Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

66K characters. Original on sec.gov · Markdown

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following tables reconcile our reported financial measures calculated in accordance with GAAP to the respective adjusted non-GAAP financial measures:


	Three Months Ended September 30, 2022
	Net revenue		Operating expenses		Operating margin		Other income (expense)		Effective income tax rate		Net income		Diluted earnings per share
	($ in millions, except per share data)
Reported - GAAP	$	5,756	$	2,644	54.1	%	$	(40)	18.6	%	$	2,499	$	2.58
(Gains) losses on equity investments	**		**		**		(60)		0.6	%	(66)		(0.07)
Litigation provisions	**		(208)		3.6	%	**		0.2	%	162		0.17

Adjusted - Non-GAAP	$	5,756	$	2,437	57.7	%	$	(99)	19.4	%	$	2,595	$	2.68


	Nine Months Ended September 30, 2022
	Net revenue		Operating expenses		Operating margin		Other income (expense)		Effective income tax rate		Net income		Diluted earnings per share
	($ in millions, except per share data)
Reported - GAAP	$	16,420	$	7,340	55.3	%	$	(437)	14.3	%	$	7,405	$	7.60
(Gains) losses on equity investments	**		**		**		133		—	%	114		0.12
Litigation provisions	**		(341)		2.1	%	**		0.5	%	251		0.26
Russia-related impacts	(37)		(67)		0.3	%	**		—	%	24		0.02
Adjusted - Non-GAAP	$	16,383	$	6,932	57.7	%	$	(303)	14.8	%	$	7,794	$	8.00


	Three Months Ended September 30, 2021
	Net revenue		Operating expenses		Operating margin		Other income (expense)		Effective income tax rate		Net income		Diluted earnings per share
	($ in millions, except per share data)
Reported - GAAP	$	4,985	$	2,268	54.5	%	$	99	14.3	%	$	2,414	$	2.44
(Gains) losses on equity investments	**		**		**		(197)		(0.2)	%	(163)		(0.16)
Litigation provisions	**		$	(27)	0.6	%	**		0.1	%	22		0.02
Indirect tax matter	**		(82)		1.6	%	6		0.2	%	69		0.07
Adjusted - Non-GAAP	$	4,985	$	2,158	56.7	%	$	(92)	14.4	%	$	2,341	$	2.37


	Nine Months Ended September 30, 2021
	Net revenue		Operating expenses		Operating margin		Other income (expense)		Effective income tax rate		Net income		Diluted earnings per share
	($ in millions, except per share data)
Reported - GAAP	$	13,668	$	6,413	53.1	%	$	229	15.7	%	$	6,308	$	6.35
(Gains) losses on equity investments	**		**		**		(534)		(0.3)	%	(432)		(0.43)
Litigation provisions	**		(94)		0.7	%	**		0.1	%	74		0.07
Indirect tax matter	**		(82)		0.6	%	6		0.1	%	69		0.07
Adjusted - Non-GAAP	$	13,668	$	6,237	54.4	%	$	(299)	15.6	%	$	6,018	$	6.06

Note: Tables may not sum due to rounding.

** Not applicable.

34 MASTERCARD SEPTEMBER 30, 2022 FORM 10-Q

PART I

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table represents the reconciliation of our growth rates reported under GAAP to our non-GAAP growth rates:


	Three Months Ended September 30, 2022 as compared to the Three Months Ended September 30, 2021
	Increase/(Decrease)
	Net revenue	Operating expenses	Operating margin	Effective income tax rate	Net income	Diluted earnings per share
Reported - GAAP	15%	17%	(0.5) ppt	4.4 ppt	4%	6%
(Gains) losses on equity investments	**	**	**	0.8 ppt	5%	5%
Litigation provisions	**	(8)%	3.0 ppt	0.1 ppt	6%	6%

Indirect tax matter	**	4%	(1.6) ppt	(0.2) ppt	(3)%	(3)%
Adjusted - Non-GAAP	15%	13%	1.0 ppt	5.0 ppt	11%	13%
Currency impact 1	7%	4%	1.1 ppt	0.4 ppt	9%	9%
Adjusted - Non-GAAP - currency-neutral	23%	17%	2.0 ppt	5.4 ppt	20%	22%


	Nine Months Ended September 30, 2022 as compared to the Nine Months Ended September 30, 2021
	Increase/(Decrease)
	Net revenue	Operating expenses	Operating margin	Effective income tax rate	Net income	Diluted earnings per share
Reported - GAAP	20%	14%	2.2 ppt	(1.4) ppt	17%	20%
(Gains) losses on equity investments	**	**	**	0.3 ppt	11%	11%
Litigation provisions	**	(4)%	1.4 ppt	0.4 ppt	3%	3%
Russia-related impacts	—%	(1)%	0.3 ppt	— ppt	—%	—%
Indirect tax matter	**	1%	(0.6) ppt	(0.1) ppt	(1)%	(2)%
Adjusted - Non-GAAP	20%	11%	3.3 ppt	(0.8) ppt	29%	32%
Currency impact 1	6%	3%	0.9 ppt	0.2 ppt	8%	8%
Adjusted - Non-GAAP - currency-neutral	25%	14%	4.2 ppt	(0.6) ppt	38%	40%

Note: Table may not sum due to rounding.

** Not applicable.

1 See “Non-GAAP Financial Information” for further information on Currency impact.

MASTERCARD SEPTEMBER 30, 2022 FORM 10-Q 35

PART I

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, on a local currency basis and U.S. dollar-converted basis. GDV 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 and includes the impact of balance transfers and convenience checks 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 our volumes are reported. These exchange rates are calculated on a quarterly basis using the average exchange rate for each quarter. We report 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 Volume 2 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 Transactions 2 measures the number of transactions switched by Mastercard, which is defined 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 Mastercard and partial cross-checking against information provided by Mastercard’s transaction switching systems. All data is subject to revision and amendment by Mastercard or Mastercard’s customers. Starting in the first quarter of 2022, data related to sanctioned Russian banks was not reported to us and therefore such amounts are not included. Subsequent to the suspension of our business operations in Russia in March 2022, there is no Russian data to be reported.

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

Currency Impact

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 are also 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, certain of our domestic assessments, cross-border volume fees and 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 nine months ended September 30, 2022, GDV on a U.S. dollar-converted basis increased 4% and 8%, respectively, while GDV on a local currency basis increased 11% and 14%, respectively, versus the comparable periods in 2021. Further, the impact from transactional currency occurs in transaction processing revenue, other revenue and operating expenses when the transacting currency of these items is different than the functional currency of the entity.

To manage the impact of foreign currency variability on anticipated revenues and expenses, we may enter into foreign exchange derivative contracts and designate such derivatives as hedging instruments in a cash flow hedging relationship as discussed further in Note 17 (Derivative and Hedging Instruments) to the consolidated financial statements included in Part I, Item 1.

36 MASTERCARD SEPTEMBER 30, 2022 FORM 10-Q

PART I

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Foreign Exchange Activity

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 currency monetary assets and liabilities. The gains or losses resulting from the 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 17 (Derivative and Hedging Instruments) to the consolidated financial statements included in Part I, Item 1.

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 SEPTEMBER 30, 2022 FORM 10-Q 37

PART I

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Financial Results

Revenue

For the three months ended September 30, 2022, net revenue increased 15% versus the comparable period in 2021. Adjusted net revenue increased 15%, or 23% on a currency-neutral basis, and includes 1 percentage point of growth from acquisitions. The remaining increase was primarily driven by domestic and cross-border transaction and volume growth and an increase in our Cyber & Intelligence and Data & Services solutions revenues within other revenues. These increases were partially offset by an increase in rebates and incentives (contra-revenue) of 20%, or 26% on a currency-neutral basis, primarily due to increased volumes and transactions and new and renewed deals.

For the nine months ended September 30, 2022, net revenue increased 20% versus the comparable period in 2021. Adjusted net revenue increased 20%, or 25% on a currency-neutral basis, and includes 1 percentage point of growth from acquisitions. The remaining increase was primarily driven by domestic and cross-border transaction and volume growth and an increase in our Cyber & Intelligence and Data & Services solutions revenues within other revenues. These increases were partially offset by an increase in rebates and incentives (contra-revenue) of 21%, or 25% on a currency-neutral basis, primarily due to increased volumes and transactions and new and renewed deals.

See Note 3 (Revenue) to the consolidated financial statements included in Part II, Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2021 for a further discussion of how we recognize revenue.

The components of net revenue were as follows:


	Three Months Ended September 30,				Increase/ (Decrease)		Nine Months Ended September 30,					Increase/ (Decrease)
	2022		2021			2022			2021
	($ in millions)
Domestic assessments	$	2,252	$	2,139	5%		$	6,669		$	5,993	11%
Cross-border volume fees	1,803		1,276		41%		4,813			3,284		47%
Transaction processing	3,288		2,849		15%		9,261			7,812		19%
Other revenues	1,824		1,562		17%		5,153			4,384		18%
Gross revenue	9,167		7,826		17%		25,896			21,473		21%
Rebates and incentives (contra-revenue)	(3,411)		(2,841)		20%		(9,476)			(7,805)		21%
Net revenue	5,756		4,985		15%		16,420			13,668		20%
Special Items 1	—		—		**		(37)			—		—%
Adjusted net revenue (excluding Special Items 1)	$	5,756	$	4,985	15%		$	16,383		$	13,668	20%

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.

38 MASTERCARD SEPTEMBER 30, 2022 FORM 10-Q

PART I

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Drivers of Change

The following tables summarize the drivers of change in net revenue:


	Three Months Ended September 30, 2022
	Increase/(Decrease)
	Operational			Special Items 4	Acquisitions			Currency Impact 5			Total
Domestic assessments	9	%	1	**		—	%		(3)	%		5	%
Cross-border volume fees	57	%	1	**		—	%		(15)	%		41	%
Transaction processing	22	%	2	**		—	%		(7)	%		15	%
Other revenues	20	%	3	**		2	%		(5)	%		17	%
Rebates and incentives (contra-revenue)	26	%		**		—	%		(6)	%		20	%
Net revenue	22	%		**		1	%		(7)	%		15	%


	Nine Months Ended September 30, 2022
	Increase/(Decrease)
	Operational			Special Items 4			Acquisitions			Currency Impact 5			Total
Domestic assessments	14	%	1		—	%		—	%		(3)	%		11	%
Cross-border volume fees	58	%	1		**			—	%		(12)	%		47	%
Transaction processing	23	%	2		**			—	%		(5)	%		19	%
Other revenues	18	%	3		**			4	%		(4)	%		18	%
Rebates and incentives (contra-revenue)	26	%			—	%		—	%		(5)	%		21	%
Net revenue	24	%			—	%		1	%		(6)	%		20	%

Note: Tables may not sum due to rounding.

** Not meaningful.

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

2 Includes impacts from our key metrics, other non-volume based fees, pricing, mix and foreign exchange-related revenues attributable to settlement activities. Also includes impacts from our cyber and intelligence solutions fees and other value-added services.

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

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

5 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 SEPTEMBER 30, 2022 FORM 10-Q 39

PART I

ITEM 2. 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.


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
	Increase/(Decrease)				Increase/(Decrease)
	USD	Local	USD	Local	USD	Local	USD	Local
Mastercard-branded GDV 1	4%	11%	21%	20%	8%	14%	22%	20%
United States	10%	10%	20%	20%	11%	11%	22%	22%
Worldwide less United States	1%	12%	21%	20%	6%	15%	22%	18%

Cross-border volume 1	29%	44%	54%	52%	39%	51%	30%	25%

Mastercard-branded GDV 1 adjusted for Russia 2	9%	18%	21%	20%	12%	19%	22%	19%
Worldwide less United States adjusted for Russia 2	8%	22%	21%	19%	13%	24%	22%	18%

Cross-border volume 1 adjusted for Russia 2	33%	50%	53%	51%	42%	55%	30%	24%


	Three Months Ended September 30,		Nine Months Ended September 30,
	2022	2021	2022	2021
	Increase/(Decrease)		Increase/(Decrease)
Switched transactions	9%	25%	14%	24%

Switched transactions adjusted for Russia 2	19%	24%	22%	23%

1 Excludes volume generated by Maestro and Cirrus cards.

2 Starting in the first quarter of 2022, as a result of imposed sanctions and the suspension of our business operations in Russia, we have provided adjusted growth rates for our key operating metrics excluding activity from Russian issued cards from the current and prior periods.

Operating Expenses

For the three months ended September 30, 2022, operating expenses increased 17% versus the comparable period in 2021. Adjusted operating expenses increased 13%, or 17% on a currency-neutral basis, versus the comparable period in 2021, which includes a 3 percentage point increase from acquisitions. The remaining increase was primarily due to higher personnel costs to support our continued investment in our strategic initiatives across payments, services and new network capabilities.

For the nine months ended September 30, 2022, operating expenses increased 14% versus the comparable period in 2021. Adjusted operating expenses increased 11%, or 14% on a currency-neutral basis, versus the comparable period in 2021, which includes a 5 percentage point increase from acquisitions. The remaining increase was primarily due to higher personnel costs to support our continued investment in our strategic initiatives across payments, services and new network capabilities, unfavorable foreign exchange activity and increased spending on advertising and marketing.

40 MASTERCARD SEPTEMBER 30, 2022 FORM 10-Q

PART I

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The components of operating expenses were as follows:


	Three Months Ended September 30,				Increase/ (Decrease)		Nine Months Ended September 30,					Increase/ (Decrease)
	2022		2021			2022			2021
	($ in millions)
General and administrative	$	2,069	$	1,831	13%		$	5,860		$	5,225	12%
Advertising and marketing	182		222		(18)%		573			557		3%
Depreciation and amortization	185		188		(2)%		566			537		5%
Provision for litigation	208		27		**		341			94		**
Total operating expenses	2,644		2,268		17%		7,340			6,413		14%
Special Items 1	(208)		(109)		**		(408)			(176)		**
Adjusted total operating expenses (excluding Special Items 1)	$	2,437	$	2,158	13%		$	6,932		$	6,237	11%

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.

Drivers of Change

The following tables summarize the drivers of changes in operating expenses:


	Three Months Ended September 30, 2022
	Increase/(Decrease)
	Operational	Special Items 1	Acquisitions	Currency Impact 2	Total
General and administrative	19%	(5)%	4%	(4)%	13%
Advertising and marketing	(15)%	**	—%	(4)%	(18)%
Depreciation and amortization	(1)%	**	5%	(5)%	(2)%
Provision for litigation	**	**	**	**	**
Total operating expenses	14%	4%	3%	(4)%	17%


	Nine Months Ended September 30, 2022
	Increase/(Decrease)
	Operational	Special Items 1	Acquisitions	Currency Impact 2	Total
General and administrative	11%	—%	5%	(3)%	12%
Advertising and marketing	6%	**	1%	(4)%	3%
Depreciation and amortization	—%	**	9%	(4)%	5%
Provision for litigation	**	**	**	**	**
Total operating expenses	10%	3%	5%	(3)%	14%

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.

General and Administrative

For the three months ended September 30, 2022, general and administrative expenses increased 13%, or 18% on a currency-neutral basis, versus the comparable period in 2021. Current period results include growth of 4 percentage points from acquisitions. The remaining increase was primarily due to higher personnel costs to support our continued investment in our strategic initiatives across payments, services and new network capabilities, partially offset by a decrease of 5 percentage points from the Special Item related to the indirect tax matter in 2021.

For the nine months ended September 30, 2022, general and administrative expenses increased 12%, or 15% on a currency-neutral basis, versus the comparable period in 2021. Current period results include growth of 5 percentage points from acquisitions. The remaining

MASTERCARD SEPTEMBER 30, 2022 FORM 10-Q 41

PART I

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

increase was primarily due to higher personnel costs to support our continued investment in our strategic initiatives across payments, services and new network capabilities and balance sheet remeasurement losses due to unfavorable foreign exchange activity.

The components of general and administrative expenses were as follows:


	Three Months Ended September 30,				Increase/ (Decrease)		Nine Months Ended September 30,					Increase/(Decrease)
	2022		2021			2022			2021
	($ in millions)
Personnel 1	$	1,382	$	1,166	19%		$	3,882		$	3,400	14%
Professional fees	118		95		24%		313			298		5%
Data processing and telecommunications	228		228		—%		688			643		7%
Foreign exchange activity 2	38		19		**		109			35		**
Other 1, 3	303		323		(6)%		868			849		2%
Total general and administrative expenses	$	2,069	$	1,831	13%		$	5,860		$	5,225	12%

Note: Table may not sum due to rounding.

** Not meaningful.

1 For the nine months ended September 30, 2022, total general and administrative expenses includes a Special Item for Russia-related impacts of $67 million, of which $35 million is included within Personnel and $32 million is included within Other. See “Non-GAAP Financial Information” for further information on our non-GAAP adjustments and the reconciliation to GAAP reported amounts.

2 Foreign exchange activity includes the impact of remeasurement of assets and liabilities denominated in foreign currencies net of the impact of gains and losses on foreign exchange derivative contracts. See Note 17 (Derivative and Hedging Instruments) to the consolidated financial statements included in Part I, Item 1 for further discussion.

3 Includes a special item related to a foreign indirect tax matter of $82 million for the three and nine months ended September 30, 2021. See “Non-GAAP Financial Information” for further information on our non-GAAP adjustments and the reconciliation to GAAP reported amounts.

Advertising and Marketing

For the three months ended September 30, 2022, advertising and marketing expenses decreased 18%, or 14% on a currency-neutral basis, versus the comparable period in 2021, primarily due to lower spending on marketing campaigns.

For the nine months ended September 30, 2022, advertising and marketing expenses increased 3%, or 7% on a currency-neutral basis, versus the comparable period in 2021, primarily due to an increase in spending on advertising and sponsorships.

Depreciation and Amortization

For the three months ended September 30, 2022, depreciation and amortization expenses decreased 2%, or increased 3% on a currency-neutral basis, versus the comparable period in 2021, primarily due to the amortization of acquired intangible assets from acquisitions.

For the nine months ended September 30, 2022, depreciation and amortization expenses increased 5%, or 9% on a currency-neutral basis, versus the comparable period in 2021, due to the amortization of acquired intangible assets from acquisitions.

Provision for Litigation

For the three and nine months ended September 30, 2022, we recorded litigation provisions of $208 million and $341 million, respectively. For the three and nine months ended September 30, 2021, we recorded litigation provisions of $27 million and $94 million, respectively. See “Non-GAAP Financial Information” in this section for further discussion.

42 MASTERCARD SEPTEMBER 30, 2022 FORM 10-Q

PART I

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Other Income (Expense)

For the three months ended September 30, 2022, other income (expense) was unfavorable $139 million, versus the comparable period in 2021, primarily due to lower net gains in the current period versus the prior period related to unrealized fair market value adjustments on marketable and non-marketable equity securities and realized gains on sales of marketable and non-marketable equity securities in 2021. Adjusted other income (expense) was unfavorable $7 million versus the prior year.

For the nine months ended September 30, 2022, other income (expense) was unfavorable $666 million, versus the comparable period in 2021, primarily due to net losses in the current period versus net gains in the prior period related to unrealized fair market value adjustments on marketable and non-marketable equity securities and realized gains on sales of marketable and non-marketable equity securities in 2021. Adjusted other income (expense) was unfavorable $4 million versus the prior year.

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


	Three Months Ended September 30,				Increase/ (Decrease)		Nine Months Ended September 30,					Increase/ (Decrease)
	2022		2021			2022			2021
	($ in millions)
Investment income	$	16	$	5	**		$	28		$	9	**
Gains (losses) on equity investments, net	60		197		**		(133)			534		**
Interest expense	(120)		(110)		9%		(344)			(323)		7%
Other income (expense), net	4		7		**		12			9		**
Total other income (expense)	(40)		99		**		(437)			229		**
(Gains) losses on equity investments 1	(60)		(197)		**		133			(534)		**
Special Items 1	—		6		**		—			6		**

Adjusted total other income (expense) 1	$	(99)	$	(92)	8%		$	(303)		$	(299)	2%

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.

Income Taxes

The effective income tax rates were 18.6% and 14.3% for the three months ended September 30, 2022 and 2021, respectively. The adjusted effective income tax rates were 19.4% and 14.4% for the three months ended September 30, 2022 and 2021, respectively. Both the as reported and as adjusted effective income tax rates were higher versus the comparable period in 2021, primarily due to the following:

the recognition of U.S. tax benefits in the third quarter of 2021 (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.
a discrete tax expense related to an unfavorable court ruling in the current period

The change in these discrete tax items contributed to the higher rate, partially offset by a favorable change in our geographic mix of earnings in the current period.

The effective income tax rates were 14.3% and 15.7% for the nine months ended September 30, 2022 and 2021, respectively. The adjusted effective income tax rates were 14.8% and 15.6% for the nine months ended September 30, 2022 and 2021, respectively. Both the as reported and as adjusted effective income tax rates were lower versus the comparable period in 2021, primarily due to the following:

a discrete tax benefit in the first quarter of 2022 related to final U.S. tax regulations published in the current year. These regulations resulted in a valuation allowance release of $333 million associated with the U.S. foreign tax credit carryforward deferred tax asset. The regulations limit our ability to generate foreign tax credits starting in 2022 for certain foreign taxes paid, resulting in additional U.S. tax expense
a favorable change in our geographic mix of earnings in 2022

The change in these tax benefits in 2022 contributed to the lower rate, partially offset by the recognition of U.S. tax benefits in 2021 (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., as well as a discrete tax expense related to an unfavorable court ruling in 2022.

MASTERCARD SEPTEMBER 30, 2022 FORM 10-Q 43

PART I

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Liquidity and Capital Resources

We rely on existing liquidity, cash generated from operations and access to capital to fund our global operations, 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:


	September 30, 2022		December 31, 2021
	(in billions)
Cash, cash equivalents and investments 1	$	8.0	$	7.9
Unused line of credit	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 $2.1 billion and $2.5 billion at September 30, 2022 and December 31, 2021, 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 which include litigation provisions and credit and settlement exposure.

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 of our Annual Report on Form 10-K for the year ended December 31, 2021, Part II, Item 1A - Risk Factors of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 and Note 15 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part I, Item 1 of this Report.

Cash Flow

The table below shows a summary of the cash flows from operating, investing and financing activities:


	Nine Months Ended September 30,
	2022		2021
	(in millions)
Net cash provided by operating activities	$	8,095	$	6,274
Net cash used in investing activities	(1,120)		(4,834)
Net cash used in financing activities	(6,714)		(4,938)

Net cash provided by operating activities increased $1,821 million for the nine months ended September 30, 2022, versus the comparable period in 2021, primarily due to higher net income adjusted for non-cash items and timing of settlement with customers.

Net cash used in investing activities decreased $3,714 million for the nine months ended September 30, 2022, versus the comparable period in 2021, primarily due to lower business acquisition activity in the current year.

Net cash used in financing activities increased $1,776 million for the nine months ended September 30, 2022, versus the comparable period in 2021, primarily due to higher repurchases of our Class A common stock in the current year.

Debt and Credit Availability

In February 2022, we issued €750 million ($728 million as of September 30, 2022) principal amount of notes due February 2029 (the “2022 EUR Notes”). In July 2022, we entered into an unsecured INR22.7 billion ($278 million as of September 30, 2022) term loan due July 2023 (the “INR Term Loan”). Our total debt outstanding was $14.5 billion and $13.9 billion at September 30, 2022 and December 31, 2021, respectively, with the earliest maturity of €700 million ($680 million as of September 30, 2022) of principal occurring in December 2022.

44 MASTERCARD SEPTEMBER 30, 2022 FORM 10-Q

PART I

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As of September 30, 2022, 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 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. We had no borrowings outstanding under the Commercial Paper Program or the Credit Facility at September 30, 2022 and December 31, 2021.

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 ended December 31, 2021 for further discussion on our debt, the Commercial Paper Program and the Credit Facility.

Dividends and Share Repurchases

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 $1,430 million for the nine months ended September 30, 2022.

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.

On February 8, 2022, our Board of Directors declared a quarterly cash dividend of $0.49 per share paid on May 9, 2022 to holders of record on April 8, 2022 of our Class A common stock and Class B common stock. The aggregate amount of this dividend was $477 million.

On June 20, 2022, our Board of Directors declared a quarterly cash dividend of $0.49 per share payable on August 9, 2022 to holders of record on July 8, 2022 of our Class A common stock and Class B common stock. The aggregate amount of this dividend was $474 million.

On September 19, 2022, our Board of Directors declared a quarterly cash dividend of $0.49 per share payable on November 9, 2022 to holders of record on October 7, 2022 of our Class A common stock and Class B common stock. The aggregate amount of this dividend is estimated to be $472 million.

Repurchased shares of our common stock are considered treasury stock. In November 2021 and December 2020, our Board of Directors approved share repurchase programs of our Class A common stock authorizing us to repurchase up to $8.0 billion and $6.0 billion, respectively. The program approved in 2021 became effective in May 2022 after completion of the share repurchase program authorized 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. The following table summarizes our share repurchase authorizations and repurchase activity of our Class A common stock through September 30, 2022:




	(in millions, except average price data)
Remaining authorization at December 31, 2021		$	11,927
Dollar value of shares repurchased during the nine months ended September 30, 2022		$	6,339
Remaining authorization at September 30, 2022		$	5,588
Shares repurchased during the nine months ended September 30, 2022		18.3
Average price paid per share during the nine months ended September 30, 2022		$	345.54

Recent Accounting Pronouncements

For a description of recent accounting pronouncements, if any, and the potential impact of these pronouncements refer to Note 1 (Summary of Significant Accounting Policies) to the consolidated financial statements included in Part I, Item 1.

Item 3. Quantitative and qualitative disclosures about market risk

Market risk is the potential for economic losses to be incurred on market risk sensitive instruments arising from adverse changes in factors such as interest rates and foreign currency exchange rates. Our exposure to market risk from changes in interest rates and foreign exchange

MASTERCARD SEPTEMBER 30, 2022 FORM 10-Q 45

PART I

Previous: Item 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) · Next: Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK