposure consisted of hedging a portion of anticipated revenues impacted by transactional currencies by entering into foreign exchange derivative contracts, and recording the related changes in fair value in general and administrative expenses on the consolidated statement of operations.

During the first quarter of 2021, we started to formally designate certain newly-executed foreign exchange derivative contracts, which meet the established accounting criteria, as cash flow hedges.

Gains and losses resulting from changes in fair value of these designated contracts are deferred in accumulated other comprehensive income (loss) and subsequently recognized in the respective component of net revenue when the underlying forecasted transactions impact earnings.

Foreign Exchange Activity

We incur foreign currency gains and losses from remeasuring monetary assets and liabilities, including settlement receivables and payables with our customers, that are denominated in a currency other than the functional currency of the entity.

We incur foreign currency gains and losses from remeasuring monetary assets and liabilities, including settlement assets and obligations, that are denominated in a currency other than the functional currency of the entity.

To manage this foreign exchange risk, we may enter into foreign exchange derivative contracts to economically hedge the foreign currency exposure of a portion of our nonfunctional monetary assets and liabilities.

The gains or losses resulting from changes in fair value of these contracts are intended to reduce the potential effect of the underlying hedged exposure and are recorded net within general and

MASTERCARD 2020 FORM 10-K 47

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

administrative expenses on the consolidated statement of operations.

The impact of foreign exchange activity, including the related hedging activities, has not been eliminated in our currency-neutral results.

The gains or losses resulting from changes in fair value of these contracts are intended to reduce the potential effect of the underlying hedged exposure and are recorded net within general and administrative expenses on the consolidated statement of operations.

The impact of this foreign exchange activity, including the related hedging activities, has not been eliminated in our currency-neutral results.

Our foreign exchange risk management activities are discussed further in Note 23 (Derivative and Hedging Instruments) to the consolidated financial statements included in Part II, Item 8.

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dollar and/or a continued and sustained deterioration of economic conditions in these countries.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Financial Results

Primary drivers of net revenue, versus the prior year, were as follows:

Gross revenue decreased 5%, or 4% on a currency-neutral basis, driven by decreased cross-border volumes reflecting impacts of the COVID-19 outbreak, partially offset by increases in our value-added products and services and the number of switched transactions.

Gross dollar volume of $6.3 trillion was flat.

Rebates and incentives increased 3%, or 4% on a currency-neutral basis, due to new and renewed deals partially offset by a favorable mix of volume-based incentives.

Net revenue decreased 9%, or 8% on a currency-neutral basis, including 1 percentage point of growth from our acquisitions.

Gross revenue increased 26%, or 25% on a currency-neutral basis, which includes growth of 2 percentage points from acquisitions.

The remaining increase was primarily driven by transaction and volume growth and an increase in our Cyber & Intelligence and Data & Services solutions within other revenue.

Rebates and incentives increased 32%, or 31% on a currency-neutral basis, primarily due to increased volumes and transactions and new and renewed deals.

Net revenue increased 23%, or 22% on a currency-neutral basis, and includes 2 percentage points of growth from acquisitions.

See Note 3 (Revenue) to the consolidated financial statements included in Part II, Item 8 for a further discussion of how we recognize revenue.

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Net revenue $ 18,884 $ 15,301 $ 16,883 23% (9)%

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table summarizes the drivers of change in net revenue:

For the Years Ended December 31,

Volume Acquisitions Currency Impact 1

Operational Acquisitions Currency Impact 3

2021 2020 2021 2020 2021 2020 2021 2020

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Other revenues 23% 2 12% 2 8% 3% 1% (1)% 32 % 14 %

Rebates and incentives (6)% 5 9% 5 —% —% (2)% (3)% 10 % 6 11 % 6 3 % 18 %

Rebates and incentives (contra-revenue) 31% 4% —% —% 1% (2)% 32 % 3 %

Net revenue 20% (9)% 2% 1% 1% (1)% 23 % (9) %

Table may not sum due to rounding

** Not applicable

1 Represents the translational and transactional impact of currency.

2 Includes impact from pricing, other non-volume based fees and geographic mix.

3 Includes impact of the allocation of revenue to service deliverables, which are primarily recorded in other revenue when services are performed.

4 Includes impacts from cyber and intelligence fees, data analytics and consulting fees and other payment-related products and services.

5 Includes the impact from mix on volume-based incentives.

6 Includes the impact of new, renewed and expired agreements.

1 Includes impacts from our key metrics, other non-volume based fees, pricing and mix.

2 Includes impacts from our cyber and intelligence solution fees, data analytics and consulting fees and other value-added services.

3 Includes the translational and transactional impact of currency and the related impact of our foreign exchange derivative contracts designated as cash flow hedging instruments.

MASTERCARD 2021 FORM 10-K 51

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following tables provide a summary of the trend in volumes and transactions.

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22 % 21 % (2) % — %

Asia Pacific/Middle East/Africa (3) % (2) % 8 % 12 %

Canada (4) % (3) % 4 % 7 %

Europe (2) % 1 % 12 % 18 %

Latin America (17) % (2) % 9 % 15 %

United States 23 % 23 % 2 % 2 %

Worldwide less United States 22 % 20 % (4) % (1) %

Cross-border volume 1

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Operating Expenses

Operating expenses were flat in 2020 versus the prior year.

Adjusted operating expenses decreased 1% on both an as adjusted and a currency-neutral basis versus the prior year.

Operating expenses increased 22% in 2021 versus the prior year.

Adjusted operating expenses increased 21%, or 19% on a currency-neutral basis, versus the prior year.

Current year results include growth of approximately 7 percentage points from acquisitions.

Excluding acquisitions, expenses declined 5% primarily due to reduced spending on advertising and marketing, travel and professional fees, partially offset by higher personnel and data processing costs to support continued investment in our strategic initiatives.

MASTERCARD 2020 FORM 10-K 49

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Excluding acquisitions, expenses increased 12% primarily due to higher personnel costs to support our continued investment in our strategic initiatives, increased spending on advertising and marketing and increased data processing costs.

The components of operating expenses were as follows:

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1 See “Non-GAAP Financial Information” for further information on our non-GAAP adjustments and the reconciliation to GAAP reported amounts.

52 MASTERCARD 2021 FORM 10-K

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table summarizes the drivers of changes in operating expenses:

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General and Administrative

General and administrative expenses increased 3% on both an as reported and a currency-neutral basis in 2020 versus the prior year.

Current year results include growth of approximately 4 percentage points from acquisitions.

Excluding acquisitions, expenses declined 1% primarily due to reduced spending on travel and professional fees, partially offset by an increase in personnel and data processing costs to support continued investment in our strategic initiatives.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General and administrative expenses increased 20%, or 18% on a currency-neutral basis, in 2021 versus the prior year.

Current year results include growth of 6 percentage points from acquisitions and 1 percentage point from Special Items.

The remaining increase was primarily due to higher personnel costs to support our continued investment in our strategic initiatives and increased data processing costs.

The components of general and administrative expenses were as follows:

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51 9 32 ** **

Other 974 1,081 1,019 (10)% 6%

1,216 974 1,081 25% (10)%

Total general and administrative expenses $ 7,087 $ 5,910 $ 5,763 20% 3%

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See Note 23 (Derivative and Hedging Instruments) to the consolidated financial statements included in Part II, Item 8 for further discussion.

2 Includes a special item related to a foreign indirect tax matter of $82 million, pre-tax, recorded during 2021.

See “Non-GAAP Financial Information” for further information on our non-GAAP adjustments and the reconciliation to GAAP reported amounts.

Advertising and Marketing

Advertising and marketing expenses decreased 30%, or 29% on a currency-neutral basis in 2020 versus the prior year, primarily due to lower advertising and sponsorship spend in response to COVID-19.

Advertising and marketing expenses increased 36%, on both an as reported and currency-neutral basis, in 2021 versus the prior year, primarily due to an increase in spending on certain marketing campaigns and an increase in advertising and sponsorship spend driven by the reinstatement of sponsored events as the effects of the pandemic recede.

Depreciation and Amortization

Depreciation and amortization expenses increased 11% on both an as reported and a currency-neutral basis in 2020 versus the prior year.

Current year results include growth of approximately 6 percentage points from acquisitions.

The remaining increase was primarily due to higher depreciation from capital investments.

Depreciation and amortization expenses increased 25%, or 23% on a currency-neutral basis, in 2021 versus the prior year, which includes growth of 20 percentage points from acquisitions due to the amortization of acquired intangible assets.

Provision for Litigation

In 2020, we recorded $73 million related to various litigation settlements and legal costs.

There were no litigation charges in the prior year.

In 2021 and 2020, we recorded $ 94 million and $73 million, respectively, related to various litigation settlements and legal costs.

See Note 21 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part II, Item 8 for further discussion.

MASTERCARD 2021 FORM 10-K 53

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Other Income (Expense)

Other income (expense) was unfavorable in 2020 versus the prior year primarily due to increased interest expense related to our recent debt issuances, as well as lower net gains in the current year versus the prior year related to unrealized fair market value adjustments on marketable and non-marketable equity securities and a decrease in our investment income.

Other income (expense) was favorable $546 million in 2021 versus the prior year, primarily due to higher net gains in the current period versus the prior period related to unrealized fair market value adjustments on marketable and nonmarketable equity securities and realized gains on sales of marketable equity securities.

Adjusted other income (expense) was unfavorable $62 million versus the prior year, primarily due to increased interest expense related to our recent debt issuances and a decrease in our investment income.

The components of other income (expense) were as follows:

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Total other income (expense) 225 (321) 67 ** **

(Gains) losses on equity investments 1

(645) (30) (167) ** **

Special Items 1

Adjusted total other income (expense) 1

$ (413) $ (351) $ (100) 18 % **

Table may not sum due to rounding.

** Not meaningful

1 See “Non-GAAP Financial Information” for further information on our non-GAAP adjustments and the reconciliation to GAAP reported amounts.

The effective income tax rates for the years ended December 31, 2021 and 2020 were 15.7% and 17.4%, respectively.

The effective income tax rate for 2020 was higher than the prior year, primarily due to discrete tax benefits in 2019, partially offset by a more

MASTERCARD 2020 FORM 10-K 51

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

favorable geographic mix of earnings in 2020.

The 2019 discrete tax benefits related to a favorable court ruling, a reduction to the Company’s transition tax liability and additional foreign tax credits which can be carried back under U.S tax reform transition rules issued by the Department of the Treasury and the Internal Revenue Service.

The adjusted effective income tax rates for the years ended December 31, 2021 and 2020 were 15.4% and 17.2%, respectively.

The adjusted effective income tax rate was higher than the prior year, primarily due to a discrete tax benefit related to a favorable court ruling in 2019.

Both the as reported and as adjusted effective income tax rates in 2021 were lower than the prior year, primarily due to the recognition of U.S.

tax benefits, the majority of which were discrete, resulting from a higher foreign derived intangible income deduction and greater utilization of foreign tax credits in the U.S.

In addition, a more favorable geographic mix of earnings in 2021 contributed to our lower effective tax rates.

These benefits were partially offset by a lower discrete tax benefit related to share-based payments in 2021.

See Note 20 (Income Taxes) to the consolidated financial statements included in Part II, Item 8 for further discussion.

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This amount excludes restricted cash and restricted cash equivalents of $2.5 billion and $2.3 billion at December 31, 2021 and 2020, respectively.

We believe that our existing cash, cash equivalents and investment securities balances, our cash flow generating capabilities, and our access to capital resources are sufficient to satisfy our future operating cash needs, capital asset purchases, outstanding commitments and other liquidity requirements associated with our existing operations and potential obligations.

Our liquidity and access to capital could be negatively impacted by global credit market conditions.

1 unchanged sentence

Historically, payments under these guarantees have not been significant;

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

however, historical trends may not be an indication of potential future losses.

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Net cash used in financing activities (6,555) (2,152) (5,867)

Net cash provided by operating activities decreased $1.0 billion in 2020 versus the prior year, primarily due to lower net income adjusted for non-cash items, partially offset by a decrease in litigation payments.

Net cash used in investing activities increased $239 million in 2020 versus the prior year, primarily due to lower net proceeds from our investments in available-for-sale and held-to-maturity securities, partially offset by higher prior year acquisition payments.

Net cash used in financing activities decreased $3.7 billion in 2020 versus the prior year, primarily due to lower repurchases of our Class A common stock, higher net debt proceeds in the current period and the repayment of debt that matured in the prior year.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Net cash provided by operating activities increased $2.2 billion in 2021 versus the prior year, primarily due to higher net income adjusted for non-cash items and the timing of customer incentive payments, partially offset by higher outstanding receivables in the current period due to increased volumes and timing of settlement with customers.

Net cash used in investing activities increased $3.4 billion in 2021 versus the prior year, primarily due to increased acquisition activity in the current year.

Net cash used in financing activities increased $4.4 billion in 2021 versus the prior year, primarily due to lower proceeds from debt issuances, higher repurchases of our Class A common stock and repayment of debt in the current year.

Debt and Credit Availability

In March 2020, we issued $1 billion principal amount of notes due March 2027, $1.5 billion principal amount of notes due March 2030 and $1.5 billion principal amount notes due March 2050.

Our total debt outstanding was $12.7 billion at December 31, 2020, with the earliest maturity of $650 million of principal occurring in November 2021.

In March 2021, we issued $600 million principal amount of notes due March 2031 and $700 million principal amount of notes due March 2051 and in November 2021, we issued $750 million principal amount of notes due November 2031 (collectively the “2021 USD Notes”).

Additionally, during 2021, $650 million of principal related to the 2016 USD Notes was redeemed.

Our total debt outstanding was $13.9 billion at December 31, 2021, with the earliest maturity of €700 million (approximately $793 million as of December 31, 2021) of principal occurring in December 2022.

The proceeds of the 2021 USD Notes due March 2031 are to be used to fund eligible green and social projects, examples of which are described in the Use of Proceeds section of the Prospectus Supplement filed on March 4, 2021.

All other notes are to be used for general corporate purposes.

As of December 31, 2021, we have a commercial paper program (the “Commercial Paper Program”), under which we are authorized to issue up to $6 billion in outstanding notes, with maturities up to 397 days from the date of issuance.

In conjunction with the Commercial Paper Program, we have a committed unsecured $6 billion revolving credit facility (the “Credit Facility”) which, in 2020, was extended for an additional year and now expires in November 2025.

Borrowings under the Commercial Paper Program and the Credit Facility are to provide liquidity for general corporate purposes, including providing liquidity in the event of one or more settlement failures by our customers.

In conjunction with the Commercial Paper Program, we have a committed unsecured $6 billion revolving credit facility (the “Credit Facility”) which now expires in November 2026.

Borrowings under the Commercial Paper Program and the Credit Facility are to be used to provide liquidity for general corporate purposes, including providing liquidity in the event of one or more settlement failures by our customers.

In addition, we may borrow and repay amounts under these facilities for business continuity purposes.

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The declaration and payment of future dividends is at the sole discretion of our Board of Directors after taking into account various factors, including our financial condition, operating results, available cash and current and anticipated cash needs.

MASTERCARD 2021 FORM 10-K 55

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table summarizes the annual, per share dividends paid in the years reflected:

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Cash dividends paid $ 1,741 $ 1,605 $ 1,345

On December 8, 2020, our Board of Directors declared a quarterly cash dividend of $0.44 per share paid on February 9, 2021 to holders of record on January 8, 2021 of our Class A common stock and Class B common stock.

On November 30, 2021, our Board of Directors declared a quarterly cash dividend of $0.49 per share paid on February 9, 2022 to holders of record on January 7, 2022 of our Class A common stock and Class B common stock.

The aggregate amount of this dividend was $479 million.

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Repurchased shares of our common stock are considered treasury stock.

In December 2020, 2019 and 2018, our Board of Directors approved share repurchase programs authorizing us to repurchase up to $6.0 billion, $8.0 billion and $6.5 billion, respectively, of our Class A common stock.

The program approved in 2020 will become effective after completion of the share repurchase program authorized in 2019.

In November 2021, December 2020 and December 2019, our Board of Directors approved share repurchase programs authorizing us to repurchase up to $8.0 billion, $6.0 billion and $8.0 billion, respectively, of our Class A common stock.

The program approved in 2021 will become effective after completion of the share repurchase program approved in 2020.

The timing and actual number of additional shares repurchased will depend on a variety of factors, including cash requirements to meet the operating needs of the business, legal requirements, as well as the share price and economic and market conditions.

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See Note 16 (Stockholders' Equity) to the consolidated financial statements included in Part II, Item 8 for further discussion.

MASTERCARD 2020 FORM 10-K 53

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Critical Accounting Estimates

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Revenue Recognition - Rebates and Incentives

We enter into business agreements with certain customers that provide for rebates or support when customers meet certain volume thresholds as well as other support incentives, which are tied to customer performance.

We enter into business agreements with certain customers that provide for rebates and incentives when customers meet certain volume thresholds or other incentives tied to customer performance.

We consider various factors in estimating customer performance, including forecasted transactions, card issuance and card conversion volumes, expected payments and historical experience with that customer.

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If our customers’ actual performance is not consistent with our estimates of their performance, net revenue may be materially different.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Loss Contingencies

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We account for our business combinations using the acquisition method of accounting.

The acquisition purchase price, including contingent consideration, is allocated to the underlying identified, tangible and intangible assets, liabilities assumed and any non-controlling interest in the acquiree, based on their respective estimated fair values on the acquisition date.

The acquisition purchase price, including contingent consideration, if any, is allocated to the underlying identified, tangible and intangible assets, liabilities assumed and any non-controlling interest in the acquiree, based on their respective estimated fair values on the acquisition date.

Any excess of purchase price over the fair value of net assets acquired, including identifiable intangible assets, is recorded as goodwill.

The amounts and useful lives assigned to acquisition-related tangible and intangible assets impact the amount and timing of future amortization

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The amounts and useful lives assigned to acquisition-related tangible and intangible assets impact the amount and timing of future amortization expense.

We use various valuation techniques to determine fair value, primarily discounted cash flows analysis, relief-from-royalty and multi-period excess earnings for estimating the value of intangible assets.

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Our estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable.

MASTERCARD 2021 FORM 10-K 57

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis