MASTERCARD, INC. Item 2. Management's discussion and analysis of financial condition and results of operations The following supplements management's discussion and analysis ofMastercard Incorporated for the year endedDecember 31, 2019 as contained in the Company's Annual Report on Form 10-K filed with theU.S. Securities and Exchange Commission onFebruary 14, 2020 . It also should be read in conjunction with the consolidated financial statements and notes ofMastercard Incorporated and its consolidated subsidiaries, includingMastercard International Incorporated (together, "Mastercard" or the "Company"), included elsewhere in this Report. Percentage changes provided throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations" were calculated on amounts rounded to the nearest thousand. COVID-19 The coronavirus ("COVID-19") pandemic has spread rapidly across the globe. This outbreak has resulted in the widespread reduction of business activity, adversely impacting consumers, our customers, suppliers and business partners. We are monitoring the effects of the pandemic and related actions taken by governments as they relate to travel restrictions, social distancing measures, re-opening of businesses, and the continued impact of these actions on consumer and commercial behavior. The pandemic has had significant negative effects on the global economy. The duration of the pandemic and its impact on the global economy is uncertain and may continue to be volatile. The COVID-19 outbreak has affected our 2020 performance to date, during which we have seen unfavorable trends compared to historical periods. The impact of this outbreak started in the first quarter of 2020 as we experienced declines in our key metrics, primarily due to travel restrictions and stay-at-home orders implemented by governments in many regions and countries across the globe. Early in the second quarter of 2020 switched transactions and cross-border volume growth rates started to stabilize around new lower activity levels as a result of compliance with social distancing and mobility limitations. Subsequently switched transactions trends have progressively improved from the lower levels, in part due to relaxation of social distancing measures globally and the impact of fiscal stimulus inthe United States . Cross-border volume trends continued to be significantly impacted by the decline in travel, with modest improvements as the quarter progressed. Additionally, gross domestic volumes declined during the second quarter of 2020 as compared to the year ago periods in 2019 for the reasons mentioned above. The full extent to which the pandemic, and measures taken in response, affect our business, results of operations and financial condition will depend on future developments, which are highly uncertain, and cannot be predicted at this time. Financial Results Overview The following table provides a summary of our key GAAP operating results, as reported: Three Months Ended June 30, Six Months Ended June 30, 2020 2019 Increase/(Decrease) 2020 2019
Increase/(Decrease)
($ in millions, except per share data)
Net revenue $ 3,335 $ 4,113 (19)% $ 7,344 $ 8,002 (8)%
Operating expenses $ 1,628 $ 1,716 (5)% $ 3,426 $ 3,392 1%
Operating income $ 1,707 $ 2,397 (29)% $ 3,918 $ 4,610 (15)%
Operating margin 51.2 % 58.3 % (7.1) ppt 53.3 % 57.6 % (4.3) ppt
Income tax expense $ 270 $ 471 (42)% $ 564 $ 812 (30)%
Effective income tax rate 16.0 % 18.7 % (2.7) ppt 15.4 % 17.2 % (1.8) ppt
Net income $ 1,420 $ 2,048 (31)% $ 3,113 $ 3,910 (20)%
Diluted earnings per share
(30)%$ 3.08 $ 3.80 (19)% Diluted weighted-average shares outstanding 1,008 1,025 (2)% 1,009 1,028 (2)% 28MASTERCARD JUNE 30, 2020 FORM 10-Q --------------------------------------------------------------------------------
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table provides a summary of our key non-GAAP operating results1,
adjusted to exclude the impact of gains and losses on our equity investments,
special items (which represent litigation judgments and settlements and certain
one-time items) and the related tax impacts on our non-GAAP adjustments. In
addition, we have presented growth rates, adjusted for the impact of currency:
Three Months Ended June 30, Increase/(Decrease) Six Months Ended June 30, Increase/(Decrease)
2020 2019 As adjusted Currency-neutral 2020 2019 As adjusted Currency-neutral
($ in millions, except per share data)
Net revenue $ 3,335 $ 4,113 (19)% (17)% $ 7,344 $ 8,002 (8)% (6)%
Adjusted operating
expenses $ 1,606 $ 1,716 (6)% (5)% $ 3,398 $ 3,392 -% 2%
Adjusted operating
margin 51.8 % 58.3 % (6.4) ppt (6.0) ppt 53.7 % 57.6 % (3.9) ppt (3.5) ppt
Adjusted effective
income tax rate 16.3 % 18.5 % (2.2) ppt (1.9) ppt 15.5 % 17.7 % (2.2) ppt (2.0) ppt
Adjusted net income $ 1,370 $ 1,937 (29)% (27)% $ 3,214 $ 3,765 (15)% (12)%
Adjusted diluted
earnings per share $ 1.36 $ 1.89 (28)% (26)% $ 3.19 $ 3.66 (13)% (11)%
Note: Tables may not sum due to rounding. 1 See "Non-GAAP Financial Information" for further information on our non-GAAP
adjustments and the reconciliation to GAAP reported amounts.
Key highlights for the three and six months ended
Net revenue
Three Months Ended
For the three months ended June 30, 2020, net
revenue decreased 17% on a currency-neutral basis
GAAP Non-GAAP reflecting impacts of COVID-19, and includes a 1
(currency-neutral) percentage point benefit from acquisitions. The
primary drivers were:
down 19% down 17% - Gross dollar volume decline of 10% on a
local currency basis
- Cross-border volume decline of 45% on a
local currency basis
- Switched transaction decline of 10%
These decreases to net revenue were partially
offset by:
- Other revenues growth of 12%, or 14% on a
currency-neutral basis, which
includes 4 percentage points of growth due to
acquisitions
- Rebates and incentives decline of 10%, or 7%
on a currency-neutral basis
Six Months Ended
For the six months ended June 30, 2020, net
revenue decreased 6% on a currency-neutral basis
GAAP Non-GAAP reflecting impacts of COVID-19, and includes a 1
(currency-neutral) percentage point benefit from acquisitions. The
primary drivers were:
down 8% down 6% - Gross dollar volume decline of 1% on a local
currency basis
- Cross-border volume decline of 24% on a
local currency basis
- Rebates and incentives growth of 6%, or 9%
on a currency-neutral basis
These decreases to net revenue were partially
offset by:
- Switched transaction growth of 1%
- Other revenues growth of 19%, or 20% on a
currency-neutral basis, which
includes 5 percentage points of growth due to
acquisitions
Adjusted
Operating expenses operating expenses
Three Months Ended June 30, 2020 For the three months ended June 30, 2020, the 5
percentage point decline in adjusted operating
expenses on a currency-neutral basis included a 4
GAAP Non-GAAP percentage point increase due to acquisitions.
(currency-neutral) Excluding acquisitions, the 9 percentage points
decline was primarily due to lower advertising
down 5% down 5% and marketing, travel and professional fee
related spend.
Six Months Ended June 30, 2020 For the six months ended June 30, 2020, the 2
percentage points of growth in adjusted operating
expenses on a currency-neutral basis was
GAAP Non-GAAP primarily due to 5 percentage points of growth
(currency-neutral) from acquisitions, partially offset by lower
advertising and marketing, travel and
professional fee related spend.
up 1% up 2%
MASTERCARD JUNE 30, 2020 FORM 10-Q 29
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PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Effective income Adjusted effective
tax rate income tax rate
Three Months Ended June 30, 2020 Adjusted effective income tax rates of 16.3% and
15.5% for the three and six months ended June 30,
2020, respectively, were lower than the
GAAP Non-GAAP comparable periods in 2019 primarily due to a
(currency-neutral) more favorable geographic mix of earnings.
16.0% 16.3%
Six Months Ended June 30, 2020
GAAP Non-GAAP
(currency-neutral)
15.4% 15.5%
Other financial highlights for the six months ended
• We repurchased 4.7 million shares of our common stock for
dividends of
• We completed a debt offering for an aggregate principal amount of
Non-GAAP Financial Information Non-GAAP financial information is defined as a numerical measure of a company's performance that excludes or includes amounts so as to be different than the most comparable measure calculated and presented in accordance with accounting principles generally accepted inthe United States ("GAAP"). Our non-GAAP financial measures exclude the impact of gains and losses on our equity investments which includes mark-to-market fair value adjustments, impairments and gains and losses upon disposition, as well as the related tax impacts. Our non-GAAP financial measures also exclude the impact of special items, where applicable, which represent litigation judgments and settlements and certain one-time items, as well as the related tax impacts ("Special Items"). Our non-GAAP financial measures for the comparable periods exclude the impact of the following: Gains and Losses on Equity Investments • In the three and six months endedJune 30, 2020 we recorded net gains of$75
million (
primarily related to unrealized fair market value adjustments on marketable and
non-marketable equity securities.
• In the three and six months ended
million (
(
related to unrealized fair market value adjustments on marketable and
non-marketable equity securities.
Special Items Litigation provisions • In the second quarter of 2020, we recorded pre-tax charges of$22 million ($17
million after tax, or
fees and litigation settlements with
• In the first quarter of 2020, we recorded pre-tax charges of
million after tax, and an immaterial impact per diluted share) related to
litigation settlements with
Tax act
• In the first quarter of 2019, we recorded a
diluted share) related to a reduction to the 2017 one-time deemed repatriation
tax on accumulated foreign earnings resulting from final transition tax
regulations issued in 2019.
See Note 6 (Investments), Note 14 (Income Taxes) and Note 15 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part I, Item 1 for further discussion. We excluded these items because management evaluates the underlying operations and performance of the Company separately from these recurring and nonrecurring items. We believe that the non-GAAP financial measures presented facilitate an understanding of our operating performance and provide a meaningful comparison of our results between periods. We use non-GAAP financial measures to, among other things, evaluate our ongoing operations in relation to historical results, for internal planning and forecasting purposes and in the calculation of performance-based compensation. In addition, we present growth rates adjusted for the impact of currency which is a non-GAAP financial measure. Currency-neutral growth rates are calculated by remeasuring the prior period's results using the current period's exchange rates for both the translational and transactional impacts on operating results. The impact of currency translation represents the effect of translating operating results where the functional currency is different than ourU.S. dollar reporting currency. The impact of the transactional currency represents the effect of converting 30MASTERCARD JUNE 30, 2020 FORM 10-Q --------------------------------------------------------------------------------
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
revenue and expenses occurring in a currency other than the functional currency.
We believe the presentation of currency-neutral growth rates provides relevant
information to facilitate an understanding of our operating results.
Net revenue, operating expenses, operating margin, other income (expense),
effective income tax rate, net income and diluted earnings per share adjusted
for the impact of gains and losses on our equity investments, Special Items
and/or the impact of currency, are non-GAAP financial measures and should not be
relied upon as substitutes for measures calculated in accordance with GAAP.
The following tables reconcile our reported financial measures calculated in
accordance with GAAP to the respective non-GAAP adjusted financial measures:
Three Months Ended June 30, 2020
Operating Other Income Effective Diluted earnings
expenses Operating margin (Expense) income tax rate Net income per share
($ in millions, except per share data)
Reported - GAAP $ 1,628 51.2 % $ (17 ) 16.0 % $ 1,420 $ 1.41
(Gains) losses on equity
investments ** ** (75 ) 0.2 % (67 ) (0.07 )
Litigation provisions (22 ) 0.7 % ** 0.1 % 17 0.02
Non-GAAP $ 1,606 51.8 % $ (92 ) 16.3 % $ 1,370 $ 1.36
Six Months Ended June 30, 2020
Operating Other Income Effective Diluted earnings
expenses Operating margin (Expense) income tax rate Net income per share
($ in millions, except per share data)
Reported - GAAP $ 3,426 53.3 % $ (241 ) 15.4 % $ 3,113 $ 3.08
(Gains) losses on equity
investments ** ** 99 0.1 % 80 0.08
Litigation provisions (28 ) 0.4 % ** - % 22 0.02
Non-GAAP $ 3,398 53.7 % $ (142 ) 15.5 % $ 3,214 $ 3.19
Three Months Ended June 30, 2019
Effective
Operating Other Income income tax Diluted earnings
expenses Operating margin (Expense) rate Net income per share
($ in millions, except per share data)
Reported - GAAP $ 1,716 58.3 % $ 122 18.7 % $ 2,048 $ 2.00
(Gains) losses on equity
investments ** ** $ (143 ) (0.2 )% (111 ) (0.11 )
Non-GAAP $ 1,716 58.3 % $ (21 ) 18.5 % $ 1,937 $ 1.89
Six Months Ended June 30, 2019
Effective
Operating Other Income income tax Diluted earnings
expenses Operating margin (Expense) rate Net income per share
($ in millions, except per share data)
Reported - GAAP $ 3,392 57.6 % $ 112 17.2 % $ 3,910 $ 3.80
(Gains) losses on equity
investments ** ** (148 ) (0.1 )% (116 ) (0.11 )
Tax act ** ** ** 0.6 % (30 ) (0.03 )
Non-GAAP $ 3,392 57.6 % $ (36 ) 17.7 % $ 3,765 $ 3.66
Note: Tables may not sum due to rounding.
** Not applicable
MASTERCARD JUNE 30, 2020 FORM 10-Q 31-------------------------------------------------------------------------------- PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following tables represent the reconciliation of our growth rates reported under GAAP to our non-GAAP growth rates:
Three Months Ended June 30, 2020 as compared to the Three Months Ended June
30, 2019
Increase/(Decrease)
Effective Diluted
Operating Operating income tax earnings
Net revenue expenses margin rate Net income per share
Reported - GAAP (19)% (5)% (7.1) ppt (2.7) ppt (31)% (30)%
(Gains) losses on
equity investments ** ** ** 0.4 ppt 1% -%
Litigation provisions ** (1)% 0.7 ppt 0.1 ppt 1% 1%
Non-GAAP (19)% (6)% (6.4) ppt (2.2) ppt (29)% (28)%
Currency impact 1 2% 2% 0.4 ppt 0.3 ppt 2% 2%
Non-GAAP -
currency-neutral (17)% (5)% (6.0) ppt (1.9) ppt (27)% (26)%
Six Months Ended June 30, 2020 as compared to the Six Months Ended June 30,
2019
Increase/(Decrease)
Effective Diluted
Operating Operating income tax earnings
Net revenue expenses margin rate Net income per share
Reported - GAAP (8)% 1% (4.3) ppt (1.8) ppt (20)% (19)%
(Gains) losses on
equity investments ** ** ** 0.3 ppt 5% 5%
Litigation provisions ** (1)% 0.4 ppt - 1% 1%
Tax act ** ** ** (0.6) ppt 1% 1%
Non-GAAP (8)% -% (3.9) ppt (2.2) ppt (15)% (13)%
Currency impact 1 2% 1% 0.3 ppt 0.2 ppt 2% 2%
Non-GAAP -
currency-neutral (6)% 2% (3.5) ppt (2.0) ppt (12)% (11)%
Note: Tables may not sum due to rounding.
** Not applicable
1 Represents the translational and transactional impact of currency.
Key Metrics
In addition to the financial measures described above in "Financial Results
Overview", we review the following metrics to evaluate and identify trends in
our business, measure our performance, prepare financial projections and make
strategic decisions. We believe that the key metrics presented facilitate an
understanding of our operating and financial performance and provide a
meaningful comparison of our results between periods.
Gross Dollar Volume ("GDV")1 measures dollar volume of activity on cards
carrying our brands during the period. Dollar volume represents purchase volume
plus cash volume and includes the impact of balance transfers and convenience
checks; "purchase volume" means the aggregate dollar amount of purchases made
with Mastercard -branded cards for the relevant period; and "cash volume" means
the aggregate dollar amount of cash disbursements obtained with
Mastercard -branded cards for the relevant period. Information denominated in
U.S. dollars relating to GDV is calculated by applying an established U.S.
dollar/local currency exchange rate for each local currency in which Mastercard
volumes are reported. These exchange rates are calculated on a quarterly basis
using the average exchange rate for each quarter. Mastercard reports
period-over-period rates of change in purchase volume and cash volume on the
basis of local currency information, in order to eliminate the impact of changes
in the value of currencies against the U.S. dollar in calculating such rates of
change.
Cross-border Volume2 measures cross-border dollar volume initiated and switched
through our network during the period, on a local currency basis and U.S.
dollar-converted basis, for all Mastercard -branded programs.
Switched Transactions2 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.
Operating margin is calculated by dividing our operating income by net revenue.
1 Data used in the calculation of GDV is provided by Mastercard customers and is
subject to verification by
information provided by
is subject to revision and amendment by
2 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. 32MASTERCARD JUNE 30, 2020 FORM 10-Q --------------------------------------------------------------------------------
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Foreign Currency
Currency Impact (Translational and Transactional)
Our primary revenue functional currencies are the U.S. dollar, euro, Brazilian
real and the British pound. Our overall operating results are impacted by
currency translation, which represents the effect of translating operating
results where the functional currency is different than our U.S. dollar
reporting currency.
Our operating results can also be impacted by transactional currency. The impact
of the transactional currency represents the effect of converting revenue and
expense transactions occurring in a currency other than the functional currency.
Changes in currency exchange rates directly impact the calculation of gross
dollar volume ("GDV") and gross euro volume ("GEV"), which are used in the
calculation of our domestic assessments, cross-border volume fees and certain
volume-related rebates and incentives. In most non-European regions, GDV is
calculated based on local currency spending volume converted to U.S. dollars
using average exchange rates for the period. In Europe , GEV is calculated based
on local currency spending volume converted to euros using average exchange
rates for the period. As a result, our domestic assessments, cross-border volume
fees and certain volume-related rebates and incentives are impacted by the
strengthening or weakening of the U.S. dollar versus non-European local
currencies and the strengthening or weakening of the euro versus other European
local currencies. For example, our billing in Australia is in the U.S. dollar,
however, consumer spend in Australia is in the Australian dollar. The currency
transactional impact of converting Australian dollars to our U.S. dollar billing
currency will have an impact on the revenue generated. The strengthening or
weakening of the U.S. dollar is evident when GDV growth on a U.S.
dollar-converted basis is compared to GDV growth on a local currency basis. For
the three and six months ended June 30, 2020 , GDV on a U.S. dollar-converted
basis decreased 14% and 4%, respectively, while GDV on a local currency basis
decreased 10% and 1%, respectively, versus the comparable periods in 2019.
Further, the impact from transactional currency occurs in transaction processing
revenue, other revenue and operating expenses when the local currency of these
items are different than the functional currency.
The translational and transactional impact of currency ("Currency impact") has
been identified in our drivers of change impact 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.
Foreign Exchange Activity
We incur foreign currency gains and losses from remeasuring monetary assets and
liabilities that are in a currency other than the functional currency and from
remeasuring foreign exchange derivative contracts ("Foreign Exchange Activity").
The impact of Foreign Exchange Activity has not been eliminated in our
currency-neutral results (see "Non-GAAP Financial Information") and is recorded
in general and administrative expenses on the consolidated statement of
operations. We manage foreign currency balance sheet remeasurement and
transactional currency exposure through our foreign exchange risk management
activities, which are discussed further in Note 17 (Derivative and Hedging
Instruments) to the consolidated financial statements included in Part I,
Item 1. Since we do not designate foreign exchange derivatives as hedging
instruments pursuant to the accounting standards for derivative instruments and
hedging activities, we record gains and losses on foreign exchange derivatives
immediately in current period earnings, with the related hedged item being
recognized as the exposures materialize.
Risk of Currency Devaluation
We are exposed to currency devaluation in certain countries. In addition, we are
subject to exchange control regulations that restrict the conversion of
financial assets into U.S. dollars. While these revenues and assets are not
material to us on a consolidated basis, we can be negatively impacted should
there be a continued and sustained devaluation of local currencies relative to
the U.S. dollar and/or a continued and sustained deterioration of economic
conditions in these countries.
MASTERCARD JUNE 30, 2020 FORM 10-Q 33
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PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Financial Results
Revenue
Primary drivers of net revenue, versus the comparable periods in 2019, were as
follows:
For the three months ended June 30, 2020 , net revenue decreased 19%, or 17% on a
currency-neutral basis reflecting impacts of the COVID-19 outbreak, and includes
1 percentage point of growth from our acquisitions. Gross revenue decreased 16%,
or 14% on a currency-neutral basis, driven by decreased volumes, primarily
cross-border volumes, offset by an increase in our value-added products and
services. Rebates and incentives decreased 10%, or 7% on a currency-neutral
basis, due to decreased volumes partially offset by new and renewed deals.
For the six months ended June 30, 2020 , net revenue decreased 8%, or 6% on a
currency-neutral basis reflecting impacts of the COVID-19 outbreak primarily in
the second quarter of 2020, and includes 1 percentage point of growth from our
acquisitions. Gross revenue decreased 4%, or 2% on a currency-neutral basis,
driven by decreased dollar volume activity, primarily cross-border volumes,
partially offset by an increase in our value-added products and services and
transactions growth. Rebates and incentives increased 6%, or 9% on a
currency-neutral basis, due to new and renewed deals partially offset by
decreased volumes.
See Note 3 (Revenue) in Part II, Item 8 of our Annual Report on Form 10-K for
the year ended December 31, 2019 for further discussion of how we recognize
revenue.
The components of net revenue were as follows:
Three Months Ended June 30, Increase Six Months Ended June 30, Increase
2020 2019 (Decrease) 2020 2019 (Decrease)
($ in millions)
Domestic assessments $ 1,474 $ 1,680 (12)% $ 3,157 $ 3,285 (4)%
Cross-border volume fees 637 1,374 (54)% 1,854 2,637 (30)%
Transaction processing 1,901 2,053 (7)% 4,101 3,975 3%
Other revenues 1,081 962 12% 2,143 1,804 19%
Gross revenue 5,093 6,069 (16)% 11,255 11,701 (4)%
Rebates and incentives
(contra-revenue) (1,758 ) (1,956 ) (10)% (3,911 ) (3,699 ) 6%
Net revenue $ 3,335 $ 4,113 (19)% $ 7,344 $ 8,002 (8)%
34 MASTERCARD JUNE 30, 2020 FORM 10-Q
--------------------------------------------------------------------------------PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following table summarizes the drivers of change in net revenue:
Three Months Ended June 30, 2020
Foreign
Currency
Volume Acquisitions 1 Other 2 Total
Domestic assessments (10)% -% (4)% 2 % 3 (12)%
Cross-border volume fees (46)% -% (1)% (6 )% (54)%
Transaction processing (6)% -% (2)% - % (7)%
Other revenues ** 4% (2)% 10 % 4 12%
Rebates and incentives (contra-revenue) (15)% -% (3)% 8 % 5 (10)%
Net revenue (15)% 1% (2)% (3 )% (19)%
Six Months Ended June 30, 2020
Currency
Volume Acquisitions Impact 1 Other 2 Total
Domestic assessments (1)% -% (4)% 1 % 3 (4)%
Cross-border volume fees (25)% -% (2)% (3 )% (30)%
Transaction processing 2% -% (2)% 3 % 3%
Other revenues ** 5% (2)% 15 % 4 19%
Rebates and incentives (contra-revenue) (4)% -% (3)% 13 % 5 6%
Net revenue (6)% 1% (2)% (2 )% (8)%
Note: 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 geographical
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 of new, renewed and expired agreements.
The following tables provide a summary of the trend in volumes and transactions versus the comparable periods in 2019:
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Increase/(Decrease) Increase/(Decrease)
USD Local USD Local USD Local USD Local
Mastercard -branded GDV
1 (14)% (10)% 9% 13% (4)% (1)% 7% 13%
Asia Pacific/Middle
East/Africa (15)% (12)% 7% 12% (6)% (3)% 6% 12%
Canada (16)% (13)% 4% 8% (7)% (5)% 2% 7%
Europe (17)% (13)% 10% 19% (5)% (1)% 8% 18%
Latin America (33)% (17)% 9% 16% (16)% (2)% 6% 15%
United States (5)% (5)% 10% 10% 1% 1% 9% 9%
Cross-border volume 1 (47)% (45)% 10% 16% (26)% (24)% 8% 14%
1 Excludes volume generated by Maestro and Cirrus cards.
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Increase/(Decrease) Increase/(Decrease)
Switched transactions (10)% 18% 1% 18%
MASTERCARD JUNE 30, 2020 FORM 10-Q 35-------------------------------------------------------------------------------- PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating Expenses For the three months endedJune 30, 2020 , operating expenses decreased 5% versus the comparable period in 2019. Adjusted operating expenses decreased 6%, or 5% on a currency-neutral basis, versus the comparable period in 2019, and includes 4 percentage points of growth from acquisitions. Excluding acquisitions, the 9% decline was primarily due to lower advertising and marketing, travel and professional fee related spend. For the six months endedJune 30, 2020 , operating expenses increased 1% versus the comparable period in 2019. Adjusted operating expenses were flat, or increased 2% on a currency-neutral basis, versus the comparable period in 2019, primarily due to 5 percentage points of growth from acquisitions, partially offset by lower advertising and marketing, travel and professional fee related spend primarily in the second quarter of 2020. The components of operating expenses were as follows: Three Months Ended June 30, Increase Six Months Ended June 30, Increase 2020 2019 (Decrease) 2020 2019 (Decrease)
($ in millions)
General and administrative
93 225 (59)% 247 417 (41)%
Depreciation and amortization 145 122 19% 289 239 21%
Provision for litigation 22 - ** 28 - **
Total operating expenses 1,628 1,716 (5)% 3,426 3,392 1%
Special Items1 (22 ) - ** (28 ) - **
Adjusted total operating
expenses (excluding Special
Items1) $ 1,606 $ 1,716 (6)%
Note: 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 following table summarizes the drivers of changes in operating expenses:
Three Months Ended June 30, 2020
Special Currency
Operational Items 1 Acquisitions Impact 2 Total
General and administrative (3)% ** 4% (2)% -%
Advertising and marketing (58)% ** -% (1)% (59)%
Depreciation and amortization 15% ** 6% (1)% 19%
Provision for litigation ** ** ** ** **
Total operating expenses (9)% 1% 4% (2)% (5)%
Six Months Ended June 30, 2020
Special Currency
Operational Items 1 Acquisitions Impact 2 Total
General and administrative 1% ** 5% (1)% 5%
Advertising and marketing (40)% ** 1% (1)% (41)%
Depreciation and amortization 13% ** 9% (1)% 21%
Provision for litigation ** ** ** ** **
Total operating expenses (3)% 1% 5% (1)% 1%
Note: Tables 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.
2 Represents the translational and transactional impact of currency.
36MASTERCARD JUNE 30, 2020 FORM 10-Q --------------------------------------------------------------------------------
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General and Administrative
For the three months ended June 30, 2020 , general and administrative expenses
were flat, or increased 1% on a currency-neutral basis, versus the comparable
period in 2019. Current year results include growth of 4 percentage points from
acquisitions. Excluding acquisitions, the 3 percentage point decrease in
expenses was primarily due to reduced spend on travel and professional fees,
partially offset by an increase in personnel to support our continued investment
in our strategic initiatives.
For the six months ended June 30, 2020 , general and administrative expenses
increased 5%, or 6% on a currency-neutral basis, versus the comparable period in
2019. Current year results include growth of 5 percentage points from
acquisitions and an increase in personnel to support our continued investment in
our strategic initiatives. These increases are partially offset by reduced spend
on travel and professional fees and a 2 percentage point benefit, primarily from
foreign exchange derivative contracts.
The components of general and administrative expenses were as follows:
Three Months Ended June 30 , Increase
Six Months Ended
2020 2019 (Decrease) 2020 2019 (Decrease)
($ in millions)
Personnel $ 915 $ 853 7% $ 1,877 $ 1,664 13%
Professional fees 84 102 (18)% 177 188 (6)%
Data processing and
telecommunications 177 162 9% 356 317 12%
Foreign exchange activity1 19 13 ** (33 ) 14 **
Other 173 239 (27)% 485 553 (12)%
General and administrative
expenses $ 1,368 $ 1,369 -% Note: Table may not sum due to rounding. ** Not meaningful.
1 Foreign exchange activity includes gains and losses on foreign exchange
derivative contracts and the impact of remeasurement of assets and liabilities
denominated in foreign currencies. See Note 17 (Derivative and Hedging
Instruments) to the consolidated financial statements included in Part I, Item
1 for further discussion. Advertising and Marketing Advertising and marketing expenses decreased 59% and 41%, or 58% and 40% on a currency-neutral basis, respectively, for the three and six months endedJune 30, 2020 , versus the comparable periods in 2019, primarily due to lower advertising and sponsorship spend in response to COVID-19. Depreciation and Amortization Depreciation and amortization expenses increased 19% and 21%, or 20% and 22% on a currency-neutral basis, respectively, for the three and six months endedJune 30, 2020 , versus the comparable periods in 2019, due to higher depreciation from capital investments and the impact of acquisitions, which contributed 6 and 9 percentage points of growth, respectively. Provision for Litigation For the three and six months endedJune 30, 2020 , we recorded$22 million and$28 million , respectively related to various litigation settlements and legal costs. There were no litigation charges in the comparable period in 2019. See "Non-GAAP Financial Information" in this section and Note 15 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part I, Item 1 of this Report for further discussion. MASTERCARD JUNE 30, 2020 FORM 10-Q 37 -------------------------------------------------------------------------------- PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Other Income (Expense) For the three months endedJune 30, 2020 , other income (expense) was unfavorable, versus the comparable period in 2019, primarily due to lower net gains in the current period related to unrealized fair market value adjustments on marketable equity securities, as well as increased interest expense related to our recent debt issuances. For the six months endedJune 30, 2020 , other income (expense) was unfavorable, versus the comparable period in 2019, primarily due to net losses in the current period versus net gains in prior period related to unrealized fair market value adjustments on marketable equity securities, as well as increased interest expense related to our recent debt issuances. The components of our other income (expense) were as follows: Three Months Ended June 30, Increase Six Months Ended June 30, Increase 2020 2019 (Decrease) 2020 2019 (Decrease) ($ in millions) Investment income $ 8 $ 24 (67)% $ 24$ 51 (52)% Gains (losses) on equity investments, net 75 143 (47)% (99 ) 148 ** Interest expense (101 ) (51 ) ** (170 ) (97 ) (76)% Other income (expense), net 1 6 (77)% 4 10 (59)% Total other income (expense)$ (17 ) $ 122 **$ (241 ) $ 112 ** Note: Table may not sum due to rounding. ** Not meaningful. Income Taxes The effective income tax rates were 16.0% and 15.4% for the three and six months endedJune 30, 2020 , versus 18.7% and 17.2%, respectively, for the comparable periods in 2019. The adjusted effective income tax rates were 16.3% and 15.5% for the three and six months endedJune 30, 2020 , versus 18.5% and 17.7%, respectively, for the comparable periods in 2019. The effective income tax rates, both as reported and as adjusted, for the three and six months endedJune 30, 2020 were lower versus the comparable periods in 2019, primarily due to a more favorable geographic mix of earnings. Liquidity and Capital Resources We rely on existing liquidity, cash generated from operations and access to capital to fund our global operations, credit and settlement exposure, capital expenditures, investments in our business and current and potential obligations. The following table summarizes the cash, cash equivalents, investments and credit available to us: June 30, December 31, 2020 2019 (in billions)
Cash, cash equivalents and investments 1
6.0 6.0
1 Investments include available-for-sale securities and held-to-maturity
securities. This amount excludes restricted cash and restricted cash
equivalents of
2019, 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. We guarantee the settlement of many of the transactions between our customers. Historically, payments under these guarantees have not been significant; however, historical trends may not be an indication of potential future losses. The risk of loss on these guarantees is specific to individual customers, but may also be driven by regional or global economic conditions, including, but not limited to the health of the financial institutions in a country or region. See Note 16 (Settlement and Other Risk Management) to the consolidated financial statements in Part I, Item 1 for a description of these guarantees. Our liquidity and access to capital could also be negatively impacted by the outcome of any of the legal or regulatory proceedings to which we are a party. For additional discussion of these and other risks facing our business, see Part I, Item 1A - Risk Factors and Part II, Item 7 (Business Environment) of our Annual Report on Form 10-K for the year endedDecember 31, 2019 , Note 15 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part I, Item 1 and Part II, Item 1A - Risk Factors of this Report. 38MASTERCARD JUNE 30, 2020 FORM 10-Q --------------------------------------------------------------------------------
PART I
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cash Flow
The table below shows a summary of the cash flows from operating, investing and
financing activities:
Six Months Ended June 30,
2020 2019
(in millions)
Net cash provided by operating activities $ 3,317 $ 2,848
Net cash used in investing activities (626 ) (554 ) Net cash provided by (used in) financing activities 1,691
(3,160 )
Net cash provided by operating activities increased$469 million for the six months endedJune 30, 2020 , versus the comparable period in 2019, primarily due to higher collections of accounts receivable in the current period and a decrease in accrued litigation payments, partially offset by lower net income adjusted for non-cash items. Net cash used in investing activities increased for the six months endedJune 30, 2020 , versus the comparable period in 2019, primarily due to lower net proceeds from investments in available-for-sale and held-to-maturity securities, partially offset by higher prior year acquisitions. During the six months endedJune 30, 2020 we had net cash provided by financing activities versus the comparable period in 2019 when we had net use of cash for financing activities. This change was primarily due to lower repurchases of our Class A common stock and higher net debt proceeds in the current period. Debt and Credit Availability InMarch 2020 , we issued$1 billion principal amount of notes dueMarch 2027 ,$1.5 billion principal amount of notes dueMarch 2030 and$1.5 billion principal amount notes dueMarch 2050 . Our total debt outstanding was$12.5 billion and$8.5 billion atJune 30, 2020 andDecember 31, 2019 , respectively, with the earliest maturity of$650 million of principal occurring inNovember 2021 . As ofJune 30, 2020 , 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 expires inNovember 2024 . Borrowings under the Commercial Paper Program and the Credit Facility are to provide liquidity for general corporate purposes, including providing liquidity in the event of one or more settlement failures by our customers. In addition, we may borrow and repay amounts under these facilities for business continuity purposes. We had no borrowings outstanding under the Commercial Paper Program or the Credit Facility atJune 30, 2020 andDecember 31, 2019 . See Note 10 (Debt) to the consolidated financial statements included in Part I, Item 1 for further discussion on our debt and Note 15 (Debt) to the consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year endedDecember 31, 2019 for further discussion on our debt, the Commercial Paper Program and the Credit Facility. Dividends We have historically paid quarterly dividends on our outstanding Class A common stock and Class B common stock. Subject to legally available funds, we intend to continue to pay a quarterly cash dividend. 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. Aggregate payments for quarterly dividends totaled$804 million for the six months endedJune 30, 2020 . OnDecember 4, 2019 , our Board of Directors declared a quarterly cash dividend of$0.40 per share paid onFebruary 7, 2020 to holders of record onJanuary 9, 2020 of our Class A common stock and Class B common stock. The aggregate amount of this dividend was$403 million . OnFebruary 4, 2020 , our Board of Directors declared a quarterly cash dividend of$0.40 per share payable onMay 8, 2020 to holders of record onApril 9, 2020 of our Class A common stock and Class B common stock. The aggregate amount of this dividend was$402 million . OnJune 16, 2020 , our Board of Directors declared a quarterly cash dividend of$0.40 per share payable onAugust 7, 2020 to holders of record onJuly 9, 2020 of our Class A common stock and Class B common stock. The aggregate amount of this dividend is estimated to be$401 million .MASTERCARD JUNE 30, 2020 FORM 10-Q 39 -------------------------------------------------------------------------------- PART I ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Share Repurchases Repurchased shares of our common stock are considered treasury stock. InDecember 2019 and 2018, our Board of Directors approved share repurchase programs authorizing us to repurchase up to$8.0 billion and$6.5 billion , respectively, of our Class A common stock under each plan. The program approved in 2019 became effective inJanuary 2020 after completion of the share repurchase program authorized in 2018. The timing and actual number of additional shares repurchased will depend on a variety of factors, including the operating needs of the business, legal requirements, price and economic and market conditions. The following table summarizes our share repurchase authorizations and repurchase activity of our Class A common stock throughJune 30, 2020 , under the plans approved in 2019 and 2018: (in
millions, except
average price data)
Remaining authorization at December 31, 2019 $ 8,304
Dollar value of shares repurchased during the six months ended
$ 1,383
Remaining authorization atJune 30, 2020 $
6,921
Shares repurchased during the six months endedJune 30, 2020
4.7
Average price paid per share during the six months ended
$ 293.83
See Note 11 (Stockholders' Equity) to the consolidated financial statements included in Part I, Item 1 for further discussion. Off-Balance Sheet Arrangements We have no off-balance sheet debt, other than the commitments presented in the future obligations table in Part II, Item 7 - Liquidity and Capital Resources of our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Recent Accounting Pronouncements Refer to Note 1 (Summary of Significant Accounting Policies) to the consolidated financial statements included in Part I, Item 1. 40MASTERCARD JUNE 30, 2020 FORM 10-Q --------------------------------------------------------------------------------
PART I
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