NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(UNAUDITED)
Note 1—Summary of Significant Accounting Policies
Organization.
Visa Inc. ("Visa" or the "Company") is a global payments technology company that enables fast, secure and reliable electronic payments across more than
200
countries and territories. Visa and its wholly-owned consolidated subsidiaries, including Visa U.S.A. Inc. ("Visa U.S.A."), Visa International Service Association ("Visa International"), Visa Worldwide Pte. Limited, Visa Europe Limited ("Visa Europe"), Visa Canada Corporation, Visa Technology & Operations LLC and CyberSource Corporation, operate one of the world’s largest retail electronic payments networks — VisaNet — which facilitates authorization, clearing and settlement of payment transactions and enables the Company to provide its financial institution and merchant clients a wide range of products, platforms and value-added services. VisaNet also offers fraud protection for account holders and assured payment for merchants. Visa is not a bank and does not issue cards, extend credit or set rates and fees for account holders on Visa products. In most cases, account holder and merchant relationships belong to, and are managed by, Visa's financial institution clients.
Consolidation and basis of presentation.
The accompanying unaudited consolidated financial statements include the accounts of Visa and its consolidated entities and are presented in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The Company consolidates its majority-owned and controlled entities, including variable interest entities ("VIEs") for which the Company is the primary beneficiary. The Company’s investments in VIEs have not been material to its consolidated financial statements as of and for the periods presented. All significant intercompany accounts and transactions are eliminated in consolidation.
The accompanying unaudited consolidated financial statements are presented in accordance with the U.S. Securities and Exchange Commission (SEC) requirements for Quarterly Reports on Form 10-Q and, consequently, do not include all of the annual disclosures required by U.S. GAAP. Reference should be made to the Visa Annual Report on Form 10-K for the year ended
September 30, 2017
for additional disclosures, including a summary of the Company’s significant accounting policies.
In the opinion of management, the accompanying unaudited consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the Company's financial position, results of operations and cash flows for the interim periods presented.
Recently Issued and Adopted Accounting Pronouncements.
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of goods or services to customers. The ASU will replace existing revenue recognition guidance in U.S. GAAP when it becomes effective. Subsequently, the FASB also issued a series of amendments to the new revenue standard. The Company will adopt the standard effective October 1, 2018, and expects to adopt the standard using the modified retrospective transition method. The Company expects that the new standard will primarily impact recognition timing for certain fixed incentives and price discounts provided to clients, and the classification of certain client incentives between contra revenues and operating expenses. The Company is still in the process of quantifying the full effect that ASU 2014-09 and all of its related subsequent updates will have on its consolidated financial statements and related disclosures. The impact of the new standard to future financial results is unknowable as it is not possible to estimate the impact to the recognition of new customer contracts which may be executed in future periods. The Company has completed an assessment of its existing customer contracts through December 31, 2017. Application of the new standard to consolidated financial statements for the first quarter of fiscal 2018 would not have resulted in a material impact. The Company will continue to assess the impact of the new standard as new customer contracts are executed going forward.
In March 2016, the FASB issued ASU 2016-05, which clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815,
Derivatives and Hedging
, does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The Company adopted the standard effective October 1, 2017. The adoption did not have a material impact on the consolidated financial statements.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In March 2016, the FASB issued ASU 2016-06, which clarifies the requirements for assessing whether contingent call/put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment is required to assess the embedded call/put options solely in accordance with a four-step decision sequence. The Company adopted the standard effective October 1, 2017. The adoption did not have a material impact on the consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07, which eliminates the requirement that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The equity method investor is required to add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The Company adopted the standard effective October 1, 2017. The adoption did not have a material impact on the consolidated financial statements.
Note 2—U.S. and Europe Retrospective Responsibility Plans
U.S. Retrospective Responsibility Plan
Under the terms of the U.S. retrospective responsibility plan, the Company maintains an escrow account from which settlements of, or judgments in, certain litigation referred to as the "U.S. covered litigation" are paid. The escrow funds are held in money market investments along with interest income earned, less applicable taxes, and are classified as restricted cash on the consolidated balance sheets. The balance of the escrow account was
$0.9 billion
at
December 31, 2017
and
$1.0 billion
at
September 30, 2017
. The Company paid
$150 million
from the litigation escrow account during the
three months ended December 31, 2017
. See
Note 11—Legal Matters
.
The accrual related to the U.S. covered litigation could be either higher or lower than the litigation escrow account balance. The Company did not record an additional accrual for the U.S. covered litigation during the
three months ended December 31, 2017
. See
Note 11—Legal Matters
.
Europe Retrospective Responsibility Plan
The Company, Visa Europe or their affiliates are parties to certain existing and potential litigation relating to the setting of multilateral interchange fee rates in the Visa Europe territory (the "VE territory covered litigation"). Under the terms of the Europe retrospective responsibility plan, the Company is entitled to recover certain losses resulting from VE territory covered litigation (the "VE territory covered losses") through a periodic adjustment to the class A common stock conversion rates applicable to the UK&I and Europe preferred stock. VE territory covered losses are recorded in "right to recover for covered losses" within equity before the corresponding adjustment to the applicable conversion rate is effected. Adjustments to the conversion rate may be executed once in any six-month period unless a single, individual loss greater than €
20 million
is incurred, in which case, the six-month limitation does not apply. When the adjustment to the conversion rate is made, the amount previously recorded in "right to recover for covered losses" as contra-equity is then recorded against the book value of the preferred stock within stockholders' equity.
During the
three months ended December 31, 2017
, the Company recovered
$50 million
of VE territory covered losses through adjustments to the class A common stock conversion rates applicable to the UK&I and Europe preferred stock, from
13.077
and
13.948
, respectively, at
September 30, 2017
to
12.966
and
13.893
, respectively, at
December 31, 2017
.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table sets forth the activities related to VE territory covered losses in preferred stock and "right to recover for covered losses" within equity during the
three months ended December 31, 2017
. VE territory covered losses incurred reflect settlements with merchants and additional legal costs. See
Note 11—Legal Matters
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
Right to Recover for Covered Losses
|
|
UK&I
|
|
Europe
|
|
|
(in millions)
|
Balance as of September 30, 2017
|
$
|
2,326
|
|
|
$
|
3,200
|
|
|
$
|
(52
|
)
|
VE territory covered losses incurred
|
—
|
|
|
—
|
|
|
(3
|
)
|
Recovery through conversion rate adjustment
|
(31
|
)
|
|
(19
|
)
|
|
50
|
|
Balance as of December 31, 2017
|
$
|
2,295
|
|
|
$
|
3,181
|
|
|
$
|
(5
|
)
|
The following table sets forth the as-converted value of the preferred stock available to recover VE territory covered losses compared to the book value of preferred shares recorded in stockholders' equity within the Company's unaudited consolidated balance sheet as of
December 31, 2017
and
September 30, 2017
.
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
September 30, 2017
|
|
As-Converted Value of Preferred Stock
(2)
|
|
Book Value of Preferred Stock
|
|
As-Converted Value of Preferred Stock
(3)
|
|
Book Value of Preferred Stock
|
|
(in millions)
|
UK&I preferred stock
|
$
|
3,667
|
|
|
$
|
2,295
|
|
|
$
|
3,414
|
|
|
$
|
2,326
|
|
Europe preferred stock
|
5,001
|
|
|
3,181
|
|
|
4,634
|
|
|
3,200
|
|
Total
|
8,668
|
|
|
5,476
|
|
|
8,048
|
|
|
5,526
|
|
Less: right to recover for covered losses
|
(5
|
)
|
|
(5
|
)
|
|
(52
|
)
|
|
(52
|
)
|
Total recovery for covered losses available
|
$
|
8,663
|
|
|
$
|
5,471
|
|
|
$
|
7,996
|
|
|
$
|
5,474
|
|
|
|
(1)
|
Figures in the table may not recalculate exactly due to rounding. As-converted and book values are based on unrounded numbers.
|
|
|
(2)
|
The as-converted value of preferred stock is calculated as the product of: (a)
2 million
and
3 million
shares of the UK&I and Europe preferred stock outstanding, respectively, as of
December 31, 2017
; (b)
12.966
and
13.893
, the class A common stock conversion rate applicable to the UK&I and Europe preferred stock as of
December 31, 2017
, respectively; and (c)
$114.02
, Visa's class A common stock closing stock price as of
December 31, 2017
.
|
|
|
(3)
|
The as-converted value of preferred stock is calculated as the product of: (a)
2 million
and
3 million
shares of the UK&I and Europe preferred stock outstanding, respectively, as of
September 30, 2017
; (b)
13.077
and
13.948
, the class A common stock conversion rate applicable to the UK&I and Europe preferred stock as of
September 30, 2017
, respectively; and (c)
$105.24
, Visa's class A common stock closing stock price as of
September 30, 2017
.
|
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 3—Fair Value Measurements and Investments
Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
Using Inputs Considered as
|
|
Level 1
|
|
Level 2
|
|
December 31,
2017
|
|
September 30,
2017
|
|
December 31,
2017
|
|
September 30,
2017
|
|
(in millions)
|
Assets
|
|
|
|
|
|
|
|
Cash equivalents and restricted cash:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
5,918
|
|
|
$
|
5,935
|
|
|
|
|
|
U.S. government-sponsored debt securities
|
|
|
|
|
$
|
567
|
|
|
$
|
2,870
|
|
Investment securities, trading:
|
|
|
|
|
|
|
|
Equity securities
|
106
|
|
|
82
|
|
|
|
|
|
Investment securities, available-for-sale:
|
|
|
|
|
|
|
|
U.S. government-sponsored debt securities
|
|
|
|
|
3,530
|
|
|
3,663
|
|
U.S. Treasury securities
|
2,337
|
|
|
1,621
|
|
|
|
|
|
Equity securities
|
114
|
|
|
124
|
|
|
|
|
|
Prepaid and other current assets:
|
|
|
|
|
|
|
|
Foreign exchange derivative instruments
|
|
|
|
|
26
|
|
|
18
|
|
Total
|
$
|
8,475
|
|
|
$
|
7,762
|
|
|
$
|
4,123
|
|
|
$
|
6,551
|
|
Liabilities
|
|
|
|
|
|
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
Foreign exchange derivative instruments
|
|
|
|
|
$
|
65
|
|
|
$
|
98
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
65
|
|
|
$
|
98
|
|
There were
no
transfers between Level 1 and Level 2 assets during the
three months ended December 31, 2017
.
Level 1 assets measured at fair value on a recurring basis.
Money market funds, publicly-traded equity securities and U.S. Treasury securities are classified as Level 1 within the fair value hierarchy, as fair value is based on quoted prices in active markets.
Level 2 assets and liabilities measured at fair value on a recurring basis.
The fair value of U.S. government-sponsored debt securities, as provided by third-party pricing vendors, is based on quoted prices in active markets for similar, not identical, assets. The pricing data obtained from outside sources is reviewed internally for reasonableness, compared against benchmark quotes from independent pricing sources, then confirmed or revised accordingly. Foreign exchange derivative instruments are valued using inputs that are observable in the market or can be derived principally from or corroborated by observable market data. There were no substantive changes to the valuation techniques and related inputs used to measure fair value during the
three months ended December 31, 2017
.
Assets Measured at Fair Value on a Non-recurring Basis
Non-marketable equity investments and investments accounted for under the equity method
. These investments are classified as Level 3 due to the absence of quoted market prices, the inherent lack of liquidity, and the fact that inputs used to measure fair value are unobservable and require management's judgment. When certain events or circumstances indicate that impairment may exist, the Company revalues the investments using various assumptions, including the financial metrics and ratios of comparable public companies. There were no significant impairments during the
three months ended December 31, 2017
or
2016
. These investments totaled
$99 million
and
$94 million
at
December 31, 2017
and
September 30, 2017
, respectively, and are classified in other assets on the consolidated balance sheets.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Non-financial assets and liabilities.
Long-lived assets such as goodwill, indefinite-lived intangible assets, finite-lived intangible assets, and property, equipment and technology are considered non-financial assets. The Company does not have any non-financial liabilities measured at fair value on a non-recurring basis. Finite-lived intangible assets primarily consist of customer relationships, trade names and reseller relationships, all of which were obtained through acquisitions.
If the Company were required to perform a quantitative assessment for impairment testing of goodwill and indefinite-lived intangible assets, the fair values would generally be estimated using an income approach. As the assumptions employed to measure these assets on a non-recurring basis are based on management's judgment using internal and external data, these fair value determinations are classified as Level 3 in the fair value hierarchy. The Company completed its annual impairment review of its indefinite-lived intangible assets and goodwill as of February 1, 2017, and concluded that there was no impairment. No recent events or changes in circumstances indicate that impairment existed at
December 31, 2017
.
Other Fair Value Disclosures
Long-term debt.
Debt instruments are measured at amortized cost on the Company's unaudited consolidated balance sheet at
December 31, 2017
. The fair value of the debt instruments, as provided by third-party pricing vendors, is based on quoted prices in active markets for similar, not identical, assets. The pricing data obtained from outside sources is reviewed internally for reasonableness, compared against benchmark quotes from independent pricing sources, then confirmed or revised accordingly. If measured at fair value in the financial statements, these instruments would be classified as Level 2 in the fair value hierarchy.
The following table presents the carrying amount and estimated fair value of the Company’s debt in order of maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
September 30, 2017
|
|
Carrying Amount
|
|
Estimated Fair Value
|
|
Carrying Amount
|
|
Estimated Fair Value
|
|
(in millions)
|
1.20% Senior Notes due December 2017
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,749
|
|
|
$
|
1,751
|
|
2.20% Senior Notes due December 2020
|
2,991
|
|
|
2,998
|
|
|
2,990
|
|
|
3,031
|
|
2.15% Senior Notes due September 2022
|
993
|
|
|
986
|
|
|
993
|
|
|
997
|
|
2.80% Senior Notes due December 2022
|
2,240
|
|
|
2,283
|
|
|
2,240
|
|
|
2,301
|
|
3.15% Senior Notes due December 2025
|
3,969
|
|
|
4,089
|
|
|
3,967
|
|
|
4,098
|
|
2.75% Senior Notes due September 2027
|
740
|
|
|
740
|
|
|
740
|
|
|
737
|
|
4.15% Senior Notes due December 2035
|
1,486
|
|
|
1,665
|
|
|
1,485
|
|
|
1,637
|
|
4.30% Senior Notes due December 2045
|
3,462
|
|
|
3,983
|
|
|
3,463
|
|
|
3,873
|
|
3.65% Senior Notes due September 2047
|
740
|
|
|
770
|
|
|
740
|
|
|
746
|
|
Total
|
$
|
16,621
|
|
|
$
|
17,514
|
|
|
$
|
18,367
|
|
|
$
|
19,171
|
|
Other financial instruments not measured at fair value.
The following financial instruments are not measured at fair value on the Company's unaudited consolidated balance sheet at
December 31, 2017
, but disclosure of their fair values is required: time deposits recorded in prepaid expenses and other current assets, settlement receivable and payable, commercial paper and customer collateral. The estimated fair value of such instruments at
December 31, 2017
approximates their carrying value due to their generally short maturities. If measured at fair value in the financial statements, these financial instruments would be classified as Level 2 in the fair value hierarchy.
Investments
Available-for-sale investment securities.
The Company had
$110 million
in gross unrealized gains and
$12 million
in gross unrealized losses at
December 31, 2017
. There were
$120 million
gross unrealized gains and
$4 million
gross unrealized losses at
September 30, 2017
. A majority of the Company's available-for-sale investment securities with stated maturities are due within
one
to
two
years.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 4—Debt
The Company had outstanding debt as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
September 30, 2017
|
|
|
|
Principal Amount
|
|
Unamortized Discounts and Debt Issuance Costs
|
|
Carrying Amount
|
|
Principal Amount
|
|
Unamortized Discounts and Debt Issuance Costs
|
|
Carrying Amount
|
|
Effective Interest Rate
|
|
(in millions, except percentages)
|
1.20% Senior Notes due December 2017 (the "2017 Notes")
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,750
|
|
|
$
|
(1
|
)
|
|
$
|
1,749
|
|
|
1.37
|
%
|
Total current maturities of long-term debt
|
—
|
|
|
—
|
|
|
—
|
|
|
1,750
|
|
|
(1
|
)
|
|
1,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.20% Senior Notes due December 2020
|
3,000
|
|
|
(9
|
)
|
|
2,991
|
|
|
3,000
|
|
|
(10
|
)
|
|
2,990
|
|
|
2.30
|
%
|
2.15% Senior Notes due September 2022
|
1,000
|
|
|
(7
|
)
|
|
993
|
|
|
1,000
|
|
|
(7
|
)
|
|
993
|
|
|
2.30
|
%
|
2.80% Senior Notes due December 2022
|
2,250
|
|
|
(10
|
)
|
|
2,240
|
|
|
2,250
|
|
|
(10
|
)
|
|
2,240
|
|
|
2.89
|
%
|
3.15% Senior Notes due December 2025
|
4,000
|
|
|
(31
|
)
|
|
3,969
|
|
|
4,000
|
|
|
(33
|
)
|
|
3,967
|
|
|
3.26
|
%
|
2.75% Senior Notes due September 2027
|
750
|
|
|
(10
|
)
|
|
740
|
|
|
750
|
|
|
(10
|
)
|
|
740
|
|
|
2.91
|
%
|
4.15% Senior Notes due December 2035
|
1,500
|
|
|
(14
|
)
|
|
1,486
|
|
|
1,500
|
|
|
(15
|
)
|
|
1,485
|
|
|
4.23
|
%
|
4.30% Senior Notes due December 2045
|
3,500
|
|
|
(38
|
)
|
|
3,462
|
|
|
3,500
|
|
|
(37
|
)
|
|
3,463
|
|
|
4.37
|
%
|
3.65% Senior Notes due September 2047
|
750
|
|
|
(10
|
)
|
|
740
|
|
|
750
|
|
|
(10
|
)
|
|
740
|
|
|
3.73
|
%
|
Total long-term debt
|
16,750
|
|
|
(129
|
)
|
|
16,621
|
|
|
16,750
|
|
|
(132
|
)
|
|
16,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
$
|
16,750
|
|
|
$
|
(129
|
)
|
|
$
|
16,621
|
|
|
$
|
18,500
|
|
|
$
|
(133
|
)
|
|
$
|
18,367
|
|
|
|
Senior Notes
On October 11, 2017, the Company redeemed all of the
$1.75 billion
principal amount outstanding of the 2017 Notes. The redemption was funded with net proceeds from new fixed-rate senior notes issued by the Company in September 2017. As a result of this redemption, we recorded a
$1 million
loss on extinguishment of debt during the three months ended
December 31, 2017
.
The Company recognized interest expense for the senior notes of
$138 million
and
$125 million
for the three months ended
December 31, 2017
and
2016
, respectively, as non-operating expense
.
Note 5—Settlement Guarantee Management
The Company indemnifies its clients for settlement losses suffered due to failure of any other clients to fund its settlement obligations in accordance with the Visa rules. This indemnification creates settlement risk for the Company due to the difference in timing between the date of a payment transaction and the date of subsequent settlement. The Company’s settlement exposure is limited to the amount of unsettled Visa payment transactions at any point in time. The Company requires certain clients that do not meet its credit standards to post collateral to offset potential loss from their estimated unsettled transactions. The Company’s estimated maximum settlement exposure was
$71.3 billion
during the
three months ended December 31, 2017
, compared to
$67.7 billion
during the
three
months ended
September 30, 2017
. Of these amounts,
$4.5 billion
and
$2.8 billion
were covered by collateral at
December 31, 2017
and
September 30, 2017
, respectively. The total available collateral balances presented in the table below were greater than the settlement exposure covered by customer collateral held due to instances in which the available collateral exceeded the total settlement exposure for certain financial institutions at each date presented.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The Company maintained collateral as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
September 30,
2017
|
|
(in millions)
|
Cash equivalents
(1)
|
$
|
1,569
|
|
|
$
|
1,490
|
|
Pledged securities at market value
|
169
|
|
|
167
|
|
Letters of credit
|
1,319
|
|
|
1,316
|
|
Guarantees
|
617
|
|
|
941
|
|
Total
|
$
|
3,674
|
|
|
$
|
3,914
|
|
|
|
(1)
|
Cash collateral held by Visa Europe is not included on the Company's consolidated balance sheets as its clients retain beneficial ownership and the cash is only accessible to the Company in the event of default by the client on its settlement obligations.
|
The fair value of the settlement risk guarantee is estimated based on a proprietary probability-weighted model and was approximately $
3 million
at
December 31, 2017
and
September 30, 2017
. These amounts are reflected in accrued liabilities on the Company's consolidated balance sheets.
Note 6—Pension and Other Postretirement Benefits
The Company sponsors various qualified and non-qualified defined benefit pension and other postretirement benefit plans that provide for retirement and medical benefits for all eligible employees residing in the United States. The Company also sponsors other pension benefit plans that provide benefits for internationally-based employees at certain non-U.S. locations. The components of net periodic benefit cost presented below include the U.S. pension and other postretirement benefit plans and the non-U.S. pension plans, comprising only the Visa Europe plans. Disclosures relating to other non-U.S. pension benefit plans are not included as they are immaterial, individually and in aggregate.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
Pension Benefits
|
|
Three Months Ended
December 31,
|
|
Three Months Ended
December 31,
|
|
Three Months Ended
December 31,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(in millions)
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
2
|
|
Interest cost
|
8
|
|
|
9
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
3
|
|
Expected return on plan assets
|
(17
|
)
|
|
(18
|
)
|
|
—
|
|
|
—
|
|
|
(5
|
)
|
|
(4
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service credit
|
—
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
Actuarial loss
|
—
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlement loss
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total net periodic benefit cost
|
$
|
(9
|
)
|
|
$
|
(3
|
)
|
|
$
|
—
|
|
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
|
$
|
1
|
|
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 7—Stockholders' Equity
As-Converted Class A Common Stock.
The number of shares of each series and class and the number of shares of class A common stock on an as-converted basis at
December 31, 2017
, are as follows:
|
|
|
|
|
|
|
|
|
|
(in millions, except conversion rates)
|
Shares Outstanding
|
|
Conversion Rate
Into Class A
Common Stock
|
|
As-converted Class A Common
Stock
(1)
|
UK&I preferred stock
|
2
|
|
|
12.9660
|
|
|
32
|
|
Europe preferred stock
|
3
|
|
|
13.8930
|
|
|
44
|
|
Class A common stock
(2)
|
1,805
|
|
|
—
|
|
|
1,805
|
|
Class B common stock
|
245
|
|
|
1.6483
|
|
(3)
|
405
|
|
Class C common stock
|
12
|
|
|
4.0000
|
|
|
49
|
|
Total
|
|
|
|
|
2,335
|
|
|
|
(1)
|
Figures in the table may not recalculate exactly due to rounding. As-converted class A common stock is calculated based on unrounded numbers.
|
|
|
(2)
|
Class A common stock shares outstanding exclude repurchases traded but not yet settled on or before
December 31, 2017
.
|
|
|
(3)
|
The class B to class A common stock conversion rate is presented on a rounded basis. Conversion calculations for dividend payments are based on a conversion rate rounded to the tenth decimal.
|
Reduction in as-converted shares.
During the
three
months ended
December 31, 2017
, total as-converted class A common stock was reduced by
17 million
shares at an average price of
$110.27
per share. Of the
17 million
shares,
16 million
were repurchased in the open market using
$1.8 billion
of operating cash on hand. Additionally, the Company recovered
$50 million
of VE territory covered losses in accordance with the Europe retrospective responsibility plan. The recovery has the same economic effect on earnings per share as repurchasing the Company's class A common stock, because it reduces the UK&I and Europe preferred stock conversion rates and consequently the as-converted class A common stock share count. See
Note 2—U.S. and Europe Retrospective Responsibility Plans
.
The following table presents share repurchases in the open market.
(1)
|
|
|
|
|
(in millions, except per share data)
|
Three Months Ended
December 31, 2017
|
Shares repurchased in the open market
(2)
|
16
|
|
Average repurchase price per share
(3)
|
$
|
110.24
|
|
Total cost
|
$
|
1,778
|
|
|
|
(1)
|
Shares repurchased in the open market reflect repurchases settled during the
three
months ended
December 31, 2017
. These amounts include repurchases traded but not yet settled on or before
September 30, 2017
and exclude repurchases traded but not yet settled on or before
December 31, 2017
.
|
|
|
(2)
|
All shares repurchased in the open market have been retired and constitute authorized but unissued shares.
|
|
|
(3)
|
Figures in the table may not recalculate exactly due to rounding. Average repurchase price per share is calculated based on unrounded numbers.
|
As of
December 31, 2017
, the Company's April 2017 share repurchase program had remaining authorized funds of
$2.1 billion
for share repurchase. All share repurchase programs authorized prior to April 2017 have been completed. In
January 2018
, the Company's board of directors authorized an additional
$7.5 billion
share repurchase program.
Under the terms of the Europe retrospective responsibility plan, the Company is entitled to recover VE territory covered losses through periodic adjustments to the class A common stock conversion rates applicable to the UK&I and Europe preferred stock. See
Note 2—U.S. and Europe Retrospective Responsibility Plans
.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table presents as-converted UK&I and Europe preferred stock, after the Company recovered VE territory covered losses through conversion rate adjustments, for the
three
months ended
December 31, 2017
.
|
|
|
|
|
|
|
|
|
|
Three Months Ended
December 31, 2017
|
(in millions, except per share data)
|
UK&I Preferred Stock
|
|
Europe Preferred Stock
|
Reduction in equivalent number of shares of class A common stock
(1)
|
—
|
|
|
—
|
|
Effective price per share
(2)
|
$
|
111.32
|
|
|
$
|
111.32
|
|
Recovery through conversion rate adjustment
|
$
|
31
|
|
|
$
|
19
|
|
|
|
(1)
|
The reduction in equivalent number of shares of class A common stock was less than one million shares for both series of preferred stock.
|
|
|
(2)
|
Effective price per share is calculated using the volume-weighted average price of the Company's class A common stock over a pricing period in accordance with the Company's current certificates of designations for its series B and C convertible participating preferred stock.
|
Dividends.
In
January 2018
, the Company’s board of directors declared a quarterly cash dividend of
$0.21
per share of class A common stock (determined in the case of class B and C common stock and UK&I and Europe preferred stock on an as-converted basis). The cash dividend will be paid on
March 6, 2018
, to all holders of record of the Company's common and preferred stock as of
February 16, 2018
. The Company declared and paid
$458 million
in dividends to holders of the Company's common stock during the
three
months ended
December 31, 2017
.
Note 8—Earnings Per Share
Basic earnings per share is computed by dividing net income available to each class by the weighted-average number of shares of common stock outstanding and participating securities during the period. Net income is allocated to each class of common stock and participating securities based on its proportional ownership on an as-converted basis. The weighted-average number of shares of each class of common stock outstanding reflects changes in ownership over the periods presented. See
Note 7—Stockholders' Equity
.
Diluted earnings per share is computed by dividing net income available by the weighted-average number of shares of common stock outstanding, participating securities and, if dilutive, potential class A common stock equivalent shares outstanding during the period. Dilutive class A common stock equivalents may consist of: (1) shares of class A common stock issuable upon the conversion of UK&I and Europe preferred stock and class B and C common stock based on the conversion rates in effect through the period, and (2) incremental shares of class A common stock calculated by applying the treasury stock method to the assumed exercise of employee stock options, the assumed purchase of stock under the Employee Stock Purchase Plan and the assumed vesting of unearned performance shares.
The following table presents earnings per share for the
three months ended December 31, 2017
.
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share
|
|
|
Diluted Earnings Per Share
|
|
(in millions, except per share data)
|
|
Income
Allocation
(A)
(2)
|
|
Weighted-
Average
Shares
Outstanding (B)
|
|
Earnings per
Share =
(A)/(B)
|
|
|
Income
Allocation
(A)
(2)
|
|
Weighted-
Average
Shares
Outstanding (B)
|
|
Earnings per
Share =
(A)/(B)
|
Class A common stock
|
$
|
1,945
|
|
|
1,811
|
|
|
$
|
1.07
|
|
|
|
$
|
2,522
|
|
|
2,353
|
|
(3)
|
$
|
1.07
|
|
Class B common stock
|
435
|
|
|
245
|
|
|
$
|
1.77
|
|
|
|
$
|
434
|
|
|
245
|
|
|
$
|
1.77
|
|
Class C common stock
|
54
|
|
|
13
|
|
|
$
|
4.30
|
|
|
|
$
|
54
|
|
|
13
|
|
|
$
|
4.29
|
|
Participating securities
(4)
|
88
|
|
|
Not presented
|
|
|
Not presented
|
|
|
|
$
|
87
|
|
|
Not presented
|
|
|
Not presented
|
|
Net income
|
$
|
2,522
|
|
|
|
|
|
|
|
|
|
|
|
|
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table presents earnings per share for the
three
months ended
December 31, 2016
.
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share
|
|
|
Diluted Earnings Per Share
|
|
(in millions, except per share data)
|
|
Income
Allocation
(A)
(2)
|
|
Weighted-
Average
Shares
Outstanding (B)
|
|
Earnings per
Share =
(A)/(B)
|
|
|
Income
Allocation
(A)
(2)
|
|
Weighted-
Average
Shares
Outstanding (B)
|
|
Earnings per
Share =
(A)/(B)
|
Class A common stock
|
$
|
1,594
|
|
|
1,860
|
|
|
$
|
0.86
|
|
|
|
$
|
2,070
|
|
|
2,421
|
|
(3)
|
$
|
0.86
|
|
Class B common stock
|
347
|
|
|
245
|
|
|
$
|
1.41
|
|
|
|
$
|
346
|
|
|
245
|
|
|
$
|
1.41
|
|
Class C common stock
|
57
|
|
|
17
|
|
|
$
|
3.43
|
|
|
|
$
|
57
|
|
|
17
|
|
|
$
|
3.42
|
|
Participating securities
(4)
|
72
|
|
|
Not presented
|
|
|
Not presented
|
|
|
|
$
|
72
|
|
|
Not presented
|
|
|
Not presented
|
|
Net income
|
$
|
2,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Figures in the table may not recalculate exactly due to rounding. Earnings per share is calculated based on unrounded numbers.
|
|
|
(2)
|
Net income is allocated based on proportional ownership on an as-converted basis. The weighted-average number of shares of as-converted class B common stock used in the income allocation was
405 million
for the
three
months ended
December 31, 2017
and
2016
. The weighted-average number of shares of as-converted class C common stock used in the income allocation was
51 million
and
67 million
for the
three
months ended
December 31, 2017
and
2016
, respectively. The weighted-average number of shares of preferred stock, included within participating securities, was
32 million
and
35 million
of as-converted UK&I preferred stock for the
three
months ended
December 31, 2017
and
2016
, respectively, and
44 million
of as-converted Europe preferred stock for the
three
months ended
December 31, 2017
and
2016
.
|
|
|
(3)
|
Weighted-average diluted shares outstanding are calculated on an as-converted basis, and include incremental common stock equivalents, as calculated under the treasury stock method. The computation includes approximately
5 million
common stock equivalents for the
three
months ended
December 31, 2017
and
2016
, because their effect would be dilutive. The computation excludes
2 million
and
3 million
of common stock equivalents for the
three months ended December 31, 2017
and
2016
, respectively, because their effect would have been anti-dilutive.
|
|
|
(4)
|
Participating securities include preferred stock outstanding and unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, such as the Company's UK&I and Europe preferred stock, restricted stock awards, restricted stock units and earned performance-based shares. Participating securities' income is allocated based on the weighted-average number of shares of as-converted stock.
|
Note 9—Share-based Compensation
The Company granted the following equity awards to employees and non-employee directors under the 2007 Equity Incentive Compensation Plan during the
three
months ended
December 31, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
Weighted-Average
Grant Date Fair
Value
|
|
Weighted-Average
Exercise Price
|
Non-qualified stock options
|
1,622,760
|
|
|
$
|
17.88
|
|
|
$
|
109.82
|
|
Restricted stock units ("RSUs")
|
2,626,011
|
|
|
$
|
109.82
|
|
|
|
Performance-based shares
(1)
|
641,498
|
|
|
$
|
120.11
|
|
|
|
|
|
(1)
|
Represents the maximum number of performance-based shares which could be earned.
|
The Company’s non-qualified stock options and RSUs are equity awards with service-only conditions and are accordingly expensed on a straight-line basis over the vesting period. The Company's performance-based shares are equity awards with service, market and performance conditions that are accounted for using the graded-vesting method. The Company recorded share-based compensation cost of
$68 million
for the
three
months ended
December 31, 2017
, net of estimated forfeitures, which are adjusted as appropriate.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 10—Income Taxes
The effective income tax rates were
22%
and
31%
for the
three
months ended
December 31, 2017
and 2016, respectively. The effective tax rate for the
three
months ended
December 31, 2017
differs from the effective tax rate in the same prior-year period primarily due to U.S. tax reform legislation, commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act”), enacted on December 22, 2017. The Tax Act transitions the U.S. tax system to a new territorial system and lowers the statutory federal corporate income tax rate from
35%
to
21%
.
The reduction of the statutory federal corporate tax rate to
21%
became effective on January 1, 2018. In fiscal 2018, the Company’s statutory federal corporate rate is a blended rate of
24.5%
, which will be reduced to
21%
in fiscal 2019 and thereafter.
As a result of the reduction in the federal corporate tax rate, the Company remeasured its net deferred tax liabilities as of the enactment date of the Tax Act. The deferred tax remeasurement resulted in a one-time, non-cash tax benefit estimated to be approximately
$1.1 billion
, recorded in the three months ended December 31, 2017.
In transitioning to the new territorial tax system, the Tax Act requires the Company to include certain untaxed foreign earnings of non-U.S. subsidiaries in its fiscal 2018 taxable income. Such foreign earnings are subject to a one-time tax at
15.5%
on the amount held in cash or cash equivalents, and at
8%
on the remaining non-cash amount. The
15.5%
and
8%
tax, collectively referred to as the “transition tax”, was estimated to be
$1.1 billion
, and was recorded in the three months ended December 31, 2017. The Company intends to elect to pay the transition tax over a period of eight years as permitted by the Tax Act.
The above-mentioned accounting impacts of the deferred tax remeasurement and transition tax are provisional, based on currently available information and technical guidance on the interpretations of the new law. The Company continues to obtain and analyze additional information and guidance as they become available to complete the accounting for the tax impacts of the Tax Act. Additional information currently unavailable that is needed to complete the analysis includes, but is not limited to, foreign tax returns and foreign tax documentation for the computation of foreign tax credits, the final determination of the untaxed foreign earnings subject to the transition tax, and the final determination of the net deferred tax liabilities subject to remeasurement. The provisional accounting impacts may change in future reporting periods until the accounting analysis is finalized, which will occur no later than the first quarter of fiscal 2019, as permitted by Staff Accounting Bulletin 118.
The Tax Act also introduces several tax provisions, including:
|
|
•
|
Tax on global intangible low-tax income, which, in general, is determined annually based on the Company’s aggregate foreign subsidiaries’ income in excess of certain qualified business asset investment return. This provision is effective for the Company on October 1, 2018. The Company needs additional information to complete its analysis on whether to adopt an accounting policy to account for the tax effects of global intangible low-tax income in the period that it is subject to such tax, or to provide deferred taxes for book and tax basis differences that, upon reversal, may be subject to such tax. Hence, the Company has not recorded any tax on global intangible low-tax income in the three months ended December 31, 2017. The Company will make an accounting policy election no later than the first quarter of fiscal 2019.
|
|
|
•
|
Base erosion and anti-abuse tax, which, in general, functions like a minimum tax that partially disallows deductions for certain related party transactions. This new minimum tax is determined on a year-by-year basis, and this provision is effective for the Company on October 1, 2018. Hence, no base erosion anti-abuse tax was recorded in the three months ended December 31, 2017.
|
|
|
•
|
Deduction for foreign-derived intangible income, which, in general, allows a deduction of certain intangible income derived from serving foreign markets. This provision is effective for the Company on October 1, 2018. Hence, the Company has not recorded the impact of this provision in the three months ended December 31, 2017.
|
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
|
|
•
|
Other new tax provisions, which disallow certain deductions related to entertainment expenses, fringe benefits provided to employees, executive compensation, and fines or penalties or similar payments to governments. The Company has recorded provisional amounts for the tax effects of these new provisions in the three months ended December 31, 2017, based on information currently available. The provisional amounts may change in future reporting periods when additional information is obtained and analyzed, which will occur no later than the first quarter of fiscal 2019.
|
During the
three
months ended
December 31, 2017
, the Company's gross unrecognized tax benefits increased by
$44 million
. The Company's net unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate increased by
$38 million
. The increase in unrecognized tax benefits is primarily related to various tax positions across several jurisdictions. During the
three
months ended
December 31, 2017
and 2016, there were no significant changes in interest and penalties related to uncertain tax positions.
The Company’s tax filings are subject to examination by the U.S. federal, state and foreign taxing authorities. The timing and outcome of the final resolutions of the various ongoing income tax examinations are highly uncertain. It is not reasonably possible to estimate the increase or decrease in unrecognized tax benefits within the next twelve months.
Note 11—Legal Matters
The Company is party to various legal and regulatory proceedings. Some of these proceedings involve complex claims that are subject to substantial uncertainties and unascertainable damages. Accordingly, except as disclosed, the Company has not established reserves or ranges of possible loss related to these proceedings, as at this time in the proceedings, the matters do not relate to a probable loss and/or the amount or range of losses are not reasonably estimable. Although the Company believes that it has strong defenses for the litigation and regulatory proceedings described below, it could, in the future, incur judgments or fines or enter into settlements of claims that could have a material adverse effect on the Company's financial position, results of operations or cash flows. From time to time, the Company may engage in settlement discussions or mediations with respect to one or more of its outstanding litigation matters, either on its own behalf or collectively with other parties.
The litigation accrual is an estimate and is based on management’s understanding of its litigation profile, the specifics of each case, advice of counsel to the extent appropriate and management’s best estimate of incurred loss as of the balance sheet date.
The following table summarizes the activity related to accrued litigation:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
December 31, 2017
|
|
December 31, 2016
|
|
(in millions)
|
Balance at beginning of period
|
$
|
982
|
|
|
$
|
981
|
|
Provision for uncovered legal matters
|
—
|
|
|
15
|
|
Accrual of VE territory covered litigation
|
—
|
|
|
86
|
|
Payments on legal matters
|
(152
|
)
|
|
(88
|
)
|
Balance at end of period
|
$
|
830
|
|
|
$
|
994
|
|
Accrual Summary—U.S. Covered Litigation
Visa Inc., Visa U.S.A. and Visa International are parties to certain legal proceedings that are covered by the U.S. retrospective responsibility plan, which the Company refers to as the U.S. covered litigation. See
Note 2—U.S. and Europe Retrospective Responsibility Plans
.
An accrual for the U.S. covered litigation and a charge to the litigation provision are recorded when a loss is deemed to be probable and reasonably estimable. In making this determination, the Company evaluates available information, including but not limited to actions taken by the litigation committee. The total accrual related to the U.S. covered litigation could be either higher or lower than the escrow account balance.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes the activity related to U.S. covered litigation:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
December 31, 2017
|
|
December 31, 2016
|
|
(in millions)
|
Balance at beginning of period
|
$
|
978
|
|
|
$
|
978
|
|
Payments on U.S. covered litigation
|
(150
|
)
|
|
—
|
|
Balance at end of period
|
$
|
828
|
|
|
$
|
978
|
|
Accrual Summary—VE Territory Covered Litigation
Visa Inc., Visa International and Visa Europe are parties to certain legal proceedings that are covered by the Europe retrospective responsibility plan. Unlike the U.S. retrospective responsibility plan, the Europe retrospective responsibility plan does not have an escrow account that is used to fund settlements or judgments. The Company is entitled to recover VE territory covered losses through periodic adjustments to the conversion rates applicable to the UK&I preferred stock and Europe preferred stock. An accrual for the VE territory covered losses and a reduction to stockholders' equity will be recorded when the loss is deemed to be probable and reasonably estimable. See further discussion below under
VE Territory Covered Litigation
and
Note 2—U.S. and Europe Retrospective Responsibility Plans
.
The following table summarizes the activity related to VE territory covered litigation:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
December 31, 2017
|
|
December 31, 2016
|
|
(in millions)
|
Balance at beginning of period
|
$
|
1
|
|
|
$
|
2
|
|
Accrual for VE territory covered litigation
|
—
|
|
|
86
|
|
Payments on VE territory covered litigation
|
(1
|
)
|
|
(88
|
)
|
Balance at end of period
|
$
|
—
|
|
|
$
|
—
|
|
U.S. Covered Litigation
Interchange Multidistrict Litigation (MDL) – Individual Merchant Actions
A number of individual merchant actions previously filed have been settled, and remain settled. In addition, following the automatic termination of the settlement agreement with Wal-Mart Stores Inc., Visa and Wal-Mart Stores Inc. entered into a new, unconditional settlement agreement on October 31, 2017. Consequently, as of the filing date, Visa has reached settlement agreements with individual merchants representing approximately
51%
of the Visa-branded payment card sales volume of merchants who opted out of the 2012 Settlement Agreement.
VE Territory Covered Litigation
UK Merchant Litigation
Since July 2013, in excess of
300
Merchants (the capitalized term "Merchant," when used in this section, means a merchant together with subsidiary/affiliate companies that are party to the same claim) have commenced proceedings against Visa Europe, Visa Inc. and Visa International relating to interchange rates in Europe. They seek damages for alleged anti-competitive conduct in relation to one or more of the following types of interchange fees for credit and debit card transactions: UK domestic, Irish domestic, other European domestic, intra-European Economic Area and/or other inter-regional. As of the filing date, Visa Europe, Visa Inc. and Visa International have settled the claims asserted by over
75
Merchants, leaving more than
200
Merchants with outstanding claims.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
In November 2016, a trial commenced relating to claims filed by a number of Merchants. All of these Merchants except
one
settled before the trial concluded in March 2017. On November 30, 2017, the court found entirely in Visa’s favor and entered judgment dismissing the remaining claim
.
An appeal has been lodged, and the Court of Appeal listed the matter for hearing in April 2018. A further judgment on exemption issues is expected to be released in early 2018, which will not change the overall finding on liability set out in the November 30, 2017 judgment
.
In addition, over
30
additional Merchants have threatened to commence similar proceedings. Standstill agreements have been entered into with respect to some of those Merchants' claims. While the amount of interchange being challenged could be substantial, these claims have not yet been filed and their full scope is not yet known. The Company has learned that several additional European entities have indicated that they may also bring similar claims and the Company anticipates additional claims in the future
.
Other Litigation
Canadian Competition Proceedings
Merchant Litigation.
The court in Quebec held a class certification hearing in November 2017 and reserved decision.
Black Card
On December 28, 2017, Black Card LLC ("Black Card") filed a lawsuit against Visa Inc., Visa U.S.A. Inc., and certain Visa member financial institutions in the U.S. District Court for the Western District of Wisconsin. The complaint alleges that defendants conspired to impede Black Card's business in violation of Section 1 of the Sherman Act and fraudulently concealed their conduct. Black Card seeks treble damages, post-judgment interest, and attorneys' fees.
This action follows a lawsuit filed by Black Card in the U.S. District Court for the District of Wyoming in February 2015 relating to a contractual dispute. The District Court in Wyoming granted Visa's motions for summary judgment and the matter was dismissed. Black Card appealed this decision to the U.S. Court of Appeals for the Tenth Circuit on May 10, 2017.