Mastercard Inc: Form 10-Q for the period ended Sep 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)

Note: Table may not sum due to rounding.

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)

Note: Table 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.

2 For the three months ended September 30, 2023 and 2022, the amounts presented are GAAP reported amounts, not adjusted.

Key highlights for the three and nine months ended September 30, 2023, versus the comparable periods in 2022:

Other financial highlights for the nine months ended September 30, 2023 were as follows:

• We generated net cash flows from operations of $7.9 billion.
• We repurchased 19.2 million shares of our common stock for $7.2 billion and paid dividends of $1.6 billion.
• We completed a debt offering for an aggregate principal amount of $1.5 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”). We also present growth rates adjusted for the impact of currency which is a non-GAAP financial measure. 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. We excluded these Special Items because management evaluates the underlying operations and performance of the Company separately from these recurring and nonrecurring items. 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, should not be relied upon as substitutes for measures calculated in accordance with GAAP. 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 nine months ended September 30, 2023, we recorded net losses of $6 million ($5 million after tax, or an immaterial impact per diluted share) and $95 million ($63 million after tax, or $0.07 per diluted share), respectively, primarily related to unrealized fair market value adjustments on marketable and nonmarketable equity securities.
• In the three and nine months ended September 30, 2022, we recorded net gains of $60 million ($66 million after tax, or $0.07 per diluted share) and net losses of $133 million ($114 million after tax, or $0.12 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 nine months ended September 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 third quarter of 2022, we recorded charges of $208 million ($162 million after tax, or $0.17 per diluted share) as a result of developments in settlement discussions with certain U.K. merchants, including a settlement reached with one of those merchants.
• In the second quarter of 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 nine months ended September 30, 2022, we recorded a net charge of $30 million ($24 million after tax, or $0.02 per diluted share), directly related to imposed sanctions and the suspension of our business operations in Russia. The net charge was comprised of general and administrative expenses of $67 million, primarily related to incremental employee-related costs and reserves on uncollectible balances with certain sanctioned customers. This charge was offset by net benefits of $37 million, 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.

Currency-neutral Growth Rates

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.

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.

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, British pound and the Brazilian real. 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 euros 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 nine months ended September 30, 2023, GDV on a U.S. dollar-converted basis increased 11% and 10%, respectively, while GDV on a local currency basis increased 11% and 13%, 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 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 September 30, 2023, net revenue increased 14% versus the comparable period in 2022. Adjusted net revenue increased 14%, or 11% 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 12%, or 10% 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 included $3,963 million of rebates and incentives provided to customers, which increased 22% as reported, or 20% 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 17%, or 14% 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) demand for our consulting and marketing services, as well as our loyalty solutions, partially offset by (iii) other solutions.

For the nine months ended September 30, 2023, net revenue increased 13% versus the comparable period in 2022. Adjusted net revenue increased 13%, or 14% 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 11%, as reported and 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 included $11,074 million of rebates and incentives provided to customers, which increased 23%, 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 17%, as reported and on a currency-neutral basis, versus the comparable period in 2022, which included 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 demand for our fraud and security solutions, and (ii) demand for our consulting and marketing services, as well as our loyalty solutions, partially offset by (iii) other solutions.

2022

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 included 1 percentage point of growth from acquisitions. 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 16%, or 24% 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 included $3,240 million of rebates and incentives provided to customers, which increased 19%, 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.

Net revenue from our value-added services and solutions increased 14%, or 21% on a currency-neutral basis, versus the comparable period in 2021, which included a 2 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 and demand for our fraud and security solutions, as well as the scaling of our identity and authentication solutions and (ii) demand for our data analytics and marketing services.

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. The increase in net revenue was attributable to both our payment network and value-added services and solutions and included 1 percentage points of growth from acquisitions.

Net revenue from our payment network increased 23%, or 29% 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 included $9,003 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.

Net revenue from our value-added services and solutions increased 15%, or 20% on a currency-neutral basis, versus the comparable period in 2021, which included a 4 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 and demand for our fraud and security solutions, as well as the scaling of our identity and authentication solutions and (ii) demand for our data analytics and consulting 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, open 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 September 30, 2023, operating expenses increased 2% versus the comparable period in 2022. Adjusted operating expenses increased 10%, or 9% on a currency-neutral basis, versus the comparable period in 2022, which included a 1 percentage point increase from acquisitions. The remaining increase was primarily due to higher personnel costs.

For the nine months ended September 30, 2023, operating expenses increased 8% versus the comparable period in 2022. Operating expenses increased 11%, on both an as-adjusted and currency-neutral basis, versus the comparable period in 2022, which included 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.

3The Special Items driver impact related to provision for litigation is reflected in total operating expenses.

General and Administrative

For the three months ended September 30, 2023, general and administrative expenses increased 10%, or 9% on a currency-neutral basis, versus the comparable period in 2022. Current period results included growth of 1 percentage points from acquisitions. 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.

For the nine months ended September 30, 2023, general and administrative expenses increased 11%, or 12% on a currency-neutral basis, versus the comparable period in 2022. Current period results included 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 1 percentage point 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 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.

Advertising and Marketing

For the three months ended September 30, 2023, advertising and marketing expenses increased 6%, or 4% on a currency-neutral basis, versus the comparable period in 2022, primarily due to an increase in spending on sponsorships.

For the nine months ended September 30, 2023, advertising and marketing expenses decreased 2% 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.

Depreciation and Amortization

For the three months ended September 30, 2023, depreciation and amortization expenses increased 14%, or 11% on a currency-neutral basis, versus the comparable period in 2022, primarily due to increased software capitalization.

For the nine months ended September 30, 2023, depreciation and amortization expenses increased 5% on both an as reported and currency-neutral basis, versus the comparable period in 2022, primarily due to increased software capitalization.

Provision for Litigation

For the nine months ended September 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 September 30, 2023, other income (expense) was unfavorable $43 million, versus the comparable period in 2022, primarily due to net losses in the current year versus net gains in the prior year related to unrealized fair market value adjustments on marketable equity securities, partially offset by higher net investment income in the current year. Adjusted other income (expense) was favorable $21 million versus the prior year, primarily due to an increase in our investment income, partially offset by increased interest expense related to our 2023 debt issuances.

For the nine months ended September 30, 2023, other income (expense) was favorable $119 million, versus the comparable period in 2022, primarily due to an increase in our investment income and lower mark-to-market losses in 2023. Adjusted other income (expense) was favorable $80 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 15.0% and 18.6% for the three months ended September 30, 2023 and 2022, respectively. The adjusted effective income tax rates were 15.0% and 19.4% for the three months ended September 30, 2023 and 2022, respectively. Both the as reported and as adjusted effective income tax rates were lower versus the comparable period in 2022, primarily due to our ability to now claim more U.S. foreign tax credits generated in 2022 and 2023 resulting from Notice 2023-55 (the “Notice”), released by the U.S. Department of Treasury (“Treasury”) in the current period, partially offset by a $115 million discrete tax expense to establish a valuation allowance on the deferred tax asset related to U.S. foreign tax credits generated prior to 2022.

The effective income tax rates were 18.6% and 14.3% for the nine months ended September 30, 2023 and 2022, respectively. The adjusted effective income tax rates were 19.0% and 14.8% for the nine months ended September 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 deferred tax asset related to U.S. foreign tax credits. In 2022, we recognized a discrete tax benefit of $333 million to release the valuation allowance resulting from U.S. tax regulations published in the first quarter of 2022 (the “2022 Regulations”). In 2023, the treatment of foreign taxes paid under the 2022 Regulations changed due to the foreign tax legislation enacted in Brazil and the Notice released by Treasury. Therefore, we recognized a total $327 million discrete tax expense in 2023 to establish the valuation allowance. The discrete tax expense recognized in the nine months ended September 30, 2023 was partially offset by our ability to now claim more U.S. foreign tax credits generated in 2022 and 2023 due to the Notice.

As of September 30, 2023, the deferred tax asset related to U.S. foreign tax credits and corresponding valuation allowance is $575 million due to foreign tax legislation enacted in Brazil and the Notice. The valuation allowance relates to our ability to recognize future tax benefits associated with the carryforward of U.S. foreign tax credits generated in the current and prior periods. The recognition of the U.S. foreign tax credits is dependent upon the realization of future foreign source income in the appropriate foreign tax credit basket in accordance with U.S. federal income tax law.

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 $1.9 billion and $2.2 billion at September 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 Flows

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

(in millions)

Net cash provided by operating activities decreased $245 million for the nine months ended September 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, more than offset by restricted cash paid for litigation settlement, higher employee incentives paid, higher customer incentive payments and timing of settlement with customers.

Net cash used in investing activities increased $17 million for the nine months ended September 30, 2023, versus the comparable period in 2022, primarily due to an increase in capitalized software and purchases of investments in time deposits partially offset by less cash paid for business acquisitions in the current year.

Net cash used in financing activities increased $424 million for the nine months ended September 30, 2023, versus the comparable period in 2022, primarily due to higher repurchases of our Class A common stock in the current year partially offset by higher proceeds from debt issuances.

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 the date of settlement) term loan, originally due July 2023 (the “April 2023 INR Term Loan”). In July 2023, we modified and combined the 2022 INR Term Loan and April 2023 INR Term Loan (the “2023 INR Term Loan”), increasing the total unsecured loans to INR28.1 billion ($342 million as of the date of settlement). The 2023 INR Term Loan is due July 2024.

Our total debt outstanding was $15.6 billion and $14.0 billion at September 30, 2023 and December 31, 2022, respectively, with the earliest maturity of $1 billion of principal occurring in April 2024.

As of September 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 September 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 $1,624 million for the nine months ended September 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 was $538 million.

On September 19, 2023 our Board of Directors declared a quarterly cash dividend of $0.57 per share payable on November 9, 2023 to holders of record on October 9, 2023 of our Class A common stock and Class B common stock. The aggregate amount of this dividend is estimated to be $536 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 September 30, 2023:

(in millions, except average price data)

1 The dollar-value of shares repurchased does not include a 1% excise tax 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 loss of approximately $92 million and loss of approximately $94 million on our foreign exchange derivative contracts outstanding at September 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 September 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 $320 million and $203 million on our foreign exchange derivative contracts designated as a net investment hedge at September 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 President and Chief Executive Officer and our Chief Financial Officer, to allow timely decisions regarding disclosure. The President and Chief Executive Officer and the Chief Financial Officer, with assistance from other members of management, have reviewed the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Report and, based on their evaluation, have concluded that the disclosure controls and procedures were effective as of such date.

Changes in Internal Control over Financial Reporting

There was no change in Mastercard’s internal control over financial reporting that occurred during the three months ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, Mastercard's internal control over financial reporting.

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.