UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30,December 31, 2013
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-33977
VISA INC.
(Exact name of Registrant as specified in its charter)
|
| | |
Delaware | | 26-0267673 |
(State or other jurisdiction of incorporation or organization) | | (IRS Employer Identification No.) |
| | |
P.O. Box 8999 San Francisco, California | | 94128-8999 |
(Address of principal executive offices) | | (Zip Code) |
Registrant’s telephone number, including area code: (650) 432-3200
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes R No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes R No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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| |
Large accelerated filer R | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company.) | Smaller Reporting Company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No R
As of July 19, 2013January 24, 2014, there were 514,589,442504,306,404 shares of class A common stock, par value $0.0001 per share, 245,513,385 shares of class B common stock, par value $0.0001 per share, and 27,393,26426,047,808 shares of class C common stock, par value $0.0001 per share, of Visa Inc. outstanding.
VISA INC.
TABLE OF CONTENTS
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PART I. | | |
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Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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PART II. | | |
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Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
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PART I. FINANCIAL INFORMATION
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ITEM 1. | Financial Statements |
VISA INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| | | June 30, 2013 | | September 30, 2012 | December 31, 2013 | | September 30, 2013 |
| (in millions, except par value data) | (in millions, except par value data) |
Assets | | | | | | |
Cash and cash equivalents | $ | 1,453 |
| | $ | 2,074 |
| $ | 2,121 |
| | $ | 2,186 |
|
Restricted cash—litigation escrow (Note 2) | 49 |
| | 4,432 |
| 49 |
| | 49 |
|
Investment securities: | | | | | | |
Trading | 73 |
| | 66 |
| 89 |
| | 75 |
|
Available-for-sale | 1,822 |
| | 677 |
| 1,880 |
| | 1,994 |
|
Income tax receivable | 600 |
| | 179 |
| 20 |
| | 142 |
|
Settlement receivable | 459 |
| | 454 |
| 888 |
| | 799 |
|
Accounts receivable | 779 |
| | 723 |
| 840 |
| | 761 |
|
Customer collateral (Note 6) | 817 |
| | 823 |
| |
Customer collateral (Note 5) | | 886 |
| | 866 |
|
Current portion of client incentives | 240 |
| | 209 |
| 235 |
| | 282 |
|
Deferred tax assets | 429 |
| | 2,027 |
| 466 |
| | 481 |
|
Prepaid expenses and other current assets | 220 |
| | 122 |
| 291 |
| | 187 |
|
Total current assets | 6,941 |
| | 11,786 |
| 7,765 |
| | 7,822 |
|
Investment securities, available-for-sale | 3,189 |
| | 3,283 |
| 3,040 |
| | 2,760 |
|
Client incentives | 85 |
| | 58 |
| 98 |
| | 89 |
|
Property, equipment and technology, net | 1,689 |
| | 1,634 |
| 1,746 |
| | 1,732 |
|
Other assets | 332 |
| | 151 |
| 584 |
| | 521 |
|
Intangible assets, net | 11,368 |
| | 11,420 |
| 11,334 |
| | 11,351 |
|
Goodwill | 11,681 |
| | 11,681 |
| 11,681 |
| | 11,681 |
|
Total assets | $ | 35,285 |
| | $ | 40,013 |
| $ | 36,248 |
| | $ | 35,956 |
|
Liabilities | | | | | | |
Accounts payable | $ | 131 |
| | $ | 152 |
| $ | 101 |
| | $ | 184 |
|
Settlement payable | 817 |
| | 719 |
| 1,246 |
| | 1,225 |
|
Customer collateral (Note 6) | 817 |
| | 823 |
| |
Customer collateral (Note 5) | | 886 |
| | 866 |
|
Accrued compensation and benefits | 444 |
| | 460 |
| 337 |
| | 523 |
|
Client incentives | 829 |
| | 830 |
| 864 |
| | 919 |
|
Accrued liabilities | 628 |
| | 584 |
| |
Accrued liabilities (Note 6) | | 947 |
| | 613 |
|
Accrued litigation (Note 11) | 5 |
| | 4,386 |
| 4 |
| | 5 |
|
Total current liabilities | 3,671 |
| | 7,954 |
| 4,385 |
| | 4,335 |
|
Deferred tax liabilities | 4,043 |
| | 4,058 |
| 4,160 |
| | 4,149 |
|
Other liabilities | 568 |
| | 371 |
| |
Other liabilities (Note 6) | | 689 |
| | 602 |
|
Total liabilities | 8,282 |
| | 12,383 |
| 9,234 |
| | 9,086 |
|
See accompanying notes, which are an integral part of these unaudited consolidated financial statements.
4
VISA INC.
CONSOLIDATED BALANCE SHEETS—(Continued)
(UNAUDITED)
| | | June 30, 2013 | | September 30, 2012 | December 31, 2013 | | September 30, 2013 |
| (in millions, except par value data) | (in millions, except par value data) |
Equity | | | | | | |
Preferred stock, $0.0001 par value, 25 shares authorized and none issued | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
|
Class A common stock, $0.0001 par value, 2,001,622 shares authorized, 515 and 535 shares issued and outstanding at June 30, 2013, and September 30, 2012, respectively (Note 7) | — |
| | — |
| |
Class B common stock, $0.0001 par value, 622 shares authorized, 245 shares issued and outstanding at June 30, 2013, and September 30, 2012 (Note 7) | — |
| | — |
| |
Class C common stock, $0.0001 par value, 1,097 shares authorized, 27 and 31 shares issued and outstanding at June 30, 2013, and September 30, 2012, respectively (Note 7) | — |
| | — |
| |
Class A common stock, $0.0001 par value, 2,001,622 shares authorized, 505 and 508 shares issued and outstanding at December 31, 2013 and September 30, 2013, respectively (Note 7) | | — |
| | — |
|
Class B common stock, $0.0001 par value, 622 shares authorized, 245 shares issued and outstanding at December 31, 2013 and September 30, 2013 (Note 7) | | — |
| | — |
|
Class C common stock, $0.0001 par value, 1,097 shares authorized, 26 and 27 shares issued and outstanding at December 31, 2013 and September 30, 2013, respectively (Note 7) | | — |
| | — |
|
Additional paid-in capital | 19,130 |
| | 19,992 |
| 18,702 |
| | 18,875 |
|
Accumulated income | 7,989 |
| | 7,809 |
| 8,269 |
| | 7,974 |
|
Accumulated other comprehensive income (loss), net: | | | | | | |
Investment securities, available-for-sale | 26 |
| | 3 |
| 70 |
| | 59 |
|
Defined benefit pension and other postretirement plans | (181 | ) | | (186 | ) | (60 | ) | | (60 | ) |
Derivative instruments classified as cash flow hedges | 40 |
| | 13 |
| 34 |
| | 23 |
|
Foreign currency translation adjustments | (1 | ) | | (1 | ) | (1 | ) | | (1 | ) |
Total accumulated other comprehensive loss, net | (116 | ) | | (171 | ) | |
Total accumulated other comprehensive income, net | | 43 |
| | 21 |
|
Total equity | 27,003 |
| | 27,630 |
| 27,014 |
| | 26,870 |
|
Total liabilities and equity | $ | 35,285 |
| | $ | 40,013 |
| $ | 36,248 |
| | $ | 35,956 |
|
See accompanying notes, which are an integral part of these unaudited consolidated financial statements.
5
VISA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| | | Three Months Ended June 30, | | Nine Months Ended June 30, | Three Months Ended December 31, |
| 2013 | | 2012 | | 2013 | | 2012 | 2013 | | 2012 |
| (in millions, except per share data) | (in millions, except per share data) |
Operating Revenues | | | | | | | | | | |
Service revenues | $ | 1,298 |
| | $ | 1,216 |
| | $ | 3,967 |
| | $ | 3,608 |
| $ | 1,419 |
| | $ | 1,300 |
|
Data processing revenues | 1,191 |
| | 1,040 |
| | 3,456 |
| | 2,913 |
| 1,264 |
| | 1,115 |
|
International transaction revenues | 854 |
| | 748 |
| | 2,490 |
| | 2,229 |
| 891 |
| | 805 |
|
Other revenues | 179 |
| | 175 |
| | 533 |
| | 532 |
| 180 |
| | 179 |
|
Client incentives | (521 | ) | | (614 | ) | | (1,641 | ) | | (1,592 | ) | (599 | ) | | (553 | ) |
Total operating revenues | 3,001 |
| | 2,565 |
| | 8,805 |
| | 7,690 |
| 3,155 |
| | 2,846 |
|
Operating Expenses | | | | | | | | | | |
Personnel | 493 |
| | 435 |
| | 1,433 |
| | 1,255 |
| 470 |
| | 454 |
|
Marketing | 252 |
| | 242 |
| | 640 |
| | 602 |
| 186 |
| | 193 |
|
Network and processing | 117 |
| | 102 |
| | 346 |
| | 303 |
| 132 |
| | 110 |
|
Professional fees | 103 |
| | 99 |
| | 282 |
| | 251 |
| 75 |
| | 88 |
|
Depreciation and amortization | 101 |
| | 84 |
| | 291 |
| | 244 |
| 107 |
| | 92 |
|
General and administrative | 108 |
| | 112 |
| | 322 |
| | 320 |
| 108 |
| | 106 |
|
Litigation provision (Note 11) | (1 | ) | | 4,098 |
| | 3 |
| | 4,098 |
| — |
| | 3 |
|
Total operating expenses | 1,173 |
| | 5,172 |
| | 3,317 |
| | 7,073 |
| 1,078 |
| | 1,046 |
|
Operating income (loss) | 1,828 |
| | (2,607 | ) | | 5,488 |
| | 617 |
| |
Operating income | | 2,077 |
| | 1,800 |
|
Non-operating income | 5 |
| | — |
| | 3 |
| | 2 |
| 6 |
| | 1 |
|
Income (loss) before income taxes | 1,833 |
| | (2,607 | ) | | 5,491 |
| | 619 |
| |
Income tax provision (benefit) | 608 |
| | (768 | ) | | 1,703 |
| | 139 |
| |
Net income (loss) including non-controlling interest | 1,225 |
| | (1,839 | ) | | 3,788 |
| | 480 |
| |
Loss attributable to non-controlling interest | — |
| | — |
| | — |
| | 2 |
| |
Net income (loss) attributable to Visa Inc. | $ | 1,225 |
| | $ | (1,839 | ) | | $ | 3,788 |
| | $ | 482 |
| |
Income before income taxes | | 2,083 |
| | 1,801 |
|
Income tax provision | | 676 |
| | 508 |
|
Net income | | $ | 1,407 |
| | $ | 1,293 |
|
See accompanying notes, which are an integral part of these unaudited consolidated financial statements.
6
VISA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS—(Continued)
(UNAUDITED)
| | | Three Months Ended June 30, | | Nine Months Ended June 30, | Three Months Ended December 31, |
| 2013 | | 2012 | | 2013 | | 2012 | 2013 | | 2012 |
| (in millions, except per share data) | (in millions, except per share data) |
Basic earnings (loss) per share (Note 8) | | | | | | | | |
Basic earnings per share (Note 8) | | | | |
Class A common stock | $ | 1.89 |
| | $ | (2.74 | ) | | $ | 5.76 |
| | $ | 0.71 |
| $ | 2.21 |
| | $ | 1.94 |
|
Class B common stock | $ | 0.79 |
| | $ | (1.16 | ) | | $ | 2.42 |
| | $ | 0.32 |
| $ | 0.93 |
| | $ | 0.82 |
|
Class C common stock | $ | 1.89 |
| | $ | (2.74 | ) | | $ | 5.76 |
| | $ | 0.71 |
| $ | 2.21 |
| | $ | 1.94 |
|
Basic weighted-average shares outstanding (Note 8) | | | | | | | | | | |
Class A common stock | 515 |
| | 525 |
| | 524 |
| | 523 |
| 505 |
| | 531 |
|
Class B common stock | 245 |
| | 245 |
| | 245 |
| | 245 |
| 245 |
| | 245 |
|
Class C common stock | 28 |
| | 40 |
| | 29 |
| | 43 |
| 27 |
| | 30 |
|
Diluted earnings (loss) per share (Note 8) | | | | | | | | |
Diluted earnings per share (Note 8) | | | | |
Class A common stock | $ | 1.88 |
| | $ | (2.74 | ) | | $ | 5.74 |
| | $ | 0.71 |
| $ | 2.20 |
| | $ | 1.93 |
|
Class B common stock | $ | 0.79 |
| | $ | (1.16 | ) | | $ | 2.41 |
| | $ | 0.32 |
| $ | 0.93 |
| | $ | 0.81 |
|
Class C common stock | $ | 1.88 |
| | $ | (2.74 | ) | | $ | 5.74 |
| | $ | 0.71 |
| $ | 2.20 |
| | $ | 1.93 |
|
Diluted weighted-average shares outstanding (Note 8) | | | | | | | | | | |
Class A common stock | 651 |
| | 672 |
| | 660 |
| | 681 |
| 639 |
| | 669 |
|
Class B common stock | 245 |
| | 245 |
| | 245 |
| | 245 |
| 245 |
| | 245 |
|
Class C common stock | 28 |
| | 40 |
| | 29 |
| | 43 |
| 27 |
| | 30 |
|
See accompanying notes, which are an integral part of these unaudited consolidated financial statements.
7
VISA INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2013 | | 2012 | | 2013 | | 2012 |
| (in millions) |
Net income (loss) including non-controlling interest | $ | 1,225 |
| | $ | (1,839 | ) | | $ | 3,788 |
| | $ | 480 |
|
Other comprehensive (loss) income, net of tax: | | | | | | | |
Investment securities, available-for-sale: | | | | | | | |
Net unrealized (loss) gain | (10 | ) | | (6 | ) | | 40 |
| | 1 |
|
Income tax effect | 1 |
| | 2 |
| | (16 | ) | | — |
|
Reclassification adjustment for net gain realized in net income including non-controlling interest | — |
| | — |
| | (1 | ) | | — |
|
Income tax effect | — |
| | — |
| | — |
| | — |
|
Defined benefit pension and other postretirement plans | 3 |
| | 9 |
| | 8 |
| | 1 |
|
Income tax effect | (1 | ) | | (3 | ) | | (3 | ) | | (3 | ) |
Derivative instruments classified as cash flow hedges: | | | | | | | |
Net unrealized gain | 40 |
| | 21 |
| | 55 |
| | 9 |
|
Income tax effect | (9 | ) | | (9 | ) | | (9 | ) | | (3 | ) |
Reclassification adjustment for net gain realized in net income including non-controlling interest | (9 | ) | | (7 | ) | | (26 | ) | | (3 | ) |
Income tax effect | 2 |
| | 2 |
| | 7 |
| | 3 |
|
Foreign currency translation adjustments | — |
| | (8 | ) | | — |
| | (4 | ) |
Other comprehensive income, net of tax | 17 |
| | 1 |
| | 55 |
| | 1 |
|
Comprehensive income (loss) including non-controlling interest | 1,242 |
| | (1,838 | ) | | 3,843 |
| | 481 |
|
Comprehensive loss attributable to non-controlling interest | — |
| | — |
| | — |
| | 2 |
|
Comprehensive income (loss) attributable to Visa Inc. | $ | 1,242 |
| | $ | (1,838 | ) | | $ | 3,843 |
| | $ | 483 |
|
|
| | | | | | | |
| Three Months Ended December 31, |
| 2013 | | 2012 |
| (in millions) |
Net income | $ | 1,407 |
| | $ | 1,293 |
|
Other comprehensive income (loss), net of tax: | | | |
Investment securities, available-for-sale: | | | |
Net unrealized gain | 17 |
| | 48 |
|
Income tax effect | (6 | ) | | (17 | ) |
Defined benefit pension and other postretirement plans: | | | |
Net unrealized actuarial gain and prior service credit | 1 |
| | — |
|
Amortization of actuarial (gain) loss and prior service credit realized in net income | (2 | ) | | 3 |
|
Income tax effect | 1 |
| | (1 | ) |
Derivative instruments classified as cash flow hedges: | | | |
Net unrealized gain | 24 |
| | 9 |
|
Income tax effect | (4 | ) | | — |
|
Reclassification adjustment for net gain realized in net income | (11 | ) | | (11 | ) |
Income tax effect | 2 |
| | 3 |
|
Other comprehensive income, net of tax | 22 |
| | 34 |
|
Comprehensive income | $ | 1,429 |
| | $ | 1,327 |
|
See accompanying notes, which are an integral part of these unaudited consolidated financial statements.
8
VISA INC.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(UNAUDITED)
| | | Common Stock | | Additional Paid-In Capital | | Accumulated Income (Deficit) | | Accumulated Other Comprehensive (Loss) Income | | Total Equity | Common Stock | | Additional Paid-in Capital | | Accumulated Income | | Accumulated Other Comprehensive Income | | Total Equity |
| Class A | | Class B | | Class C | | Class A | | Class B | | Class C | |
| (in millions, except per share data) | (in millions, except per share data) |
Balance as of September 30, 2012 | 535 |
| | 245 |
| | 31 |
| | $ | 19,992 |
| | $ | 7,809 |
| | $ | (171 | ) | | $ | 27,630 |
| |
Net income attributable to Visa Inc. | | | | | | | | | 3,788 |
| | | | 3,788 |
| |
Balance as of September 30, 2013 | | 508 |
| | 245 |
| | 27 |
| | $ | 18,875 |
| | $ | 7,974 |
| | $ | 21 |
| | $ | 26,870 |
|
Net income | | | | | | | | | | 1,407 |
| | | | 1,407 |
|
Other comprehensive income, net of tax | | | | | | | | | | | 55 |
| | 55 |
| | | | | | | | | | | 22 |
| | 22 |
|
Comprehensive income including non-controlling interest | | | | | | | | | | | | | 3,843 |
| |
Comprehensive income | | | | | | | | | | | | | | 1,429 |
|
Issuance of restricted stock awards(1) | 1 |
| | | | | | | | | | | | — |
| — |
| | | | | | | | | | | | — |
|
Conversion of class C common stock upon sale into public market | 4 |
| | | | (4 | ) | | | | | | | | — |
| 1 |
| | | | (1 | ) | | | | | | | | — |
|
Share-based compensation | | | | | | | 139 |
| | | | | | 139 |
| | | | | | | 45 |
| | | | | | 45 |
|
Excess tax benefit for share-based compensation | | | | | | | 64 |
| | | | | | 64 |
| | | | | | | 54 |
| | | | | | 54 |
|
Cash proceeds from exercise of stock options | 1 |
| | | | | | 98 |
| | | | | | 98 |
| 1 |
| | | | | | 38 |
| | | | | | 38 |
|
Restricted stock and performance shares settled in cash for taxes(1)(2) | — |
| | | | | | (64 | ) | | | | | | (64 | ) | — |
| | | | | | (77 | ) | | | | | | (77 | ) |
Cash dividends declared and paid, at a quarterly amount of $0.33 per as-converted share (Note 7) | | | | | | | | | (653 | ) | | | | (653 | ) | |
Cash dividends declared and paid, at a quarterly amount of $0.40 per as-converted share (Note 7) | | | | | | | | | | (254 | ) | | | | (254 | ) |
Repurchase of class A common stock (Note 7) | (26 | ) | | | | | | (1,099 | ) | | (2,955 | ) | | | | (4,054 | ) | (5 | ) | | | | | | (233 | ) | | (858 | ) | | | | (1,091 | ) |
Balance as of June 30, 2013 | 515 |
| | 245 |
| | 27 |
| | $ | 19,130 |
| | $ | 7,989 |
| | $ | (116 | ) | | $ | 27,003 |
| |
Balance as of December 31, 2013 | | 505 |
| | 245 |
| | 26 |
| | $ | 18,702 |
| | $ | 8,269 |
| | $ | 43 |
| | $ | 27,014 |
|
| |
(1) | Increase in class A common stock is less than 1 million shares. |
| |
(2) | Decrease in class A common stock is less than 1 million shares. |
See accompanying notes, which are an integral part of these unaudited consolidated financial statements.
9
VISA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| | | Nine Months Ended June 30, | Three Months Ended December 31, |
| 2013 | | 2012 | 2013 | | 2012 |
| (in millions) | (in millions) |
Operating Activities | | | | | | |
Net income including non-controlling interest | $ | 3,788 |
| | $ | 480 |
| |
Adjustments to reconcile net income including non-controlling interest to net cash provided by operating activities: | | | | |
Net income | | $ | 1,407 |
| | $ | 1,293 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | | |
Amortization of client incentives | 1,641 |
| | 1,592 |
| 599 |
| | 553 |
|
Share-based compensation | 139 |
| | 112 |
| 45 |
| | 48 |
|
Excess tax benefit for share-based compensation | (64 | ) | | (42 | ) | (54 | ) | | (50 | ) |
Depreciation and amortization of property, equipment, technology and intangible assets | 291 |
| | 244 |
| 107 |
| | 92 |
|
Deferred income taxes | 1,562 |
| | (1,427 | ) | 19 |
| | 1,622 |
|
Litigation provision and accretion (Note 11) | 3 |
| | 4,099 |
| |
Other | 39 |
| | (34 | ) | 5 |
| | 12 |
|
Change in operating assets and liabilities: | | | | | | |
Income tax receivable | (421 | ) | | (41 | ) | 122 |
| | (1,162 | ) |
Settlement receivable | (5 | ) | | (31 | ) | (89 | ) | | (405 | ) |
Accounts receivable | (56 | ) | | (231 | ) | (79 | ) | | (78 | ) |
Client incentives | (1,700 | ) | | (1,315 | ) | (616 | ) | | (453 | ) |
Other assets | (310 | ) | | — |
| (199 | ) | | (228 | ) |
Accounts payable | 5 |
| | (58 | ) | (80 | ) | | 1 |
|
Settlement payable | 98 |
| | 298 |
| 21 |
| | 353 |
|
Accrued and other liabilities | 351 |
| | 134 |
| 334 |
| | (38 | ) |
Accrued litigation (Note 11) | (4,384 | ) | | (140 | ) | (1 | ) | | (4,384 | ) |
Net cash provided by operating activities | 977 |
| | 3,640 |
| |
Net cash provided by (used in) operating activities | | 1,541 |
| | (2,824 | ) |
Investing Activities | | | | | | |
Purchases of property, equipment, technology and intangible assets | (333 | ) | | (270 | ) | (120 | ) | | (100 | ) |
Proceeds from disposal of property, equipment and technology | — |
| | 2 |
| |
Investment securities, available-for-sale: | | | | | | |
Purchases | (2,789 | ) | | (3,326 | ) | (754 | ) | | (1,184 | ) |
Proceeds from sales and maturities | 1,767 |
| | 1,640 |
| 600 |
| | 418 |
|
Net distributions from other investments | 1 |
| | 14 |
| |
Acquisitions, net of cash received | — |
| | (3 | ) | |
Purchases of / contributions to other investments | | (2 | ) | | — |
|
Proceeds / distributions from other investments | | — |
| | 1 |
|
Net cash used in investing activities | (1,354 | ) | | (1,943 | ) | (276 | ) | | (865 | ) |
See accompanying notes, which are an integral part of these unaudited consolidated financial statements.
10
VISA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
(UNAUDITED)
| | | Nine Months Ended June 30, | Three Months Ended December 31, |
| 2013 | | 2012 | 2013 | | 2012 |
| (in millions) | (in millions) |
Financing Activities | | | | | | |
Repurchase of class A common stock (Note 7) | $ | (4,054 | ) | | $ | (536 | ) | $ | (1,091 | ) | | $ | (1,253 | ) |
Dividends paid (Note 7) | (653 | ) | | (448 | ) | (254 | ) | | (220 | ) |
Deposits into litigation escrow account—retrospective responsibility plan | — |
| | (1,565 | ) | |
Payments from litigation escrow account—retrospective responsibility plan (Note 2) | 4,383 |
| | 140 |
| |
Payments from litigation escrow account—retrospective responsibility plan (Note 11) | | — |
| | 4,383 |
|
Cash proceeds from exercise of stock options | 98 |
| | 111 |
| 38 |
| | 70 |
|
Restricted stock and performance shares settled in cash for taxes | (64 | ) | | — |
| (77 | ) | | (64 | ) |
Excess tax benefit for share-based compensation | 64 |
| | 42 |
| 54 |
| | 50 |
|
Payment for earn-out related to PlaySpan acquisition | (12 | ) | | — |
| — |
| | (12 | ) |
Principal payments on capital lease obligations | (6 | ) | | (6 | ) | — |
| | (5 | ) |
Net cash used in financing activities | (244 | ) | | (2,262 | ) | |
Effect of exchange rate changes on cash and cash equivalents | — |
| | (4 | ) | |
Net cash (used in) provided by financing activities | | (1,330 | ) | | 2,949 |
|
Decrease in cash and cash equivalents | (621 | ) | | (569 | ) | (65 | ) | | (740 | ) |
Cash and cash equivalents at beginning of year | 2,074 |
| | 2,127 |
| 2,186 |
| | 2,074 |
|
Cash and cash equivalents at end of period | $ | 1,453 |
| | $ | 1,558 |
| $ | 2,121 |
| | $ | 1,334 |
|
Supplemental Disclosure of Cash Flow Information | | | | |
Supplemental Disclosure | | | | |
Income taxes paid, net of refunds | $ | 478 |
| | $ | 1,575 |
| $ | 96 |
| | $ | 45 |
|
Amounts included in accounts payable and accrued and other liabilities related to purchases of property, equipment, technology and intangible assets | $ | 27 |
| | $ | 85 |
| |
Non-cash accruals related to purchases of property, equipment, technology and intangible assets | | $ | 20 |
| | $ | 33 |
|
See accompanying notes, which are an integral part of these unaudited consolidated financial statements.
11
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30,December 31, 2013
(unaudited)
Note 1—Summary of Significant Accounting Policies
Organization. Visa Inc. (“Visa” or the “Company”) is a global payments technology company that connects consumers, businesses, financial institutions and governments around the worldin more than 200 countries and territories to fast, secure and reliable electronic payments. 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 Canada Corporation, Inovant LLC and CyberSource Corporation (“CyberSource”), operate one of the world’s most advanced processing networks. The Company provides its clients withnetworks — VisaNet — which facilitates authorization, clearing and settlement of payment processing platforms that encompass consumer credit, debit, prepaidtransactions worldwide. VisaNet also offers fraud protection for account holders and commercial payments, and facilitates global commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses and government entities. The Companyassured payment for merchants. Visa is not a bank and does not issue cards, extend credit or collect, assessset rates and fees for account holders on Visa-branded cards and payment products. In most cases, account holder and merchant relationships belong to, and are managed by, Visa's financial institution clients. Visa provides a wide variety of payment solutions that support payment products that issuers can offer to their account holders: pay now with debit, pay ahead with prepaid or set cardholder fees or interest charges.pay later with credit products. These services facilitate transactions on Visa's network among account holders, merchants, financial institutions and governments in mature and emerging markets globally.
Consolidation and basis of presentation. The accompanying unaudited consolidated financial statements include the accounts of Visa and its consolidated entities and are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Company consolidates its majority-owned and controlled entities, including variable interest entities ("VIEs") for which the Company is the primary beneficiary. The Company’s investments in VIEs have not been material to its consolidated financial statements as of and for the periods presented. All significant intercompany accounts and transactions are eliminated in consolidation.
Beginning with the first quarter of fiscal 2013, income tax receivable is presented separately on the consolidated balance sheets. Previously, it had been included in the prepaid expenses and other current assets line. The Company also combined the interest income (expense), investment income and other lines on the consolidated statements of operations into one line entitled, "Non-operating income." All prior period information has been reclassified to conform to current period presentation.
The accompanying unaudited consolidated financial statements are presented in accordance with the U.S. Securities and Exchange Commission ("SEC") requirements for Quarterly Reports on Form 10-Q and, consequently, do not include all of the annual disclosures required by U.S. GAAP. Reference should be made to the Visa Annual Report on Form 10-K for the year ended September 30, 20122013 for additional disclosures, including a summary of the Company’s significant accounting policies.
In the opinion of management, the accompanying unaudited consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the Company's financial position, results of operationoperations and cash flows for the interim periods presented.
Recently issuedIssued and adopted accounting pronouncements. In June 2011, the FinancialAdopted Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2011-05, which impacts the presentation of comprehensive income. The guidance requires components of other comprehensive income to be presented with net income to arrive at total comprehensive income. This ASU impacts presentation only and does not impact the underlying components of other comprehensive income or net income. In December 2011, the FASB issued an amendment to ASU 2011-05, which deferred the requirement to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income. All other components of ASU 2011-05 were adopted effective October 1, 2012. The adoption did not have a material impact on the consolidated financial statements.
In February 2013, the FASB issued ASU 2013-02, which established the effective date for the requirement to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income. The standard impacts presentation only and does not impact the underlying components of other comprehensive income or net income. The Company will adopt the standard effective October 1, 2013. The adoption is not expected to have a material impact on the consolidated financial statements.
In July 2012, the FASB issued ASU 2012-02, which allows an entity to first assess qualitative factors to determine whether it is necessary to perform a quantitative impairment test for indefinite-lived intangible assets. The
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Company adopted ASU 2012-02 effective October 1, 2012, and applied the new guidance in its annual impairment review of indefinite-lived intangible assets as of February 1, 2013. See Note 3—Fair Value Measurements and Investments. The adoption did not have a material impact on the consolidated financial statements.Pronouncements.
In January 2013, the FASB issued ASUAccounting Standards Update ("ASU") 2013-01, which clarifies the scope of ASU 2011-11. As amended, ASU 2011-11 requires disclosure of the effect or potential effect of offsetting arrangements on a Company's financial position as well as enhanced disclosure of the rights of offset associated with a Company's recognized derivative instruments, including bifurcated embedded derivatives, repurchase agreements and reverse repurchase agreements, and securities borrowing and lending transactions. The amended standard impacts presentation only and isonly. The Company adopted the standard effective October 1, 2013. The adoption did not expected to have a material impact on the consolidated financial statements.
In February 2013, the FASB issued ASU 2013-02, which established the effective date for the requirement to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income. The standard impacts presentation only and does not impact the underlying components of other comprehensive income or net income. The Company will adoptadopted the standard effective October 1, 2013. Beginning with fiscal 2014, the components related to pension and postretirement benefit plans are presented on the consolidated statements of comprehensive income. All prior period information has been reclassified to conform to current period presentation. The adoption did not have a material impact on the consolidated financial statements.
In February 2013, the FASB issued ASU 2013-04, which provides guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
obligation is fixed at the reporting date. The Company will adopt the standard effective October 1, 2014. The adoption is not expected to have a material impact on the consolidated financial statements.
In March 2013, the FASB issued ASU 2013-05, which clarifies the applicable guidance for the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity, or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The Company will adopt the standard effective October 1, 2014. The adoption is not expected to have a material impact on the consolidated financial statements.
In July 2013, the FASB issued ASU 2013-11, which provides guidance for the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The Company will adopt the standard effective October 1, 2014. The adoption is not expected to have a material impact on the consolidated financial statements.
Note 2—Retrospective Responsibility Plan
Under the terms of the retrospective responsibility plan, the Company maintains an escrow account from which settlements of, or judgments in, the covered litigation are paid. At December 31, 2013 and September 30, 2013, the balance of the escrow account was $49 million.
On January 14, 2014, the court entered the final judgment order approving the settlement with the class plaintiffs in the interchange multidistrict litigation proceedings, which is subject to the adjudication of any appeals. Takedown payments of approximately $1.1 billion related to the opt-out merchants were received on January 27, 2014, and were deposited into the litigation escrow account. The deposit into the litigation escrow account, and a related increase in accrued litigation to address opt-out claims will be recorded in the second quarter of fiscal 2014. See Note 11—Legal Matters.
The following table summarizes activity related to the litigation escrow account. |
| | | |
| (in millions) |
Balance at October 1, 2012 | $ | 4,432 |
|
Payments to settlement funds(1): | |
Class plaintiffs | (4,033 | ) |
Individual plaintiffs | (350 | ) |
Balance at June 30, 2013 | $ | 49 |
|
| |
(1)
| These payments are associated with the Multidistrict Litigation Proceedings. The settlement with the class plaintiffs in these proceedings is subject to final court approval, which the Company cannot assure will be received, and to the adjudication of any appeals. See Note 11—Legal Matters.
|
The accrual related to the covered litigation could be either higher or lower than the litigation escrow account balance. The Company did not record an additional accrual for the covered litigation during the ninethree months ended June 30,December 31, 2013.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 3—Fair Value Measurements and Investments
Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis.Basis | | | Fair Value Measurements Using Inputs Considered as | Fair Value Measurements Using Inputs Considered as |
| Level 1 | | Level 2 | | Level 3 | Level 1 | | Level 2 | | Level 3 |
| June 30, 2013 | | September 30, 2012 | | June 30, 2013 | | September 30, 2012 | | June 30, 2013 | | September 30, 2012 | December 31, 2013 | | September 30, 2013 | | December 31, 2013 | | September 30, 2013 | | December 31, 2013 | | September 30, 2013 |
| (in millions) | (in millions) |
Assets | | | | | | | | | | | | | | | | | | | | | | |
Cash equivalents and restricted cash: | | | | | | | | | | | | | | | | | | | | | | |
Money market funds | $ | 620 |
| | $ | 5,676 |
| | | | | | | | | $ | 998 |
| | $ | 1,071 |
| | | | | | | | |
Commercial paper | | | | | $ | 52 |
| | $ | 93 |
| | | | | | | | | $ | 44 |
| | $ | 51 |
| | | | |
Investment securities, trading: | | | | | | | | | | | | | | | | | | | | | | |
Equity securities | 73 |
| | 66 |
| | | | | | | | | 89 |
| | 75 |
| | | | | | | | |
Investment securities, available-for-sale: | | | | | | | | | | | | | | | | | | | | | | |
U.S. government-sponsored debt securities | | | | | 2,880 |
| | 2,821 |
| | | | | | | | | 2,743 |
| | 2,704 |
| | | | |
U.S. Treasury securities | 1,574 |
| | 1,066 |
| | | | | | | | | 1,670 |
| | 1,673 |
| | | | | | | | |
Equity securities | 60 |
| | 2 |
| | | | | | | | | 122 |
| | 101 |
| | | | | | | | |
Corporate debt securities | | | | | 491 |
| | 63 |
| | | | | | | | | 378 |
| | 269 |
| | | | |
Auction rate securities | | | | | | | | | $ | 7 |
| | $ | 7 |
| | | | | | | | | $ | 7 |
| | $ | 7 |
|
Prepaid and other current assets: | | | | | | | | | | | | | | | | | | | | | | |
Foreign exchange derivative instruments | | | | | 44 |
| | 13 |
| | | | | | | | | 34 |
| | 23 |
| | | | |
Total | $ | 2,327 |
| | $ | 6,810 |
| | $ | 3,467 |
| | $ | 2,990 |
| | $ | 7 |
| | $ | 7 |
| $ | 2,879 |
| | $ | 2,920 |
| | $ | 3,199 |
| | $ | 3,047 |
| | $ | 7 |
| | $ | 7 |
|
Liabilities | | | | | | | | | | | | | | | | | | | | | | |
Accrued liabilities: | | | | | | | | | | | | | | | | | | | | | | |
Visa Europe put option | | | | | | | | | $ | 145 |
| | $ | 145 |
| | | | | | | | | $ | 145 |
| | $ | 145 |
|
Earn-out related to PlaySpan acquisition | | | | | | | | | — |
| | 12 |
| |
Foreign exchange derivative instruments | | | | | $ | 6 |
| | $ | 11 |
| | | | | | | | | $ | 13 |
| | $ | 15 |
| | | | |
Total | $ | — |
| | $ | — |
| | $ | 6 |
| | $ | 11 |
| | $ | 145 |
| | $ | 157 |
| $ | — |
| | $ | — |
| | $ | 13 |
| | $ | 15 |
| | $ | 145 |
| | $ | 145 |
|
There were no significant transfers between Level 1 and Level 2 assets during the ninethree months ended June 30,December 31, 2013 and 2012.
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. The significant decrease in the Company's Level 1 assets primarily reflects payments from the litigation escrow account totaling $4.4 billion in connection with the covered litigation. See Note 2—Retrospective Responsibility Plan and Note 11—Legal Matters.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Level 2 assets and liabilities measured at fair value on a recurring basis. The fair value of U.S. government-sponsored debt securities and corporate debt securities, as provided by third-party pricing vendors, is based on quoted prices in active markets for similar, (not identical)not identical, assets. The pricing data obtained from outside sources is
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
reviewed internally for reasonableness, compared against benchmark quotes from independent pricing sources, then confirmed or revised accordingly. Commercial paper and foreign exchange derivative instruments are valued using inputs that are observable in the market or can be derived principally from or corroborated by observable market data. There were no substantive changes to the valuation techniques and related inputs used to measure fair value during the ninethree months ended June 30,December 31, 2013.
Level 3 assets and liabilities measured at fair value on a recurring basis. Auction rate securities are classified as Level 3 due to a lack of trading in active markets and a lack of observable inputs in measuring fair value. There were no substantive changes to the valuation techniques and related inputs used to measure fair value during the ninethree months ended June 30,December 31, 2013.
Visa Europe put option agreement. The Company has granted Visa Europe a perpetual put option, (the "put option")or the put option, which, if exercised, will require Visa Inc. to purchase all of the outstanding shares of capital stock of Visa Europe from its members. The put option provides a formula for determining the purchase price of the Visa Europe shares, which, subject to certain adjustments, applies Visa Inc.’s forward price-to-earnings multiple (as defined in the put option agreement), or the P/E ratio, (as defined in the option agreement), at the time the option is exercised, to Visa Europe’s projected adjusted sustainablenet income for the forward 12-month period (as defined in the put option agreement), or the adjusted sustainable income (as defined in the option agreement).income. The calculation of Visa Europe’s adjusted sustainable income under the terms of the put option agreement includes potentially material adjustments for cost synergies and other negotiated items. Upon exercise, the key inputs to this formula, including Visa Europe’s adjusted sustainable income, will be the result of negotiation between the Company and Visa Europe. The put option provides an arbitration mechanism in the event that the two parties are unable to agree on the ultimate purchase price.
The fair value of the put option represents the value of Visa Europe’s option, which under certain conditions could obligate the Company to purchase its member equity interest for an amount above fair value. While the put option is in fact non-transferable, its fair value represents the Company’s estimate of the amount the Company would be required to pay a third-party market participant to transfer the potential obligation in an orderly transaction at the measurement date. The valuation of the put option therefore requires substantial judgment. The most subjective estimates applied in valuing the put option are the assumed probability that Visa Europe will elect to exercise its option and the estimated differential between the P/E ratio and the P/E ratio applicable to Visa Europe on a standalone basis at the time of exercise, whichor the Company refers to as the “P/P/E differential.” The liability is classified within Level 3, as the assumed probability that Visa Europe will elect to exercise its option, the estimated P/E differential, and other inputs used to value the put option are unobservable.
At June 30,December 31, 2013 and September 30, 20122013, the Company determined the fair value of the put option to be $145 million. While $145 million represents the fair value of the put option at June 30,December 31, 2013, it does not represent the actual purchase price that the Company may be required to pay if the option is exercised, which could be several billion dollars or more. During the ninethree months ended June 30,December 31, 2013, there were no changes to the valuation methodology used to estimate the fair value of the put option. At June 30,December 31, 2013, the key unobservable inputs included a 40% probability of exercise by Visa Europe at some point in the future and an estimated P/E differential of 1.9x. At June 30,December 31, 2013, the Company's spot P/E was 21.0x21.5x, and there was a differential of 2.4x(1.3x) between this ratio and the estimated spot ratio applicable to Visa Europe. These ratios are for reference only and are not necessarily indicative of the ratio or differential that could be applicable if the put option were exercised at any point in the future. The use of an assumed probability of exercise that is 5% higher than the Company's estimate would have resulted in an increase of approximately $18 million in the value of the put option. An increase of 1.0x in the assumed P/E differential would have resulted in an increase of approximately $84 million in the value of the put option.
The put option is exercisable at any time at the sole discretion of Visa Europe. As such, the put option liability is included in accrued liabilities on the Company's consolidated balance sheet at June 30,December 31, 2013. Classification in current liabilities is not an indication of management’s expectation of exercise and simply reflects the fact that the obligation resulting from the exercise of the instrument could become payable within 12 months. Any non-cash changes in fair value are recorded in non-operating income on the consolidated statements of operations.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Earn-out related to PlaySpan acquisition. The fair value of the earn-out liability was reduced to zero, reflecting payments made in full during the quarter ended December 31, 2012, upon achieving certain revenue targets and other milestones.
A separate roll-forward of Level 3 assets and liabilities measured at fair value on a recurring basis is not presented as the primary activities during the ninethree months ended June 30,December 31, 2013 and 2012 wereare already discussed above.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Assets and Liabilities 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. The Company recognized a There were no$15 million other-than-temporary impairment loss
events or circumstances that indicated these investments became impaired during the ninethree months ended
June 30,December 31, 2013. There were no impairment charges recorded during the nine months ended June 30, 2012. or 2012. At June 30,December 31, 2013, and September 30, 20122013, these investments totaled $5432 million and $8630 million, respectively. These assets are classified in other assets on the consolidated balance sheets.
Due to a change in the Company's relationship with one of its investees during fiscal 2013, the Company reclassified equity securities previously accounted for as an equity method investment, with a carrying value of $12 million, to long-term available-for-sale investment securities. The fair value of this investment at June 30, 2013 was $57 million, resulting in the recognition of a pre-tax unrealized gain of $45 million in other comprehensive income.
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, reacquired rights,tradenames and reseller relationships, and tradenames, all of which were obtained through acquisitions.
If the Company were required to perform a quantitative assessment for impairment testing of goodwill and indefinite-lived intangible assets, the fair values would generally be estimated using an income approach. As the assumptions employed to measure these assets on a non-recurring basis are based on management's judgment using internal and external data, these fair value determinations are classified as Level 3 in the fair value hierarchy. The Company completed its annual impairment review of its indefinite-lived intangible assets and goodwill as of February 1, 2013, and concluded that there wasThere were no impairment. No recent events or changes in circumstances indicate that impairment existed atindicated these assets became impaired during the three months ended June 30,December 31, 2013 or 2012.
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 June 30,December 31, 2013, 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 June 30,December 31, 2013, approximates their carrying value due to their generally short maturities. If measured at fair value in the financial statements, these financial instruments would be classified as Level 2 in the fair value hierarchy.
Investments
Available-for-sale investment securities
The Company had $48110 million in gross unrealized gains and $6$1 million in gross unrealized losses at June 30,December 31, 2013. The unrealized gains were primarily related to the Company's reclassified equity investment discussed above. There were $493 million gross unrealized gains and $1 million gross unrealized losses at September 30, 20122013. The gross unrealized gains at December 31, 2013 and September 30, 2013 primarily relate to the Company's available-for-sale equity securities. A majority of the Company's available-for-sale investment securities with stated maturities are due within one to fivethree years.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 4—Debt
Commercial paper program. Visa maintains a commercial paper program to support its working capital requirements and for other general corporate purposes. On February 7, 2013, the Company replaced the existing $500 million program with a new commercial paper program. Under the new 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 new program at June 30, 2013.
Credit facility. On January 31, 2013, the Company entered into an unsecured $3.0 billion revolving credit facility. This credit facility, which expires on January 30, 2014, replaced the Company's existing $3.0 billion credit facility, which would have expired on February 15, 2013. The new credit facility contains covenants and events of default customary for facilities of this type. The participating lenders in the new credit facility include affiliates of certain holders of the Company's class B and class C common stock and some of the Company's clients or affiliates of its clients. The new credit facility is maintained to provide liquidity in the event of settlement failures by the Company's clients, to back up the commercial paper program and 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 credit rating of the Company's senior unsecured long-term debt. Visa also agreed to pay a commitment fee that fluctuates based on the credit rating of the Company's senior unsecured long-term debt. Currently, the applicable margin is 0.00% to 0.75% depending on the type of the loan, and the commitment fee is 0.05%. There were no borrowings under this facility and the Company was in compliance with all related covenants at June 30, 2013 .
Note 5—4—Pension and Other Postretirement Benefits
The Company sponsors various qualified and non-qualified defined benefit pension and other postretirement benefit plans that provide for retirement and medical benefits for substantially all employees residing in the United States.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The components of net periodic benefit cost are as follows: | | | Pension Benefits | | Other Postretirement Benefits | Pension Benefits | | Other Postretirement Benefits |
| Three Months Ended June 30, | | Nine Months Ended June 30, | | Three Months Ended June 30, | | Nine Months Ended June 30, | Three Months Ended December 31, | | Three Months Ended December 31, |
| 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 | 2013 | | 2012 | | 2013 | | 2012 |
| (in millions) | (in millions) |
Service cost | $ | 10 |
| | $ | 10 |
| | $ | 32 |
| | $ | 29 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | 11 |
| | $ | 10 |
| | $ | — |
| | $ | — |
|
Interest cost | 9 |
| | 10 |
| | 27 |
| | 30 |
| | — |
| | — |
| | — |
| | 1 |
| 10 |
| | 9 |
| | — |
| | — |
|
Expected return on assets | (16 | ) | | (14 | ) | | (47 | ) | | (41 | ) | | — |
| | — |
| | — |
| | — |
| (17 | ) | | (16 | ) | | — |
| | — |
|
Amortization of: | | | | | | | | | | | | | | | | | | | | | | |
Prior service credit | (2 | ) | | (2 | ) | | (7 | ) | | (7 | ) | | (1 | ) | | — |
| | (2 | ) | | (2 | ) | (2 | ) | | (2 | ) | | (1 | ) | | (1 | ) |
Actuarial loss | 8 |
| | 8 |
| | 22 |
| | 24 |
| | — |
| | — |
| | — |
| | — |
| — |
| | 7 |
| | — |
| | — |
|
Settlement loss | — |
| | 3 |
| | — |
| | 3 |
| | — |
| | — |
| | — |
| | — |
| 1 |
| | — |
| | — |
| | — |
|
Total net periodic benefit cost | $ | 9 |
| | $ | 15 |
| | $ | 27 |
| | $ | 38 |
| | $ | (1 | ) | | $ | — |
| | $ | (2 | ) | | $ | (1 | ) | $ | 3 |
| | $ | 8 |
| | $ | (1 | ) | | $ | (1 | ) |
Note 6—5—Settlement Guarantee Management
The indemnification for settlement losses that Visa provides to its financial institution clients creates settlement risk for the Company due to the difference in timing between the date of a payment transaction and the date of subsequent settlement. The exposure to settlement losses through ourVisa's settlement indemnification is accounted for as a settlement risk guarantee. The Company’s settlement exposure is limited to the amount of unsettled Visa payment transactions at any point in time. The Company requires certain financial institution clients that do not meet its credit standards to post collateral to offset potential loss from their estimated unsettled transactions. The Company’s estimated maximum settlement exposure was $52.153.2 billion at June 30,December 31, 2013, compared to $49.353.8 billion at September 30, 20122013. Of these
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
settlement exposure amounts, $3.63.0 billion at June 30,December 31, 2013 and$3.5 billionat September 30, 20122013, werewas covered by collateral.
The Company maintained collateral as follows: | | | June 30, 2013 | | September 30, 2012 | December 31, 2013 | | September 30, 2013 |
| (in millions) | (in millions) |
Cash equivalents | $ | 817 |
| | $ | 823 |
| $ | 886 |
| | $ | 866 |
|
Pledged securities at market value | 264 |
| | 307 |
| 233 |
| | 256 |
|
Letters of credit | 1,157 |
| | 1,084 |
| 1,210 |
| | 1,191 |
|
Guarantees | 2,088 |
| | 2,022 |
| 1,416 |
| | 1,411 |
|
Total | $ | 4,326 |
| | $ | 4,236 |
| $ | 3,745 |
| | $ | 3,724 |
|
The total available collateral balances presented in the table above were greater than the settlement exposure covered by customer collateral held due to instances in which the available collateral exceeded the total settlement exposure for certain financial institutions at each date presented.
The fair value of the settlement risk guarantee is estimated based on a proprietary probability-weighted model and was approximately $2 million at December 31, 2013 and $1 million at JuneSeptember 30, 2013 and September 30, 2012. These amounts are reflected in accrued liabilities on the consolidated balance sheets.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Note 6—Accrued and Other Liabilities
Accrued liabilities consisted of the following: |
| | | | | | | |
| December 31, 2013 | | September 30, 2013 |
| (in millions) |
Accrued operating expenses | $ | 153 |
| | $ | 182 |
|
Visa Europe put option—(See Note 3—Fair Value Measurements and Investments)(1) | 145 |
| | 145 |
|
Deferred revenue | 72 |
| | 60 |
|
Accrued marketing and product expenses | 22 |
| | 27 |
|
Accrued income taxes(2) | 412 |
| | 64 |
|
Other | 143 |
| | 135 |
|
Total | $ | 947 |
| | $ | 613 |
|
Other non-current liabilities consisted of the following:
|
| | | | | | | |
| December 31, 2013 | | September 30, 2013 |
| (in millions) |
Accrued income taxes(3) | $ | 539 |
| | $ | 453 |
|
Employee benefits | 86 |
| | 86 |
|
Other | 64 |
| | 63 |
|
Total | $ | 689 |
| | $ | 602 |
|
| |
(1) | The put option is exercisable at any time at the sole discretion of Visa Europe with payment required 285 days thereafter. Classification in current liabilities is not an indication of management’s expectation of exercise and simply reflects the fact that the obligation resulting from the exercise of the instrument could become payable within 12 months. |
| |
(2) | The increase in current accrued income taxes is primarily related to current income taxes accrued in the first quarter of fiscal 2014, but payable in the second quarter of fiscal 2014. |
| |
(3) | The increase in non-current accrued income taxes is due to an increase in liabilities for uncertain tax positions. |
Note 7—Stockholders' Equity
The number of shares of each class and the number of shares of class A common stock on an as-converted basis at June 30,December 31, 2013, are as follows: | | (in millions, except conversion rate) | Shares Outstanding | | Conversion Rate Into Class A Common Stock | | As-converted Class A Common Stock(1) | Shares Outstanding | | Conversion Rate Into Class A Common Stock | | As-converted Class A Common Stock(1) |
Class A common stock | 515 |
| | — |
| | 515 |
| 505 |
| | — |
| | 505 |
|
Class B common stock | 245 |
| | 0.4206 |
| | 103 |
| 245 |
| | 0.4206 |
| | 103 |
|
Class C common stock | 27 |
| | 1.0000 |
| | 27 |
| 26 |
| | 1.0000 |
| | 26 |
|
Total | | | | | 645 |
| | | | | 634 |
|
| |
(1) | Figures in the table may not recalculate exactly due to rounding. As-converted class A common stock is calculated based on whole numbers, not the rounded numbers presented. |
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Reduction in as-converted class A common stock
stock. The following table presents share repurchases in the open market. | | (in millions, except per share data) | Three Months Ended June 30, 2013 | | Nine Months Ended June 30, 2013 | | Three Months Ended December 31, 2013 |
Shares repurchased in the open market (1) | 6 |
| | 26 |
| | 5 |
|
Weighted-average repurchase price per share | $ | 176.75 |
| | $ | 157.48 |
| | $ | 199.56 |
|
Total cost | $ | 981 |
| | $ | 4,054 |
| | $ | 1,091 |
|
| |
(1) | All shares repurchased in the open market have been retired and constitute authorized but unissued shares. |
At June 30, 2013, the Company had $61 million of remaining funds available for share repurchases under the current program authorized by the board of directors. In JulyOctober 2013, the Company'sCompany’s board of directors authorized a new $1.5$5.0 billion share repurchase program. As of December 31, 2013, the program had remaining authorized funds of $4.2 billion. All share repurchase programs authorized prior to be in effect through July 2014.October 2013 have been completed.
Dividends. On July 16, 2013,In January 2014, the Company’s board of directors declared a quarterly cash dividend in the amount of $0.330.40 per share of class A common stock (determined in the case of class B and class C common stock on an as-converted basis), which will be paid on SeptemberMarch 4, 20132014, to all holders of record of the Company's class A, class B and
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
class C common stock as of August 16, 2013February 14, 2014. The Company declared and paid $653$254 million in dividends during the ninethree months ended June 30,December 31, 2013.
Note 8—Earnings Per Share
The following table presents earnings per share for the three months ended June 30,December 31, 2013.(1) | | | Basic Earnings Per Share | | | Diluted Earnings Per Share | Basic Earnings Per Share | | | Diluted Earnings Per Share |
| (in millions, except per share data) | (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) | 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 | $ | 973 |
| | 515 |
| | $ | 1.89 |
| | | $ | 1,225 |
| | 651 |
| (3) | $ | 1.88 |
| $ | 1,115 |
| | 505 |
| | $ | 2.21 |
| | | $ | 1,407 |
| | 639 |
| (3) | $ | 2.20 |
|
Class B common stock | 194 |
| | 245 |
| | 0.79 |
| | | 194 |
| | 245 |
| | 0.79 |
| 228 |
| | 245 |
| | $ | 0.93 |
| | | $ | 228 |
| | 245 |
| | $ | 0.93 |
|
Class C common stock | 53 |
| | 28 |
| | 1.89 |
| | | 53 |
| | 28 |
| | 1.88 |
| 59 |
| | 27 |
| | $ | 2.21 |
| | | $ | 59 |
| | 27 |
| | $ | 2.20 |
|
Participating securities(4) | 5 |
| | Not presented |
| | Not presented |
| | | 5 |
| | Not presented |
| | Not presented |
| 5 |
| | Not presented |
| | Not presented |
| | | $ | 5 |
| | Not presented |
| | Not presented |
|
Net income attributable to Visa Inc. | $ | 1,225 |
| | | | | | | | | | | | |
Net income | | $ | 1,407 |
| | | | | | | | | | | |
The following table presents earnings per share for the ninethree months ended June 30, 2013December 31, 2012.(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 | $ | 3,014 |
| | 524 |
| | $ | 5.76 |
| | | $ | 3,788 |
| | 660 |
| (3) | $ | 5.74 |
|
Class B common stock | 594 |
| | 245 |
| | 2.42 |
| | | 592 |
| | 245 |
| | 2.41 |
|
Class C common stock | 166 |
| | 29 |
| | 5.76 |
| | | 165 |
| | 29 |
| | 5.74 |
|
Participating securities(4) | 14 |
| | Not presented |
| | Not presented |
| | | 14 |
| | Not presented |
| | Not presented |
|
Net income attributable to Visa Inc. | $ | 3,788 |
| | | | | | | | | | | |
The following table presents loss per share for the three months ended June 30, 2012.(1) |
| | | | | | | | | | | | | | | | | | | | | | |
| Basic Earnings (Loss) Per Share | | | Diluted Earnings (Loss) Per Share |
| (in millions, except per share data) |
| Loss Allocation (A)(2) | | Weighted- Average Shares Outstanding (B) | | Earnings (Loss) per Share = (A)/(B) | | | Loss Allocation (A)(2) | | Weighted- Average Shares Outstanding (B) | | Earnings (Loss) per Share = (A)/(B) |
Class A common stock | $ | (1,437 | ) | | 525 |
| | $ | (2.74 | ) | | | $ | (1,839 | ) | | 672 |
| (3) | $ | (2.74 | ) |
Class B common stock | (286 | ) |
| 245 |
| | (1.16 | ) | | | (286 | ) |
| 245 |
| | (1.16 | ) |
Class C common stock | (109 | ) | | 40 |
| | (2.74 | ) | | | (109 | ) | | 40 |
| | (2.74 | ) |
Participating securities(4) | (7 | ) | | Not presented |
| | Not presented |
| | | (7 | ) | | Not presented |
| | Not presented |
|
Net loss attributable to Visa Inc. | $ | (1,839 | ) | | | | | | | | | | | |
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table presents earnings per share for the nine months ended June 30, 2012. (1) | | | Basic Earnings Per Share | | | Diluted Earnings Per Share | Basic Earnings Per Share | | | Diluted Earnings Per Share |
| (in millions, except per share data) | (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) | 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 | $ | 372 |
| | 523 |
| | $ | 0.71 |
| | | $ | 482 |
| | 681 |
| (3) | $ | 0.71 |
| $ | 1,031 |
| | 531 |
| | $ | 1.94 |
| | | $ | 1,293 |
| | 669 |
| (3) | $ | 1.93 |
|
Class B common stock | 78 |
| | 245 |
| | 0.32 |
| | | 78 |
| | 245 |
| | 0.32 |
| 200 |
| | 245 |
| | $ | 0.82 |
| | | $ | 200 |
| | 245 |
| | $ | 0.81 |
|
Class C common stock | 30 |
| | 43 |
| | 0.71 |
| | | 30 |
| | 43 |
| | 0.71 |
| 57 |
| | 30 |
| | $ | 1.94 |
| | | $ | 57 |
| | 30 |
| | $ | 1.93 |
|
Participating securities(4) | 2 |
| | Not presented |
| | Not presented |
| | | 2 |
| | Not presented |
| | Not presented |
| 5 |
| | Not presented |
| | Not presented |
| | | $ | 5 |
| | Not presented |
| | Not presented |
|
Net income attributable to Visa Inc. | $ | 482 |
| | | | | | | | | | | | |
Net income | | $ | 1,293 |
| | | | | | | | | | | |
| |
(1) | Figures in the table may not recalculate exactly due to rounding. Earnings (loss) per share is calculated based on whole numbers, not the rounded numbers presented. |
| |
(2) | Net income (loss) attributable to Visa Inc. is allocated based on proportional ownership on an as-converted basis. The weighted-average numbersnumber of shares of as-converted class B common stock used in the income (loss) allocation werewas 103 million for the three and nine months ended June 30, 2013, and 104 million and 110 million for the three and nine months ended June 30, 2012, respectively.December 31, 2013 and December 31, 2012. |
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| |
(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 2 million of common stock equivalents for the three months ended December 31, 2013 and nineDecember 31, 2012, because their effect would be dilutive. The calculation excludes less than 1 million of common stock equivalents for the three months ended June 30,December 31, 2013, and 3 million for the nine months ended June 30,December 31, 2012, because their effect would have been dilutive. The computation excludes less than 1 million common stock equivalents for the three and nine months ended June 30, 2013 and the nine months ended June 30, 2012, because their effect would have been anti-dilutive. The computation also excludes 7 million outstanding stock awards for the three months ended June 30, 2012, because their effect would have been anti-dilutive as the Company had a net loss. |
| |
(4) | Participating securities are unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, such as the Company's restricted stock awards, restricted stock units and earned performance-based shares. |
Note 9—Share-based Compensation
The Company granted the following equity awards to employees and non-employee directors under the 2007 Equity Incentive Compensation Plan during the ninethree months ended June 30,December 31, 2013: | | | Granted | | Weighted-Average Grant Date Fair Value | | Weighted-Average Exercise Price | Granted | | Weighted-Average Grant Date Fair Value | | Weighted-Average Exercise Price |
Non-qualified stock options | 579,318 |
| | $ | 39.03 |
| | $ | 147.37 |
| 315,226 |
| | $ | 43.41 |
| | $ | 197.39 |
|
Restricted stock awards ("RSAs") | 891,360 |
| | 146.96 |
| | | 494,621 |
| | $ | 197.39 |
| | |
Restricted stock units ("RSUs") | 326,746 |
| | 145.83 |
| | | 221,103 |
| | $ | 197.39 |
| | |
Performance-based shares(1) | 230,518 |
| | 164.14 |
| | | 278,451 |
| | $ | 225.46 |
| | |
| |
(1) | Represents the maximum number of performance-based shares which could be earned. |
The Company’s non-qualified stock options, RSAs and RSUs are equity awards with service-only conditions and are accordingly expensed on a straight-line basis over the vesting period. ForThe Company's performance-based shares are equity awards with service, market and performance and market conditions the Company usesthat are accounted for using the graded-vesting method of expense attribution.method. Compensation cost is recorded net of estimated forfeitures, which are adjusted as appropriate.
Note 10—Income Taxes
The effective income tax rates were 33%32% and 31%28% for the three and nine months ended June 30,December 31, 2013 respectively, and29% and 22% for the three and nine months ended June 30, 2012, respectively. The effective tax
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
rates rate for the three and nine months ended June 30,December 31, 2013 differdiffers from the effective tax ratesrate in the same periodsperiod in the previous fiscal 2012year mainly due to:
certain foreign tax credit benefits related to prior years recognized in the second quarterabsence of fiscal 2013;
a $76$76 million tax benefit recognized in the first quarter of fiscal 2013, as a result of new guidance issued by the state of California regarding apportionment rules for years prior to fiscal 2012; and
2012.the absence of:
the tax benefit and the offsetting tax reserve associated with the covered litigation provision recorded in the third quarter of fiscal 2012;
a one-time foreign tax credit carryover benefit recognized in the third quarter of fiscal 2012; and
a one-time, non-cash benefit of $208 million from the remeasurement of existing net deferred tax liabilities in the second quarter of fiscal 2012, as a result of the California state apportionment rule changes adopted in that quarter.
During the three and nine months ended June 30,December 31, 2013, the Company's gross unrecognized tax benefits increased by $10$47 million, and $231 $45 million, respectively, $8 million and $179 million of which respectively, would favorably impact theour effective income tax rate if recognized. The increase in gross unrecognized tax benefits is primarily due to changes in judgments and estimatespotential audit exposure related to various tax positions across several jurisdictions. During the three and nine months ended June 30,December 31, 2013 and 2012, the Company accrued $4$2 million and $9 million of interest respectively, compared to $1 millionand $15 million, respectively, in the prior-year comparable periods. During the three and nine months ended June 30, 2013, the Company accrued no penalties and $2 million of penalties, respectively, related to uncertain tax positions.No penalties related to uncertain tax positions were accrued for the same prior-year comparable periods.
The Company reclassified $1.6 billion from deferred tax assets to income tax receivable in the first quarter of the current fiscal year to reflect the current tax deduction related to the payments totaling $4.4 billion made in connection with the covered litigation. See Note 2—Retrospective Responsibility Plan and Note 11—Legal Matters. The income tax receivable has been applied and will continue to be applied to reduce income taxes payable throughout fiscal 2013.
Note 11—Legal Matters
The Company is party to various legal and regulatory proceedings. Some of these proceedings involve complex claims that are subject to substantial uncertainties and unascertainable damages. Accordingly, except as disclosed, the Company has not established reserves or ranges of possible loss related to these proceedings, as at this time in the proceedings, the matters do not relate to a probable loss and/or the amount or range of losses are not reasonably estimable. Although the Company believes that it has strong defenses for the litigation and regulatory proceedings described below, it could, in the future, incur judgments or fines or enter into settlements of claims that could have a material adverse effect on the Company's financial position, results of operations or cash flows. From time to time, the Company may engage in settlement discussions or mediations with respect to one or more of its outstanding litigation matters, either on its own behalf or collectively with other parties.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 activity related to accrued litigation. | | | Fiscal 2013 | | Fiscal 2012 | 2013 | | 2012 |
| (in millions) | (in millions) |
Balance at October 1 | $ | 4,386 |
| | $ | 425 |
| $ | 5 |
| | $ | 4,386 |
|
Provision for unsettled matters | 3 |
| | 4,098 |
| — |
| | 3 |
|
Interest accretion on settled matters | — |
| | 1 |
| |
Payment on unsettled matters(1) | (4,033 | ) | | — |
| — |
| | (4,033 | ) |
Payment on settled matters | (351 | ) | | (140 | ) | (1 | ) | | (351 | ) |
Balance at June 30 | $ | 5 |
| | $ | 4,384 |
| |
Balance at December 31 | | $ | 4 |
| | $ | 5 |
|
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
| |
(1) | On December 10, 2012,In fiscal 2013, the Company paid approximately $4.0 billion from the litigation escrow account into a settlement fund established pursuant to the definitive class settlement agreement in the Multidistrict Litigation Proceedings. Theinterchange multidistrict litigation. Under the settlement agreement, if class members opt-out (“opt-out merchants”) of the damages portion of the class settlement, the defendants are entitled to receive payments of no more than 25% of the original cash payments made into the settlement fund, based on the percentage of payment card sales volume for a defined period attributable to merchants who opted out (the "takedown payments"). On January 14, 2014, the court entered the final judgment order approving the settlement with the class plaintiffs in the interchange multidistrict litigation proceedings, which is subject to final court approval, which the Company cannot assure will be received, and to the adjudication of any appeals. Takedown payments of approximately $1.1 billion were received on January 27, 2014, and deposited into the Company’s litigation escrow account. The deposit into the litigation escrow account, and a related increase in accrued litigation to address opt-out claims will be recorded in the second quarter of fiscal 2014. See further discussion below.
|
Covered Litigation
Visa Inc., Visa U.S.A. and Visa International are parties to certain legal proceedings that are covered by the retrospective responsibility plan, which the Company refers to as the covered litigation. See Note 2—Retrospective Responsibility Plan. An accrual for the covered litigation and a charge to the litigation provision are recorded when 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 Attridge Litigation. The parties in the Credit/Debit Card Tying Cases subsequently agreed upon a revised written settlement agreement, which was submitted to the court for preliminary approval on August 20, 2012 and executed as of September 6, 2012. The court entered an order preliminarily approving the settlement on November 20, 2012. On April 11, 2013, the settlement in the Credit/Debit Tying Cases was granted final approval, and objectors have filed notices of appeal in those cases and the Attridge case. On April 25, 2013, in light of the proceedings in the Credit/Debit Card Tying Cases, the Attridge case was stayed until September 20, 2013.
The Interchange Litigation
Multidistrict Litigation Proceedings (MDL). The district court entered the preliminary approval order on November 27, 2012. On November 27, 2012, certain objectors filed a notice of appeal from the preliminary approval order in the U.S. Court of Appeals for the Second Circuit. Objectors also moved to stay the preliminary approval order in the district court and moved for expedited briefing in the court of appeals. On December 10, 2012, the court of appeals entered an order deferring briefing for the appeal until after the district court enters an order of final approval and final judgment with respect to the settlement, or otherwise concludes the matters by entry of a final judgment. On December 17, 2012, certain objectors filed a motion asking the court of appeals to reconsider its decision, which was denied on January 31, 2013. On January 15, 2013, the district court denied as moot objectors' request to stay the preliminary approval order.
On December 10, 2012, Visa paid approximately $4.0 billion from the litigation escrow account into a settlement fund established pursuant to the definitive class settlement agreement.
Certain retailers in the proposed settlement classes thereafter objected to the settlement, opted out of the damages portion of the class settlement, and/or are seeking to opt out of the rules portion of the class settlement. Details of retailers who have filed an opt-out claim may be found below (see "Interchange Opt-out Litigation" below).
Certain competitors and other interested parties have also objected to the class settlement, including Discover, which filed a motion to intervene on May 28, 2013. Discover seeks, among other things, to object to the settlement agreement and to file a proposed complaint challenging certain aspects of the settlement agreement as a restraint of trade in violation of Section 1 of the Sherman Act. On June 13, 2013, the district court ordered defendants to respond to Discover's objections by August 16, 2013.
On July 1, 2013, the class administrator filed an amended report stating that the administrator had received 7,953 requests to opt out of the settlement. Underissued a memorandum and order approving the Settlement Agreement ifwith the class members opt outplaintiffs. On January 14, 2014, the court entered the final judgment order approving the settlement. A number of objectors to the damagessettlement have appealed from that order. Until the appeals are finally adjudicated, no assurance can be provided that the Company will be able to resolve the class plaintiffs' claims as contemplated by the Settlement Agreement. On January 27, 2014, Visa's portion of the class settlement,takedown payments related to the defendants are entitledopt-out merchants, which was calculated to receive payments of no more than 25% of the original cash payments madebe approximately $1.1 billion, was deposited into the settlement fund, based on the percentage of payment card sales volume for a defined period attributable to merchants who opted out (the “takedown payments”). By no later than August 16, 2013, the parties will submit to the court any disputes about the takedown payments.litigation escrow account.
Interchange Opt-out Litigation
OnBeginning in May 24, 2013, CVS Pharmacy, Inc.more than 25 opt-out cases have been filed suitby hundreds of merchants in various federal district courts, generally pursuing damages claims on allegations similar to those raised in MDL 1720. A similar case has been filed by a merchant in Texas state court. A number of the Eastern Districtcases also include allegations that Visa has monopolized, attempted to monopolize, and/or conspired to monopolize debit card-related market segments, and one of New Yorkthe cases seeks an injunction against the fixed acquirer network fee. The cases name as defendants Visa Inc., Visa U.S.A., Visa International, MasterCard Incorporated, and MasterCard International Incorporated. The CVS case has been includedIncorporated, although some also include certain U.S. financial institutions as partdefendants. All of MDL 1720. On May 28 and 29, 2013, Buc-ee's Ltd. and Shop Rite Inc. (and two other plaintiffs), respectively,the cases originally filed suitin federal court either were filed in the SouthernU.S. District Court for the Eastern District of New York against Visa Inc., Visa U.S.A., Visa International, MasterCard Incorporated, and MasterCard International Incorporated. The Buc-ee's complaint also includes certain U.S. financial institution defendantshave been assigned to the judge presiding over MDL 1720, or have been transferred by the Judicial Panel on Multidistrict Litigation for inclusion in MDL 1720. On June 14, 2013,Visa removed the Clerk ofTexas state court case to federal court and sought to transfer it to MDL 1720, but the Judicial Panelfederal court remanded the case to Texas state court before the case could be transferred to
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
on Multidistrict LitigationMDL 1720. Cases that are transferred the Shop Rite and Buc-ee's cases to the Eastern District of New York for inclusionor otherwise included in MDL 1720. Plaintiffs in the CVS, Shop Rite, and Buc-ee's cases are pursuing damages claims based upon allegations similar to those raised in MDL 1720. As part of MDL 1720 these cases arewill be covered litigation for purposes of the retrospective responsibility plan. See Note 2—Retrospective Responsibility Plan.
On May 24, 2013,January 14, 2014, Visa MasterCard, and certain U.S. financial institution defendants in MDL 1720 filed a complaint in the U.S. District Court for the Eastern District of New York against certain named class representative plaintiffs who had opted out or stated their intention to opt out of the damages portion of the MDL class settlement. On June 10, 2013, Visa filed a similar complaint in the Eastern District of New York against Wal-Mart StoresThe Home Depot, Inc. Both complaints seekand Home Depot U.S.A., Inc. seeking a declaration that, from January 1, 2004 to November 27, 2012, the time period for which opt-outs may seek damages under the MDL class settlement, Visa's conduct in, among other things, continuing to set default interchange rates, maintaining its “honor"honor all cards”cards" rule, enforcing certain rules relating to merchants, and restructuring itself, did not violate federal or state antitrust laws. Both cases haveThe case has been assigned to the same district court judge presiding over MDL 1720.
Consumer Interchange Litigation
On May 23,December 16, 2013, Target Corporationa putative class action was filed in federal district court in California against certain financial institutions alleging that they conspired to fix interchange fees and a numberimposed other alleged restraints on competition.The complaint was filed on behalf of otherfour named plaintiffs filed suitand an alleged class of all Visa and MasterCard payment cardholders in the Southern District of New York againstUnited States since January 1, 2000. Although no Visa Inc.,entity is named as a defendant, the complaint identifies Visa U.S.A., Visa International, MasterCard, Incorporated, and MasterCard International Incorporated. Thecertain non-defendant financial institutions as co-conspirators, and plaintiffs are formerassert that they may seek leave to amend the complaint to add the co-conspirators as defendants.Plaintiffs seek injunctive relief, attorneys’ fees, and treble damages allegedly to compensate the purported class members offor more than $54.0 billion dollars in purported overcharges imposed on them each year by defendants and their alleged co-conspirators.Defendants sought to transfer the damages class incase to MDL 1720, who opted out of the damages portion of the class settlement and are pursuing damages claims. Plaintiffs in the Target case are pursuing damages claims on allegations similar to those raised in MDL 1720. On June 6, 2013,but the Clerk of the Judicial Panel on Multidistrict Litigation filed an order conditionally transferringdeclined to transfer the case to MDL 1720.
Other Litigation
Vale Canjeable
On December 9, 2013, the Constitutional Chamber reversed the Commercial Chamber’s judgment and issued a final decision. The Constitutional Chamber ruled that the Target“Vale” opt-out case to the Eastern District of New York for inclusion in MDL 1720 (seemark is distinctive and Visa’s mark, “Multidistrict Litigation ProceedingsVisa Vale,” above). On June 13, 2013, the Target plaintiffs filed a Notice of Opposition to the conditional transfer order, and on June 27, 2013, the Target plaintiffsinfringed the plaintiff’s mark, but the plaintiff suffered no damages as a result of the infringement. The ruling permits the plaintiff to seek its costs from the defendants in relation to certain appeals filed a motion to vacateby the conditional transfer order. On June 26,defendants.
European Competition Proceedings
U.K. Merchant Litigation. Since November 2013, a group of fifty-five merchants in a case known as 7-Eleven filed suit in the Southern District of New York against Visa Inc., Visa U.S.A.,International, and Visa International, MasterCard Incorporated, MasterCard International Incorporated, and certain U.S. financial institution defendants in MDL 1720. The allegations in the 7-Eleven case are similar to those thatEurope have been generally raised in MDL 1720, but also include allegations that Visa has monopolized, attempted to monopolize, and conspired to monopolize the debit card network services market in violation of Section 2 of the Sherman Act; and plaintiffs seek an injunction against the Fixed Acquirer Network Fee. On June 28, 2013, the defendants filed aput on notice of a tag-along action and requested that the Clerkadditional claims on behalf of the Judicial Panel on Multidistrict Litigation transfer the 7-Eleven opt-out case to the Eastern District of New York for inclusion in MDL 1720 (see“Multidistrict Litigation Proceedings,” above). On Julyapproximately 12 2013, the Clerk of the Judicial Panel on Multidistrict Litigation filed an order conditionally transferring the 7-Eleven opt-out case to the Eastern District of New York for inclusion in MDL 1720. On July 12, 2013, the 7-Eleven plaintiffs filed a Notice of Opposition to the conditional transfer order. The Target and 7-Eleven opt-out cases will be covered litigation for purposes of the retrospective responsibility plan (see Note 2—Retrospective Responsibility Plan) if transferred to or otherwise included in MDL 1720.
Other Litigation
“Indirect Purchaser” Actions. In the Credit/Debit Card Tying Cases, the court entered an order preliminarily approving the settlement on November 20, 2012. On April 11, 2013, the court entered an order finally approving the settlement and entered judgment. Objectors to the settlementmerchants. Some merchants have filed notices of appeal.
Vale Canjeable
In June 2013, the Venezuelan Supreme Court ruled in Visa and Todoticket's favor with respect to both appeals. The Supreme Court dismissed the plaintiff's claims of trademark infringement and damages in their entirety. The Supreme Court's decision furthermore invalidated the injunction ordered by the Fifth Municipal court effective immediately.
European Interchange Proceedings
European Commission. On March 8, 2013, Visa Inc. and Visa International received a redacted copy of the supplementary Statement of Objections (“SSO”) that was previously announced by the European Commission (“EC”) on July 31, 2012. On April 24, 2013, Visa Inc. and Visa International received a less redacted version of the SSO from the EC, but to datewhile some merchants have not received a complete copy of the SSO without redactions. The SSO alleges a breach of Article 101 of the Treaty on the Functioning of the European Union and Article 53 of the European Economic Area Agreement. Among other things, the SSO asserts claims jointly againstyet filed; instead, those merchants have entered into standstill agreements with Visa Europe, Visa Inc., and
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Visa International objecting to: (1)related to the level of domestic creditclaims. In general, the claims relate to interchange primarily in the following eight European Economic Area member states: Ireland, Luxembourg, Sweden, Italy, Malta, Netherlands, Belgium, and Hungary; (2) the level of cross-border credit interchange for transactions at European merchants with respect to cards issued bothrates in Europe, and outside of Europe, and seeking the substantial reduction of bothseek damages for alleged anti-competitive conduct relating to U.K. domestic, Irish domestic, and such cross-borderintra-European Economic Area (EEA) interchange fees for credit interchange; (3) Visa Europe's rule prohibiting cross-border acquiring; and (4) other point-of-sale rules, such as the “Honor All Cards” and “no-surcharge” rules.debit cards. The SSO also announces the EC's intention to impose fines. The potential amount of any fine resulting from the actioninterchange being challenged could be substantial but cannot besubstantial; among the remedies sought in one filed claim is a demand for compensatory damages estimated by the plaintiffs at this time. approximately $145 million. However, the full scope of the claims is not yet known because some claims remain unfiled.
Visa Europe is obligated to indemnify Visa Inc. and Visa International in connection with this proceeding,the European Competition Proceedings, in our opinion, including payment of any fines that may be imposed. However, on April 4, 2013, Visa Europe has expressed an "initial" view that it is not obligated to indemnify Visa Inc. or Visa International for any claim in the SSO.European Competition Proceedings, including claims asserted in both the European Commission matter and the U.K. Merchant Litigation. Visa Inc. continues to firmly believe that Visa Europe is obligated to indemnify for all such claims, contained in the SSO, and has been in discussions with Visa Europe to resolve this issue. BothWhile the parties are not currently in non-binding arbitration, both parties have initiated athe executive engagement aspect of the dispute resolution procedure contemplated by the Framework Agreement to resolve their dispute regarding this indemnification issue.
Visa Europe has offered commitments addressing domestic interchange, cross-border interchange within Europe, cross-border acquiring within Europe, and other Visa Europe rules. The EC will consider whether to accept those commitments after a period of public comment.U.S. ATM Access Fee Litigation
Threatened Merchant Litigation. On March 22, 2013, Visa Inc. learned that counsel for private merchant plaintiffs have threatened to file litigation against Visa Europe, Visa Inc., and Visa International with respect to interchange rates in Europe. While the amount of interchange being challenged could be substantial, the full scope of the claims is not known at this time. On March 28, 2013, Visa Europe, Visa Inc., Visa International and the plaintiffs entered into (1) a standstill agreement, which tolled any limitation periods that would have been applicable to the claims which had not yet expired; and (2) a costs agreement, which preserved the then-current recoverability rules in the United Kingdom which changed on April 1, 2013. Visa Europe is obligated to indemnify Visa Inc. and Visa International in connection with this proceeding, in our opinion, and Visa Europe has agreed to bear certain costs contemplated by the standstill agreement. However, on April 4, 2013, Visa Europe expressed an "initial" view that they are not obligated to indemnify Visa Inc. or Visa International for claims included within this threatened litigation. Visa Inc. continues to firmly believe that Visa Europe is obligated to indemnify for these claims, and has been in discussions with Visa Europe to resolve this issue. Both parties have initiated a dispute resolution procedure contemplated by the Framework Agreement to resolve their dispute regarding this indemnification issue.
Canadian Competition Proceedings
Competition Bureau. On July 23, 2013, the Competition Tribunal ruled in favor of Visa Canada and MasterCard, dismissing the Commissioner of Competition's challenges to Visa's "no-surcharge" and "honour all cards" policies. The Competition Tribunal found that the Commissioner failed to establish that either policy constituted resale price maintenance under Section 76 of the Competition Act.
Merchant Litigation. In the Watson case, the plaintiff's reply materials in support of class certification were received on November 30, 2012. The class certification hearing commenced on April 22, 2013 and concluded on May 1, 2013.
On December 3, 2012, plaintiff's counsel19, 2013, the U.S. District Court for the District of Columbia denied plaintiffs’ motions for leave to file amended complaints in the 1023926 Alberta Ltd.National ATM Council action filed an application for certification of a class action. On December 14, 2012, the Watson plaintiff's counsel filed another merchant class action in Alberta (and the consumer class actions, and denied plaintiffsMacaroniesHair Club and Laser Centre Inc.) which effectively mirrors the claims in the Watson’ case. Following a hearing on defendants' applications to staymotions for an order altering or amending the Alberta actions, the court ordered that both Alberta actions be stayed pending the decision in the Watson case and on the condition that the Watson class definition be amended to include Alberta residents.
court's February 13, 2013 judgment. On January 4, 2013, plaintiff's counsel in the Canada Rent A Heater (2000) Ltd. action (now titled Crown and Hand Pub Ltd.) filed an application for certification of a class action. On January 23, 2013, the Watson plaintiff's counsel filed another action in Saskatchewan (Hello Baby Equipment Inc.) which effectively mirrors the claims in the Watson case.10, 2014,
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Dynamic Currency Conversion (“DCC”)
On February 4, 2013, the Australian Competition and Consumer Commission (“ACCC”) commenced proceedings in the Federal Court of Australia against Visa Inc., Visa U.S.A., V.W.P.L., and Visa AP (Australia) Pty Limited alleging that certain Visa policies related to the provision of DCC services violated Australian competition law. Among other things, the ACCC alleges that: (1) from May 2010 to October 2010, Visa prohibited DCC services with respect to transactions on Visa international payment cards conducted at Australian merchant outlets that had not previously been conducting DCC transactions; and (2) from at least May 2007, Visa prohibited DCC services with respect to cash withdrawals at Australian ATMs on Visa international payment cards. The ACCC seeks declaratory relief and a monetary fine. The potential amount of any fine cannot be estimated at this time.
On June 6, 2013, Visa filed its response to the ACCC's allegations.
U.S. ATM Access Fee Litigation
On February 13, 2013, the court granted the motion to dismiss and dismissed the cases without prejudice. On March 12, 2013, plaintiffs in the National ATM Council class action and the consumer class actions moved for an order altering or amending the court's February 13, 2013 order to provide that (1) the complaints (as opposedfiled notices of appeal to the cases) are dismissed without prejudice, and (2) plaintiffs may move to amend their complaints.U.S. Court of Appeals for the District of Columbia Circuit.
Note 12—Subsequent Events
Interchange Multidistrict Litigation. On April 15, 2013,January 14, 2014, the court entered the final judgment order approving the settlement with the class plaintiffs in the interchange multidistrict litigation proceedings, which is subject to the adjudication of any appeals. Takedown payments of approximately National ATM Council $1.1 billionclass action related to the opt-out merchants were received on January 27, 2014, and deposited into the Company’s litigation escrow account. The deposit into the litigation escrow account, and a related increase in accrued litigation to address opt-out claims will be recorded in the second quarter of fiscal 2014. See Note 11—Legal Matters.
Credit facility renewal. On January 29, 2014, the Company, Visa International Service Association and Visa U.S.A. Inc. (collectively, the "Borrowers") entered into a 364-day, unsecured $3.0 billion revolving credit facility (the “Credit Facility”) with Bank of America, N.A., as administrative agent and the lenders party thereto. JPMorgan Chase Bank, N.A., acted as syndication agent in connection with the Credit Facility; Bank of China, Los Angeles Branch, Barclays Bank plc, Citibank, N.A., Goldman Sachs Bank USA, Standard Chartered Bank, The Bank of Tokyo-Mitsubishi UFJ, Ltd., U.S. Bank National Association and Wells Fargo Bank, National Association, acted as Documentation Agents; and Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities LLC, Bank of China, Los Angeles Branch, Barclays Bank plc, Citibank, N.A., Goldman Sachs Bank USA, Standard Chartered Bank, The Bank of Tokyo-Mitsubishi UFJ, Ltd., U.S. Bank National Association and Wells Fargo Bank, National Association, acted as joint lead arrangers and joint book runners. The Credit Facility, which expires on Stoumbos January 28, 2015, replaced the Company’s prior $3.0 billion credit facility, which was to expire on January 30, 2014, and which the Borrowers terminated on January 29, 2014.
The Credit Facility provides the Borrowers with a borrowing capacity of up to $3.0 billion. Borrowings under the Credit Facility are available for general corporate purposes. Interest on the borrowings under the Credit Facility would be charged at the London Interbank Offered Rate (LIBOR) or an alternative base rate, in each case moved for leaveplus applicable margins that fluctuate based on the applicable rating of senior unsecured long-term debt securities of the Company. The Borrowers have agreed to file amended complaints. On April 18, 2013, plaintiffspay a commitment fee which will fluctuate based on such applicable rating of the Company.
Other material terms are:
a financial covenant which requires the Company to maintain a Consolidated Indebtedness to Consolidated EBITDA Ratio (as defined in the Mackmin Credit Facility) of not greater than 3.75 to 1.00;
customary restrictive covenants, which limit the Borrowers' ability to, among other things, create certain liens, effect fundamental changes to their business, or merge or dispose of substantially all of their assets, subject in each case moved for leave to file an amended complaint. Defendants filed responses opposingcustomary exceptions and amounts;
customary events of default, upon the motions onoccurrence of which, after any applicable grace period, the grounds that they are not procedurally properrequisite lenders will have the ability to accelerate all outstanding loans thereunder and would be futileterminate the commitments; and
other customary and standard terms and conditions.
The Borrowers currently have no borrowings under the Credit Facility. The participating lenders in any event. On April 24, 2013, the court orderedCredit Facility include certain holders of the defendants to file further detailed responses, addressing futility in particular. Briefing onCompany’s class B and class C common stock, certain of the motions is complete.Borrowers' customers, and their affiliates.
Consumer Financial Protection Bureau. On February 7, 2013, Visa received a letter from the Consumer Financial Protection Bureau (“CFPB”) seeking documents and information, on a voluntary basis, regarding Visa's practices with respect to the conversion of U.S. cardholder foreign transactions from foreign currency into U.S. dollars. On March 20, 2013, Visa met with the CFPB and provided information and materials in response to the requests. Visa is continuing to cooperate with the CFPB's inquiry.
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ITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
This management’s discussion and analysis provides a review of the results of operations, financial condition and the liquidity and capital resources of Visa Inc. and its subsidiaries (“Visa,” “we,” “our” or the “Company”) on a historical basis and outlines the factors that have affected recent earnings, as well as those factors that may affect future earnings. The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and related notes included elsewhere in this report.
Forward-Looking Statements
This quarterly reportQuarterly Report on Form 10-Q contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. TheseForward-looking statements can begenerally are identified by the terms "believe,words such as "believes," "continue,"estimates," "could,"expects," "estimate," "expect,"intends," "may," "potential,"projects," "project,"could," "should," "will," "will continue" and other similar references to the future.
expressions. Examples of such forward-looking statements include, but are not limited to, statements we make about the settlement of the multi-district interchange litigation; our response to the U.S. Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act; the number of transactions we process; the shift to electronic payments and our growth in the category; the growth rate of consumer and commercial spending; our liquidity needs and our ability to meet them; dividend payments; andrevenue, client incentives, operating margin, earnings per share, free cash flow, revenue, incentive payments, expenses, operating margin, tax rate and capital expenditures and the growth of those items.
By their nature, forward-looking statements: (i) speak only as of the date they are made,made; (ii) are neithernot statements of historical fact noror guarantees of future performanceperformance; and (iii) are subject to risks, uncertainties, assumptions andor changes in circumstances that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from thoseour forward-looking statements because ofdue to a variety of factors, including the following:
the impact of new laws, regulations and marketplace barriers, including:
rules capping debit interchange reimbursement feesrates and expanding financial institutions' and merchants' choices among debit payment networks promulgated under the Dodd-Frank Act;
rules under the Dodd-FrankWall Street Reform and Consumer Protection Act expanding issuers' and merchants' choice among debit payment networks;
increased regulation in jurisdictions outside of the United States and in other product categories;
increased government support of national payment networks outside the United States; and
rules aboutincreased regulation on consumer privacy, and data use and security;
developments in current or future litigation orand government enforcement, including:
including those affecting interchange reimbursement fees, antitrust and tax disputes; andtax;
new lawsuits, investigations or proceedings, or changes to our failure to satisfy the conditions necessary to make the multidistrict litigation settlement effective;potential exposure in connection with pending lawsuits, investigations or proceedings;
economic factors, such as:
an increase or spread ofeconomic fragility in the current European crisis involving sovereign debtEurozone and the euro;
a failure to resolve the current sequestration in the United States;
general economic, political and social conditions in mature and emerging markets globally;
material changes in cross-border activity, foreign exchange controls and fluctuations in currency exchange rates; and
material changes in our financial institution clients' performance compared to our estimates; and
other global economic, political and health conditions;
industry developments, such as competitive pressure, rapid technological developments and disintermediation from theour payments value stream;network;
system developments, such as:
disruption of our transaction processing systems or the inability to process transactions efficiently;
account data compromisesbreaches or increased fraudulent or other illegal activities involving our cards;Visa-branded cards or payment products; and
issues arising at Visa Europe, including failure to maintain systems interoperability between our systems;with Visa Europe;
costs and liquidity needs arising if Visa Europe were to exercise its right to require us to acquire all of its outstanding stock;
the loss of organizational effectiveness or key employees;
the failure to integrate recent acquisitions successfully or to effectively launchdevelop new products and businesses;
natural disasters, terrorist attacks, military or political conflicts, and public health emergencies; and
the
various other factors, discussed under the heading "Risk Factors"including those contained in our Annual Report on Form 10-K on filefor the year ended September 30, 2013 and our other filings with the U.S. Securities and Exchange Commission. You should not place undue reliance on such statements. UnlessExcept as required to do so by law, we do not intend to update or revise any forward-looking statement becausestatements as a result of new information, or future developments or otherwise.
Overview
Visa is a global payments technology company that connects consumers, businesses, financial institutions and governments around the world to fast, secure and reliable electronic payments. We provide our financial institution clients with a global payments infrastructure and support services for the delivery of Visa-branded payment processing platforms that encompass consumerproducts, including credit, debit, prepaid and commercial payments.prepaid. We facilitate global commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses and government entities. Each of these constituencies has played a key role in the ongoing worldwide migration from paper-based to electronic forms of payment, and we believe that this transformation continues to yield significant growth opportunities, particularly outside the United States. We continue to explore additional opportunities to enhance our competitive position by expanding the scope of payment servicessolutions we provide.
Overall economic conditions. Our business is affected by overall economic conditions and consumer spending. Our business performance during the ninethree months ended June 30,December 31, 2013 reflects the impacts of a tepidslow-moving global economic recovery.
Adjusted financial results. Our financial results for fiscal 2012 reflect the impact of the following significant items that we believe are not indicative of our financial performance in the prior or future periods, as they either are related to amounts covered by the retrospective responsibility plan, or have no cash impact. As such, we believe the presentation of adjusted financial results excluding the following amounts provides a clearer understanding of our operating performance for the periods presented.
Litigation provision. During the third quarter of fiscal 2012, we recorded a litigation provision of $4.1 billion and related tax benefits associated with the interchange MDL, which is covered by the retrospective responsibility plan. Monetary liabilities from settlements of, or judgments in, the covered litigation are paid from the litigation escrow account. See Note 2—Retrospective Responsibility Plan and Note 11—Legal Matters to our unaudited consolidated financial statements.
Deferred tax adjustment. During the second quarter of fiscal 2012, our reported financial results benefited from a one-time, non-cash adjustment of $208 million related to the remeasurement of our net deferred tax liabilities attributable to changes in the California state apportionment rules.
The following tables present our financial results for the three and nine months ended June 30, 2013, as compared to our adjusted financial results for the three and nine months ended June 30, 2012.
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2013 | | | Three Months Ended June 30, 2012 |
| (in millions, except margin ratio and per share data) |
| Operating expenses | | Operating margin (1) | | Net income attributable to Visa Inc. | | Diluted earnings per share (2) | | | Operating expenses | | Operating margin (1) | | Net (loss) income attributable to Visa Inc. | | Diluted (loss) earnings per share (2) |
As reported | $ | 1,173 |
| | 61 | % | | $ | 1,225 |
| | $ | 1.88 |
| | | $ | 5,172 |
| | (102 | )% | | $ | (1,839 | ) | | $ | (2.74 | ) |
Litigation provision | — |
| | — |
| | — |
| | — |
| | | (4,098 | ) | | NM |
| | 2,894 |
| (3 | ) | 4.30 |
|
Adjusted | $ | 1,173 |
| | 61 | % | | $ | 1,225 |
| | $ | 1.88 |
| | | $ | 1,074 |
| | 58 | % | | $ | 1,055 |
| | $ | 1.56 |
|
Weighted-average number of diluted shares outstanding (4) | | | | | | | 651 |
| | | | | | | | | 675 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended June 30, 2013 | | | Nine Months Ended June 30, 2012 |
| (in millions, except margin ratio and per share data) |
| Operating expenses | | Operating margin (1) | | Net income attributable to Visa Inc. | | Diluted earnings per share (2) | | | Operating expenses | | Operating margin (1) | | Net income attributable to Visa Inc. | | Diluted earnings per share (2) |
As reported | $ | 3,317 |
| | 62 | % | | $ | 3,788 |
| | $ | 5.74 |
| | | $ | 7,073 |
| | 8 | % | | $ | 482 |
| | $ | 0.71 |
|
Litigation provision | — |
| | — |
| | — |
| | — |
| | | (4,098 | ) | | 53 | % | | 2,894 |
| (3 | ) | 4.25 |
|
Impact of deferred tax adjustment | — |
| | — |
| | — |
| | — |
| | | — |
| | — | % | | (208 | ) | | (0.30 | ) |
Adjusted | $ | 3,317 |
| | 62 | % | | $ | 3,788 |
| | $ | 5.74 |
| | | $ | 2,975 |
| | 61 | % | | $ | 3,168 |
| | $ | 4.66 |
|
Weighted-average number of diluted shares outstanding (as reported) | | | | | | | 660 |
| | | | | | | | | 681 |
|
| |
(1)
| Operating margin is calculated as operating income (loss) divided by total operating revenues. |
| |
(2)
| Figures in the table may not recalculate exactly due to rounding. Diluted earnings (loss) per share is calculated based on whole numbers, not the rounded numbers presented. |
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(3)
| The litigation provision adjustment to net (loss) income attributable to Visa Inc. is shown net of tax. The tax impact is determined by applying applicable federal and state tax rates to the litigation provision and applying related reserves for uncertain tax positions. |
| |
(4)
| For the three months ended June 30, 2012, the computation of adjusted diluted earnings per share included the effect of 3 million incremental dilutive shares, which were excluded from the computation of reported diluted loss per share as they were considered anti-dilutive when applied to a net loss. |
Interchange Multidistrict Litigation Proceedings (MDL). On October 19, 2012, Visa, MasterCard, various U.S. financial institution defendants andJanuary 14, 2014, the class plaintiffs signed a settlement agreement to resolve the class plaintiffs' claims in the interchange MDL. The court entered the preliminary approvalfinal judgment order ofapproving the class plaintiffs' settlement agreement on November 27, 2012. On December 10, 2012, Visa paid approximately $4.0 billion from the litigation escrow account into a settlement fund established pursuant to the definitive class settlement agreement. Certain retailers in the proposed settlement classes thereafter objected to the settlement or have opted-out or are seeking to opt-out of all or portions of the settlement. The settlement with the class plaintiffs in the interchange multidistrict litigation proceedings, which is subject to final court approval, which we cannot assure will be received, and to the adjudication of any appeals. We also signed a settlement agreement to resolve the claims brought by a groupTakedown payments of individual merchants which were consolidated with the MDL for coordination of pre-trial proceedings. Pursuantapproximately $1.1 billion related to the settlement agreement, we paid $350 million fromopt-out merchants were received on January 27, 2014, and were deposited into the litigation escrow account. The deposit into the litigation escrow account, and a related increase in accrued litigation to address opt-out claims will be recorded in the individual merchants on October 29, 2012, and on November 6, 2012, the court entered an
order dismissing the individual merchants' claims with prejudice.fiscal 2014. See Note 2—Retrospective Responsibility Plan and Note 11—Legal Matters to our unaudited consolidated financial statements.
Reduction in as-converted class A common stock. During the three and nine months ended June 30, 2013, we repurchased 6 million and 26 million shares, respectively, of our class A common stock using $1.0 billion and $4.1 billion, respectively, of cash on hand. At June 30, 2013, we had $61 million of remaining funds available for share repurchases under the current program authorized by the board of directors. In JulyOctober 2013, our board of directors authorized a new $1.5$5.0 billion share repurchase program. During the three months ended December 31, 2013, we repurchased 5 million shares of our class A common stock using $1.1 billion of cash on hand. As of December 31, 2013, the October program had remaining authorized funds of $4.2 billion. All share repurchase programs authorized prior to be in effect through July 2014.October 2013 have been completed. See Note 7—Stockholders' Equity to our unaudited consolidated financial statements.
Nominal payments volume and transaction counts. Payments volume is the primary driver for our service revenues, and the number of processed transactions is the primary driver for our data processing revenues. Compared to the prior year periods, overall payments volume grew in all categories worldwide except U.S. consumer debit, which has been negatively impacted by the Dodd-Frank Act beginning April 1, 2012. Excluding U.S. debit transactions, theworldwide. The number of processed transactions continues to increase at a healthy rate, reflecting the continuing worldwide shift to electronic currency.
The following tables present nominal payments volume.(1) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. | | Rest of World | | Visa Inc. |
| 3 Months Ended March 31, 2013 (2) | | 3 Months Ended March 31, 2012 (2) | | % Change | | 3 Months Ended March 31, 2013 (2) | | 3 Months Ended March 31, 2012 (2) | | % Change | | 3 Months Ended March 31, 2013 (2) | | 3 Months Ended March 31, 2012 (2) | | % Change |
| (in billions, except percentages) |
Nominal Payments Volume | | | | | | | | | | | | | | | | | |
Consumer credit | $ | 186 |
| | $ | 168 |
| | 10 | % | | $ | 363 |
| | $ | 337 |
| | 8 | % | | $ | 549 |
| | $ | 505 |
| | 9 | % |
Consumer debit(3) | 264 |
| | 264 |
| | — | % | | 99 |
| | 83 |
| | 19 | % | | 362 |
| | 346 |
| | 5 | % |
Commercial and other(3) | 80 |
| | 76 |
| | 6 | % | | 33 |
| | 31 |
| | 8 | % | | 113 |
| | 106 |
| | 7 | % |
Total Nominal Payments Volume | $ | 530 |
| | $ | 508 |
| | 4 | % | | $ | 495 |
| | $ | 450 |
| | 10 | % | | $ | 1,025 |
| | $ | 958 |
| | 7 | % |
Cash volume | 108 |
| | 108 |
| | — | % | | 514 |
| | 476 |
| | 8 | % | | 621 |
| | 584 |
| | 6 | % |
Total Nominal Volume(4) | $ | 637 |
| | $ | 615 |
| | 4 | % | | $ | 1,009 |
| | $ | 926 |
| | 9 | % | | $ | 1,646 |
| | $ | 1,541 |
| | 7 | % |
| | | U.S. | | Rest of World | | Visa Inc. | U.S. | | International | | Visa Inc. |
| 9 Months Ended March 31, 2013 (2) | | 9 Months Ended March 31, 2012 (2) | | % Change | | 9 Months Ended March 31, 2013 (2) | | 9 Months Ended March 31, 2012 (2) | | % Change | | 9 Months Ended March 31, 2013 (2) | | 9 Months Ended March 31, 2012 (2) | | % Change | 3 Months Ended September 30, 2013 (2) | | 3 Months Ended September 30, 2012 (2) | | % Change | | 3 Months Ended September 30, 2013 (2) | | 3 Months Ended September 30, 2012 (2) | | % Change | | 3 Months Ended September 30, 2013 (2) | | 3 Months Ended September 30, 2012 (2) | | % Change |
| (in billions, except percentages) | (in billions, except percentages) |
Nominal Payments Volume | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer credit | $ | 580 |
| | $ | 523 |
| | 11 | % | | $ | 1,116 |
| | $ | 1,024 |
| | 9 | % | | $ | 1,696 |
| | $ | 1,547 |
| | 10 | % | $ | 213 |
| | $ | 191 |
| | 12 | % | | $ | 389 |
| | $ | 362 |
| | 7 | % | | $ | 602 |
| | $ | 553 |
| | 9 | % |
Consumer debit(3) | 771 |
| | 801 |
| | (4 | )% | | 291 |
| | 248 |
| | 17 | % | | 1,062 |
| | 1,049 |
| | 1 | % | 272 |
| | 249 |
| | 9 | % | | 105 |
| | 89 |
| | 18 | % | | 377 |
| | 338 |
| | 12 | % |
Commercial and other(3) | 244 |
| | 229 |
| | 7 | % | | 104 |
| | 96 |
| | 8 | % | | 349 |
| | 325 |
| | 7 | % | |
Commercial(4) | | 90 |
| | 82 |
| | 9 | % | | 35 |
| | 34 |
| | 2 | % | | 125 |
| | 117 |
| | 7 | % |
Total Nominal Payments Volume | $ | 1,595 |
| | $ | 1,554 |
| | 3 | % | | $ | 1,511 |
| | $ | 1,368 |
| | 10 | % | | $ | 3,106 |
| | $ | 2,922 |
| | 6 | % | $ | 575 |
| | $ | 522 |
| | 10 | % | | $ | 529 |
| | $ | 486 |
| | 9 | % | | $ | 1,104 |
| | $ | 1,007 |
| | 10 | % |
Cash volume | 327 |
| | 323 |
| | 1 | % | | 1,548 |
| | 1,435 |
| | 8 | % | | 1,876 |
| | 1,759 |
| | 7 | % | 117 |
| | 111 |
| | 5 | % | | 523 |
| | 496 |
| | 5 | % | | 640 |
| | 608 |
| | 5 | % |
Total Nominal Volume(4)(5) | $ | 1,923 |
| | $ | 1,877 |
| | 2 | % | | $ | 3,059 |
| | $ | 2,803 |
| | 9 | % | | $ | 4,982 |
| | $ | 4,680 |
| | 6 | % | $ | 692 |
| | $ | 633 |
| | 9 | % | | $ | 1,053 |
| | $ | 982 |
| | 7 | % | | $ | 1,745 |
| | $ | 1,615 |
| | 8 | % |
| |
(1) | Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on whole numbers, not the rounded numbers presented. |
| |
(2) | Service revenues in a given quarter are assessed based on payments volume in the prior quarter. Therefore, service revenues reported for the three and nine months ended June 30,December 31, 2013 and 2012, were based on payments volume reported by our financial institution clients for the three and nine months ended March 31,September 30, 2013 and 2012, respectively. |
| |
(3) | Includes prepaid volume. |
| |
(4) | Includes large, middle and small business credit, and small business debit and prepaid volume. |
| |
(5) | Total nominal volume is the sum of total nominal payments volume and cash volume. Total nominal payments volume is the total monetary value of transactions for goods and services that are purchased.purchased on Visa-branded cards and payment products. Cash volume generally consists of cash access transactions, balance access transactions, balance transfers and convenience checks. Total nominal volume is provided by our financial institution clients, subject to review by Visa. From time to time, previously presented volume information may be updated. Prior year volume information presented in these tables has not been updated, as subsequent adjustments wereperiod updates are not material. |
The table below provides the number of transactions processed by our VisaNet system and billable transactions processed by CyberSource’s network.(1) | | | Three Months Ended June 30, | | Nine Months Ended June 30, | Three Months Ended December 31, |
2013 | | 2012 | | % Change | | 2013 | | 2012 | | % Change | 2013 | | 2012 | | % Change |
(in millions, except percentages) | Visa processed transactions(2) | 14,972 |
| | 13,113 |
| | 14 | % | | 42,981 |
| | 39,751 |
| | 8 | % | 15,985 |
| | 14,159 |
| | 13 | % |
CyberSource billable transactions(3) | 1,648 |
| | 1,303 |
| | 27 | % | | 4,836 |
| | 3,819 |
| | 27 | % | 1,894 |
| | 1,581 |
| | 20 | % |
| |
(1) | Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on whole numbers, not the rounded numbers presented. |
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(2) | Represents transactions involving Visa, Visa Electron, Interlink and PLUS cards processed on Visa's networks. |
| |
(3) | Transactions include, but are not limited to, authorization, settlement payment network connectivity, fraud management, payment security management, tax services and delivery address verification. |
Results of Operations
Operating Revenues
The following table sets forth our operating revenues earned in the United States, in the rest of the worldinternationally and from Visa Europe. Revenues earned from Visa Europe are a result of our contractual arrangement with Visa Europe, as
governed by the framework agreement that provides for trademark and technology licenses and bilateral services. | | | Three Months Ended June 30, | | 2013 vs. 2012 | | Nine Months Ended June 30, | | 2013 vs. 2012 | Three Months Ended December 31, | | 2013 vs. 2012 |
| 2013 | | 2012 | | $ Change | | % Change(1) | | 2013 | | 2012 | | $ Change | | % Change(1) | 2013 | | 2012 | | $ Change | | % Change(1) |
| (in millions, except percentages) | (in millions, except percentages) |
U.S. | $ | 1,632 |
| | $ | 1,449 |
| | $ | 183 |
| | 13 | % | | $ | 4,756 |
| | $ | 4,199 |
| | $ | 557 |
| | 13 | % | $ | 1,690 |
| | $ | 1,527 |
| | $ | 163 |
| | 11 | % |
Rest of world | 1,314 |
| | 1,058 |
| | 256 |
| | 24 | % | | 3,883 |
| | 3,323 |
| | 560 |
| | 17 | % | |
International | | 1,412 |
| | 1,264 |
| | 148 |
| | 12 | % |
Visa Europe | 55 |
| | 58 |
| | (3 | ) | | (5 | )% | | 166 |
| | 168 |
| | (2 | ) | | (2 | )% | 53 |
| | 55 |
| | (2 | ) | | (5 | )% |
Total operating revenues | $ | 3,001 |
| | $ | 2,565 |
|
| $ | 436 |
| | 17 | % | | $ | 8,805 |
| | $ | 7,690 |
| | $ | 1,115 |
| | 14 | % | $ | 3,155 |
| | $ | 2,846 |
|
| $ | 309 |
| | 11 | % |
| |
(1) | Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on whole numbers, not the rounded numbers presented. |
The increase in operating revenues mainlyprimarily reflects continued growth in our underlying business drivers: nominal payments volume; processed transactions; and cross-border volume. Operating revenue growth for the nine-month comparable period also benefited from pricing modifications implemented beginning in the third quarter of fiscal 2012,These benefits were partially offset by volume loss and increases toin client incentives in the United States as part of our strategy to mitigate the impacts of the Dodd-Frank Act. We now expect our percentage growth in operating revenues for the full 2013 fiscal year to be around 13%.incentives.
Our operating revenues, primarily service revenues and international transaction revenues, are impacted by the overall strengthening or weakening of the U.S. dollar as payments volume and related revenues denominated in local currencies are converted to U.S. dollars. There was no significant impact on the year-over-year growth for the three or nine months ended June 30, 2013, as theThe effect of exchange rate movements was substantiallyin the three months ended December 31, 2013, as partially mitigated throughby our hedging program. Weprogram, resulted in a negative two percentage point impact to our total operating revenue growth compared to the prior year. While we expect the impacts of our hedging program to continue to minimizemitigate this risk during fiscal 2014, a general strengthening of the effectU.S. dollar is expected to reduce total operating revenue growth by about two percentage points for the full 2014 fiscal year, net of exchange rate movements during the remainder of fiscal 2013.offsetting hedges.
The following table sets forth the components of our total operating revenues.
| | | Three Months Ended June 30, | | 2013 vs. 2012 | | Nine Months Ended June 30, | | 2013 vs. 2012 | Three Months Ended December 31, | | 2013 vs. 2012 |
| 2013 | | 2012 | | $ Change | | % Change(1) | | 2013 | | 2012 | | $ Change | | % Change(1) | 2013 | | 2012 | | $ Change | | % Change(1) |
| (in millions, except percentages) | (in millions, except percentages) |
Service revenues | $ | 1,298 |
| | $ | 1,216 |
| | $ | 82 |
| | 7 | % | | $ | 3,967 |
| | $ | 3,608 |
| | $ | 359 |
| | 10 | % | $ | 1,419 |
| | $ | 1,300 |
| | $ | 119 |
| | 9 | % |
Data processing revenues | 1,191 |
| | 1,040 |
| | 151 |
| | 15 | % | | 3,456 |
| | 2,913 |
| | 543 |
| | 19 | % | 1,264 |
| | 1,115 |
| | 149 |
| | 13 | % |
International transaction revenues | 854 |
| | 748 |
| | 106 |
| | 14 | % | | 2,490 |
| | 2,229 |
| | 261 |
| | 12 | % | 891 |
| | 805 |
| | 86 |
| | 11 | % |
Other revenues | 179 |
| | 175 |
| | 4 |
| | 1 | % | | 533 |
| | 532 |
| | 1 |
| | — | % | 180 |
| | 179 |
| | 1 |
| | — | % |
Client incentives | (521 | ) | | (614 | ) | | 93 |
| | (15 | )% | | (1,641 | ) | | (1,592 | ) | | (49 | ) | | 3 | % | (599 | ) | | (553 | ) | | (46 | ) | | 8 | % |
Total operating revenues | $ | 3,001 |
| | $ | 2,565 |
| | $ | 436 |
| | 17 | % | | $ | 8,805 |
| | $ | 7,690 |
| | $ | 1,115 |
| | 14 | % | $ | 3,155 |
| | $ | 2,846 |
| | $ | 309 |
| | 11 | % |
| |
(1) | Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on whole numbers, not the rounded numbers presented. |
Service revenues increased during the three- and nine-monththree-month comparable periodsperiod primarily due to 7% and 6%10% growth in nominal payments volume, respectively; however, the growth in service revenues was greater than the growth in nominal payments volume for the nine-month comparable period. This reflects a shift in the mix of our payments volume, most notably a significant decline in volume related to Interlink, which is a debit product that does not generate any service revenues.volume.
Data processing revenues increased due to overall growth in processed transactions of 14% and 8%13% during the three- and nine-monththree-month comparable periods, respectively,period, and solid growth in CyberSource billable transactions. Growth in the number of processed transactions reflected growth in Visa transactions processed outside of the United States, U.S. credit transactionsinternationally and U.S. debit transactions, excluding Interlink. Processed transaction growth from Interlink increased 25% during the three-month comparable period and decreased 24% during the nine-month comparable period. The decrease reflects an anticipated decline in U.S. debit processed transactions as a result of certain provisions of the Dodd-Frank Act, which became effective in the third quarter of fiscal 2012.U.S.
Data processing revenues for the nine-month comparable period also benefited from the implementation of our strategy to mitigate, to some extent, the negative impacts from the Dodd-Frank Act through pricing modifications and collaborating with our clients and other business partners to win merchant and acquirer routing preference. This price restructuring became effective in the third quarter of fiscal 2012 and included the implementation of the Fixed Acquirer Network Fee, which was partially offset by reductions in certain variable fees. While data processing fees benefited from the price restructuring, increased merchant and acquirer incentives executed as part of this strategy resulted in higher client incentive levels, which partially offset this increase.
International transaction revenues increased during the three- and nine-monththree-month comparable periods,period, primarily due to 11% and 10% growth in nominal cross-border payments volume, respectively.volume.
Client incentives decreasedincreased during the three-month comparable period mainly due to the absence of significant one-time incentives incurred in the prior year, combined with the impact of recently executed issuer contracts, offset by an increase due to overall growth in global payments volume. Additionally, the overall increase during the nine-month comparable period reflects incentives incurred on significant long-term clientcustomer contracts that were initiated or renewed after the thirdfirst quarter of fiscal 2012. These included a number2013, as well as overall growth in global payments volume. The amount of client incentives we record in
significant long-term merchant and acquirer contracts executed as part of our strategy to mitigate the impact of the Dodd-Frank Act. The amount of client incentives we record in future periods will vary based on changes in performance expectations, actual client performance, amendments to existing contracts or the execution of new contracts. We expect incentives as a percentage of gross revenues to be in the range of 16%16.5% to 17%17.5% for the full 20132014 fiscal year.
Operating Expenses
The following table sets forth components of our total operating expenses.
| | | Three Months Ended June 30, | | 2013 vs. 2012 | | Nine Months Ended June 30, | | 2013 vs. 2012 | Three Months Ended December 31, | | 2013 vs. 2012 |
| 2013 | | 2012 | | $ Change | | % Change(1) | | 2013 | | 2012 | | $ Change | | % Change(1) | 2013 | | 2012 | | $ Change | | % Change(1) |
| (in millions, except percentages) | (in millions, except percentages) |
Personnel | 493 |
| | $ | 435 |
| | $ | 58 |
| | 13 | % | | 1,433 |
| | $ | 1,255 |
| | $ | 178 |
| | 14 | % | $ | 470 |
| | $ | 454 |
| | $ | 16 |
| | 4 | % |
Marketing | 252 |
| | 242 |
| | 10 |
| | 4 | % | | 640 |
| | 602 |
| | 38 |
| | 6 | % | 186 |
| | 193 |
| | (7 | ) | | (4 | )% |
Network and processing | 117 |
| | 102 |
| | 15 |
| | 14 | % | | 346 |
| | 303 |
| | 43 |
| | 14 | % | 132 |
| | 110 |
| | 22 |
| | 20 | % |
Professional fees | 103 |
| | 99 |
| | 4 |
| | 5 | % | | 282 |
| | 251 |
| | 31 |
| | 12 | % | 75 |
| | 88 |
| | (13 | ) | | (15 | )% |
Depreciation and amortization | 101 |
| | 84 |
| | 17 |
| | 22 | % | | 291 |
| | 244 |
| | 47 |
| | 20 | % | 107 |
| | 92 |
| | 15 |
| | 16 | % |
General and administrative | 108 |
| | 112 |
| | (4 | ) | | (3 | )% | | 322 |
| | 320 |
| | 2 |
| | 1 | % | 108 |
| | 106 |
| | 2 |
| | 2 | % |
Litigation provision | (1 | ) | | 4,098 |
| | (4,099 | ) | | NM |
| | 3 |
| | 4,098 |
| | (4,095 | ) | | NM |
| — |
| | 3 |
| | (3 | ) | | NM |
|
Total Operating Expenses | $ | 1,173 |
| | $ | 5,172 |
| | $ | (3,999 | ) | | (77 | )% | | $ | 3,317 |
| | $ | 7,073 |
| | $ | (3,756 | ) | | (53 | )% | $ | 1,078 |
| | $ | 1,046 |
| | $ | 32 |
| | 3 | % |
| |
(1) | Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on |
whole numbers, not the rounded numbers presented.
Personnel increased primarily due to increases in headcount throughout the organization reflecting our strategy to invest for future growth, particularly in key product and geography-specific initiatives.growth.
Marketing increased mainly reflecting strategiesdecreased compared to promotethe prior year primarily due to the planned timing of our core productsmarketing spend for fiscal 2014. We anticipate an increase in spending during the second and third quarter of fiscal 2014 to support a number of various campaigns including the 2013 FIFA Confederation Cup2014 Sochi Winter Olympics and the 2014 Winter Olympics. Total marketing spend is expected to be under $1 billion for fiscal 2013.FIFA World Cup.
Network and processing increased mainly due to greater investment in technology projects and costs incurred for the operation of our processing network.
Professional fees increaseddecreased primarily reflecting greater investmentdue to the absence of certain project costs incurred in technology projects.fiscal 2013, partially offset by costs incurred to support our network applications.
Depreciation and amortization increased primarily due to additional depreciation from our ongoing investments in technology assets and infrastructure to support our core business as well as our e-commerce and mobileeCommerce initiatives.
Litigation provision decrease reflects the absence of a $4.1 billion accrual recorded in the prior year related to the covered litigation. See Note 11—Legal Matters to our unaudited consolidated financial statements.
Effective Income Tax Rate
The effective income tax rates were 33%32% and 31%28% for the three and nine months ended June 30,December 31, 2013 respectively, and29% and 22% for the three and nine months ended June 30, 2012, respectively. The effective tax ratesrate for the three and nine months ended June 30,December 31, 2013 differdiffers from the effective tax ratesrate in the same periodsperiod in the previous fiscal 2012year mainly due to:
certain foreign tax credit benefits related to prior years recognized in the second quarterabsence of fiscal 2013;
a $76$76 million tax benefit recognized in the first quarter of fiscal 2013, as a result of new guidance issued by the state of California regarding apportionment rules for years prior to fiscal 2012; and
2012.the absence of:
the tax benefit and the offsetting tax reserve associated with the covered litigation provision recorded in the third quarter of fiscal 2012;
a one-time foreign tax credit carryover benefit recognized in the third quarter of fiscal 2012; and
a one-time, non-cash benefit of $208 million from the remeasurement of existing net deferred tax liabilities in the second quarter of fiscal 2012, as a result of the California state apportionment rule changes adopted in that quarter.
Excluding the impact of the covered litigation provision recorded in the third quarter of fiscal 2012, and the one-time, non-cash benefit of $208 million from the remeasurement of existing net deferred tax liabilities in the second quarter of fiscal 2012, our effective tax rates for the three and nine months ended June 30, 2012 would have been 29% and 33%, respectively.
For the full year, we anticipate that our annual effective income tax rate will be between 30% and 32%.
During the three and nine months ended June 30,December 31, 2013, our gross unrecognized tax benefits increased by $10$47 million, and $231 $45 million, respectively, $8 million and $179 million of which respectively, would favorably impact our effective income tax rate if recognized. The increase in gross unrecognized tax benefits is primarily due to changes in judgments and estimatespotential audit exposure related to various tax positions across several jurisdictions.
Liquidity and Capital Resources
Cash Flow Data
The following table summarizes our cash flow activity for the periods presented. | | | Nine Months Ended June 30, | Three Months Ended December 31, |
| 2013 | | 2012 | 2013 | | 2012 |
| (in millions) | (in millions) |
Total cash provided by (used in): | | | | | | |
Operating activities | $ | 977 |
| | $ | 3,640 |
| $ | 1,541 |
| | $ | (2,824 | ) |
Investing activities | (1,354 | ) | | (1,943 | ) | (276 | ) | | (865 | ) |
Financing activities | (244 | ) | | (2,262 | ) | (1,330 | ) | | 2,949 |
|
Effect of exchange rate changes on cash and cash equivalents | — |
| | (4 | ) | |
Decrease in cash and cash equivalents | $ | (621 | ) | | $ | (569 | ) | $ | (65 | ) | | $ | (740 | ) |
Operating activities. Cash provided by operating activities duringfor the ninethree months ended June 30,December 31, 2013,, reflects was higher compared to the prior year, primarily reflecting the absence of payments made from the litigation escrow account totaling $4.4$4.4 billion in connection with the covered litigation. As these payments werelitigation, and increases in net income. Payments made in the prior year from ourthe litigation escrow account they are also reflected as a cash inflow under financing activities.activities during the three months ended December 31, 2012. See Note 2—Retrospective Responsibility Plan and Note 11—Legal Matters to our unaudited consolidated financial statements. The current tax deduction related to these payments contributed to the $1.1 billion decline in overall income taxes paid for the comparable year-over-year period. Absent the above impacts, cash provided by operating activities would have totaled $4.3 billion, an increase over the prior-year period. This increase reflects continued growth in net income.
Investing activities. Cash used in investing activities was lower compared to the prior year, primarily reflecting a decrease in purchases of available-for-sale investment securities combined with greaterand an increase in proceeds received from maturitiesthe sale and salesmaturity of available-for-sale investment securities.
Financing activities. Cash used in financing activities during the ninethree months ended June 30,December 31, 2013,, reflects the use of $4.11.1 billion to repurchase class A common stock in the open market, combined with dividend payments of $653 million, offset by the funding of payments from the litigation escrow account totaling $4.4 billion in connection with the covered litigation. Activity in the prior year mainly reflected a deposit into the litigation escrow account totaling $1.6 billion, $536 million in repurchases of our class A common stock in the open market, and dividend payments of $448254 million. Activity in the prior year primarily reflected the funding of payments from the litigation escrow account totaling $4.4 billion in connection with the covered litigation, offset by $1.3 billion used to repurchase class A common stock in the open market.
Sources of Liquidity
Our primary sources of liquidity are cash on hand, cash flow from operations, our investment portfolio and access to various equity and borrowing arrangements. Funds from operations are maintained in cash and cash equivalents and short-term or long-term available-for-sale investment securities based upon our funding requirements, access to liquidity from these holdings, and the returns that these holdings provide. We believe that
cash flow generated from operations, in conjunction with access to our other sources of liquidity, will be more than sufficient to meet our ongoing operational needs.
Cash and cash equivalents and short-term and long-term available-for-sale investment securities held by our foreign subsidiaries totaled $4.34.6 billion at June 30,December 31, 2013. If it were necessary to repatriate these funds for use in the United States, we would be required to pay U.S. income taxes on most of these amounts.this amount. The amount of income taxes that would have resulted had these funds been repatriated is not practicably determinable. It is our intent to indefinitely reinvest the majority of these funds outside of the United States. As such, we have not accrued any U.S. income tax provision in our financial results related to the majority of these funds.
Commercial paper program. We maintain a commercial paper program to support our working capital requirements and for other general corporate purposes. On February 7, 2013, we replaced the existing $500 million program with a new commercial paper program. Under the new program, we are authorized to issue up to $3.0 billion in outstanding notes, with maturities up to 397 days from the date of issuance. We had no outstanding obligations under the new program at June 30, 2013. See Note 4—Debt to our unaudited consolidated financial statements.
Credit facility. On January 31, 2013, we entered into an unsecured $3.0 billion revolving credit facility. This credit facility, which expires on January 30, 2014, replaced our existing $3.0 billion credit facility, which would have expired on February 15, 2013. The new credit facility contains covenants and events of default customary for facilities of this type. There were no borrowings under the new credit facility and we were in compliance with all related covenants at June 30, 2013. See Note 4—Debt to our unaudited consolidated financial statements.
Uses of Liquidity
There has been no significant change to our primary uses of liquidity since September 30, 20122013, except as discussed below. Based on our current cash flow budgets and forecasts of our short-term and long-term liquidity needs, we believe that our projected sources of liquidity will be sufficient to meet our projected liquidity needs for more than the next 12 months. We will continue to assess our liquidity position and potential sources of supplemental liquidity in view of our operating performance, current economic and capital market conditions and other relevant circumstances.
MDL impact on free cash flow.Covered litigation. On December 10, 2012, we paidJanuary 14, 2014, the court entered the final judgment order approving the settlement with the class plaintiffs in the interchange multidistrict litigation proceedings, which is subject to the adjudication of
any appeals. Our portion of the takedown payments of approximately $4.0$1.1 billion fromrelated to the opt-out merchants was received on January 27, 2014, and deposited into the litigation escrow account into a settlement fund established pursuant to the definitive MDL class settlement agreement. Under the settlement agreement, if class members opt outaccount. Receipt of the damages portion of the class settlement, defendants are entitled to receive takedown payments increases our current taxable income by $1.1 billion, and income tax payable by $387 million. This will negatively impact our free cash flow in the remaining quarters of no more than 25% offiscal 2014, beginning with the originalfiscal second quarter. We continue to expect annual free cash payments made intoflow to be about $5 billion for the settlement fund, based on the percentage of payment card sales volume for a defined period attributable to merchants who opted out.full fiscal 2014 year. SeeNote 2—Retrospective Responsibility Plan and Note 11—Legal Matters to our unaudited consolidated financial statements. Upon final court approval of the settlement agreement, the Visa takedown payment, not to exceed $1.0 billion, will have the effect of reducing our current tax deduction for the $4.0 billion payment originally made into the settlement fund. The effective reduction in our current tax deduction will increase our deferred tax asset and decrease our income tax receivable, which will have a negative impact on our free cash flow in the year the final court approval is rendered. See Note 10—Income Taxes to our unaudited consolidated financial statements. We continue to expect annual free cash flow to be about $6 billion for fiscal 2013.
Reduction in as-converted class A common stock. In October 2013, our board of directors authorized a new $5.0 billion share repurchase program. During the three and ninethree months ended June 30,December 31, 2013, we repurchased 65 million and 26 million shares respectively, of our class A common stock using $1.0$1.1 billion and $4.1 billion, respectively, of cash on hand. AtAs of June 30,December 31, 2013, wethe October program had remaining authorized funds of $61 million of remaining funds available for share repurchases under the current program authorized by the board of directors. Our board of directors authorized a new $1.54.2 billion. All share repurchase programprograms authorized prior to be in effect through July 2014.October 2013 have been completed. See Note 7—Stockholders' Equity to our unaudited consolidated financial statements.
Dividends. During the ninethree months ended June 30,December 31, 2013, we declared and paid $653254 million in dividends. On July 16, 2013,In January 2014, our board of directors declared a cash dividend in the amount of $0.330.40 per share of class A common stock (determined in the case of class B and class C common stock on an as-converted basis), which will be paid on SeptemberMarch 4, 20132014, to all holders of record as of August 16, 2013February 14, 2014. See Note 7—Stockholders' Equity to our unaudited consolidated financial statements. We expect to continue paying quarterly dividends in cash, subject to approval by the board of directors. Class B and class C common stock will share ratably on an as-converted basis in such future dividends.
Visa Europe put option agreement. We have granted Visa Europe a perpetual put option which, if exercised, will require us to purchase all of the outstanding shares of capital stock of Visa Europe from its members. Visa Europe may exercise the put option at any time. At June 30,December 31, 2013, we determined the fair value of the put option liability to be approximately $145 million. While this amount represents the fair value of the put option at June 30,December 31, 2013, it does not represent the actual purchase price that we may be required to pay if the option is exercised. The purchase price we could be obligated to pay 285 days after exercise will represent a substantial financial obligation, which could be several billion dollars or more. We may need to obtain third-party financing, either by borrowing funds or by undertaking a subsequent equity offering in order to fund this payment. The amount of this potential obligation could vary dramatically based on, among other things, Visa Europe’s adjusted sustainable income and our P/E ratio, in each case, as negotiated at the date of exercise.time the put option is exercised.
Fair Value Measurements—Financial Instruments
As of June 30,December 31, 2013, our financial instruments measured at fair value on a recurring basis included $5.8$6.1 billion of assets and $151158 million of liabilities. Of these instruments, $152 million, or less than 3%2%, had significant unobservable inputs, with the Visa Europe put option liability constituting $145 million of this amount. See Note 3—Fair Value Measurements and Investments to our unaudited consolidated financial statements.
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ITEM 3. | Quantitative and Qualitative Disclosures about Market Risk |
There have been no significant changes to our market risks during the ninethree months ended June 30,December 31, 2013, compared to September 30, 20122013.
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ITEM 4. | Controls and Procedures |
Disclosure controls and procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) of Visa Inc. at the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures of Visa Inc. were effective at the reasonable assurance level as of the end of the period covered by this report.
Changes in internal control over financial reporting. There has been no change in the internal control over financial reporting of Visa Inc. that occurred during the fiscal period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
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ITEM 1. | Legal Proceedings. |
Refer to Note 11—Legal Matters to the unaudited consolidated financial statements included in this Form 10-Q for a description of the Company’s current material legal proceedings.
For a discussion of the Company’s risk factors, see the information under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended September 30, 20122013, filed with the SEC on November 15, 201222, 2013.
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ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
ISSUER PURCHASES OF EQUITY SECURITIES
The table below sets forth information with respect to purchases of the Company’s common stock made by or on behalf of the Company during the quarter ended June 30,December 31, 2013. |
| | | | | | | | | | | | | |
Period | (a) Total Number of Shares Purchased (1) | | (b) Average Price Paid per Share | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2) |
April 1-30, 2013 | 825,429 |
| | $ | 162.71 |
| | 825,429 |
| | $ | 907,840,727 |
|
May 1-31, 2013 | 1,767,608 |
| | $ | 179.93 |
| | 1,758,753 |
| | $ | 591,372,019 |
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June 1-30, 2013 | 2,966,303 |
| | $ | 178.77 |
| | 2,966,303 |
| | $ | 61,028,535 |
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Total | 5,559,340 |
| | $ | 176.75 |
| | 5,550,485 |
| | |
|
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Period | (a) Total Number of Shares Purchased (1) | | (b) Average Price Paid per Share | | (c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | | (d) Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2) |
October 1-31, 2013 | — |
| | $ | — |
| | — |
| | $ | 5,250,658,812 |
|
November 1-30, 2013 | 3,654,494 |
| | $ | 198.33 |
| | 3,376,303 |
| | $ | 4,580,712,323 |
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December 1-31, 2013 | 2,089,544 |
| | $ | 201.43 |
| | 2,089,539 |
| | $ | 4,159,771,842 |
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Total | 5,744,038 |
| | $ | 199.46 |
| | 5,465,842 |
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(1) | Includes 8,855278,196 shares of class A common stock withheld at an average price of $181.73$197.38 per share (per the terms of grants under our 2007 Equity Incentive Compensation Plan) to offset tax withholding obligations that occur upon vesting and release of restricted shares. |
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(2) | The figures in the table reflect transactions according to trade dates. For purposes of the Company's consolidated financial statements included in this Form 10-Q, the impact of these repurchases is recorded according to settlement dates. In JulyOctober 2013, the Company'sCompany’s board of directors authorized an additional $1.5a new $5.0 billion share repurchase program to be in effect through July 2014. program. |
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ITEM 3. | Defaults Upon Senior Securities. |
None.
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ITEM 4. | Mine Safety Disclosures. |
Not applicable.
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ITEM 5. | Other Information. |
None.
The list of exhibits required to be filed as exhibits to this report is listed in the “Exhibit Index,” which is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | VISA INC. |
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Date: | July 24, 2013January 30, 2014 | By: | | /s/ Charles W. Scharf |
| | Name: | | Charles W. Scharf |
| | Title: | | Chief Executive Officer (Principal Executive Officer) |
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Date: | July 24, 2013January 30, 2014 | By: | | /s/ Byron H. Pollitt |
| | Name: | | Byron H. Pollitt |
| | Title: | | Chief Financial Officer (Principal AccountingFinancial Officer) |
EXHIBIT INDEX
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| | | | | | | | | |
| | | Incorporated by Reference |
Exhibit Number | | Description of Documents | Schedule/ Form | | File Number | | Exhibit | | Filing Date |
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| | | | | | | | | |
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10.1 | | Confirmation Letter by John M. Partridge, dated March 29, 2013 | 8-K | | 001-33977 | | 10.1 | | 4/1/2013 |
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10.2 | | Offer Letter dated May 20, 2013, between Visa Inc. and Ryan McInerney | 8-K | | 001-33977 | | 99.2 | | 5/23/2013 |
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31.1* | | Certification of Charles W. Scharf, Chief Executive Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | |
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31.2* | | Certification of Byron H. Pollitt, Chief Financial Officer, pursuant to Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | |
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32.1* | | Certification of Charles W. Scharf, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | |
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32.2* | | Certification of Byron H. Pollitt, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | |
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101.INS* | | XBRL Instance Document | | | | | | | |
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101.SCH* | | XBRL Taxonomy Extension Schema Document | | | | | | | |
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101.CAL* | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | |
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101.DEF* | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | |
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101.LAB* | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | |
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101.PRE* | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | |
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| | | | Incorporated by Reference |
Exhibit Number | | Description of Documents | | Schedule/ Form | | File Number | | Exhibit | | Filing Date |
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10.1* | | Form of Visa Inc. 2007 Equity Incentive Compensation Plan Stock Option Award Agreement for awards granted after November 18, 2013
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10.2* | | Form of Visa Inc. 2007 Equity Incentive Compensation Plan Restricted Stock Award Agreement for awards granted after November 18, 2013
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10.3* | | Form of Visa Inc. 2007 Equity Incentive Compensation Plan Restricted Stock Unit Award Agreement for awards granted after November 18, 2013
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10.4* | | Form of Visa Inc. 2007 Equity Incentive Compensation Plan Performance Share Award Agreement for awards granted after November 18, 2013
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10.5* | | Form of Alternate Visa Inc. 2007 Equity Incentive Compensation Plan Stock Option Award Agreement for awards granted after November 18, 2013
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10.6* | | Form of Alternate Visa Inc. 2007 Equity Incentive Compensation Plan Restricted Stock Award Agreement for awards granted after November 18, 2013
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10.7* | | Form of Alternate Visa Inc. 2007 Equity Incentive Compensation Plan Restricted Stock Unit Award Agreement for awards granted after November 18, 2013
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10.8* | | Form of Visa Inc. 2007 Equity Incentive Compensation Plan Director Restricted Stock Unit Award Agreement for awards granted after November 18, 2013
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31.1* | | Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | |
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31.2* | | Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | | | | | | | |
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32.1* | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | |
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32.2* | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | | | | | | | |
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101.INS | | XBRL Instance Document | | | | | | | | |
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101.SCH | | XBRL Taxonomy Extension Schema Document | | | | | | | | |
| | | | | | | | | | |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | | |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | | |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document | | | | | | | | |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | | |
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* | Filed or furnished herewith. |