Mastercard Inc: Form 10-Q for the period ended Jun 30, 2023

The following supplements management's discussion and analysis of Mastercard Incorporated for the year ended December 31, 2022 as contained in the Company's Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission on February 14, 2023. It also should be read in conjunction with the consolidated financial statements and notes of Mastercard Incorporated and its consolidated subsidiaries, including Mastercard 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. During the fourth quarter of 2022, the Company updated its disaggregated net revenue presentation by category and geography to reflect the nature of its payment services and to align such information with the way in which management views its categories of net revenue. Prior period amounts have been reclassified to conform to the updated presentation. The reclassification had no impact on previously reported total net revenue, operating income or net income.

Financial Results Overview

The following table provides a summary of our key GAAP operating results, as reported:

($ in millions, except per share data)

** Not meaningful.

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:

($ in millions, except per share data)

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 June 30, 2023, versus the comparable periods in 2022:

Other financial highlights for the six months ended June 30, 2023 were as follows:

• We generated net cash flows from operations of $4.6 billion.
• We repurchased 14.4 million shares of our common stock for $5.3 billion and paid dividends of $1.1 billion.
• We completed a debt offering for an aggregate principal amount of $1.5 billion and entered into an Indian rupee-denominated term loan for $0.1 billion.

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 in the 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 and 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 ended June 30, 2023, we recorded net gains of $123 million ($118 million after tax, or $0.12 per diluted share) and net losses of $89 million ($58 million after tax, or $0.06 per diluted share), respectively, primarily related to unrealized fair market value adjustments on marketable and nonmarketable equity securities.
• In the three and six months ended June 30, 2022, we recorded net losses of $117 million ($113 million after tax, or $0.12 per diluted share) and $193 million ($181 million after tax, or $0.18 per diluted share), respectively, primarily related to unrealized fair market value adjustments on marketable and non-marketable equity securities.

Special Items

Litigation provisions

• In the three months ended June 30, 2023, we recorded charges of $20 million ($15 million after tax, or $0.02 per diluted share) as a result of settlements with a number of U.K. and Pan-European merchants. In the six months ended June 30, 2023, we recorded charges of $231 million ($156 million after tax, or $0.16 per diluted share) primarily as a result of a change in estimate related to the claims of merchants who opted out of the U.S. merchant class litigation.
• In the three and six months ended June 30, 2022, we recorded charges of $133 million ($89 million after tax, or $0.09 per diluted share) as a result of a change in estimate related to the claims of merchants who opted out of the U.S. merchant class litigation.

Russia-related impacts

• In the three and six months ended June 30, 2022, we recorded net charges of $26 million ($20 million after tax, or $0.02 per diluted share) and $30 million ($24 million after tax, or $0.02 per diluted share), respectively, directly related to imposed sanctions and the suspension of our business operations in Russia. The net charges are comprised of general and administrative expenses of $33 million and $67 million, respectively, primarily related to incremental employee-related costs and reserves on uncollectible balances with certain sanctioned customers. These charges are partially offset by net benefits of $6 million and $37 million, respectively, in net revenue, primarily related to a reduction in payment network rebates and incentives liabilities as a result of lower estimates of customer performance for certain customer business agreements due to the suspension of our business operations in Russia.

See Note 6 (Investments) and Note 15 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part I, Item 1 of this Report and “Management Discussion and Analysis of Financial Condition and Results of Operations - Russia and Ukraine” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022 for further discussion related to certain of our non-GAAP financial measures. 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.

Currency-neutral Growth Rates

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 our U.S. dollar reporting currency. The impact of the transactional currency represents the effect of converting revenue and expenses occurring in a currency other than the functional currency of the entity. The impact of the related realized gains and losses resulting from our foreign exchange derivative contracts designated as cash flow hedging instruments is recognized in the respective financial statement line item on the statement of operations when the underlying forecasted transactions impact earnings. We believe the presentation of currency-neutral growth rates provides relevant information to facilitate an understanding of our operating results.

The translational and transactional impact of currency and the related impact of our foreign exchange derivative contracts designated as cash flow hedging instruments (“Currency impact”) has been excluded from our currency-neutral growth rates and has been identified in our “Drivers of Change” tables. See “Foreign Currency - Currency Impact” for further information on our currency impacts and “Financial Results - Net Revenue” and “Financial Results - Operating Expenses” for our "Drivers of Change” tables.

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 adjusted non-GAAP financial measures:

($ in millions, except per share data)

($ in millions, except per share data)

($ in millions, except per share data)

($ in millions, except per share data)

Note: Tables may not sum due to rounding.

** Not applicable.

The following tables represent the reconciliation of our growth rates reported under GAAP to our non-GAAP growth rates:

Note: Tables may not sum due to rounding.

** Not applicable.

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

Key Metrics and Drivers

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.

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.

Key Drivers

**Gross Dollar Volume (“GDV”)**1 measures dollar volume of activity, including both domestic and cross-border volume, 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; “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.

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.

Cross-border Volume Growth2 measures the growth of cross-border dollar volume 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, which is defined as the number of transactions initiated and switched through our network during the period.

2 Growth rates are normalized to eliminate the effects of differing switching and carryover days between periods, as needed. Carryover days are those where transactions and volumes from days where the Company does not clear and settle are processed.

The following tables provide a summary of the growth trends in our key drivers:

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 drivers excluding activity from Russian issued cards from the prior periods. See “Management Discussion and Analysis of Financial Condition and Results of Operations - Russia and Ukraine” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022 for further information.

Key Metrics related to the Payment Network

Assessments represent agreed-upon standard pricing provided to our customers based on various forms of payment-related activity. Assessments are used internally by management to monitor operating performance as it allows for comparability and provides visibility into cardholder trends. Assessments do not represent our net revenue.

The following provides additional information on our key metrics related to the payment network:

• Domestic assessments are charges based on activity related to cards that carry the Company’s brands where the merchant country and the country of issuance are the same. These assessments are primarily driven by the domestic dollar volume of activity (e.g., domestic purchase volume, domestic cash volume) or the number of cards issued.
• Cross-border assessments are charges based on activity related to cards that carry the Company’s brands where the merchant country and the country of issuance are different. These assessments are primarily driven by the cross-border dollar volume of activity (e.g., cross-border purchase volume, cross-border cash volume).
• Transaction processing assessments are charges primarily driven by the number of switched transactions on our payment network. Switching activities include:
• Authorization, the process by which a transaction is routed to the issuer for approval
• Clearing, the determination and exchange of financial transaction information between issuers and acquirers after a transaction has been successfully conducted at the point of interaction
• Settlement, which facilitates the determination and exchange of funds between parties

These assessments can also include connectivity services and network access which are based on the volume of data transmitted and the number of authorization and settlement messages.

• Other network assessments are charges for licensing, implementation and other franchise fees.

The following table provides a summary of our key metrics related to the payment network:

($ in millions)

($ in millions)

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”), which are used in the calculation of our key metrics related to domestic assessments and cross-border assessments as well as certain volume-related rebates and incentives. GDV is calculated based on local currency spending volume converted to U.S. dollars and euro using average exchange rates for the period. As a result, our key metrics related to domestic assessments and cross-border assessments as well as certain volume-related rebates and incentives are impacted by the strengthening or weakening of the U.S. dollar and euro versus 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, 2023, GDV on a U.S. dollar-converted basis increased 10% and 10%, respectively, while GDV on a local currency basis increased 12% and 14%, respectively, versus the comparable periods in 2022. Further, the impact from transactional currency occurs in our key metric related to transaction processing assessments as well as value-added services and solutions 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.

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.

Financial Results

Net Revenue

The components of net revenue were as follows:

($ in millions)

($ in millions)

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.

2023

For the three months ended June 30, 2023, net revenue increased 14% versus the comparable period in 2022. Adjusted net revenue increased 14%, or 15% on a currency-neutral basis. The increase in net revenue was attributable to both our payment network and value-added services and solutions.

Net revenue from our payment network increased 13%, or 14% on a currency-neutral basis, versus the comparable period in 2022. The increase was primarily driven by growth in domestic and cross-border dollar volumes and an increase in the number of switched transactions, reflecting trends of growth in our key drivers. Net revenue from our payment network includes $3,694 million of rebates and incentives provided to customers, which increased 22% as reported and on a currency-neutral basis, versus the comparable period in 2022, primarily due to an increase in our key drivers as well as new and renewed deals.

Net revenue from our value-added services and solutions increased 16% as reported and on a currency-neutral basis, versus the comparable period in 2022. The increase was driven primarily by the continued growth of (i) our cyber and intelligence solutions, driven by our underlying key drivers and demand for our fraud and security solutions and (ii) continued demand for our consulting and marketing services, partially offset by other solutions.

For the six months ended June 30, 2023, net revenue increased 13% versus the comparable period in 2022. Adjusted net revenue increased 13%, or 15% on a currency-neutral basis. The increase in net revenue was attributable to both our payment network and value-added services and solutions.

Net revenue from our payment network increased 10%, or 12% on a currency-neutral basis, versus the comparable period in 2022. The increase was primarily driven by growth in domestic and cross-border dollar volumes and an increase in the number of switched transactions, reflecting trends of growth in our key drivers. The 12% increase on a currency-neutral basis is 1 percentage point lower due to the Russia-related Special Item in 2022. Net revenue from our payment network includes $7,111 million of rebates and incentives provided to customers, which increased 23%, or 25% on a currency-neutral basis, versus the comparable period in 2022, primarily due to an increase in our key drivers as well as new and renewed deals. The 25% increase on a currency-neutral basis is 1 percentage point higher due to the Russia-related Special Item in 2022.

Net revenue from our value-added services and solutions increased 17%, or 18% on a currency-neutral basis, versus the comparable period in 2022, which includes a 1 percentage point increase from acquisitions. The remaining increase was driven primarily by the continued growth of (i) our cyber and intelligence solutions, driven by our underlying key drivers and (ii) demand for our fraud and security solutions, and demand for our consulting and marketing services, as well as our loyalty solutions.

2022

For the three months ended June 30, 2022, net revenue increased 21% versus the comparable period in 2021. Adjusted net revenue increased 21%, or 27% on a currency-neutral basis. The increase in net revenue was attributable to both our payment network and value-added services and solutions.

Net revenue from our payment network increased 26%, or 31% on a currency-neutral basis, versus the comparable period in 2021. The increase was primarily driven by growth in domestic and cross-border dollar volumes and an increase in the number of switched transactions, reflecting trends of growth in our key drivers. Net revenue from our payment network includes $3,039 million of rebates and incentives provided to customers, which increased 18%, or 22% on a currency-neutral basis, versus the comparable period in 2021, primarily due to an increase in our key drivers as well as new and renewed deals.

Net revenue from our value-added services and solutions increased 14%, or 19% on a currency-neutral basis, versus the comparable period in 2021, which includes a 3 percentage point increase from acquisitions. The remaining increase was driven primarily by the continued growth of (i) our cyber and intelligence solutions, driven by growth in our underlying key drivers as well as the scaling of our authentication solutions and (ii) our data analytics services.

For the six months ended June 30, 2022, net revenue increased 23% versus the comparable period in 2021. Adjusted net revenue increased 22%, or 27% on a currency-neutral basis. The increase in net revenue was attributable to both our payment network and value-added services and solutions and included 2 percentage points of growth from acquisitions.

Net revenue from our payment network increased 27%, or 32% on a currency-neutral basis, versus the comparable period in 2021. The increase was primarily driven by growth in domestic and cross-border dollar volumes and an increase in the number of switched transactions, reflecting trends of growth in our key drivers. The 32% increase on a currency-neutral basis is 1 percentage point higher due to the Russia-related Special Item in 2022. Net revenue from our payment network includes $5,763 million of rebates and incentives provided to customers, which increased 21%, or 25% on a currency-neutral basis, versus the comparable period in 2021, primarily due to an increase in our key drivers as well as new and renewed deals. The 25% increase on a currency-neutral basis is 1 percentage point lower due to the Russia-related Special Item in 2022.

Net revenue from our value-added services and solutions increased 16%, or 20% on a currency-neutral basis, versus the comparable period in 2021, which includes a 5 percentage point increase from acquisitions. The remaining increase was driven primarily by the continued growth of (i) our cyber and intelligence solutions, driven by growth in our underlying key drivers as well as the scaling of our authentication solutions and (ii) our data analytics services.

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, 2022 for a further discussion of how we recognize revenue.

Drivers of Change

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

Note: Tables may not sum due to rounding.

** Not applicable.

1Includes impacts from our key drivers and metrics, offset by rebates and incentives.

2Includes impacts from cyber and intelligence, data and services, processing and gateway, ACH batch and real-time account-based domestic and cross-border payments and solutions, opening banking and digital identity, offset by rebates and incentives.

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

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

Operating Expenses

For the three months ended June 30, 2023, operating expenses increased 5% versus the comparable period in 2022. Adjusted operating expenses increased 12%, or 13% on a currency-neutral basis, versus the comparable period in 2022, primarily due to higher personnel costs.

For the six months ended June 30, 2023, operating expenses increased 11% versus the comparable period in 2022. Adjusted operating expenses increased 11%, or 12% on a currency-neutral basis, versus the comparable period in 2022, which includes a 1 percentage point increase from acquisitions. The remaining increase was primarily due to higher personnel costs.

The components of operating expenses were as follows:

($ in millions)

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:

Note: Tables may not sum due to rounding.

** Not applicable/meaningful.

1Represents the translational and transactional impact of currency.

2See “Non-GAAP Financial Information” for further information on our non-GAAP adjustments and the reconciliation to GAAP reported amounts.

General and Administrative

For the three months ended June 30, 2023, general and administrative expenses increased 13%, or 14% on a currency-neutral basis, versus the comparable period in 2022. The 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 2 percentage points from the Special Item for Russia-related impacts in 2022.

For the six months ended June 30, 2023, general and administrative expenses increased 12%, or 13% on a currency-neutral basis, versus the comparable period in 2022. Current period results include growth of 1 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 2 percentage points from the Special Item for Russia-related impacts in 2022.

The components of general and administrative expenses were as follows:

($ in millions)

Note: Table may not sum due to rounding.

** Not meaningful.

1 For the three months ended June 30, 2022, total general and administrative expenses includes a Special Item for Russia-related impacts of $33 million, of which $31 million is included within Personnel and $2 million is included within Other. For the six months ended June 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.

Advertising and Marketing

For the three months ended June 30, 2023, advertising and marketing expenses decreased 4% on both an as reported and a currency-neutral basis, versus the comparable period in 2022, primarily due to a decrease in spending on marketing campaigns and advertising, partially offset by an increase in spending on sponsorships. For the six months ended June 30, 2023, advertising and marketing expenses decreased 6%, or 5% on a currency-neutral basis, versus the comparable period in 2022, primarily due to a decrease in spending on marketing campaigns and advertising, partially offset by an increase in spending on sponsorships.

Depreciation and Amortization

For the three and six months ended June 30, 2023, depreciation and amortization expenses were relatively flat on both an as reported and a currency-neutral basis, versus the comparable periods in 2022.

Provision for Litigation

For the three months ended June 30, 2023, we recorded litigation provisions of $20 million as a result of settlements with a number of U.K. and Pan-European merchants. For the six months ended June 30, 2023, we recorded litigation provisions of $231 million as a result of a change in estimate related to the claims of merchants who opted out of the U.S. merchant class litigation as well as settlements with a number of U.K. and Pan-European merchants. See Note 15 (Legal and Regulatory Proceedings) to the consolidated financial statements included in Part I, Item 1 of this Report and “Non-GAAP Financial Information” in this section for further discussion.

Other Income (Expense)

For the three months ended June 30, 2023, other income (expense) was favorable $268 million, versus the comparable period in 2022, primarily due to net gains in the current year versus the net losses in the prior year related to unrealized fair market value adjustments on marketable equity securities. Adjusted other income (expense) was favorable $29 million versus the prior year, primarily due to an increase in our investment income, partially offset by increased interest expense related to our 2022 and 2023 debt issuances.

For the six months ended June 30, 2023, other income (expense) was favorable $162 million, versus the comparable period in 2022, primarily due to lower net losses in the current year versus the prior year related to unrealized fair market value adjustments on marketable and nonmarketable equity securities. Adjusted other income (expense) was favorable $59 million versus the prior year, primarily due to an increase in our investment income, partially offset by increased interest expense related to our 2022 and 2023 debt issuances.

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

($ in millions)

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 23.2% and 18.7% for the three months ended June 30, 2023 and 2022, respectively. The adjusted effective income tax rates were 23.9% and 18.8% for the three months ended June 30, 2023 and 2022, respectively. Both the as reported and as adjusted effective income tax rates were higher versus the comparable period in 2022, primarily due to a $212 million discrete tax expense to establish a valuation allowance associated with the U.S. foreign tax credit carryforward deferred tax asset resulting from foreign tax legislation enacted in Brazil in the current period. The U.K. statutory tax rate increase, effective in 2023, also contributed to the higher as reported and as adjusted effective income tax rates for the current period.

The effective income tax rates were 20.6% and 11.9% for the six months ended June 30, 2023 and 2022, respectively. The adjusted effective income tax rates were 21.2% and 12.3% for the six months ended June 30, 2023 and 2022, respectively. Both the as reported and as adjusted effective income tax rates were higher versus the comparable period in 2022, primarily due to changes in the valuation allowance associated with the U.S. foreign tax credit carryforward deferred tax asset. In 2022, we recognized a discrete tax benefit related to final U.S. tax regulations published in the first quarter of 2022 (“2022 Regulations”), which resulted in a valuation allowance release of $333 million. In the second quarter of 2023, foreign tax legislation was enacted in Brazil which changed the treatment of foreign taxes paid under the 2022 Regulations. Therefore, we recognized a $212 million discrete tax expense in 2023 to establish the valuation allowance on the remaining U.S. foreign tax credit carryforward deferred tax asset. The foreign tax legislation allows us the ability to generate additional foreign tax credits going forward. The U.K. statutory tax rate increase, effective in 2023, also contributed to the higher effective income tax rate in 2023.

On July 21, 2023, the U.S. Department of Treasury released Notice 2023-55 (the “Notice”), providing taxpayers relief from certain aspects of the 2022 Regulations for 2022 and 2023. We are evaluating the impacts of the Notice to our effective tax rate, as well as deferred tax assets and corresponding valuation allowance.

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:

(in billions)

1 Investments include available-for-sale securities and held-to-maturity securities. This amount excludes restricted cash and restricted cash equivalents of $2.4 billion and $2.2 billion at June 30, 2023 and December 31, 2022, 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, 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:

(in millions)

Net cash provided by operating activities increased $378 million for the six months ended June 30, 2023, versus the comparable period in 2022, primarily due to higher net income after adjusting for non-cash items and an increase in restricted security deposits held for customers, partially offset by higher employee incentives and customer incentive payments.

Net cash used in investing activities decreased $197 million for the six months ended June 30, 2023, versus the comparable period in 2022, primarily due to less cash paid for business acquisitions in the current year partially offset by an increase in capitalized software.

Net cash used in financing activities decreased $241 million for the six months ended June 30, 2023, versus the comparable period in 2022, primarily due to higher proceeds from debt issuances partially offset by higher repurchases of our Class A common stock in the current year.

Debt and Credit Availability

In March 2023, we issued $750 million principal amount of notes due March 2028 and $750 million principal amount of notes due March 2033 (collectively the “2023 USD Notes”). The net proceeds from the issuance of the 2023 USD Notes, after deducting the original issue discount, underwriting discount and offering expenses, were $1.489 billion. In April 2023, we entered into an additional unsecured INR4.97 billion ($61 million as of June 30, 2023) term loan, originally due July 2023 (the “April 2023 INR Term Loan”). Our total debt outstanding was $15.6 billion and $14.0 billion at June 30, 2023 and December 31, 2022, respectively, with the earliest maturity of INR28 billion ($338 million as of June 30, 2023) of principal occurring in July 2023.

In July 2023, we modified and combined each of the 2022 INR Term Loan and April 2023 INR Term Loan, increasing the total amount of the unsecured loans to INR28 billion ($342 million as of the date of settlement), which was an increase of INR412 million ($5 million as of the date of settlement) due July 2024.

As of June 30, 2023, we have a commercial paper program (the “Commercial Paper Program”), under which we are authorized to issue up to $8 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 $8 billion revolving credit facility (the “Credit Facility”) which expires in November 2027.

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 June 30, 2023 and December 31, 2022.

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, 2022 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 $1,086 million for the six months ended June 30, 2023.

On December 6, 2022, our Board of Directors declared a quarterly cash dividend of $0.57 per share paid on February 9, 2023 to holders of record on January 9, 2023 of our Class A common stock and Class B common stock. The aggregate amount of this dividend was $545 million.

On February 14, 2023, our Board of Directors declared a quarterly cash dividend of $0.57 per share paid on May 9, 2023 to holders of record on April 7, 2023 of our Class A common stock and Class B common stock. The aggregate amount of this dividend was $541 million.

On June 26, 2023, our Board of Directors declared a quarterly cash dividend of $0.57 per share payable on August 9, 2023 to holders of record on July 7, 2023 of our Class A common stock and Class B common stock. The aggregate amount of this dividend is estimated to be $538 million.

Repurchased shares of our common stock are considered treasury stock. In December 2022 and November 2021, our Board of Directors approved share repurchase programs of our Class A common stock authorizing us to repurchase up to $9.0 billion and $8.0 billion, respectively. The program approved in 2022 became effective in April 2023 after the completion of the share repurchase program approved in 2021. 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 June 30, 2023:

(in millions, except average price data)

1 The dollar-value of shares repurchased does not include a 1% excise tax on share repurchases that became effective January 1, 2023. The incremental tax is recorded in treasury stock on the consolidated balance sheet and is payable annually beginning in 2024.

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.

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 rates is limited. Management monitors risk exposures on an ongoing basis and establishes and oversees the implementation of policies governing our funding, investments and use of derivative financial instruments to manage these risks.

Foreign currency and interest rate exposures are managed through our 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.

Foreign Exchange Risk

We enter into foreign exchange derivative contracts to manage currency exposure associated with anticipated receipts and disbursements occurring in a currency other than the functional currency of the entity. We may also enter into foreign currency derivative contracts to offset possible changes in value of assets and liabilities due to foreign exchange fluctuations. The objective of these activities is to reduce our exposure to transaction gains and losses resulting from fluctuations of foreign currencies against our functional currencies, principally the U.S. dollar and euro. The effect of a hypothetical 10% adverse change in the value of the functional currencies could result in a fair value gain of approximately $26 million and loss of approximately $94 million on our foreign exchange derivative contracts outstanding at June 30, 2023 and December 31, 2022, respectively, before considering the offsetting effect of the underlying hedged activity.

We are also subject to foreign exchange risk as part of our daily settlement activities. To manage this risk, we enter into short duration foreign exchange contracts based upon anticipated receipts and disbursements for the respective currency position. This risk is typically limited to a few days between when a payment transaction takes place and the subsequent settlement with our customers. A hypothetical 10% adverse change in the value of the functional currencies would not have a material impact to the fair value of our short duration foreign exchange derivative contracts outstanding at June 30, 2023 and December 31, 2022, respectively.

We are further exposed to foreign exchange rate risk related to translation of our net investment in foreign subsidiaries where the functional currency is different than our U.S. dollar reporting currency. To manage this risk, we may enter into foreign exchange derivative contracts to hedge a portion of our net investment in foreign subsidiaries. The effect of a hypothetical 10% adverse change in the value of the U.S. dollar could result in a fair value loss of approximately $251 million and $203 million on our foreign exchange derivative contracts designated as a net investment hedge at June 30, 2023 and December 31, 2022, respectively, before considering the offsetting effect of the underlying hedged activity.

Interest Rate Risk

Our available-for-sale debt investments include fixed and variable rate securities that are sensitive to interest rate fluctuations. Our policy is to invest in high quality securities, while providing adequate liquidity and maintaining diversification to avoid significant exposure. A hypothetical 100 basis point adverse change in interest rates would not have a material impact to the fair value of our investments at June 30, 2023 and December 31, 2022.

We are also exposed to interest rate risk related to our fixed-rate debt. To manage this risk, we may enter into interest rate derivative contracts to hedge a portion of our fixed-rate debt that is exposed to changes in fair value attributable to changes in a benchmark interest rate. The effect of a hypothetical 100 basis point adverse change in interest rates would not have a material impact to the fair value of our interest rate derivative contracts designated as a fair value hedge of our fixed-rate debt at June 30, 2023 and December 31, 2022, respectively, before considering the offsetting effect of the underlying hedged activity.

Evaluation of Disclosure Controls and Procedures

Our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) are designed to ensure that information that is required to be disclosed in the reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and to ensure that information required to be disclosed is accumulated and communicated to management, including our

For a discussion of our risk factors, see Part I, Item 1A - Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2022.