NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
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 Canada”), Visa Technology & Operations LLC and CyberSource Corporation, operate one of the world’s largest retail electronic payments network — 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 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 Company’s activities are interrelated, and each activity is dependent upon and supportive of the other. All significant operating decisions are based on analysis of Visa as a single global business. Accordingly, the Company has
one
reportable segment, Payment Services.
Use of estimates
. The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions about future events. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Future actual results could differ materially from these estimates. The use of estimates in specific accounting policies is described further below as appropriate.
Cash and cash equivalents
. Cash and cash equivalents include cash and certain highly liquid investments with original maturities of 90 days or less from the date of purchase. Cash equivalents are primarily recorded at cost, which approximates fair value due to their generally short maturities.
Restricted cash—U.S. litigation escrow
. The Company maintains an escrow account from which monetary liabilities from settlements of, or judgments in, the U.S. covered litigation are paid. See
Note 2—U.S. and Europe Retrospective Responsibility Plans
and
Note 17—Legal Matters
for a discussion of the U.S. covered litigation. The escrow funds are held in money market investments, together with the interest earned, less applicable taxes payable, and classified as restricted cash on the consolidated balance sheets. Interest earned on escrow funds is included in non-operating income on the consolidated statements of operations.
Investments and fair value.
The Company measures certain assets and liabilities at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are reported under a three-level valuation hierarchy. See
Note 3—Fair Value Measurements and Investments
.
The classification of the Company’s financial assets and liabilities within the hierarchy is as follows:
Level 1
—Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 assets include money market funds, publicly-traded equity securities and U.S. Treasury securities.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
Level 2
—Inputs to the valuation methodology can include: (1) quoted prices in active markets for similar (not identical) assets or liabilities; (2) quoted prices for identical or similar assets in non-active markets; (3) inputs other than quoted prices that are observable for the asset or liability; or (4) inputs that are derived principally from or corroborated by observable market data. The Company’s Level 2 assets and liabilities include commercial paper, U.S. government-sponsored debt securities, corporate debt securities and foreign exchange derivative instruments.
Level 3
—Inputs to the valuation methodology are unobservable and cannot be corroborated by observable market data. The Company’s Level 3 assets include non-marketable equity investments and investments accounted for under the equity method.
Trading investment securities include mutual fund equity security investments related to various employee compensation and benefit plans. Trading activity in these investments is at the direction of the Company’s employees. These investments are held in a trust and are not available for the Company’s operational or liquidity needs. Interest and dividend income and changes in fair value are recorded in non-operating income, and offset in personnel expense on the consolidated statements of operations.
Available-for-sale investment securities include investments in debt and equity securities. These securities are recorded at cost at the time of purchase and are carried at fair value. The Company considers these securities to be available-for-sale to meet working capital and liquidity needs. Investments with original maturities of greater than 90 days and stated maturities of less than one year from the balance sheet date, or investments that the Company intends to sell within one year, are classified as current assets, while all other securities are classified as non-current assets. These investments are generally available to meet short-term liquidity needs. Unrealized gains and losses are reported in accumulated other comprehensive income or loss on the consolidated balance sheets until realized. The specific identification method is used to calculate realized gain or loss on the sale of marketable securities, which is recorded in non-operating income on the consolidated statements of operations. Dividend and interest income are recognized when earned and are included in non-operating income on the consolidated statements of operations.
The Company evaluates its debt and equity securities for other-than-temporary impairment, or OTTI, on an ongoing basis. When there has been a decline in fair value of a debt or equity security below the amortized cost basis, the Company recognizes OTTI if: (1) it has the intent to sell the security; (2) it is more likely than not that it will be required to sell the security before recovery of the amortized cost basis; or (3) it does not expect to recover the entire amortized cost basis of the security.
The Company applies the equity method of accounting for investments in other entities when it holds between
20%
and
50%
ownership in the entity or when it exercises significant influence. Under the equity method, the Company’s share of each entity’s profit or loss is reflected in non-operating income on the consolidated statements of operations. The equity method of accounting is also used for flow-through entities such as limited partnerships and limited liability companies when the investment ownership percentage is equal to or greater than
5%
of outstanding ownership interests, regardless of whether the Company has significant influence over the investees.
The Company applies the cost method of accounting for investments in other entities when it holds less than
20%
ownership in the entity and does not exercise significant influence, or for flow-through entities when the investment ownership is less than
5%
and the Company does not exercise significant influence. These investments consist of equity holdings in non-public companies and are recorded in other assets on the consolidated balance sheets.
The Company regularly reviews investments accounted for under the cost and equity methods for possible impairment, which generally involves an analysis of the facts and changes in circumstances influencing the investment, expectations of the entity’s cash flows and capital needs, and the viability of its business model.
Financial instruments
. The Company considers the following to be financial instruments: cash and cash equivalents, restricted cash—U.S. litigation escrow, trading and available-for-sale investment securities, settlement receivable and payable, customer collateral, non-marketable equity investments, settlement risk guarantee, and derivative instruments. See
Note 3—Fair Value Measurements and Investments
.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
Settlement receivable and payable
. The Company operates systems for authorizing, clearing and settling payment transactions worldwide. Most U.S. dollar settlements with the Company’s financial institution clients are settled within the same day and do not result in a receivable or payable balance, while settlements in currencies other than the U.S. dollar generally remain outstanding for one to two business days, resulting in amounts due from and to clients. These amounts are presented as settlement receivable and settlement payable on the consolidated balance sheets.
Customer collateral
. The Company holds cash deposits and other non-cash assets from certain clients in order to ensure their performance of settlement obligations arising from Visa payment products are processed in accordance with the Company’s rules. The cash collateral assets are restricted and fully offset by corresponding liabilities and both balances are presented on the consolidated balance sheets, excluding certain cash collateral for which clients retain beneficial ownership and the cash is only accessible to the Company in the event of default by the client on its settled obligations. All other collateral is excluded from the consolidated balance sheets. Pledged securities are held by a custodian in an account under the Company’s name and ownership; however, the Company does not have the right to repledge these securities, but may sell these securities in the event of default by the client on its settlement obligations. Letters of credit are provided primarily by client financial institutions to serve as irrevocable guarantees of payment. Guarantees are provided primarily by parent financial institutions to secure the obligations of their subsidiaries. The Company routinely evaluates the financial viability of institutions providing the letters of credit and guarantees. See
Note 8—Settlement Guarantee Management
.
Guarantees and indemnifications
. The Company recognizes an obligation at inception for guarantees and indemnifications that qualify for recognition, regardless of the probability of occurrence. The Company indemnifies its financial institution clients for settlement losses suffered due to the failure of any other client to fund its settlement obligations in accordance with the Visa operating rules. The estimated fair value of the liability for settlement indemnification is included in accrued liabilities on the consolidated balance sheets.
Property, equipment and technology, net
. Property, equipment and technology are recorded at historical cost less accumulated depreciation and amortization, which are computed on a straight-line basis over the asset’s estimated useful life. Depreciation and amortization of technology, furniture, fixtures and equipment are computed over estimated useful lives ranging from
2
to
10
years. Capital leases are amortized over the lease term and leasehold improvements are amortized over the shorter of the useful life of the asset or lease term. Building improvements are depreciated between
3
and
40
years, and buildings are depreciated over
40
years. Improvements that increase functionality of the asset are capitalized and depreciated over the asset’s remaining useful life. Land and construction-in-progress are not depreciated. Fully depreciated assets are retained in property, equipment and technology, net, until removed from service.
Technology includes purchased and internally developed software, including technology assets obtained through acquisitions. Internally developed software represents software primarily used by the VisaNet electronic payments network. Internal and external costs incurred during the preliminary project stage are expensed as incurred. Qualifying costs incurred during the application development stage are capitalized. Once the project is substantially complete and ready for its intended use these costs are amortized on a straight-line basis over the technology’s estimated useful life. Acquired technology assets are initially recorded at fair value and amortized on a straight-line basis over the estimated useful life.
The Company evaluates the recoverability of long-lived assets for impairment annually or more frequently if events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. If the sum of expected undiscounted net future cash flows is less than the carrying amount of an asset or asset group, an impairment loss is recognized to the extent that the carrying amount of the asset or asset group exceeds its fair value. See
Note 4—Property, Equipment and Technology, Net
.
Leases
. The Company enters into operating and capital leases for the use of premises, software and equipment. Rent expense related to operating lease agreements, which may or may not contain lease incentives, is primarily recorded on a straight-line basis over the lease term.
Intangible assets, net
. The Company records identifiable intangible assets at fair value on the date of acquisition and evaluates the useful life of each asset.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
Finite-lived intangible assets primarily consist of customer relationships, reacquired rights, reseller relationships and trade names obtained through acquisitions. Finite-lived intangible assets are amortized on a straight-line basis and are tested for recoverability if events or changes in circumstances indicate that their carrying amounts may not be recoverable. These intangibles have useful lives ranging from
3
to
15
years. No events or changes in circumstances indicate that impairment existed as of
September 30, 2018
. See
Note 5—Intangible Assets and Goodwill
.
Indefinite-lived intangible assets consist of trade name, customer relationships and reacquired rights. Intangible assets with indefinite useful lives are not amortized but are evaluated for impairment annually or more frequently if events or changes in circumstances indicate that impairment may exist. The Company first assesses qualitative factors to determine whether it is necessary to perform a quantitative impairment test for indefinite-lived intangible assets. The Company assesses each category of indefinite-lived intangible assets for impairment on an aggregate basis, which may require the allocation of cash flows and/or an estimate of fair value to the assets or asset group. Impairment exists if the fair value of the indefinite-lived intangible asset is less than the carrying value. The Company relies on a number of factors when completing impairment assessments, including a review of discounted net future cash flows, business plans and the use of present value techniques.
The Company completed its annual impairment review of indefinite-lived intangible assets as of
February 1, 2018
, and concluded there was
no
impairment as of that date. No recent events or changes in circumstances indicate that impairment of the Company’s indefinite-lived intangible assets existed as of
September 30, 2018
.
Goodwill
. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination. Goodwill is not amortized but is evaluated for impairment at the reporting unit level annually as of February 1, or more frequently if events or changes in circumstances indicate that impairment may exist.
The Company evaluated its goodwill for impairment as of
February 1, 2018
, and concluded there was
no
impairment as of that date. No recent events or changes in circumstances indicate that impairment existed as of
September 30, 2018
.
Accrued litigation
. The Company evaluates the likelihood of an unfavorable outcome in legal or regulatory proceedings to which it is a party and records a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These judgments are subjective, based on the status of such legal or regulatory proceedings, the merits of the Company’s defenses and consultation with corporate and external legal counsel. Actual outcomes of these legal and regulatory proceedings may differ materially from the Company’s estimates. The Company expenses legal costs as incurred in professional fees in the consolidated statements of operations. See
Note 17—Legal Matters
.
Revenue recognition
. The Company’s operating revenues consist of service revenues, data processing revenues, international transaction revenues and other revenues, reduced by costs incurred under client incentives arrangements. The Company recognizes revenue, net of sales and other similar taxes, when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured.
Service revenues consist of revenues earned for services provided in support of client usage of Visa products. Current quarter service revenues are primarily assessed using a calculation of current pricing applied to the prior quarter’s payments volume. The Company also earns revenues from assessments designed to support ongoing acceptance and volume growth initiatives, which are recognized in the same period the related volume is transacted.
Data processing revenues consist of revenues earned for authorization, clearing, settlement, network access and other maintenance and support services that facilitate transaction and information processing among the Company’s clients globally. Data processing revenues are recognized in the same period the related transactions occur or services are rendered.
International transaction revenues are earned for cross-border transaction processing and currency conversion activities. Cross-border transactions arise when the country of origin of the issuer is different from that of the merchant. International transaction revenues are primarily generated by cross-border payments and cash volume.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
Other revenues consist mainly of license fees for use of the Visa brand, fees for account holder services, licensing and certification and other activities related to the Company’s acquired entities. Other revenues also include optional service or product enhancements, such as extended account holder protection and concierge services. Other revenues are recognized in the same period the related transactions occur or services are rendered. Prior to the acquisition of Visa Europe, other revenues also included revenues earned from Visa Europe in connection with the Visa Europe Framework Agreement.
Client incentives.
The Company enters into long-term contracts with financial institution clients, merchants and strategic partners for various programs designed to increase revenue by growing payments volume, increasing Visa product acceptance, winning merchant routing transactions over to Visa’s network and driving innovation. These incentives are primarily accounted for as reductions to operating revenues or as operating expenses if a separate identifiable benefit at fair value can be established. The Company generally capitalizes advance incentive payments under these agreements if select criteria are met. The capitalization criteria include the existence of future economic benefits to Visa, the existence of legally enforceable recoverability language (e.g., early termination clauses), management’s ability and intent to enforce the recoverability language and the ability to generate future earnings from the agreement in excess of amounts deferred. Capitalized amounts are amortized over the shorter of the period of contractual recoverability or the corresponding period of economic benefit. Incentives not yet paid are accrued systematically and rationally based on management’s estimate of each client’s performance. These accruals are regularly reviewed and estimates of performance are adjusted, as appropriate, based on changes in performance expectations, actual client performance, amendments to existing contracts or the execution of new contracts.
Marketing.
The Company expenses costs for the production of advertising as incurred. The cost of media advertising is expensed when the advertising takes place. Sponsorship costs are recognized over the period in which the Company benefits from the sponsorship rights. Promotional items are expensed as incurred, when the related services are received, or when the related event occurs.
Income taxes
. The Company’s income tax expense consists of two components: current and deferred. Current income tax expense represents taxes paid or payable for the current period. Deferred tax assets and liabilities are recognized to reflect the future tax consequences attributable to temporary differences between the financial statement carrying amounts and the respective tax basis of existing assets and liabilities, and operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In assessing whether deferred tax assets are realizable, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. A valuation allowance is recorded for the portions that are not expected to be realized based on the level of historical taxable income, projections of future taxable income over the periods in which the temporary differences are deductible, and qualifying tax planning strategies.
Where interpretation of the tax law may be uncertain, the Company recognizes, measures and discloses income tax uncertainties. The Company accounts for interest expense and penalties related to uncertain tax positions as non-operating expense in the consolidated statements of operations. The Company files a consolidated federal income tax return and, in certain states, combined state tax returns. The Company elects to claim foreign tax credits in any given year if such election is beneficial to the Company. See
Note 16—Income Taxes
.
Pension and other postretirement benefit plans
. The Company’s defined benefit pension and other postretirement benefit plans are actuarially evaluated, incorporating various critical assumptions including the discount rate and the expected rate of return on plan assets (for qualified pension plans). The discount rate is based on a cash flow matching analysis, with the projected benefit payments matching spot rates from a yield curve developed from high-quality corporate bonds. The expected rate of return on pension plan assets considers the current and expected asset allocation, as well as historical and expected returns on each plan asset class. Any difference between actual and expected plan experience, including asset return experience, in excess of a
10%
corridor is recognized in net periodic pension cost over the expected average employee future service period, which is approximately
9
years for the U.S. plans and
11
years for the Visa Europe UK pension plan. Other assumptions involve demographic factors such as retirement age, mortality, attrition and the rate of compensation increases. The Company evaluates assumptions annually and modifies them as appropriate.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
The Company recognizes the funded status of its benefit plans in its consolidated balance sheets as other assets, accrued liabilities and other liabilities. The Company recognizes settlement losses when it settles pension benefit obligations, including making lump-sum cash payments to plan participants in exchange for their rights to receive specified pension benefits, when certain thresholds are met. See
Note 7—Pension, Postretirement and Other Benefits
.
Foreign currency remeasurement and translation
. The Company’s functional currency is the U.S. dollar for the majority of its foreign operations except for Visa Europe whose functional currency is the euro. Transactions denominated in currencies other than the applicable functional currency are converted to the functional currency at the exchange rate on the transaction date. At period end, monetary assets and liabilities are remeasured to the functional currency using exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are remeasured at historical exchange rates. Resulting foreign currency transaction gains and losses related to conversion and remeasurement are recorded in general and administrative expense in the consolidated statements of operations and were not material for fiscal 2018, 2017 and 2016.
Where a non-U.S. currency is the functional currency, translation from that functional currency to the U.S. dollar is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate for the period. Resulting translation adjustments are reported as a component of accumulated other comprehensive income or loss on the consolidated balance sheets.
Derivative financial instruments
. The Company uses foreign exchange forward derivative contracts to reduce its exposure to foreign currency rate changes on forecasted non-functional currency denominated operational cash flows. To qualify for cash flow hedge accounting treatment, the Company formally documents, at inception of the hedge, all relationships between the hedging transactions and the hedged items, as well as the Company’s risk management objective and strategy for undertaking various hedging transactions. The Company also formally assesses whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the cash flows of the hedged items and whether those derivatives may be expected to remain highly effective in future periods.
Derivatives are carried at fair value on a gross basis in either prepaid and other current assets, non-current other assets, accrued liabilities or non-current other liabilities on the consolidated balance sheets. At September 30, 2018, derivatives outstanding mature within 12 months or less. Gains and losses resulting from changes in fair value of designated derivative instruments are accounted for either in accumulated other comprehensive income or loss on the consolidated balance sheets, or in the consolidated statements of operations in the corresponding account where revenue or expense is hedged, or to general and administrative for hedge amounts determined to be ineffective. Gains and losses resulting from changes in fair value of derivative instruments not designated for hedge accounting are recorded in general and administrative for hedges of operating activity, or non-operating income (expense) for hedges of non-operating activity. See
Note 9—Derivative and Non-derivative Financial Instruments
.
Non-derivative financial instrument designated as a net investment hedge.
The Company designated the euro-denominated deferred cash consideration liability, a non-derivative financial instrument, as a hedge against a portion of the Company’s euro-denominated net investment in Visa Europe. Changes in the value of the deferred cash consideration liability, attributable to the change in exchange rates at the end of each reporting period, partially offset the foreign currency translation adjustments resulting from the euro-denominated net investment, are reported as a component of accumulated other comprehensive income or loss on the Company’s consolidated balance sheets. See
Note 9—Derivative and Non-derivative Financial Instruments
.
Share-based compensation
. The Company recognizes share-based compensation cost using the fair value method of accounting. The Company recognizes compensation cost for awards with only service conditions on a straight-line basis over the requisite service period, which is generally the vesting period. Compensation cost for performance and market-condition-based awards is recognized on a graded-vesting basis. The amount is initially estimated based on target performance and is adjusted as appropriate based on management’s best estimate throughout the performance period. See
Note 13—Share-based Compensation
.
Earnings per share
. The Company calculates earnings per share using the two-class method to reflect the different rights of each class and series of outstanding common stock. The dilutive effect of incremental common stock equivalents is reflected in diluted earnings per share by application of the treasury stock method. See
Note 12—Earnings Per Share
.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 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 using the modified retrospective transition method. The new standard will primarily impact the timing of recognition and classification of certain client incentives, including certain services provided as an incentive, and certain marketing-related funds paid to customers.
The Company has completed an assessment of its existing customer contracts through September 30, 2018. Based on this assessment, application of the new standard to the consolidated financial statements for fiscal 2018 would not have resulted in a material impact. The impact of the new standard to future financial results is unknowable as it is not possible to estimate the impact of the standard to new customer contracts which may be executed in future periods. However, the new standard is not expected to have a material impact to the fiscal 2019 consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, which amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments, including the requirement to measure certain equity investments at fair value with changes in fair value recognized in net income. The Company will adopt the standard effective October 1, 2018. The adoption is not expected to have a material impact on the consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, which requires the recognition of lease assets and lease liabilities arising from operating leases in the statement of financial position. The Company will adopt the standard effective October 1, 2019 and does not anticipate that this new accounting guidance will have a material impact on its consolidated statement of operations. The Company estimates the value of leased assets and liabilities that may be recognized could be in the hundreds of millions of dollars. The actual impact will depend on the Company’s lease portfolio at the time of adoption. In July 2018, the FASB issued ASU 2018-11, which provides entities with an additional transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements will continue to be in accordance with the current leases standard. The optional transition method does not change the existing disclosure requirements. The Company is evaluating the effect that ASU 2018-11 will have on its consolidated financial statements.
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.
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.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
In October 2016, the FASB issued ASU 2016-16, which requires that entities recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The Company will adopt the standard effective October 1, 2018. The Adoption is not expected to have a material impact on the consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, which requires that a statement of cash flows includes the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. The Company will adopt the standard effective October 1, 2018. The adoption will impact the presentation of transactions related to the U.S. litigation escrow account on the consolidated statements of cash flows.
In March 2017, the FASB issued ASU 2017-07, which requires that the service cost component of net periodic pension and postretirement benefit cost be presented in the same line item as other employee compensation costs, while the other components be presented separately as non-operating income (expense). Currently, all net periodic pension and postretirement benefit costs are presented in personnel expense on the Company’s consolidated statement of operations. The Company will adopt the standard effective October 1, 2018. The adoption is not expected to have a material impact on the consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, which amends the scope of modification accounting for share-based payment arrangements. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The Company will adopt the standard effective October 1, 2018. The adoption is not expected to have a material impact on the consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, which allows a reclassification from accumulated other comprehensive income to retained earnings for adjustments to tax effects that were originally recorded in other comprehensive income due to changes in the U.S. federal corporate income tax rate resulting from the enactment of the U.S. tax reform legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Company will adopt the standard effective October 1, 2019. The adoption is not expected to have a material impact on the consolidated financial statements.
In March 2018, the FASB issued ASU 2018-05 to insert the SEC’s interpretive guidance from Staff Accounting Bulletin No. 118 into the income tax accounting codification under U.S. GAAP. The ASU permits companies to use provisional amounts for certain income tax effects of the Tax Act during a one-year measurement period. The provisional accounting impacts for the Company may change in future reporting periods until the accounting analysis is finalized, which will occur no later than the first quarter of fiscal 2019.
In August 2018, the FASB issued ASU 2018-15, which requires implementation costs incurred by customers in cloud computing arrangements to be deferred and recognized over the term of the arrangement, if those costs would be capitalized by the customer in a software licensing arrangement under the internal-use software guidance. The standard will be effective for the Company on October 1, 2020. However, the Company is evaluating the effect that ASU 2018-15 will have on its consolidated financial statements and is considering early adoption of the standard.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
Note 2—U.S. and Europe Retrospective Responsibility Plans
U.S. Retrospective Responsibility Plan
The Company has established several related mechanisms designed to address potential liability under certain litigation referred to as the “U.S. covered litigation.” These mechanisms are included in and referred to as the U.S. retrospective responsibility plan and consist of a U.S. litigation escrow agreement, the conversion feature of the Company’s shares of class B common stock, the indemnification obligations of the Visa U.S.A. members, an interchange judgment sharing agreement, a loss sharing agreement and an omnibus agreement, as amended.
U.S. covered litigation consists of a number of matters that have been settled or otherwise fully or substantially resolved, as well as the following:
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the Interchange Multidistrict Litigation
. In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, 1:05-md-01720-JG-JO (E.D.N.Y.) or MDL 1720, including all cases currently included in MDL 1720, any other case that includes claims for damages relating to the period prior to the Company’s IPO that has been or is transferred for coordinated or consolidated pre-trial proceedings at any time to MDL 1720 by the Judicial Panel on Multidistrict Litigation or otherwise included at any time in MDL 1720 by order of any court of competent jurisdiction;
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any claim that challenges the reorganization or the consummation thereof; provided that such claim is transferred for coordinated or consolidated pre-trial proceedings at any time to MDL 1720 by the Judicial Panel on Multidistrict Litigation or otherwise included at any time in MDL 1720 by order of any court of competent jurisdiction; and
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any case brought after October 22, 2015 by a merchant that opted out of the Rule 23(b)(3) settlement class pursuant to the 2012 Settlement Agreement in MDL 1720 that arises out of facts or circumstances substantially similar to those alleged in MDL 1720 and that is not transferred to or otherwise included in MDL 1720. See
Note 17—Legal Matters
.
|
U.S. litigation escrow agreement.
In accordance with the U.S. litigation escrow agreement, the Company maintains an escrow account, from which settlements of, or judgments in, the U.S. covered litigation are paid. The amount of the escrow is determined by the board of directors and the Company’s litigation committee, all members of which are affiliated with, or act for, certain Visa U.S.A. members. The escrow funds are held in money market investments along with the interest earned, less applicable taxes and are classified as restricted cash on the consolidated balance sheets.
The following table sets forth the changes in the restricted cash—U.S. litigation escrow account by fiscal year:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
(in millions)
|
Balance at beginning of period
|
$
|
1,031
|
|
|
$
|
1,027
|
|
Deposits into the litigation escrow account
|
600
|
|
|
—
|
|
Payments to opt-out merchants and interest earned on escrow funds
(1)
|
(140
|
)
|
|
4
|
|
Balance at end of period
|
$
|
1,491
|
|
|
$
|
1,031
|
|
|
|
(1)
|
These payments are associated with the interchange multidistrict litigation. See
Note 17—Legal Matters
.
|
The accrual related to the U.S. covered litigation could be either higher or lower than the U.S. litigation escrow account balance. The Company recorded an additional accrual of
$600 million
for the U.S. covered litigation during fiscal
2018
.
No
additional accrual was recorded for the U.S. covered litigation during fiscal
2017
. See
Note 17—Legal Matters
.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
Conversion feature.
Under the terms of the plan, when the Company funds the U.S. litigation escrow account, the shares of class B common stock are subject to dilution through an adjustment to the conversion rate of the shares of class B common stock to shares of class A common stock. This has the same economic effect on diluted class A common stock earnings per share as repurchasing the Company’s class A common stock, because it reduces the class B conversion rate and consequently the as-converted class A common stock share count. See
Note 11—Stockholders’ Equity
.
Indemnification obligations
. To the extent that amounts available under the U.S. litigation escrow arrangement and other agreements in the plan are insufficient to fully resolve the U.S. covered litigation, the Company will use commercially reasonable efforts to enforce the indemnification obligations of Visa U.S.A.’s members for such excess amount, including but not limited to enforcing indemnification obligations pursuant to Visa U.S.A.’s certificate of incorporation and bylaws and in accordance with their membership agreements.
Interchange judgment sharing agreement.
Visa U.S.A. and Visa International have entered into an interchange judgment sharing agreement with certain Visa U.S.A. members that have been named as defendants in the interchange multidistrict litigation, which is described in
Note 17—Legal Matters
. Under this judgment sharing agreement, Visa U.S.A. members that are signatories will pay their membership proportion of the amount of a final judgment not allocated to the conduct of MasterCard.
Loss sharing agreement.
Visa has entered into a loss sharing agreement with Visa U.S.A., Visa International and certain Visa U.S.A. members. The loss sharing agreement provides for the indemnification of Visa U.S.A., Visa International and, in certain circumstances, Visa with respect to: (i) the amount of a final judgment paid by Visa U.S.A. or Visa International in the U.S. covered litigation after the operation of the interchange judgment sharing agreement, plus any amounts reimbursable to the interchange judgment sharing agreement signatories; or (ii) the damages portion of a settlement of a U.S. covered litigation that is approved as required under Visa U.S.A.’s certificate of incorporation by the vote of Visa U.S.A.’s specified voting members. The several obligation of each bank that is a party to the loss sharing agreement will equal the amount of any final judgment enforceable against Visa U.S.A., Visa International or any other signatory to the interchange judgment sharing agreement, or the amount of any approved settlement of a U.S. covered litigation, multiplied by such bank’s then-current membership proportion as calculated in accordance with Visa U.S.A.’s certificate of incorporation.
On October 22, 2015, Visa entered into an amendment to the loss sharing agreement. The amendment includes within the scope of U.S. covered litigation any action brought after the amendment by an opt out from the Rule 23(b)(3) Settlement Class in MDL 1720 that arises out of facts or circumstances substantially similar to those alleged in MDL 1720 and that is not transferred to or otherwise included in MDL 1720. On the same date, Visa entered into amendments to the interchange judgment sharing agreement and omnibus agreement that include any such action within the scope of those agreements as well.
Omnibus agreement.
Visa entered into an omnibus agreement with MasterCard and certain Visa U.S.A. members that confirmed and memorialized the signatories’ intentions with respect to the loss sharing agreement, the interchange judgment sharing agreement and other agreements relating to the interchange multidistrict litigation, see
Note 17—Legal Matters
.
Under the omnibus agreement, the monetary portion of any settlement of the interchange multidistrict litigation covered by the omnibus agreement would be divided into a MasterCard portion at
33.3333%
and a Visa portion at
66.6667%
. In addition, the monetary portion of any judgment assigned to Visa-related claims in accordance with the omnibus agreement would be treated as a Visa portion. Visa would have no liability for the monetary portion of any judgment assigned to MasterCard-related claims in accordance with the omnibus agreement, and if a judgment is not assigned to Visa-related claims or MasterCard-related claims in accordance with the omnibus agreement, then any monetary liability would be divided into a MasterCard portion at
33.3333%
and a Visa portion at
66.6667%
. The Visa portion of a settlement or judgment covered by the omnibus agreement would be allocated in accordance with specified provisions of the Company’s U.S. retrospective responsibility plan. The litigation provision on the consolidated statements of operations was not impacted by the execution of the omnibus agreement.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
On August 26, 2014, Visa entered into an amendment to the omnibus agreement. The omnibus amendment makes applicable to certain settlements in opt-out cases in the interchange multidistrict litigation the settlement-sharing provisions of the omnibus agreement, pursuant to which the monetary portion of any settlement of the interchange multidistrict litigation covered by the omnibus agreement would be divided into a MasterCard portion at
33.3333%
and a Visa portion at
66.6667%
. The omnibus amendment also provides that in the event of termination of the class settlement agreement, Visa and MasterCard would make mutually acceptable arrangements so that Visa shall have received two-thirds and MasterCard shall have received one-third of the total of (i) the sums paid to defendants as a result of the termination of the settlement agreement and (ii) the takedown payments previously made to defendants.
Europe Retrospective Responsibility Plan
UK loss sharing agreement.
The Company has entered into a loss sharing agreement with Visa Europe and certain of Visa Europe’s member financial institutions located in the United Kingdom (the “UK LSA members”). Each of the UK LSA members has agreed, on a several and not joint basis, to compensate the Company for certain losses which may be incurred by the Company, Visa Europe or their affiliates as a result of certain existing and potential litigation relating to the setting and implementation of domestic multilateral interchange fee rates in the United Kingdom prior to the closing of the Visa Europe acquisition (the “Closing”), subject to the terms and conditions set forth therein and, with respect to each UK LSA member, up to a maximum amount of the up-front cash consideration received by such UK LSA member. The UK LSA members’ obligations under the UK loss sharing agreement are conditional upon, among other things, either (a) losses valued in excess of the sterling equivalent on June 21, 2016 of
€1.0 billion
having arisen in UK covered claims (and such losses having reduced the conversion rate of the UK&I preferred stock accordingly), or (b) the conversion rate of the UK&I preferred stock having been reduced to zero pursuant to losses arising in claims relating to multilateral interchange fee rate setting in the Visa Europe territory.
Litigation management deed.
The Company has entered into a litigation management deed with Visa Europe which sets forth the agreed upon procedures for the management of the VE territory covered litigation, the allocation of losses resulting from this litigation (the “VE territory covered losses”) between the UK&I and Europe preferred stock, and any accelerated conversion or reduction in the conversion rate of the shares of UK&I and Europe preferred stock. The litigation management deed applies only to VE territory covered litigation (and resultant losses and liabilities). The litigation management deed provides that the Company will generally control the conduct of the VE territory covered litigation, subject to certain obligations to report and consult with the litigation management committees for VE territory covered litigation (the “VE territory litigation management committees”). The VE territory litigation management committees, which are composed of representatives of certain Visa Europe members, have also been granted consent rights to approve certain material decisions in relation to the VE territory covered litigation.
The Company obtained certain protections for VE territory covered losses through the UK&I and Europe preferred stock, the UK loss sharing agreement, and the litigation management deed, referred to as the “Europe retrospective responsibility plan.” The plan covers VE territory covered litigation (and resultant liabilities and losses) relating to the covered period, which generally refers to the period before the Closing. Visa’s protection from the plan is further limited to
70%
of any liabilities where the claim relates to inter-regional multilateral interchange fee rates where the issuer is located outside the Visa Europe territory, and the merchant is located within the Visa Europe territory. The plan does not protect the Company in Europe against all types of litigation or remedies or fines imposed in competition law enforcement proceedings, only the interchange litigation specifically covered by the plan’s terms.
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 a periodic adjustment to the class A common stock conversion rates applicable to the UK&I and Europe preferred stock. The total amount of protection available through the preferred stock component of the Europe retrospective responsibility plan is equivalent to the as-converted value of the preferred stock, which can be calculated at any point in time as the product of: (a) the outstanding number of shares of preferred stock; (b) the current conversion rate applicable to each class of preferred stock; and (c) Visa’s class A common stock price. This amount differs from the value of the preferred stock recorded within stockholders’ equity on the Company’s consolidated balance sheets. The book value of the preferred stock reflects its historical value recorded at the Closing less VE territory covered losses recovered through a reduction of the applicable conversion rate. The book value does not reflect changes in the underlying class A common stock price subsequent to the Closing.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
Visa Inc. net income will not be impacted by VE territory covered losses as long as the as-converted value of the preferred stock is greater than the covered loss. VE territory covered losses will be recorded when the loss is deemed to be probable and reasonably estimable, or in the case of attorney’s fees, when incurred. Concurrently, the Company will record a reduction to stockholders’ equity, which represents the Company’s right to recover such losses through adjustments to the conversion rate applicable to the preferred stock. The reduction to stockholders’ equity is recorded in a contra-equity account referred to as “right to recover for covered losses.”
VE territory covered losses may be recorded 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 will then be recorded against the book value of the preferred stock within stockholders’ equity.
During the year ended
September 30, 2018
, the Company recovered
$56 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. The conversion rates applicable to the UK&I and Europe preferred stock were reduced from
13.077
and
13.948
,
respectively, as of September 30, 2017 to
12.955
and
13.888
, respectively, as of
September 30, 2018
.
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 year ended
September 30, 2018
. VE territory covered losses incurred reflect settlements with merchants and additional legal costs. See
Note 17—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
|
—
|
|
|
—
|
|
|
(11
|
)
|
Recovery through conversion rate adjustment
|
(35
|
)
|
|
(21
|
)
|
|
56
|
|
Balance as of September 30, 2018
|
$
|
2,291
|
|
|
$
|
3,179
|
|
|
$
|
(7
|
)
|
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 consolidated balance sheets as of
September 30, 2018
and
2017
.
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
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
|
$
|
4,823
|
|
|
$
|
2,291
|
|
|
$
|
3,414
|
|
|
$
|
2,326
|
|
Europe preferred stock
|
6,580
|
|
|
3,179
|
|
|
4,634
|
|
|
3,200
|
|
Total
|
11,403
|
|
|
5,470
|
|
|
8,048
|
|
|
5,526
|
|
Less: right to recover for covered losses
|
(7
|
)
|
|
(7
|
)
|
|
(52
|
)
|
|
(52
|
)
|
Total recovery for covered losses available
|
$
|
11,396
|
|
|
$
|
5,463
|
|
|
$
|
7,996
|
|
|
$
|
5,474
|
|
|
|
(1)
|
Figures in the table may not recalculate exactly due to rounding. As-converted and book values of preferred stock 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 September 30, 2018; (b)
12.955
and
13.888
, the class A common stock conversion rate applicable to the UK&I and Europe preferred stock outstanding, respectively, as of September 30, 2018; and (c)
$150.09
, Visa’s class A common stock closing stock price as of September 30, 2018. Earnings per share is calculated based on unrounded numbers.
|
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
|
|
(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 outstanding, respectively, as of September 30, 2017; and (c)
$105.24
, Visa’s class A common stock closing stock price as of September 30, 2017. Earnings per share is calculated based on unrounded numbers.
|
Note 3—Fair Value Measurements and Investments
Fair Value Measurements
The Company measures certain assets and liabilities at fair value. See
Note 1—Summary of Significant Accounting Policies
.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 30
Using Inputs Considered as
|
|
Level 1
|
|
Level 2
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(in millions)
|
Assets
|
|
|
|
|
|
|
|
Cash equivalents and restricted cash:
|
|
|
|
|
|
|
|
Money market funds
|
$
|
6,252
|
|
|
$
|
5,935
|
|
|
|
|
|
U.S. government-sponsored debt securities
|
|
|
|
|
$
|
1,048
|
|
|
$
|
2,870
|
|
Investment securities, trading:
|
|
|
|
|
|
|
|
Equity securities
|
98
|
|
|
82
|
|
|
|
|
|
Investment securities, available-for-sale:
|
|
|
|
|
|
|
|
U.S. government-sponsored debt securities
|
|
|
|
|
5,008
|
|
|
3,663
|
|
U.S. Treasury securities
|
2,508
|
|
|
1,621
|
|
|
|
|
|
Equity securities
|
15
|
|
|
124
|
|
|
|
|
|
Prepaid and other current assets:
|
|
|
|
|
|
|
|
Foreign exchange derivative instruments
|
|
|
|
|
78
|
|
|
18
|
|
Other assets:
|
|
|
|
|
|
|
|
Total
|
$
|
8,873
|
|
|
$
|
7,762
|
|
|
$
|
6,134
|
|
|
$
|
6,551
|
|
Liabilities
|
|
|
|
|
|
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
Foreign exchange derivative instruments
|
|
|
|
|
$
|
22
|
|
|
$
|
98
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22
|
|
|
$
|
98
|
|
There were
no
transfers between Level 1 and Level 2 assets during fiscal
2018
.
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 fiscal
2018
.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
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 impairment charges incurred during
fiscal 2018
,
2017
and
2016
. At
September 30, 2018
and
2017
, these investments totaled
$137 million
and
$94 million
, respectively. These assets are classified in other assets on the consolidated balance sheets.
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. See
Note 5—Intangible Assets and Goodwill
.
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, 2018
, and concluded that there was
no
impairment. No recent events or changes in circumstances indicate that impairment existed at
September 30, 2018
. See
Note 1—Summary of Significant Accounting Policies
.
Other Fair Value Disclosures
Long-term debt. D
ebt instruments are measured at amortized cost on the Company’s consolidated balance sheets at
September 30, 2018
and
2017
. The fair value of these notes, 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 carrying value and estimated fair value of long-term debt were both
$16.6 billion
as of
September 30, 2018
. The carrying value and estimated fair value of long-term debt was
$18.4 billion
and
$19.2 billion
, respectively, as of
September 30, 2017
.
Other Financial Instruments not Measured at Fair Value
The following financial instruments are not measured at fair value on the Company’s consolidated balance sheet at
September 30, 2018
, but require disclosure of their fair values: time deposits recorded in prepaid expenses and other current assets, settlement receivable and payable and customer collateral. The estimated fair value of such instruments at
September 30, 2018
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
Trading Investment Securities
Trading investment securities include mutual fund equity security investments related to various employee compensation and benefit plans. Trading activity in these investments is at the direction of the Company’s employees. These investments are held in trust and are not available for the Company’s operational or liquidity needs. Interest and dividend income and changes in fair value are recorded in non-operating income, and offset in personnel expense on the consolidated statements of operations. As of
September 30, 2018
and
2017
, trading investment securities totaled
$98 million
and
$82 million
, respectively.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
Available-for-sale Investment Securities
The amortized cost, unrealized gains and losses and fair value of available-for-sale investment securities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
September 30, 2017
|
|
Amortized
Cost
|
|
Gross Unrealized
|
|
Fair
Value
|
|
Amortized
Cost
|
|
Gross Unrealized
|
|
Fair
Value
|
|
Gains
|
|
Losses
|
|
Gains
|
|
Losses
|
|
|
(in millions)
|
U.S. government-sponsored debt securities
|
$
|
5,016
|
|
|
$
|
—
|
|
|
$
|
(8
|
)
|
|
$
|
5,008
|
|
|
$
|
3,664
|
|
|
$
|
1
|
|
|
$
|
(2
|
)
|
|
$
|
3,663
|
|
U.S. Treasury securities
|
2,516
|
|
|
—
|
|
|
(8
|
)
|
|
2,508
|
|
|
1,623
|
|
|
—
|
|
|
(2
|
)
|
|
1,621
|
|
Equity securities
|
4
|
|
|
11
|
|
|
—
|
|
|
15
|
|
|
5
|
|
|
119
|
|
|
—
|
|
|
124
|
|
Total
|
$
|
7,536
|
|
|
$
|
11
|
|
|
$
|
(16
|
)
|
|
$
|
7,531
|
|
|
$
|
5,292
|
|
|
$
|
120
|
|
|
$
|
(4
|
)
|
|
$
|
5,408
|
|
Less: current portion of available-for-sale investment securities
|
|
|
|
|
|
|
$
|
(3,449
|
)
|
|
|
|
|
|
|
|
$
|
(3,482
|
)
|
Long-term available-for-sale investment securities
|
|
|
|
|
|
|
$
|
4,082
|
|
|
|
|
|
|
|
|
$
|
1,926
|
|
Available-for-sale investment securities primarily include U.S. Treasury securities and U.S. government-sponsored debt securities. Available-for-sale debt securities are presented below in accordance with their stated maturities. A portion of these investments,
$4.1 billion
, are classified as non-current, as they have stated maturities of more than one year from the balance sheet date. However, these investments are generally available to meet short-term liquidity needs.
|
|
|
|
|
|
|
|
|
|
Amortized Cost
|
|
Fair Value
|
|
(in millions)
|
September 30, 2018:
|
|
|
|
Due within one year
|
$
|
3,443
|
|
|
$
|
3,434
|
|
Due after 1 year through 5 years
|
4,089
|
|
|
4,082
|
|
Due after 5 years through 10 years
|
—
|
|
|
—
|
|
Due after 10 years
|
—
|
|
|
—
|
|
Total
|
$
|
7,532
|
|
|
$
|
7,516
|
|
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
Investment Income
Investment income is recorded as non-operating income in the Company’s consolidated statements of operations and consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
September 30,
|
|
2018
|
|
2017
|
|
2016
|
|
(in millions)
|
Interest and dividend income on cash and investments
|
$
|
173
|
|
|
$
|
92
|
|
|
$
|
75
|
|
Gain on other investments
|
—
|
|
|
6
|
|
|
5
|
|
Investment securities, trading:
|
|
|
|
|
|
Unrealized gains, net
|
2
|
|
|
6
|
|
|
3
|
|
Realized gains, net
|
4
|
|
|
2
|
|
|
—
|
|
Investment securities, available-for-sale:
|
|
|
|
|
|
Realized gains (losses), net from sales
|
98
|
|
|
(1
|
)
|
|
3
|
|
Realized gains from donation
|
193
|
|
|
—
|
|
|
—
|
|
Other-than-temporary impairment on investments
|
—
|
|
|
—
|
|
|
(4
|
)
|
Investment income
|
$
|
470
|
|
|
$
|
105
|
|
|
$
|
82
|
|
Note 4—Property, Equipment and Technology, Net
Property, equipment and technology, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
September 30,
2017
|
|
(in millions)
|
Land
|
$
|
69
|
|
|
$
|
72
|
|
Buildings and building improvements
|
898
|
|
|
865
|
|
Furniture, equipment and leasehold improvements
|
1,661
|
|
|
1,534
|
|
Construction-in-progress
|
153
|
|
|
139
|
|
Technology
|
2,916
|
|
|
2,533
|
|
Total property, equipment and technology
|
5,697
|
|
|
5,143
|
|
Accumulated depreciation and amortization
|
(3,225
|
)
|
|
(2,890
|
)
|
Property, equipment and technology, net
|
$
|
2,472
|
|
|
$
|
2,253
|
|
Technology consists of both purchased and internally developed software. Internally developed software primarily represents software utilized by the VisaNet electronic payments network. At
September 30, 2018
and
2017
, accumulated amortization for technology was $
1.9 billion
and $
1.7 billion
, respectively.
At
September 30, 2018
, estimated future amortization expense on technology was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ending September 30,
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
|
Total
|
|
(in millions)
|
Estimated future amortization expense
|
$
|
309
|
|
|
$
|
257
|
|
|
$
|
195
|
|
|
$
|
128
|
|
|
$
|
69
|
|
|
$
|
32
|
|
|
$
|
990
|
|
Depreciation and amortization expense related to property, equipment and technology was
$558 million
,
$500 million
and
$452 million
for fiscal
2018
,
2017
and
2016
, respectively. Included in those amounts was amortization expense on technology of
$312 million
,
$285 million
and
$259 million
for fiscal
2018
,
2017
and
2016
, respectively.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
Note 5—Intangible Assets and Goodwill
Indefinite-lived and finite-lived intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
September 30, 2017
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
Gross
|
|
Accumulated
Amortization
|
|
Net
|
|
(in millions)
|
Finite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
452
|
|
|
$
|
(274
|
)
|
|
$
|
178
|
|
|
$
|
438
|
|
|
$
|
(237
|
)
|
|
$
|
201
|
|
Trade names
|
199
|
|
|
(106
|
)
|
|
93
|
|
|
195
|
|
|
(93
|
)
|
|
102
|
|
Reseller relationships
|
95
|
|
|
(82
|
)
|
|
13
|
|
|
95
|
|
|
(79
|
)
|
|
16
|
|
Other
|
17
|
|
|
(11
|
)
|
|
6
|
|
|
17
|
|
|
(9
|
)
|
|
8
|
|
Total finite-lived intangible assets
|
763
|
|
|
(473
|
)
|
|
290
|
|
|
745
|
|
|
(418
|
)
|
|
327
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships and reacquired rights
|
23,184
|
|
|
—
|
|
|
23,184
|
|
|
23,437
|
|
|
—
|
|
|
23,437
|
|
Visa trade name
|
4,084
|
|
|
—
|
|
|
4,084
|
|
|
4,084
|
|
|
—
|
|
|
4,084
|
|
Total indefinite-lived intangible assets
|
27,268
|
|
|
—
|
|
|
27,268
|
|
|
27,521
|
|
|
—
|
|
|
27,521
|
|
Total intangible assets
|
$
|
28,031
|
|
|
$
|
(473
|
)
|
|
$
|
27,558
|
|
|
$
|
28,266
|
|
|
$
|
(418
|
)
|
|
$
|
27,848
|
|
Amortization expense related to finite-lived intangible assets was
$55 million
,
$56 million
and
$50 million
for fiscal
2018
,
2017
and
2016
, respectively. At
September 30, 2018
, estimated future amortization expense on finite-lived intangible assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ending September 30,
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
|
Total
|
|
(in millions)
|
Estimated future amortization expense
|
$
|
56
|
|
|
$
|
56
|
|
|
$
|
56
|
|
|
$
|
50
|
|
|
$
|
28
|
|
|
$
|
44
|
|
|
$
|
290
|
|
There was
no
impairment related to the Company’s indefinite-lived or finite-lived intangible assets during fiscal
2018
,
2017
or
2016
.
In February 2017, the Company acquired a business for a total purchase consideration net of cash received of approximately
$302 million
, paid primarily with cash on hand. Total purchase consideration has been allocated to the tangible and identifiable intangible assets acquired, and to liabilities assumed based on their respective fair values on the acquisition date. Related finite-lived intangible assets recorded totaled
$104 million
with a weighted-average useful life of
eight years
. Goodwill of
$181 million
was recorded to reflect the excess purchase consideration over net assets acquired. The consolidated financial statements include the operating results of the acquired business from the date of acquisition. Pro forma information related to the acquisition has not been presented as the impact is not material to the Company’s financial results.
The decrease in total net intangible assets and goodwill during fiscal
2018
was primarily related to foreign currency translation, which is recorded as a component of accumulated other comprehensive income in the consolidated balance sheets.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
Note 6—Debt
The Company had outstanding debt as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2018
|
|
September 30, 2017
|
|
|
|
Principal Amount
|
|
Principal Amount
|
|
Effective Interest Rate
|
|
(in millions, except percentages)
|
1.20% Senior Notes due 2017 (the “2017 Notes”)
|
—
|
|
|
1,750
|
|
|
1.37
|
%
|
2.20% Senior Notes due 2020 (the “2020 Notes”)
|
3,000
|
|
|
3,000
|
|
|
2.30
|
%
|
2.15% Senior Notes due September 2022 (the “September 2022 Notes”)
|
1,000
|
|
|
1,000
|
|
|
2.30
|
%
|
2.80% Senior Notes due December 2022 (the “December 2022 Notes”)
|
2,250
|
|
|
2,250
|
|
|
2.89
|
%
|
3.15% Senior Notes due 2025 (the “2025 Notes”)
|
4,000
|
|
|
4,000
|
|
|
3.26
|
%
|
2.75% Senior Notes due 2027 (the “2027 Notes”)
|
750
|
|
|
750
|
|
|
2.91
|
%
|
4.15% Senior Notes due 2035 (the “2035 Notes”)
|
1,500
|
|
|
1,500
|
|
|
4.23
|
%
|
4.30% Senior Notes due 2045 (the “2045 Notes”)
|
3,500
|
|
|
3,500
|
|
|
4.37
|
%
|
3.65% Senior Notes due 2047 (the “2047 Notes”)
|
750
|
|
|
750
|
|
|
3.73
|
%
|
Total debt
|
$
|
16,750
|
|
|
$
|
18,500
|
|
|
|
|
|
|
|
|
|
Unamortized discounts and debt issuance costs
|
(120
|
)
|
|
(133
|
)
|
|
|
Less: current portion of long-term debt
|
—
|
|
|
(1,749
|
)
|
|
|
Total long-term debt
|
$
|
16,630
|
|
|
$
|
16,618
|
|
|
|
Senior Notes
In September 2017, the Company issued fixed-rate senior notes (the September 2022 Notes, 2027 Notes and 2047 Notes, or collectively, the “Notes issued in 2017”) in an aggregate principal amount of
$2.5 billion
, with maturities ranging between
5
and
30
years. Interest on the Notes issued in 2017 is payable semi-annually on March 15 and September 15 of each year, commencing March 15, 2018. The net aggregate proceeds from the Notes issued in 2017, after deducting discounts and debt issuance costs, were approximately
$2.5 billion
.
Use of Proceeds from Notes issued in 2017
. On September 11, 2017, the Company called for redemption of all of the
$1.75 billion
principal amount outstanding of the 2017 Notes in accordance with the optional redemption provisions set forth in the governing indenture. Subsequent to fiscal 2017, on October 11, 2017, the redemption date, the Company redeemed all of the
$1.75 billion
principal amount. The redemption was funded with the proceeds from the Notes issued in 2017.
The indenture governing the Company’s outstanding senior notes, or collectively, the “Notes”, contains customary event of default provisions. The Notes are senior unsecured obligations of the Company, ranking equally and ratably among themselves and with the Company’s existing and future unsecured and unsubordinated debt. The Notes are not secured by any assets of the Company and are not guaranteed by any of the Company’s subsidiaries.
The Company was in compliance with all related covenants as of
September 30, 2018
. Each series of Notes may be redeemed as a whole or in part at the Company’s option at any time at specified redemption prices.
The Company recognized related interest expense of $
550 million
and
$505 million
in
fiscal 2018
and
fiscal 2017
, respectively, as non-operating expense.
At
September 30, 2018
, future principal payments on the Company’s outstanding debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ending September 30,
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
|
Total
|
|
(in millions)
|
Future principal payments
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,000
|
|
|
$
|
1,000
|
|
|
$
|
2,250
|
|
|
$
|
10,500
|
|
|
$
|
16,750
|
|
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
Commercial Paper Program
Visa maintains a commercial paper program to support its working capital requirements and for other general corporate purposes. Under the program, the Company is authorized to issue up to
$3.0 billion
in outstanding notes, with maturities up to
397
days from the date of issuance. The Company had
no
outstanding obligations under the program as of
September 30, 2018
and
2017
.
Credit Facility
The Company is a party to a credit agreement for a
5
-year, unsecured
$4.0 billion
revolving credit facility (the “Credit Facility”) which expires on
January 27, 2022
. Borrowings under the Credit Facility are available for general corporate purposes. Interest on borrowings under the Credit Facility would be charged at the London Interbank Offered Rate (LIBOR) or an alternative base rate, in each case plus applicable margins that fluctuate based on the applicable rating of senior unsecured long-term securities of the Company. The Company has agreed to pay a commitment fee which will fluctuate based on such applicable rating of the Company. The Company had
no
amounts outstanding under the Credit Facility as of
September 30, 2018
and
2017
.
Note 7—Pension, Postretirement and Other 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.
Disclosures presented below include the U.S. pension plans and the non-U.S. plans, comprising only the Visa Europe plans. Disclosures relating to other U.S. postretirement benefit plans and other non-U.S. pension benefit plans are not included as they are immaterial, individually and in aggregate. The Company uses a September 30 measurement date for its pension and other postretirement benefit plans.
Defined benefit pension plans.
The U.S. pension benefits under the defined benefit pension plan were earned based on a cash balance formula. An employee’s cash balance account was credited with an amount equal to
6%
of eligible compensation plus interest based on 30-year Treasury securities. In October 2015, the Company’s board of directors approved an amendment of the U.S. qualified defined benefit pension plan such that the Company discontinued employer provided credits after December 31, 2015. Plan participants continue to earn interest credits on existing balances at the time of the freeze. As a result, a curtailment gain totaling
$8 million
was recognized in fiscal
2016
as part of the Company’s net periodic benefit cost.
The funding policy for the U.S. pension benefits is to contribute annually no less than the minimum required contribution under ERISA.
Under the Visa Europe UK pension plans, presented below under “non-U.S. plans”, retirement benefits are provided based on the participants’ final pensionable pay and are currently closed to new entrants. However, future benefits continue to accrue for active participants. The funding policy is to contribute in accordance with the appropriate funding requirements agreed with the trustees of the UK pension plans. Additional amounts may be agreed with the UK pension plan trustees.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
Summary of Plan Activities
Reconciliation of pension benefit obligations, plan assets, funded status and amounts recognized in the Company’s consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
September 30,
|
|
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(in millions)
|
Change in Pension Benefit Obligation:
|
|
|
|
|
|
|
|
Benefit obligation—beginning of fiscal year
|
$
|
913
|
|
|
$
|
1,072
|
|
|
$
|
433
|
|
|
$
|
474
|
|
Service cost
|
—
|
|
|
—
|
|
|
4
|
|
|
6
|
|
Interest cost
|
32
|
|
|
36
|
|
|
12
|
|
|
11
|
|
Actuarial loss (gain)
|
(38
|
)
|
|
(58
|
)
|
|
24
|
|
|
(52
|
)
|
Benefit payments
|
(63
|
)
|
|
(137
|
)
|
|
(9
|
)
|
|
(14
|
)
|
Foreign currency exchange rate changes
|
—
|
|
|
—
|
|
|
(12
|
)
|
|
8
|
|
Benefit obligation—end of fiscal year
|
$
|
844
|
|
|
$
|
913
|
|
|
$
|
452
|
|
|
$
|
433
|
|
Accumulated benefit obligation
|
$
|
844
|
|
|
$
|
913
|
|
|
$
|
452
|
|
|
$
|
433
|
|
Change in Plan Assets:
|
|
|
|
|
|
|
|
Fair value of plan assets—beginning of fiscal year
|
$
|
1,074
|
|
|
$
|
1,077
|
|
|
$
|
433
|
|
|
$
|
415
|
|
Actual return on plan assets
|
78
|
|
|
125
|
|
|
13
|
|
|
17
|
|
Company contribution
|
1
|
|
|
9
|
|
|
11
|
|
|
5
|
|
Benefit payments
|
(63
|
)
|
|
(137
|
)
|
|
(9
|
)
|
|
(14
|
)
|
Foreign currency exchange rate changes
|
—
|
|
|
—
|
|
|
(12
|
)
|
|
10
|
|
Fair value of plan assets—end of fiscal year
|
$
|
1,090
|
|
|
$
|
1,074
|
|
|
$
|
436
|
|
|
$
|
433
|
|
Funded status at end of fiscal year
|
$
|
246
|
|
|
$
|
161
|
|
|
$
|
(16
|
)
|
|
$
|
—
|
|
Recognized in Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
Non-current asset
|
$
|
252
|
|
|
$
|
168
|
|
|
$
|
—
|
|
|
$
|
5
|
|
Current liability
|
(1
|
)
|
|
(1
|
)
|
|
(10
|
)
|
|
(5
|
)
|
Non-current liability
|
(5
|
)
|
|
(6
|
)
|
|
(6
|
)
|
|
—
|
|
Funded status at end of fiscal year
|
$
|
246
|
|
|
$
|
161
|
|
|
$
|
(16
|
)
|
|
$
|
—
|
|
Amounts recognized in accumulated other comprehensive income before tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
September 30,
|
|
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(in millions)
|
Net actuarial loss
|
$
|
47
|
|
|
$
|
97
|
|
|
$
|
39
|
|
|
$
|
9
|
|
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
Benefit obligations in excess of plan assets related to the Company’s U.S. non-qualified plan and the non-U.S. pension plans
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
September 30,
|
|
September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(in millions)
|
Accumulated benefit obligation in excess of plan assets
|
|
|
|
|
|
|
|
Accumulated benefit obligation—end of year
|
$
|
(6
|
)
|
|
$
|
(7
|
)
|
|
$
|
(452
|
)
|
|
$
|
(5
|
)
|
Fair value of plan assets—end of year
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
436
|
|
|
$
|
—
|
|
Projected benefit obligation in excess of plan assets
|
|
|
|
|
|
|
|
Benefit obligation—end of year
|
$
|
(6
|
)
|
|
$
|
(7
|
)
|
|
$
|
(452
|
)
|
|
$
|
(5
|
)
|
Fair value of plan assets—end of year
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
436
|
|
|
$
|
—
|
|
Net periodic pension cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
(1)
|
|
For the Years Ended September 30,
|
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
|
(in millions)
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
4
|
|
|
$
|
6
|
|
|
$
|
1
|
|
Interest cost
|
32
|
|
|
36
|
|
|
40
|
|
|
12
|
|
|
11
|
|
|
3
|
|
Expected return on assets
|
(70
|
)
|
|
(70
|
)
|
|
(69
|
)
|
|
(20
|
)
|
|
(16
|
)
|
|
(4
|
)
|
Amortization of prior service credit
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of actuarial loss
|
—
|
|
|
15
|
|
|
7
|
|
|
—
|
|
|
2
|
|
|
—
|
|
Curtailment gain
|
—
|
|
|
—
|
|
|
(8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlement loss
|
3
|
|
|
15
|
|
|
13
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total net periodic benefit cost
|
$
|
(35
|
)
|
|
$
|
(4
|
)
|
|
$
|
(5
|
)
|
|
$
|
(4
|
)
|
|
$
|
3
|
|
|
$
|
—
|
|
|
|
(1)
|
For fiscal 2016, the amounts represent the Visa Europe plans’ net pension benefit cost recognized from the Closing through September 30, 2016.
|
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
For the Years Ended September 30,
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
|
(in millions)
|
Current year actuarial loss (gain)
|
$
|
(47
|
)
|
|
$
|
(113
|
)
|
|
$
|
30
|
|
|
$
|
30
|
|
|
$
|
(53
|
)
|
|
$
|
66
|
|
Amortization of actuarial (loss) gain
|
(3
|
)
|
|
(30
|
)
|
|
(20
|
)
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
Amortization of prior service credit
|
—
|
|
|
—
|
|
|
9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total recognized in other comprehensive income
|
$
|
(50
|
)
|
|
$
|
(143
|
)
|
|
$
|
19
|
|
|
$
|
30
|
|
|
$
|
(55
|
)
|
|
$
|
66
|
|
Total recognized in net periodic benefit cost and other comprehensive income
|
$
|
(85
|
)
|
|
$
|
(147
|
)
|
|
$
|
14
|
|
|
$
|
26
|
|
|
$
|
(52
|
)
|
|
$
|
66
|
|
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
Weighted-Average Actuarial Assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
|
For the Years Ended September 30,
|
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
Discount rate
(1)
for benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
4.23
|
%
|
|
3.84
|
%
|
|
3.62
|
%
|
|
2.90
|
%
|
|
2.70
|
%
|
|
2.40
|
%
|
Discount rate for net periodic benefit cost:
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
3.84
|
%
|
|
3.62
|
%
|
|
4.33
|
%
|
|
2.70
|
%
|
|
2.40
|
%
|
|
3.10
|
%
|
Expected long-term rate of return on plan assets
(2)
|
7.00
|
%
|
|
7.00
|
%
|
|
7.00
|
%
|
|
4.25
|
%
|
|
4.50
|
%
|
|
3.92
|
%
|
Rate of increase
(3)
in compensation levels for:
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation
|
NA
|
|
|
NA
|
|
|
NA
|
|
|
3.20
|
%
|
|
3.20
|
%
|
|
3.20
|
%
|
Net periodic benefit cost
|
NA
|
|
|
NA
|
|
|
NA
|
|
|
3.20
|
%
|
|
3.20
|
%
|
|
3.00
|
%
|
|
|
(1)
|
Represents a single weighted-average discount rate derived based on a cash flow matching analysis, with the projected benefit payments matching spot rates from a yield curve developed from high-quality corporate bonds.
|
|
|
(2)
|
Primarily based on the targeted allocation, and evaluated for reasonableness by considering such factors as: (i) actual return on plan assets; (ii) historical rates of return on various asset classes in the portfolio; (iii) projections of returns on various asset classes; and (iv) current and prospective capital market conditions and economic forecasts.
|
|
|
(3)
|
This assumption is not applicable for the U.S. plans due to the amendment of the U.S. qualified defined benefit pension plan in October 2015, which discontinued the employer provided credits effective after December 31, 2015.
|
Pension Plan Assets
Pension plan assets are managed with a long-term perspective to ensure that there is an adequate level of assets to support benefit payments to participants over the life of the pension plan. Pension plan assets are managed by external investment managers. Investment manager performance is measured against benchmarks for each asset class on a quarterly basis. An independent consultant assists management with investment manager selections and performance evaluations.
Pension plan assets are broadly diversified to maintain a prudent level of risk and to provide adequate liquidity for benefit payments. The Company generally evaluates and rebalances the pension plan assets, as appropriate, to ensure that allocations are consistent with its investment strategy and within target allocation ranges. For U.S. pension plan assets, the Company’s investment strategy is to invest in the following: equity securities of
50%
to
80%
, fixed income securities of
25%
to
35%
and other, primarily consisting of cash equivalents to meet near term expected benefit payments and expenses, of up to
7%
. At
September 30, 2018
, U.S. pension plan asset allocations for these categories were
65%
,
29%
and
6%
, respectively, which were within target allocation ranges.
For non-U.S. pension plan assets, the Company’s investment strategy is to invest in the following: equity securities of
15%
, interest and inflation hedging assets of
40%
and other of
45%
, consisting of cash, certain multi-asset funds and property. At
September 30, 2018
, non-U.S. pension plan asset allocations for these categories were
16%
,
38%
and
46%
, respectively, which were generally aligned with the target allocations.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
The following tables set forth by level, within the fair value hierarchy, the pension plan’s investments at fair value as of
September 30, 2018
and
2017
, including the impact of transactions that were not settled at the end of September:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Fair Value Measurements at September 30 Using Inputs Considered as
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(in millions)
|
Cash equivalents
|
$
|
65
|
|
|
$
|
31
|
|
|
|
|
|
|
|
|
|
|
$
|
65
|
|
|
$
|
31
|
|
Collective investment funds
|
|
|
|
|
571
|
|
|
540
|
|
|
|
|
|
|
571
|
|
|
540
|
|
Corporate debt securities
|
|
|
|
|
187
|
|
|
197
|
|
|
|
|
|
|
187
|
|
|
197
|
|
U.S. government-sponsored debt securities
|
|
|
|
|
30
|
|
|
47
|
|
|
|
|
|
|
30
|
|
|
47
|
|
U.S. Treasury securities
|
62
|
|
|
75
|
|
|
|
|
|
|
|
|
|
|
62
|
|
|
75
|
|
Asset-backed securities
|
|
|
|
|
|
|
|
|
34
|
|
|
39
|
|
|
34
|
|
|
39
|
|
Equity securities
|
141
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
141
|
|
|
145
|
|
Total
|
$
|
268
|
|
|
$
|
251
|
|
|
$
|
788
|
|
|
$
|
784
|
|
|
$
|
34
|
|
|
$
|
39
|
|
|
$
|
1,090
|
|
|
$
|
1,074
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S. Plans
|
|
Fair Value Measurements at September 30 Using Inputs Considered as
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
(in millions)
|
Cash equivalents
|
$
|
6
|
|
|
$
|
1
|
|
|
|
|
|
|
|
|
|
|
$
|
6
|
|
|
$
|
1
|
|
Corporate debt securities
|
|
|
|
|
—
|
|
|
39
|
|
|
|
|
|
|
—
|
|
|
39
|
|
UK Treasury securities
|
—
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
150
|
|
Asset-backed securities
|
|
|
|
|
|
|
|
|
33
|
|
|
32
|
|
|
33
|
|
|
32
|
|
Equity securities
|
68
|
|
|
134
|
|
|
|
|
|
|
|
|
|
|
68
|
|
|
134
|
|
Multi-asset securities
(1)
|
|
|
|
|
329
|
|
|
77
|
|
|
|
|
|
|
329
|
|
|
77
|
|
Total
|
$
|
74
|
|
|
$
|
285
|
|
|
$
|
329
|
|
|
$
|
116
|
|
|
$
|
33
|
|
|
$
|
32
|
|
|
$
|
436
|
|
|
$
|
433
|
|
|
|
(1)
|
Multi-asset securities represent pension plan assets that are invested in funds comprised of broad ranges of assets.
|
Level 1 assets.
Cash equivalents (money market funds and time deposits), U.S. and UK Treasury securities and equity 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.
Collective investment funds are unregistered investment vehicles that generally commingle the assets of multiple fiduciary clients, such as pension and other employee benefit plans, to invest in portfolio of stocks, bonds or other securities. Although the collective investment funds held by the plan are ultimately invested in publicly traded equity securities, their own unit values are not directly observable, and therefore they are classified as Level 2. The fair values of corporate debt, multi-asset, derivatives and U.S. government-sponsored securities are based on quoted prices in active markets for similar assets as provided by third-party pricing vendors. This pricing data is reviewed internally for reasonableness through comparisons with benchmark quotes from independent third-party sources. Based on this review, the valuation is confirmed or revised accordingly.
Level 3 assets.
Asset-backed securities are bonds that are backed by various types of assets and primarily consist of mortgage-backed securities. Asset-backed securities are classified as Level 3 due to a lack of observable inputs in measuring fair value.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
There were
no
transfers between Level 1 and Level 2 assets during
fiscal 2018
or
2017
. A roll-forward of Level 3 plan assets measured at fair value is not presented because activities during
fiscal 2018
and
2017
were immaterial.
Cash Flows
|
|
|
|
|
|
|
|
|
|
U.S. Plans
|
|
Non-U.S. Plans
|
Actual employer contributions
|
(in millions)
|
2018
|
$
|
1
|
|
|
$
|
11
|
|
2017
|
9
|
|
|
5
|
|
Expected employer contributions
|
|
|
|
2019
|
1
|
|
|
10
|
|
Expected benefit payments
|
|
|
|
2019
|
150
|
|
|
5
|
|
2020
|
73
|
|
|
5
|
|
2021
|
70
|
|
|
5
|
|
2022
|
67
|
|
|
5
|
|
2023
|
64
|
|
|
5
|
|
2024-2028
|
284
|
|
|
28
|
|
Other Benefits
The Company sponsors a defined contribution plan, or 401(k) plan, that covers substantially all of its employees residing in the United States. Personnel costs included
$93 million
,
$58 million
, and
$55 million
in fiscal
2018
,
2017
and
2016
, respectively, for expenses attributable to the Company’s employees under the 401(k) plan. The Company’s contributions to this 401(k) plan are funded on a current basis, and the related expenses are recognized in the period that the payroll expenses are incurred.
Note 8—Settlement Guarantee Management
The Company indemnifies its clients for settlement losses suffered due to failure of any other client to fund its settlement obligations in accordance with the Visa operating 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.
Historically, the Company has experienced minimal losses as a result of its settlement risk guarantee. However, the Company’s future obligations, which could be material under its guarantees, are not determinable as they are dependent upon future events.
The Company’s settlement exposure is limited to the amount of unsettled Visa payment transactions at any point in time, which vary significantly day to day. The Company’s maximum settlement exposure was
$91.7 billion
and the average daily settlement exposure was
$56.7 billion
during the year ended
September 30, 2018
.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
The Company maintains and regularly reviews global settlement risk policies and procedures to manage settlement exposure, which may require clients to post collateral if certain credit standards are not met. At
September 30, 2018
and
2017
, the Company held the following collateral to manage settlement exposure:
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
September 30,
2017
|
|
(in millions)
|
Cash equivalents
|
$
|
1,708
|
|
|
$
|
1,490
|
|
Pledged securities at market value
|
192
|
|
|
167
|
|
Letters of credit
|
1,382
|
|
|
1,316
|
|
Guarantees
|
860
|
|
|
941
|
|
Total
|
$
|
4,142
|
|
|
$
|
3,914
|
|
Cash equivalent collateral reflected in customer collateral on the consolidated balance sheets is held by a custodian in an account under the Company’s name and ownership. At September 30, 2018 and 2017,
$384 million
of cash equivalent collateral is excluded from the consolidated balance sheets as clients retain beneficial ownership of it and it is only accessible to the Company in the event of default by the client on its settlement obligations. All other collateral is excluded from the consolidated balance sheets. See
Note 1—Summary of Significant Accounting Policies
.
Note 9—Derivative and Non-derivative Financial Instruments
Derivative Financial Instruments
Designated derivative financial instrument hedges.
The aggregate notional amount of the Company’s derivative contracts outstanding in its hedge program was
$2.5 billion
at
September 30, 2018
and
$1.8 billion
at
September 30, 2017
. As of
September 30, 2018
, the Company’s cash flow hedges in an asset position totaled
$78 million
and were classified in prepaid expenses and other current assets on the consolidated balance sheets, while cash flow hedges in a liability position totaled
$20 million
and were classified in accrued liabilities on the consolidated balance sheets. These amounts are subject to master netting agreements, which provide the Company with a legal right to net settle multiple payable and receivable positions with the same counterparty, in a single currency through a single payment. However, the Company presents fair values on a gross basis on the consolidated balance sheets
.
See
Note 1—Summary of Significant Accounting Policies
.
The Company uses regression analysis to assess hedge effectiveness prospectively and retrospectively. The effectiveness tests are performed on foreign exchange forward contracts based on changes in the spot rate of the derivative instrument compared to changes in the spot rate of the forecasted hedged transaction. Forward points are excluded from effectiveness testing and measurement purposes. Excluded forward points are reported in earnings. For fiscal
2018
,
2017
and
2016
, the amounts by which earnings were reduced relating to excluded forward points were
$9 million
,
$18 million
and
$30 million
, respectively.
The effective portion of changes in the fair value of derivative contracts is recorded as a component of accumulated other comprehensive income or loss on the consolidated balance sheets. When the forecasted transaction occurs and is recognized in earnings, the amount in accumulated other comprehensive income or loss related to that hedge is reclassified to operating revenue or expense. The Company expects to reclassify
$71 million
of pre-tax gains to earnings during fiscal 2019.
Non-designated derivative financial instrument hedges
. Subsequent to the acquisition of Visa Europe, the Company entered into currency forward contracts to offset Visa Europe hedges outstanding at the date of the acquisition that did not qualify for cash flow hedge accounting treatment in accordance with U.S. GAAP or the Company’s accounting policy.
The Company utilizes foreign exchange derivative contracts to hedge against foreign currency exchange rate fluctuations related to certain monetary assets and liabilities denominated in foreign currency held by Visa Europe. As of
September 30, 2018
and
2017
, the aggregate notional amount of these balance sheet hedges was
$1.2 billion
and
$1.0 billion
, respectively.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
Credit and market risks.
The Company’s derivative financial instruments are subject to both credit and market risk. The Company monitors the credit-worthiness of the financial institutions that are counterparties to its derivative financial instruments and does not consider the risks of counterparty nonperformance to be significant. The Company mitigates this risk by entering into master netting agreements, and such agreements require each party to post collateral against its net liability position with the respective counterparty. As of
September 30, 2018
, the Company has received collateral of
$56 million
, from counterparties, which is included in accrued liabilities in the consolidated balance sheets, and posted collateral of
$2 million
, which is included in prepaid expenses and other current assets in the consolidated balance sheets. Notwithstanding the Company’s efforts to manage foreign exchange risk, there can be no absolute assurance that its hedging activities will adequately protect against the risks associated with foreign currency fluctuations. Credit and market risks related to derivative instruments were not considered significant as of
September 30, 2018
.
Non-derivative Financial Instrument Designated as a Net Investment Hedge
As of
September 30, 2018
, the Company had designated
$1.1 billion
of its euro-denominated deferred cash consideration liability, a non-derivative financial instrument, as a hedge against a portion of the foreign currency exchange rate exposure of the Company’s euro-denominated net investment of
$18.8 billion
in Visa Europe. During fiscal
2018
, changes in the euro exchange rate against the U.S. dollar resulted in net foreign currency translation adjustments of
$0.4 billion
.
Note 10—Enterprise-wide Disclosures and Concentration of Business
The Company’s long-lived net property, equipment and technology assets are classified by major geographic areas as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
2018
|
|
September 30,
2017
|
|
(in millions)
|
United States
|
$
|
2,152
|
|
|
$
|
2,003
|
|
International
|
320
|
|
|
250
|
|
Total
|
$
|
2,472
|
|
|
$
|
2,253
|
|
Revenue by geographic market is primarily based on the location of the issuing financial institution. Revenues earned in the United States were approximately
45%
of net operating revenues in fiscal
2018
,
47%
in fiscal
2017
and
52%
in fiscal
2016
.
No individual country, other than the United States, generated more than 10% of net operating revenues in these years.
A significant portion of Visa’s operating revenues is concentrated among its largest clients. Loss of business from any of these clients could have an adverse effect on the Company.
The Company did not have any customer that generated greater than 10% of its net operating revenues in fiscal 2018, 2017 and 2016
.
Note 11—Stockholders’ Equity
Visa Europe acquisition.
In connection with the Visa Europe acquisition,
three
new series of preferred stock of the Company were created. Upon issuance, all of the preferred stock participate on an as-converted basis in regular quarterly cash dividends declared on the Company’s class A common stock. Additionally, Visa Europe held shares of Visa Inc.’s class C common stock, which were treated as treasury stock in purchase accounting. During fiscal
2017
, the newly-formed Visa Foundation received all Visa Inc. shares that were previously recorded as treasury stock. See
Note 16—Income Taxes
As-converted class A common stock
. The UK&I and Europe preferred stock, issued in the Visa Europe acquisition, is convertible upon certain conditions into shares of class A common stock or class A equivalent preferred stock, at an initial conversion rate of
13.952
shares of class A common stock for each share of UK&I and Europe preferred stock. The conversion rates may be reduced from time to time to offset certain liabilities. See
Note 2—U.S. and Europe Retrospective Responsibility Plans
.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
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
September 30, 2018
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
Conversion Rate Into Class A Common Stock
|
|
As-converted Class A Common Stock
(1)
|
|
(in millions, except conversion rate)
|
UK&I preferred stock
|
2
|
|
|
12.9550
|
|
|
32
|
|
Europe preferred stock
|
3
|
|
|
13.8880
|
|
|
44
|
|
Class A common stock
(2)
|
1,768
|
|
|
—
|
|
|
1,768
|
|
Class B common stock
|
245
|
|
|
1.6298
|
|
(3)
|
400
|
|
Class C common stock
|
12
|
|
|
4.0000
|
|
|
47
|
|
Total
|
|
|
|
|
2,291
|
|
|
|
(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 reflect repurchases settled on or before
September 30, 2018
.
|
|
|
(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 fiscal
2018
, total as-converted class A common stock was reduced by
63 million
shares at an average price of
$124.29
per share. Of the
63 million
shares,
58 million
were repurchased in the open market using
$7.2 billion
of operating cash on hand. Additionally, in June 2018, the Company deposited
$600 million
of operating cash into the litigation escrow account previously established under the U.S. retrospective responsibility plan. Also, the Company recovered
$56 million
of VE territory covered losses in accordance with the Europe retrospective responsibility plan during fiscal
2018
. The deposit and recovery have the same economic effect on earnings per share as repurchasing the Company’s class A common stock, because they reduce the class B common stock conversion rate and the UK&I and Europe preferred stock conversion rates and consequently, reduce 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 for the following fiscal years
(1)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended September 30,
|
|
2018
|
|
2017
|
|
2016
|
|
(in millions, except per share data)
|
Shares repurchased in the open market
(2)
|
58
|
|
|
77
|
|
|
91
|
|
Average repurchase price per share
(3)
|
$
|
123.76
|
|
|
$
|
89.98
|
|
|
$
|
77.05
|
|
Total cost
|
$
|
7,192
|
|
|
$
|
6,891
|
|
|
$
|
6,987
|
|
|
|
(1)
|
Shares repurchased in the open market reflect repurchases settled during fiscal
2018
,
2017
and
2016
. These amounts include repurchases traded but not yet settled on or before
September 30, 2017
,
September 30, 2016
and
September 30, 2015
for fiscal
2018
,
2017
and
2016
, respectively. Also, these exclude repurchases traded but not yet settled on or before
September 30, 2018
,
September 30, 2017
and
September 30, 2016
for fiscal
2018
,
2017
and
2016
, respectively.
|
|
|
(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.
|
In
January 2018
, the Company’s board of directors authorized an additional
$7.5 billion
share repurchase program. This authorization has no expiration date. As of
September 30, 2018
, the Company’s January 2018 share repurchase program had remaining authorized funds of
$4.2 billion
for share repurchase. All share repurchase programs authorized prior to
January 2018
have been completed.
Under the terms of the U.S. retrospective responsibility plan, when the Company makes a deposit into the litigation escrow account, the shares of class B common stock are subject to dilution through a reduction to the conversion rate of the shares of class B common stock to shares of class A common stock.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
The following table presents as-converted class B common stock after deposits into the litigation escrow account for fiscal 2018. There were no comparable adjustments recorded for as-converted class B common stock during fiscal 2017 and 2016.
|
|
|
|
|
|
For the Year Ended
September 30, 2018
|
|
(in millions, except per share data)
|
Reduction in equivalent number of as-converted shares of class A common stock
|
5
|
|
Effective price per share
(1)
|
$
|
132.32
|
|
Deposits under the U.S. retrospective responsibility plan
|
$
|
600
|
|
|
|
(1)
|
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 certificate of incorporation.
|
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
.
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 fiscal 2018 and 2017. There were no comparable adjustments recorded for UK&I and Europe preferred stock during fiscal 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
UK&I Preferred Stock
|
|
Europe Preferred Stock
|
|
For the Years Ended September 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
(in millions, except per share and conversion rate data)
|
Reduction in equivalent number of as-converted shares of class A common stock
|
—
|
|
(1)
|
2
|
|
|
—
|
|
(1)
|
—
|
|
(1)
|
Effective price per share
(2)
|
$
|
113.05
|
|
|
$
|
88.70
|
|
|
$
|
112.92
|
|
|
$
|
85.01
|
|
|
Recovery through conversion rate adjustment
|
$
|
35
|
|
|
$
|
190
|
|
|
$
|
21
|
|
|
$
|
1
|
|
|
|
|
(1)
|
The reduction in equivalent number of shares of class A common stock was less than one million shares.
|
|
|
(2)
|
Effective price per share for each adjustment made during the year 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. Effective price per share for each fiscal year is calculated using the weighted-average effective prices of the respective adjustments made during the year.
|
Class B common stock.
The class B common stock is not convertible or transferable until the date on which all of the U.S. covered litigation has been finally resolved. This transfer restriction is subject to limited exceptions, including transfers to other holders of class B common stock. After termination of the restrictions, the class B common stock will be convertible into class A common stock if transferred to a person that was not a Visa Member (as defined in the current certificate of incorporation) or similar person or an affiliate of a Visa Member or similar person. Upon such transfer, each share of class B common stock will automatically convert into a number of shares of class A common stock based upon the applicable conversion rate in effect at the time of such transfer.
Adjustment of the conversion rate occurs upon: (i) the completion of any follow-on offering of class A common stock completed to increase the size of the U.S. litigation escrow account (or any cash deposit by the Company in lieu thereof) resulting in a further corresponding decrease in the conversion rate; or (ii) the final resolution of the U.S. covered litigation and the release of funds remaining on deposit in the U.S. litigation escrow account to the Company resulting in a corresponding increase in the conversion rate. See
Note 2—U.S. and Europe Retrospective Responsibility Plans
.
Class C common stock.
As of
September 30, 2018
, all of the shares of class C common stock have been released from transfer restrictions. A total of
140 million
shares have been converted from class C to class A common stock upon their sale into the public market.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
Preferred stock.
Preferred stock may be issued as redeemable or non-redeemable, and has preference over any class of common stock with respect to the payment of dividends and distribution of the Company’s assets in the event of a liquidation or dissolution. The Company had
5 million
shares of UK&I and Europe preferred stock outstanding at the end of fiscal
2018
and
2017
. The shares of UK&I and Europe preferred stock are subject to restrictions on transfer and may become convertible in stages based on developments in the VE territory covered litigation. The shares of UK&I and Europe preferred stock will become fully convertible on the 12th anniversary of the Closing, subject only to a holdback to cover any then-pending claims. Upon any such conversion of the UK&I or Europe preferred stock (whether by such 12th anniversary, or thereafter with respect to claims pending on such anniversary), the holder would receive either class A common stock or class A equivalent preferred stock (for those who are not eligible to hold class A common stock pursuant to the Company’s charter). The class A equivalent preferred stock will be freely transferable and each share of class A equivalent preferred stock will automatically convert into
100
shares of class A common stock upon a transfer to any holder that is eligible to hold class A common stock under the charter. See
Note 2—U.S. and Europe Retrospective Responsibility Plans
.
Voting rights.
The holders of the UK&I and Europe preferred stock have no right to vote on any matters, except for certain defined matters, including, in specified circumstances, any consolidation, merger, combination or similar transaction of the Company in which the preferred stockholders would either (i) receive shares of common stock or other equity securities of the Company with preferences, rights and privileges that are not substantially identical to the preferences, rights and privileges of the applicable series of preferred stock or (ii) receive securities, cash or other property that is different from what the Company’s class A common stockholders would receive. With respect to these limited matters on which the holders of preferred stock may vote, approval by the preferred stockholders requires the affirmative vote of the outstanding voting power of each such series of preferred stock, each such series voting as a single class. In either case, the UK&I and Europe preferred stockholders are entitled to cast a number of votes equal to the number of shares held by each such holder. Holders of the class A equivalent preferred stock, upon issuance at conversion, will have similar voting rights to the rights of the holders of the UK&I and Europe preferred stock.
Class A common stockholders have the right to vote on all matters on which stockholders generally are entitled to vote. Class B and C common stockholders have no right to vote on any matters, except for certain defined matters, including (i) any decision to exit the core payments business, in which case the class B and C common stockholders will vote together with the class A common stockholders in a single class, and (ii) in specified circumstances, any consolidation, merger, combination or similar transaction of the Company, in which case the class B and C common stockholders will vote together as a single class. In either case, the class B and C common stockholders are entitled to cast a number of votes equal to the number of shares of class B or C common stock held multiplied by the applicable conversion rate in effect on the record date. Holders of the Company’s common stock have no right to vote on any amendment to the current certificate of incorporation that relates solely to any series of preferred stock.
Dividends declared.
The Company declared and paid
$1.9 billion
in dividends in fiscal
2018
at a quarterly rate of
$0.195
per share in the first fiscal quarter and
$0.21
per share in the remaining quarters of the fiscal year. On
October 16, 2018
, the Company’s board of directors declared a quarterly cash dividend of
$0.25
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), which will be paid on
December 4, 2018
, to all holders of record of the Company’s common and preferred stock as of
November 16, 2018
.
Note 12—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 11—Stockholders’ Equity
.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
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 fiscal
2018
.
(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
|
$
|
7,937
|
|
|
1,792
|
|
|
$
|
4.43
|
|
|
|
$
|
10,301
|
|
|
2,329
|
|
(3)
|
$
|
4.42
|
|
Class B common stock
|
1,787
|
|
|
245
|
|
|
$
|
7.28
|
|
|
|
$
|
1,785
|
|
|
245
|
|
|
$
|
7.27
|
|
Class C common stock
|
218
|
|
|
12
|
|
|
$
|
17.72
|
|
|
|
$
|
217
|
|
|
12
|
|
|
$
|
17.69
|
|
Participating securities
(4)
|
359
|
|
|
Not presented
|
|
|
Not presented
|
|
|
|
$
|
358
|
|
|
Not presented
|
|
|
Not presented
|
|
Net income
|
$
|
10,301
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents earnings per share for fiscal
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
|
$
|
5,170
|
|
|
1,845
|
|
|
$
|
2.80
|
|
|
|
$
|
6,699
|
|
|
2,395
|
|
(3)
|
$
|
2.80
|
|
Class B common stock
|
1,134
|
|
|
245
|
|
|
$
|
4.62
|
|
|
|
$
|
1,132
|
|
|
245
|
|
|
$
|
4.61
|
|
Class C common stock
|
163
|
|
|
14
|
|
|
$
|
11.21
|
|
|
|
$
|
162
|
|
|
14
|
|
|
$
|
11.19
|
|
Participating securities
(4)
|
232
|
|
|
Not presented
|
|
|
Not presented
|
|
|
|
$
|
232
|
|
|
Not presented
|
|
|
Not presented
|
|
Net income
|
$
|
6,699
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents earnings per share for fiscal
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
|
$
|
4,738
|
|
|
1,906
|
|
|
$
|
2.49
|
|
|
|
$
|
5,991
|
|
|
2,414
|
|
(3)
|
$
|
2.48
|
|
Class B common stock
|
1,006
|
|
|
245
|
|
|
$
|
4.10
|
|
|
|
$
|
1,004
|
|
|
245
|
|
|
$
|
4.09
|
|
Class C common stock
|
185
|
|
|
19
|
|
|
$
|
9.94
|
|
|
|
$
|
185
|
|
|
19
|
|
|
$
|
9.93
|
|
Participating securities
(4)
|
62
|
|
|
Not presented
|
|
|
Not presented
|
|
|
|
$
|
61
|
|
|
Not presented
|
|
|
Not presented
|
|
Net income
|
$
|
5,991
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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
403 million
for fiscal
2018
, and
405 million
for fiscal
2017
and
2016
. The weighted-average number of shares of as-converted class C common stock used in the income allocation was
49 million
,
58 million
and
75 million
for fiscal
2018
,
2017
and
2016
, respectively. The weighted-average number of shares of preferred stock included within participating securities was
32 million
and
33 million
of as-converted UK&I preferred stock for fiscal 2018 and 2017, respectively, and
44 million
of as-converted Europe preferred stock for fiscal
2018
and 2017.
|
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
|
|
(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
3 million
common stock equivalents for fiscal
2018
, and
5 million
common stock equivalents for fiscal
2017
and
2016
, because their effect would have been dilutive. The computation excludes
1 million
of common stock equivalents for fiscal
2018
, and
2 million
of common stock equivalents for fiscal
2017
and
2016
, 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. See
Note 11—Stockholders’ Equity
.
|
Note 13—Share-based Compensation
2007 Equity Incentive Compensation Plan
The Company’s 2007 Equity Incentive Compensation Plan, or the EIP, authorizes the compensation committee of the board of directors to grant non-qualified stock options (“options”), restricted stock awards (“RSAs”), restricted stock units (“RSUs”) and performance-based shares to its employees and non-employee directors, for up to
236 million
shares of class A common stock. Shares available for award may be either authorized and unissued or previously issued shares subsequently acquired by the Company. The EIP will continue to be in effect until all of the common stock available under the EIP is delivered and all restrictions on those shares have lapsed, unless the EIP is terminated earlier by the Company’s board of directors. Awards may be granted under the plan until January 31, 2022.
Share-based compensation cost is recorded net of estimated forfeitures on a straight-line basis for awards with service conditions only, and on a graded-vesting basis for awards with service, performance and market conditions. For fiscal
2018
,
2017
and
2016
, the Company recorded share-based compensation cost related to the EIP of
$312 million
,
$224 million
and
$211 million
, respectively, in personnel expense on its consolidated statements of operations. The related tax benefits were
$53 million
,
$67 million
and
$62 million
for fiscal
2018
,
2017
and
2016
, respectively. The amount of capitalized share-based compensation cost was immaterial during fiscal
2018
,
2017
and
2016
.
Options
Options issued under the EIP expire
10 years
from the date of grant and primarily vest ratably over
3 years
from the date of grant, subject to earlier vesting in full under certain conditions.
During fiscal
2018
,
2017
and
2016
, the fair value of each stock option was estimated on the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended September 30,
|
|
2018
|
|
2017
|
|
2016
|
Expected term (in years)
(1)
|
4
|
|
|
4.23
|
|
|
4.35
|
|
Risk-free rate of return
(2)
|
2.0
|
%
|
|
1.6
|
%
|
|
1.5
|
%
|
Expected volatility
(3)
|
18.3
|
%
|
|
20.2
|
%
|
|
21.7
|
%
|
Expected dividend yield
(4)
|
0.7
|
%
|
|
0.8
|
%
|
|
0.7
|
%
|
Fair value per option granted
|
$
|
18.24
|
|
|
$
|
13.90
|
|
|
$
|
15.01
|
|
|
|
(1)
|
Until March 2018, this assumption was based on the Company’s historical option exercises and those of a set of peer companies that management believed to be generally comparable to Visa. The Company’s data was weighted based on the number of years between the measurement date and Visa’s IPO date as a percentage of the options’ contractual term. The relative weighting placed on Visa’s data and peer data for stock options granted until March 2018 in fiscal
2018
was approximately
97%
and
3%
, respectively,
87%
and
13%
in fiscal
2017
, respectively, and
77%
and
23%
in fiscal
2016
, respectively. The assumptions for stock options granted after March 2018 was based on Visa’s historical exercise experience as the passage of time since the Company’s IPO has exceeded 10 years.
|
|
|
(2)
|
Based upon the zero coupon U.S. treasury bond rate over the expected term of the awards.
|
|
|
(3)
|
Based on the Company’s implied and historical volatility. The expected volatility was approximately
18%
in fiscal
2018
and
20%
in fiscal
2017
and ranged from
20%
to
23%
in fiscal
2016
.
|
|
|
(4)
|
Based on the Company’s annual dividend rate on the date of grant.
|
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
The following table summarizes the Company’s option activity for fiscal
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted-
Average
Exercise Price
Per Share
|
|
Weighted-
Average
Remaining
Contractual
Term
(in years)
|
|
Aggregate
Intrinsic
Value
(1)
(in millions)
|
Outstanding at September 30, 2017
|
7,115,876
|
|
|
$
|
50.17
|
|
|
|
|
|
Granted
|
1,646,060
|
|
|
$
|
110.26
|
|
|
|
|
|
Forfeited
|
(281,952
|
)
|
|
$
|
93.19
|
|
|
|
|
|
Expired
|
(1,128
|
)
|
|
$
|
11.00
|
|
|
|
|
|
Exercised
|
(2,690,016
|
)
|
|
$
|
28.37
|
|
|
|
|
|
Outstanding at September 30, 2018
|
5,788,840
|
|
|
$
|
75.30
|
|
|
6.94
|
|
$433
|
Options exercisable at September 30, 2018
|
3,000,704
|
|
|
$
|
55.28
|
|
|
5.42
|
|
$285
|
Options exercisable and expected to vest at September 30, 2018
(2)
|
5,567,702
|
|
|
$
|
74.23
|
|
|
6.86
|
|
$422
|
|
|
(1)
|
Calculated using the closing stock price on the last trading day of fiscal
2018
of
$150.09
, less the option exercise price, multiplied by the number of instruments.
|
|
|
(2)
|
Applies a forfeiture rate to unvested options outstanding at September 30,
2018
to estimate the options expected to vest in the future.
|
For the options exercised during fiscal
2018
,
2017
and
2016
, the total intrinsic value was
$249 million
,
$178 million
and
$103 million
, respectively, and the tax benefit realized was
$55 million
,
$62 million
and
$35 million
, respectively. As of
September 30, 2018
, there was
$22 million
of total unrecognized compensation cost related to unvested options, which is expected to be recognized over a weighted-average period of approximately
0.6
years.
Restricted Stock Awards and Restricted Stock Units
RSAs and RSUs issued under the EIP primarily vest ratably over
3 years
from the date of grant, subject to earlier vesting in full under certain conditions.
Upon vesting, the RSAs are settled in class A common stock on a one-for-one basis. During the vesting period, RSA award recipients are eligible to receive dividends and participate in the same voting rights as those granted to the holders of the underlying class A common stock. Upon vesting, RSUs can be settled in class A common stock on a one-for-one basis or in cash, or a combination thereof, at the Company’s option. The Company does not currently intend to settle any RSUs in cash. During the vesting period, RSU award recipients are eligible to receive dividend equivalents, but do not participate in the voting rights granted to the holders of the underlying class A common stock. The company discontinued granting RSAs in fiscal 2016 but will continue to grant RSUs under the EIP.
The fair value and compensation cost before estimated forfeitures for RSAs and RSUs is calculated using the closing price of class A common stock on the date of grant.
No
RSAs were granted during fiscal
2018
,
2017
and
2016
. The weighted-average grant-date fair value of RSUs granted during fiscal
2018
,
2017
and
2016
was
$111.11
,
$81.67
and
$79.77
, respectively. The total grant-date fair value of RSAs and RSUs vested during fiscal
2018
,
2017
and
2016
was
$183 million
,
$163 million
and
$142 million
, respectively.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
The following table summarizes the Company’s RSA and RSU activity for fiscal
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Weighted-
Average
Remaining
Contractual
Term
(in years)
|
|
Aggregate
Intrinsic
Value
(1)
(in millions)
|
|
Awards
|
|
Units
|
|
RSA
|
|
RSU
|
|
RSA
|
|
RSU
|
|
RSA
|
|
RSU
|
Outstanding at September 30, 2017
|
466,007
|
|
|
4,673,701
|
|
|
$
|
63.37
|
|
|
$
|
80.37
|
|
|
|
|
|
|
|
|
|
Granted
|
—
|
|
|
2,832,984
|
|
|
$
|
—
|
|
|
$
|
111.11
|
|
|
|
|
|
|
|
|
|
Vested
|
(451,297
|
)
|
|
(1,937,132
|
)
|
|
$
|
63.39
|
|
|
$
|
79.76
|
|
|
|
|
|
|
|
|
|
Forfeited
|
(14,710
|
)
|
|
(365,099
|
)
|
|
$
|
72.25
|
|
|
$
|
92.31
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2018
|
—
|
|
|
5,204,454
|
|
|
$
|
—
|
|
|
$
|
96.50
|
|
|
0.0
|
|
0.88
|
|
$
|
—
|
|
|
$781
|
|
|
(1)
|
Calculated by multiplying the closing stock price on the last trading day of fiscal
2018
of
$150.09
by the number of instruments.
|
At
September 30, 2018
, there was
$284 million
of total unrecognized compensation cost related to unvested RSUs, which is expected to be recognized over a weighted-average period of approximately
0.88
years for RSUs.
Performance-based Shares
The following table summarizes the maximum number of performance-based shares which could be earned and related activity for fiscal
2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-
Average
Grant Date
Fair Value
|
|
Weighted-
Average
Remaining
Contractual
Term
(in years)
|
|
Aggregate
Intrinsic
Value
(1)
(in millions)
|
Outstanding at September 30, 2017
|
937,675
|
|
|
$
|
84.20
|
|
|
|
|
|
Granted
(2)
|
641,498
|
|
|
$
|
120.11
|
|
|
|
|
|
Vested and earned
|
(355,563
|
)
|
|
$
|
88.05
|
|
|
|
|
|
Unearned
|
(48,980
|
)
|
|
$
|
76.07
|
|
|
|
|
|
Forfeited
|
(175,214
|
)
|
|
$
|
108.05
|
|
|
|
|
|
Outstanding at September 30, 2018
|
999,416
|
|
|
$
|
102.07
|
|
|
0.94
|
|
$150
|
|
|
(1)
|
Calculated by multiplying the closing stock price on the last trading day of
fiscal 2018
of
$150.09
by the number of instruments.
|
|
|
(2)
|
Represents the maximum number of performance-based shares which could be earned.
|
For the Company’s performance-based shares, in addition to service conditions, the ultimate number of shares to be earned depends on the achievement of both performance and market conditions. The performance condition is based on the Company’s earnings per share target. The market condition is based on the Company’s total shareholder return ranked against that of other companies that are included in the Standard & Poor’s 500 Index. The fair value of the performance-based shares, incorporating the market condition, is estimated on the grant date using a Monte Carlo simulation model. The grant-date fair value of performance-based shares granted in fiscal
2018
,
2017
and
2016
was
$120.11
,
$86.37
and
$92.71
per share, respectively. Earned performance shares granted in fiscal
2018
,
2017
and
2016
vest approximately
three
years from the initial grant date. All performance awards are subject to earlier vesting in full under certain conditions.
Compensation cost for performance-based shares is initially estimated based on target performance. It is recorded net of estimated forfeitures and adjusted as appropriate throughout the performance period. At
September 30, 2018
, there was
$54 million
of total unrecognized compensation cost related to unvested performance-based shares, which is expected to be recognized over a weighted-average period of approximately
0.94
years.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
Employee Stock Purchase Plan
The Visa Inc. Employee Stock Purchase Plan (the “ESPP”) permits eligible employees to purchase the Company’s class A common stock at a
15%
discount of the stock price on the purchase date, subject to certain restrictions. A total of
20 million
shares of class A common stock have been reserved for issuance under the ESPP. ESPP did not have a material impact on the consolidated financial statements in fiscal
2018
,
2017
or
2016
.
Note 14—Commitments and Contingencies
Commitments.
The Company leases certain premises and equipment throughout the world with varying expiration dates. The Company incurred total rent expense of
$224 million
,
$159 million
and
$134 million
in fiscal
2018
,
2017
and
2016
, respectively. Future minimum payments on leases at
September 30, 2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
Thereafter
|
|
Total
|
|
(in millions)
|
Operating leases
|
$
|
180
|
|
|
$
|
123
|
|
|
$
|
102
|
|
|
$
|
89
|
|
|
$
|
75
|
|
|
$
|
178
|
|
|
$
|
747
|
|
Deferred purchase consideration.
On June 21, 2016, the Company acquired
100%
of the share capital of Visa Europe. In connection with the purchase, the Company will pay an additional
€1.0 billion
, plus
4%
compound annual interest, on the third anniversary of the Closing.
Note 15—Related Parties
Visa considers an entity to be a related party for purposes of this disclosure if that entity owns more than
10%
of Visa’s total voting common stock at the end of the fiscal year, or if an officer or employee of that entity also serves on the Company’s board of directors. The Company considers an investee to be a related party if the Company’s: (i) ownership interest in the investee is greater than or equal to
10%
or (ii) if the investment is accounted for under the equity method of accounting. At
September 30, 2018
and
2017
,
no
entity owned more than
10%
of the Company’s total voting common stock. There were
no
significant transactions with related parties during fiscal
2018
,
2017
and
2016
.
Note 16—Income Taxes
The Company’s income before taxes by fiscal year consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
(in millions)
|
U.S.
|
$
|
8,088
|
|
|
$
|
8,440
|
|
|
$
|
5,839
|
|
Non-U.S.
|
4,718
|
|
|
3,254
|
|
|
2,173
|
|
Total income before taxes
|
$
|
12,806
|
|
|
$
|
11,694
|
|
|
$
|
8,012
|
|
U.S. income before taxes included
$2.7 billion
,
$2.9 billion
and
$2.5 billion
of the Company’s U.S. entities’ income from operations outside of the U.S. for fiscal
2018
,
2017
and
2016
, respectively.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
Income tax provision by fiscal year consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
(in millions)
|
Current:
|
|
|
|
|
|
U.S. federal
|
$
|
2,819
|
|
|
$
|
2,377
|
|
|
$
|
2,250
|
|
State and local
|
219
|
|
|
291
|
|
|
181
|
|
Non-U.S.
|
754
|
|
|
629
|
|
|
368
|
|
Total current taxes
|
3,792
|
|
|
3,297
|
|
|
2,799
|
|
Deferred:
|
|
|
|
|
|
U.S. federal
|
(1,214
|
)
|
|
1,607
|
|
|
(508
|
)
|
State and local
|
(96
|
)
|
|
66
|
|
|
(63
|
)
|
Non-U.S.
|
23
|
|
|
25
|
|
|
(207
|
)
|
Total deferred taxes
|
(1,287
|
)
|
|
1,698
|
|
|
(778
|
)
|
Total income tax provision
|
$
|
2,505
|
|
|
$
|
4,995
|
|
|
$
|
2,021
|
|
The tax effect of temporary differences that give rise to significant portions of deferred tax assets and liabilities at
September 30, 2018
and
2017
, are presented below:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
(in millions)
|
Deferred Tax Assets:
|
|
|
|
Accrued compensation and benefits
|
$
|
135
|
|
|
$
|
194
|
|
Accrued litigation obligation
|
329
|
|
|
373
|
|
Client incentives
|
213
|
|
|
272
|
|
Net operating loss carryforwards
|
34
|
|
|
45
|
|
Comprehensive loss
|
17
|
|
|
29
|
|
Federal benefit of state taxes
|
120
|
|
|
236
|
|
Other
|
127
|
|
|
193
|
|
Valuation allowance
|
(34
|
)
|
|
(35
|
)
|
Deferred tax assets
|
941
|
|
|
1,307
|
|
Deferred Tax Liabilities:
|
|
|
|
Property, equipment and technology, net
|
(286
|
)
|
|
(391
|
)
|
Intangible assets
|
(5,153
|
)
|
|
(6,756
|
)
|
Foreign taxes
|
(106
|
)
|
|
(59
|
)
|
Deferred tax liabilities
|
(5,545
|
)
|
|
(7,206
|
)
|
Net deferred tax liabilities
|
$
|
(4,604
|
)
|
|
$
|
(5,899
|
)
|
The Tax Act, enacted on December 22, 2017, 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 provisionally remeasured its net deferred tax liabilities as of the enactment date of the Tax Act. The deferred tax remeasurement is now complete and resulted in a one-time, non-cash tax benefit of
$1.1 billion
, recorded in fiscal 2018.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
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 fiscal 2018. The transition tax will be paid over a period of eight years as permitted by the Tax Act.
The above-mentioned accounting impact of the transition tax is 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 impact 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, and the final determination of the untaxed foreign earnings subject to the transition tax. The provisional accounting impact may change until the accounting analysis is finalized, which will occur no later than the first quarter of fiscal 2019, as permitted by ASU 2018-05.
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 fiscal 2018. 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 has been recorded in fiscal 2018.
|
|
|
•
|
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 fiscal 2018.
|
|
|
•
|
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 fiscal 2018, based on information currently available. The provisional amounts may change no later than the first quarter of fiscal 2019, if additional information is obtained and analyzed.
|
At
September 30, 2018
and
2017
, net deferred tax assets of
$14 million
and
$81 million
, respectively, are reflected in other assets on the consolidated balance sheets.
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that all or some portion of the deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences are deductible. The fiscal
2018
and
2017
valuation allowances relate primarily to foreign net operating losses from subsidiaries acquired in recent years.
As of
September 30, 2018
, the Company had
$17 million
federal,
$21 million
state and
$137 million
foreign net operating loss carryforwards. The federal and state net operating loss carryforwards will expire in
fiscal 2028 through 2037
. The foreign net operating loss may be carried forward indefinitely. The Company expects to fully utilize the federal and state net operating loss carryforwards in future years.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
The income tax provision differs from the amount of income tax determined by applying the applicable U.S. federal statutory rate of
24.5%
to pretax income, as a result of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended September 30,
|
|
2018
|
|
2017
|
|
2016
|
|
Dollars
|
|
Percent
|
|
Dollars
|
|
Percent
|
|
Dollars
|
|
Percent
|
|
(in millions, except percentages)
|
U.S. federal income tax at statutory rate
|
$
|
3,141
|
|
|
25
|
%
|
|
$
|
4,093
|
|
|
35
|
%
|
|
$
|
2,804
|
|
|
35
|
%
|
State income taxes, net of federal benefit
|
201
|
|
|
2
|
%
|
|
200
|
|
|
2
|
%
|
|
135
|
|
|
2
|
%
|
Non-U.S. tax effect, net of federal benefit
|
(465
|
)
|
|
(4
|
)%
|
|
(641
|
)
|
|
(5
|
)%
|
|
(553
|
)
|
|
(7
|
)%
|
Transition tax on foreign earnings
|
1,147
|
|
|
9
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
Remeasurement of deferred tax balances
|
(1,133
|
)
|
|
(9
|
)%
|
|
—
|
|
|
—
|
%
|
|
(88
|
)
|
|
(1
|
)%
|
Revaluation of Visa Europe put option
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
(89
|
)
|
|
(1
|
)%
|
Reorganization of Visa Europe and other legal entities
|
—
|
|
|
—
|
%
|
|
1,515
|
|
|
13
|
%
|
|
—
|
|
|
—
|
%
|
Other, net
|
(386
|
)
|
|
(3
|
)%
|
|
(172
|
)
|
|
(2
|
)%
|
|
(188
|
)
|
|
(3
|
)%
|
Income tax provision
|
$
|
2,505
|
|
|
20
|
%
|
|
$
|
4,995
|
|
|
43
|
%
|
|
$
|
2,021
|
|
|
25
|
%
|
The effective income tax rate was
20%
in fiscal
2018
and
43%
in fiscal
2017
. The effective tax rate in fiscal
2018
differs from the effective tax rate in fiscal
2017
primarily due to:
|
|
•
|
the effects of the Tax Act, which include the decrease in the fiscal 2018 federal statutory rate, the transition tax, and the remeasurement of deferred taxes, as discussed above;
|
|
|
•
|
$161 million
of tax benefits due to various non-recurring audit settlements in fiscal 2018; and
|
|
|
•
|
the absence of the following items related to the Visa Europe reorganization recorded in fiscal 2017:
|
|
|
▪
|
a
$1.5 billion
non-recurring, non-cash income tax provision primarily related to the elimination of deferred tax balances originally recognized upon the acquisition of Visa Europe; and
|
|
|
▪
|
a
$71 million
one-time tax benefit related to the Visa Foundation’s receipt of Visa Inc. shares, previously recorded by Visa Europe as treasury stock.
|
The effective income tax rate was
43%
in fiscal
2017
and
25%
in fiscal
2016
. The effective tax rate in fiscal
2017
differs from the effective tax rate in fiscal
2016
primarily due to:
|
|
•
|
the items listed above related to the Visa Europe reorganization recorded in fiscal 2017;
|
|
|
•
|
$70 million
of excess tax benefits related to share-based payments recorded in fiscal 2017, as a result of the early adoption of ASU 2016-09; and
|
|
|
▪
|
the effect of one-time items related to the Visa Europe acquisition recorded during fiscal 2016, the most significant of which was the
$1.9 billion
U.S. loss related to the effective settlement of the Framework Agreement between Visa and Visa Europe. These one-time items impacted the geographic mix of global income, resulting in a reduced effective tax rate in fiscal 2016;
|
|
|
•
|
an
$88 million
one-time tax benefit due to the remeasurement of deferred tax liabilities as a result of the reduction in the UK tax rate enacted in fiscal 2016; and
|
|
|
•
|
the non-taxable
$255 million
revaluation of the Visa Europe put option recorded in fiscal 2016.
|
Current income taxes receivable were
$82 million
and
$148 million
at
September 30, 2018
and
2017
, respectively. Non-current income taxes receivable of
$689 million
and
$755 million
at
September 30, 2018
and
2017
, respectively, were included in other assets. Income taxes payable of
$257 million
and
$243 million
at
September 30, 2018
and
2017
, respectively, were included in accrued liabilities. Accrued income taxes of
$2.4 billion
and
$1.1 billion
at
September 30, 2018
and
2017
, respectively, were included in other liabilities.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
The Company’s operating hub in the Asia Pacific region is located in Singapore. It is subject to a tax incentive which is effective through September 30, 2023, and is conditional upon meeting certain business operations and employment thresholds in Singapore. The tax incentive decreased Singapore tax by
$295 million
,
$252 million
and
$235 million
, and the benefit of the tax incentive on diluted earnings per share was
$0.13
,
$0.11
and
$0.10
in fiscal
2018
,
2017
and
2016
, respectively.
In accordance with
Accounting Standards Codification 740—Income Taxes
, the Company is required to inventory, evaluate and measure all uncertain tax positions taken or to be taken on tax returns, and to record liabilities for the amount of such positions that may not be sustained, or may only partially be sustained, upon examination by the relevant taxing authorities.
At
September 30, 2018
and
2017
, the Company’s total gross unrecognized tax benefits were
$1.7 billion
and
$1.4 billion
, respectively, exclusive of interest and penalties described below. Included in the
$1.7 billion
and
$1.4 billion
are
$1.2 billion
and
$1.1 billion
of unrecognized tax benefits, respectively, that if recognized, would reduce the effective tax rate in a future period.
A reconciliation of beginning and ending unrecognized tax benefits by fiscal year is as follows:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
(in millions)
|
Balance at beginning of period
|
$
|
1,353
|
|
|
$
|
1,160
|
|
Increases of unrecognized tax benefits related to prior years
|
367
|
|
|
56
|
|
Decreases of unrecognized tax benefits related to prior years
|
(233
|
)
|
|
(59
|
)
|
Increases of unrecognized tax benefits related to current year
|
172
|
|
|
197
|
|
Reductions related to lapsing statute of limitations
|
(1
|
)
|
|
(1
|
)
|
Balance at end of period
|
$
|
1,658
|
|
|
$
|
1,353
|
|
It is the Company’s policy to account for interest expense and penalties related to uncertain tax positions in non-operating expense in its consolidated statements of operations. The Company recognized
$15 million
,
$23 million
and
$15 million
of interest expense in fiscal
2018
,
2017
and
2016
, respectively, related to uncertain tax positions. The Company accrued
no
penalties in fiscal
2018
, and accrued
$1 million
and
$3 million
of penalties in fiscal
2017
and
2016
, respectively, related to uncertain tax positions. At
September 30, 2018
and
2017
, the Company had accrued interest of
$99 million
and
$84 million
, respectively, and accrued penalties of
$34 million
related to uncertain tax positions in its other long-term liabilities.
The Company’s fiscal 2012 through 2015 U.S. federal income tax return is currently under Internal Revenue Service (IRS) examination. The Company has filed federal refund claims for fiscal years 2008 through 2011, which are also currently under IRS examination. Except for the refund claims, the federal statutes of limitations have expired for fiscal years prior to 2012. The Company’s fiscal years 2006 through 2011 California tax returns are currently under examination. The California statutes of limitations have expired for fiscal years prior to 2006.
During fiscal 2013, the Canada Revenue Agency (CRA) completed its examination of the Company’s fiscal 2003 through 2009 Canadian tax returns and proposed certain assessments. Based on the findings of its examination, the CRA also proposed certain assessments to the Company’s fiscal 2010 through 2017 Canadian tax returns. The Company filed notices of objection against these assessments and, in fiscal 2015, completed the appeals process without reaching a settlement with the CRA. In April 2016, the Company petitioned the Tax Court of Canada to overturn the CRA’s assessments. Legal proceedings continue to be in progress. The Company continues to believe that its income tax provision adequately reflects its obligations to the CRA.
The Office of the Assistant Commissioner of Income Tax in India completed the examination of the Company’s income tax returns for the taxable years falling within the period from fiscal 2010 to 2015, and proposed certain assessments. The Company objected to these proposed assessments and filed appeals to the appellate authorities. While the timing and outcome of the final resolution of these appeals are uncertain, the Company believes that its income tax provision adequately reflects its income tax obligations in India.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
The Company is also subject to examinations by various state and foreign tax authorities. All material state and foreign tax matters have been concluded for years through fiscal 2002. The timing and outcome of the final resolutions of the federal, state and foreign tax examinations and refund claims are uncertain. As such, it is not reasonably possible to estimate the impact that the final outcomes could have on the Company’s unrecognized tax benefits in the next 12 months.
Note 17—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 by fiscal year:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
(in millions)
|
Balance at beginning of period
|
$
|
982
|
|
|
$
|
981
|
|
Provision for uncovered legal matters
|
7
|
|
|
19
|
|
Provision for covered legal matters
|
601
|
|
|
186
|
|
Payments for legal matters
|
(156
|
)
|
|
(204
|
)
|
Balance at end of period
|
$
|
1,434
|
|
|
$
|
982
|
|
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.
The following table summarizes the accrual activity related to U.S. covered litigation by fiscal year:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
(in millions)
|
Balance at beginning of period
|
$
|
978
|
|
|
$
|
978
|
|
Provision for interchange multidistrict litigation
|
600
|
|
|
—
|
|
Payments for U.S. covered litigation
|
(150
|
)
|
|
—
|
|
Balance at end of period
|
$
|
1,428
|
|
|
$
|
978
|
|
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
During the second quarter of fiscal 2014, pursuant to the 2012 Settlement Agreement approved by the MDL 1720 court on January 14, 2014, the Company recorded a
$1.1 billion
accrual to address “opt-out” claims for merchants who opted out of the original class settlement agreement. An additional accrual of
$450 million
associated with these opt-out claims was recorded in the fourth quarter of fiscal 2014. During the third quarter of fiscal 2018, pursuant to an amended settlement agreement that superseded the 2012 Settlement Agreement, the Company recorded an additional accrual and deposited
$600 million
into the U.S. litigation escrow account. See further discussion below under
Interchange Multidistrict Litigation
(MDL) – Individual Merchant Actions
and
Note 2—U.S. and Europe Retrospective Responsibility Plans
.
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 a periodic adjustment 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 accrual activity related to VE territory covered litigation by fiscal year:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
(in millions)
|
Balance at beginning of period
|
$
|
1
|
|
|
$
|
2
|
|
Accrual for VE territory covered litigation
|
1
|
|
|
186
|
|
Payments for VE territory covered litigation
|
(2
|
)
|
|
(187
|
)
|
Balance at end of period
|
$
|
—
|
|
|
$
|
1
|
|
U.S. Covered Litigation
Interchange Multidistrict Litigation (MDL) – Putative Class Actions
Beginning in May 2005, a series of complaints (the majority of which were styled as class actions) were filed in U.S. federal district courts by merchants against Visa U.S.A., Visa International and/or MasterCard, and in some cases, certain U.S. financial institutions. The Judicial Panel on Multidistrict Litigation issued an order transferring the cases to the U.S. District Court for the Eastern District of New York for coordination of pre-trial proceedings in MDL 1720. A group of purported class plaintiffs subsequently filed amended and supplemental class complaints. The individual and class complaints generally challenged, among other things, Visa’s and MasterCard’s purported setting of interchange reimbursement fees, their “no surcharge” and honor-all-cards rules, alleged tying and bundling of transaction fees, and Visa’s reorganization and IPO, under the federal antitrust laws and, in some cases, certain state unfair competition laws. The complaints sought money damages, declaratory and injunctive relief, attorneys’ fees and, in one instance, an order that the IPO be unwound.
Visa Inc., Visa U.S.A., Visa International, MasterCard Incorporated, MasterCard International Incorporated, various U.S. financial institution defendants, and the class plaintiffs signed a settlement agreement (the “2012 Settlement Agreement”) to resolve the class plaintiffs’ claims. Pursuant to the 2012 Settlement Agreement, the Company deposited approximately
$4.0 billion
from the U.S. litigation escrow account and approximately
$500 million
attributable to interchange reductions for an
eight
-month period into settlement accounts established under the 2012 Settlement Agreement.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
Subsequently, Visa received from the Court and deposited into the Company’s U.S. litigation escrow account “takedown payments” of approximately
$1.1 billion
. On June 30, 2016, the U.S. Court of Appeals for the Second Circuit vacated the lower court’s certification of the merchant class and reversed the approval of the settlement. The Second Circuit determined that the class plaintiffs were inadequately represented, and remanded the case to the lower court for further proceedings.
On remand, the district court entered an order appointing interim counsel for
two
putative classes of plaintiffs, a “Damages Class” and an “Injunctive Relief Class.” Thereafter, a new group of purported class plaintiffs, acting on behalf of the putative Injunctive Relief Class, filed a class action complaint seeking declaratory and injunctive relief, as well as attorneys’ fees. That complaint seeks, among other things, an injunction against: the setting of default interchange rates; certain Visa operating rules relating to merchants, including the honor-all-cards rule; and various transaction fees, including the fixed acquirer network fee. The complaint names as defendants Visa Inc., MasterCard Incorporated and MasterCard International Incorporated, and certain U.S. financial institutions. In addition, the plaintiffs purporting to act on behalf of the putative Damages Class filed a Third Consolidated Amended Class Action Complaint, seeking money damages and attorneys’ fees, among other relief.
On September 17, 2018, Visa, MasterCard, and certain U.S. financial institutions reached an agreement with plaintiffs purporting to act on behalf of the putative Damages Class to resolve all Damages Class claims (the “Amended Settlement Agreement”), subject to court approval. The Amended Settlement Agreement supersedes the 2012 Settlement Agreement and includes, among other terms, a release from participating class members for liability arising out of conduct alleged by the Damages Class in the litigation, including claims that accrue no later than
five
years after the Amended Settlement Agreement becomes final. Participating class members will not release injunctive relief claims as a named representative or non-representative class member in the putative Injunctive Relief Class. The Amended Settlement Agreement also requires an additional settlement payment from all defendants totaling
$900 million
, with the Company’s share of
$600 million
to be paid from the Company’s litigation escrow account established pursuant to the Company’s retrospective responsibility plan. See
Note 2—U.S. and Europe Retrospective Responsibility Plans
.
The additional settlement payment will be added to the approximately
$5.3 billion
previously deposited into settlement accounts by the defendants pursuant to the 2012 Settlement Agreement. If more than
15%
of class members (by payment volume) opt out of the class, up to
$700 million
may be returned to defendants (with up to
$467 million
to the Company) based on the total merchant opt-out percentage. Defendants may terminate the Amended Settlement Agreement if more than
25%
of class members (by payment volume) opt out of the class.
Settlement discussions with plaintiffs purporting to act on behalf of the putative Injunctive Relief Class are ongoing.
Interchange Multidistrict Litigation (MDL) – Individual Merchant Actions
Beginning in May 2013, more than
50
cases have been filed in or removed to various federal district courts by hundreds of merchants generally pursuing damages claims on allegations similar to those raised in MDL 1720. A number of the cases also include allegations that Visa has monopolized, attempted to monopolize, and/or conspired to monopolize debit card-related market segments. In addition, some of the cases seek an injunction against the setting of default interchange rates; certain Visa operating rules relating to merchants, including the honor-all-cards rule; and various transaction fees, including the fixed acquirer network fee. One merchant’s complaint also asserts that Visa, MasterCard and their member banks conspired to prevent the adoption of chip-and-PIN authentication in the U.S. or otherwise circumvent competition in the debit market. The cases name as defendants Visa Inc., Visa U.S.A., Visa International, MasterCard Incorporated and MasterCard International Incorporated, although some also include certain U.S. financial institutions as defendants. On October 27, 2017, certain individual merchants filed amended complaints that, among other things, added claims for injunctive relief and updated claims for damages.
In addition to the cases filed by individual merchants, Visa, MasterCard, and certain U.S. financial institution defendants in MDL 1720 filed complaints against certain merchants in the Eastern District of New York seeking, in part, a declaration that Visa’s conduct did not violate federal or state antitrust laws.
A number of the individual merchant actions have been settled, and remain settled. Those settled merchants are not members of the putative Damages Class for purposes of the Amended Settlement Agreement.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
The individual merchant actions described in this section have been either assigned to the judge presiding over MDL 1720, or have been transferred or are being considered for transfer by the Judicial Panel on Multidistrict Litigation for inclusion in MDL 1720. The court has entered an order confirming that
In re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation
, 1:05-md-01720-JG-JO (E.D.N.Y.), includes (1) all current and future actions transferred to MDL 1720 by the Judicial Panel on Multidistrict Litigation or other order of any court for inclusion in coordinated or pretrial proceedings, and (2) all actions filed in the Eastern District of New York that arise out of operative facts as alleged in the cases subject to the transfer orders of the Judicial Panel on Multidistrict Litigation. These individual merchant actions are U.S. covered litigation for purposes of the U.S. retrospective responsibility plan. See
Note 2—U.S. and Europe Retrospective Responsibility Plans
.
The Company believes it has substantial defenses to the claims asserted in the putative class actions and individual merchant actions, but the final outcome of individual legal claims is inherently unpredictable. The Company could incur judgments, enter into settlements or revise its expectations regarding the outcome of merchants’ claims, and such developments could have a material adverse effect on the Company’s financial results in the period in which the effect becomes probable and reasonably estimable. While the U.S. retrospective responsibility plan is designed to address monetary liability in these matters, see
Note 2—U.S. and Europe Retrospective Responsibility Plans
, judgments or settlements that require the Company to change its business practices, rules, or contractual commitments could adversely affect the Company’s financial results.
VE Territory Covered Litigation
UK Merchant Litigation
Since July 2013, in excess of
400
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 primarily 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
300
Merchants with outstanding claims.
A trial took place from November 2016 to March 2017, relating to claims asserted by only one Merchant. In judgments published in November 2017 and February 2018, the court found as to that Merchant that Visa’s UK domestic interchange did not restrict competition, but that if it had been found to be restrictive it would not be exemptible under applicable law. In April 2018, the Court of Appeal heard the Merchant’s appeal of the decision alongside
two
separate MasterCard cases also involving interchange claims. On July 4, 2018, the Court of Appeal overturned the lower court’s rulings, finding that Visa’s UK domestic interchange restricted competition and the question of whether Visa’s UK domestic interchange was exempt from the finding of restriction under applicable law had been incorrectly decided. The Court of Appeal remitted the claim to the lower court to reconsider the exemption issue and the assessment of damages. On July 31, 2018, both Visa and the Merchant applied for permission to appeal aspects of the Court of Appeal’s judgment to the Supreme Court of the United Kingdom.
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.
The full scope of damages is not yet known because not all Merchant claims have been served and Visa has substantial defenses. However, the total damages sought in the outstanding claims that have been issued, served and/or preserved likely amount to approximately
$2 billion
.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
Other Litigation
European Commission Proceedings
Inter-regional Interchange Investigation.
Following the issuance of a Statement of Objections in 2009 concerning, among other things, the alleged default application of Visa Inc.’s inter-regional interchange fees to intra-regional and domestic consumer debit and credit card transactions in the European Economic Area (EEA), the European Commission (EC) served a Supplementary Statement of Objections (SSO) on Visa Inc. and Visa International in 2013 and a revised SSO in August 2017. The revised SSO concerns only the application of Visa Inc.’s inter-regional interchange fees to transactions involving Visa consumer debit and credit cards issued outside of the Visa Europe region and used at merchants located within the EEA.
The EC continues to claim that inter-regional interchange fees violate EEA competition law and may impose fines in the event that it adopts an infringement decision. The potential amount of any fine cannot be estimated at this time. The EC may also require Visa to reduce the default inter-regional interchange rates the Company sets, revise the Visa operating rules or the way in which the Company enforces its rules, or otherwise modify the way the Company does business. Visa responded in writing to the revised SSO in November 2017 and an oral hearing was held in February 2018. Visa continues to cooperate with the EC in its investigation.
All issues relating to intra-regional or domestic consumer debit and credit card transactions acquired in the EEA were settled by commitments offered by Visa Europe Limited in 2010 and 2014 respectively, and endorsed by the EC. Those commitments have now expired, but the European Union rates on which those commitments were applied remain subject to limits imposed by the European Interchange Fee Regulation.
DCC Investigation.
In 2013, the EC opened an investigation against Visa Europe, based on a complaint alleging that Visa Europe’s pricing of and rules relating to Dynamic Currency Conversion (DCC) transactions infringe EU competition rules. This investigation is pending.
Canadian Merchant Litigation
Beginning in December 2010, a number of class action lawsuits were filed in Quebec, British Columbia, Ontario, Saskatchewan and Alberta against Visa Canada, MasterCard and
ten
financial institutions on behalf of merchants that accept payment by Visa and/or MasterCard credit cards. The actions allege a violation of Canada’s price-fixing law and various common law claims based on separate Visa and MasterCard conspiracies in respect of default interchange and certain of the networks’ rules. In 2015 and 2016,
four
financial institutions settled with the plaintiffs. In June 2017, Visa, MasterCard and a fifth financial institution also reached settlements with the plaintiffs. Settlement approval hearings were held in 2018 and courts in each of the
five
provinces approved the settlements. Wal-Mart Canada and/or Home Depot of Canada Inc. have filed notices of appeal of the British Columbia, Ontario, Saskatchewan and Alberta decisions approving the settlements.
U.S. ATM Access Fee Litigation
National ATM Council Class Action
. In October 2011, the National ATM Council and
thirteen
non-bank ATM operators filed a purported class action lawsuit against Visa (Visa Inc., Visa International, Visa U.S.A. and Plus System, Inc.) and MasterCard in the U.S. District Court for the District of Columbia. The complaint challenges Visa’s rule (and a similar MasterCard rule) that if an ATM operator chooses to charge consumers an access fee for a Visa or Plus transaction, that fee cannot be greater than the access fee charged for transactions on other networks. Plaintiffs claim that the rule violates Section 1 of the Sherman Act, and seek treble damages, injunctive relief, and attorneys’ fees.
Consumer Class Actions
. In October 2011, a purported consumer class action was filed against Visa and MasterCard in the same federal court challenging the same ATM access fee rules.
Two
other purported consumer class actions challenging the rules, later combined, were also filed in October 2011 in the same federal court naming Visa, MasterCard and
three
financial institutions as defendants. Plaintiffs seek treble damages, restitution, injunctive relief, and attorneys’ fees where available under federal and state law, including under Section 1 of the Sherman Act and consumer protection statutes.
These cases are proceeding in the district court.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
U.S. Department of Justice Civil Investigative Demand
On March 13, 2012, the Antitrust Division of the United States Department of Justice (the “Division”) issued a Civil Investigative Demand, or “CID,” to Visa Inc. seeking documents and information regarding a potential violation of Section 1 or 2 of the Sherman Act, 15 U.S.C. §§ 1, 2. The CID focuses on PIN-Authenticated Visa Debit and Visa’s competitive responses to the Dodd-Frank Act, including Visa’s fixed acquirer network fee. Visa is cooperating with the Division in connection with the CID.
Pulse Network
On November 25, 2014, Pulse Network LLC filed suit against Visa Inc. in federal district court in Texas. Pulse alleges that Visa has, among other things, monopolized and attempted to monopolize debit card network services markets. Pulse seeks unspecified treble damages, attorneys’ fees and injunctive relief, including to enjoin the fixed acquirer network fee structure, Visa’s conduct regarding PIN-Authenticated Visa Debit and Visa agreements with merchants and acquirers relating to debit acceptance. On August 31, 2018, the court granted Visa’s motion for summary judgment, finding that Pulse did not have standing to pursue its claims. On September 28, 2018, Pulse filed a notice of appeal seeking review of the district court’s summary judgment decision by the U.S. Court of Appeals for the Fifth Circuit.
EMV Chip Liability Shift
Following their initial complaint filed on March 8, 2016, B&R Supermarket, Inc., d/b/a Milam’s Market, and Grove Liquors LLC filed an amended class action complaint on July 15, 2016, against Visa Inc., Visa U.S.A., MasterCard, Discover, American Express, EMVCo and certain financial institutions in the U.S. District Court for the Northern District of California. The amended complaint asserts that defendants, through EMVCo, conspired to shift liability for fraudulent, faulty or otherwise rejected payment card transactions from defendants to the purported class of merchants, defined as those merchants throughout the United States who have been subjected to the “Liability Shift” since October 2015. Plaintiffs claim that the so-called “Liability Shift” violates Sections 1 and 3 of the Sherman Act and certain state laws, and seek treble damages, injunctive relief and attorneys’ fees.
EMVCo and the financial institution defendants were dismissed, and the matter was subsequently transferred to the U.S. District Court for the Eastern District of New York, which has clarified that this case is not part of MDL 1720.
Plaintiffs filed a renewed motion for class certification on July 16, 2018, following an earlier denial of the motion without prejudice.
Kroger
On June 27, 2016, The Kroger Co. (“Kroger”) filed a lawsuit against Visa Inc. in the U.S. District Court for the Southern District of Ohio. After granting a motion to dismiss filed by Visa, Kroger filed an amended complaint seeking a declaratory judgment that certain of its actions or policies with respect to its acceptance of Visa debit cards did not violate a commercial agreement between Kroger and Visa, and seeking monetary damages under state law. On November 13, 2017, Visa filed a motion to dismiss the amended complaint, and Kroger subsequently sought leave to file a second amended complaint. The parties have stipulated that the litigation, including consideration of that motion, be stayed until December 4, 2018.
Nuts for Candy
On April 5, 2017, plaintiff Nuts for Candy, on behalf of itself and a putative class of California merchants that have accepted Visa-branded cards since January 1, 2004, filed a lawsuit against Visa Inc., Visa International and Visa U.S.A. in California state court. Nuts for Candy pursues claims under California state antitrust and unfair business statutes, seeking damages, costs and other remedies. Subject to the court’s approval, Visa and Nuts for Candy have reached an agreement to resolve Nuts for Candy’s claims in connection with the settlement of the putative Damages Class claims discussed above in
Interchange Multidistrict Litigation (MDL) – Putative Class Actions
.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
Korea Fair Trade Commission
Following complaints lodged by certain financial institutions in Korea, in November 2016, the Korea Fair Trade Commission (KFTC) initiated an investigation into certain pricing changes applicable to Visa financial institutions in Korea. In August 2018, the KFTC notified Visa that the KFTC determined that the pricing changes did not violate Korean law and the investigation was closed.
Ohio Attorney General Civil Investigative Demand
On January 19, 2017, the State of Ohio Office of the Attorney General issued an investigative demand to Visa seeking documents and information focusing on Visa’s rules related to the acceptance of Visa debit cards, as well as cardholder verification methods and the routing of Visa debit transactions. Visa is cooperating with the Attorney General.
Brazilian Administrative Council for Economic Defense
On October 15, 2018, the Brazilian Administrative Council for Economic Defense (“CADE”) initiated an investigation against Visa, Mastercard, American Express and Elo seeking information regarding potential competition law violations with respect to network rules that require acquirers to receive certain information from payment facilitators. Visa is cooperating with CADE.
Selected Quarterly Financial Data (Unaudited)
The following tables show selected quarterly operating results for each quarter and full year of fiscal
2018
and
2017
for the Company:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended (unaudited)
|
|
Fiscal Year
|
Visa Inc.
|
September 30,
2018
(1)
|
|
June 30,
2018
(1)
|
|
March 31,
2018
|
|
December 31,
2017
(1)
|
|
2018 Total
|
|
(in millions, except per share data)
|
Operating revenues
|
$
|
5,434
|
|
|
$
|
5,240
|
|
|
$
|
5,073
|
|
|
$
|
4,862
|
|
|
$
|
20,609
|
|
Operating income
|
$
|
3,406
|
|
|
$
|
2,885
|
|
|
$
|
3,336
|
|
|
$
|
3,327
|
|
|
$
|
12,954
|
|
Net income
|
$
|
2,845
|
|
|
$
|
2,329
|
|
|
$
|
2,605
|
|
|
$
|
2,522
|
|
|
$
|
10,301
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
Class A common stock
|
$
|
1.24
|
|
|
$
|
1.00
|
|
|
$
|
1.12
|
|
|
$
|
1.07
|
|
|
$
|
4.43
|
|
Class B common stock
|
$
|
2.01
|
|
|
$
|
1.66
|
|
|
$
|
1.84
|
|
|
$
|
1.77
|
|
|
$
|
7.28
|
|
Class C common stock
|
$
|
4.94
|
|
|
$
|
4.02
|
|
|
$
|
4.46
|
|
|
$
|
4.30
|
|
|
$
|
17.72
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
Class A common stock
|
$
|
1.23
|
|
|
$
|
1.00
|
|
|
$
|
1.11
|
|
|
$
|
1.07
|
|
|
$
|
4.42
|
|
Class B common stock
|
$
|
2.01
|
|
|
$
|
1.65
|
|
|
$
|
1.84
|
|
|
$
|
1.77
|
|
|
$
|
7.27
|
|
Class C common stock
|
$
|
4.93
|
|
|
$
|
4.01
|
|
|
$
|
4.46
|
|
|
$
|
4.29
|
|
|
$
|
17.69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended (unaudited)
|
|
Fiscal Year
|
Visa Inc.
|
September 30,
2017
|
|
June 30,
2017
|
|
March 31,
2017
(1)
|
|
December 31,
2016
|
|
2017 Total
|
|
(in millions, except per share data)
|
Operating revenues
|
$
|
4,855
|
|
|
$
|
4,565
|
|
|
$
|
4,477
|
|
|
$
|
4,461
|
|
|
$
|
18,358
|
|
Operating income
|
$
|
3,212
|
|
|
$
|
3,024
|
|
|
$
|
2,808
|
|
|
$
|
3,100
|
|
|
$
|
12,144
|
|
Net income
|
$
|
2,140
|
|
|
$
|
2,059
|
|
|
$
|
430
|
|
|
$
|
2,070
|
|
|
$
|
6,699
|
|
Basic earnings per share
|
|
|
|
|
|
|
|
|
|
Class A common stock
|
$
|
0.91
|
|
|
$
|
0.87
|
|
|
$
|
0.18
|
|
|
$
|
0.86
|
|
|
$
|
2.80
|
|
Class B common stock
|
$
|
1.49
|
|
|
$
|
1.43
|
|
|
$
|
0.30
|
|
|
$
|
1.41
|
|
|
$
|
4.62
|
|
Class C common stock
|
$
|
3.62
|
|
|
$
|
3.46
|
|
|
$
|
0.72
|
|
|
$
|
3.43
|
|
|
$
|
11.21
|
|
Diluted earnings per share
|
|
|
|
|
|
|
|
|
|
Class A common stock
|
$
|
0.90
|
|
|
$
|
0.86
|
|
|
$
|
0.18
|
|
|
$
|
0.86
|
|
|
$
|
2.80
|
|
Class B common stock
|
$
|
1.49
|
|
|
$
|
1.42
|
|
|
$
|
0.29
|
|
|
$
|
1.41
|
|
|
$
|
4.61
|
|
Class C common stock
|
$
|
3.61
|
|
|
$
|
3.45
|
|
|
$
|
0.72
|
|
|
$
|
3.42
|
|
|
$
|
11.19
|
|
|
|
(1)
|
The Company’s unaudited consolidated statement of operations include the impact of several significant one-time items. See
Overview
within
Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations
of this report.
|