Visa 10-K 2009
Documents found in this filing:
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the fiscal year ended September 30, 2009
For the transition period from to
Commission file number 001-33977
(Exact name of Registrant as specified in its charter)
Registrants telephone number, including area code: (415) 932-2100
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
Title of each Class
Class B common stock, par value $.0001 per share
Class C common stock, par value $.0001 per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No þ
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 þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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 þ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definitions of large accelerated filer accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
The aggregate market value of the registrants class A common stock, par value $.0001 per share, held by non-affiliates (using the New York Stock Exchange closing price as of March 31, 2009, the last business day of the registrants most recently completed second fiscal quarter) was approximately $25.0 billion. There is currently no established public trading market for the registrants class B common stock, par value $.0001 per share, or the registrants class C common stock, par value $.0001 per share.
As of November 13, 2009 there were 470,210,301 shares outstanding of the registrants class A common stock, par value $.0001 per share, 245,513,385 shares outstanding of the registrants class B common stock, par value $.0001 per share, and 129,429,736 shares outstanding of the registrants class C common stock, par value $.0001 per share.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement for the 2010 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form 10-K to the extent stated herein. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the Registrants fiscal year ended September 30, 2009.
TABLE OF CONTENTS
Unless the context requires otherwise, reference to Company, Visa, we, us or our refers to Visa Inc. and its subsidiaries.
The registered trademarks of Visa Inc. and its subsidiaries include: All It Takes; Bands DesignBlue, White & Gold; Dove Design; Interlink; Life Takes Visa; PLUS; Verified by Visa; Visa; Visa Classic; Visa Corporate; Porque La Vida es Ahora; The Worlds Best Way to Pay; Visa Electron; Visa Europe; Visa Fleet; Visa Infinite; Visa Mobile; VisaNet; Visa Platinum; Visa Purchasing; Visa Resolve OnLine; Visa ReadyLink; Visa Signature; Visa Signature Business; Visa Vale; and Winged V Design. Other trademarks used in this report are the property of their respective owners.
This Form 10-K contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include, but are not limited to:
In addition, statements that contain the terms anticipate, believe, continue, could, estimate, expect, intend, may, plan, potential, predict, project, should, will and similar expressions are intended to identify forward-looking statements. In addition, any underlying assumptions are forward-looking statements. By their nature, forward-looking statements are not guarantees of future performance or results and are subject to risks, uncertainties and assumptions that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from these forward-looking statements as a result of a variety of factors, including all the risks discussed in Item 1ARisk Factors and elsewhere in this report. You are cautioned not to place undue reliance on such statements, which speak only at the date of this report. Unless we are required to do so under U.S. federal securities laws or other applicable laws, we do not intend to update or revise any forward-looking statements.
Visa operates the worlds largest retail electronic payments network and manages a leading global payments brand. We have more branded credit and debit cards in circulation, more transactions and greater total volume than any of our competitors. We facilitate global commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses and government entities. We provide financial institutions, our primary customers, with product platforms encompassing consumer credit, debit, prepaid and commercial payments. VisaNet, our secure, centralized, global processing platform, enables us to provide financial institutions and merchants with a wide range of product platforms, transaction processing and related value-added services.
Our business primarily consists of the following:
We derive revenues primarily from fees paid by our customers based on payments volume, transactions that we process and certain other related services that we provide.
In fiscal 2009:
Our Reorganization and Initial Public Offering
Visa Inc. was incorporated as a Delaware stock corporation in May 2007 and the Visa global enterprise was reorganized in October 2007. Prior to the reorganization, Visa operated as five corporate entities related by ownership and membership. For more information on our reorganization, see Item 8Financial Statements and Supplementary DataNote 2The Reorganization.
In March 2008, we completed our Initial Public Offering, or IPO. As a result of our IPO, the financial institutions that hold our class B and class C common stock represent a minority of the outstanding shareholder interest of Visa Inc. For more information about our IPO, our capital structure and our classes of common stock, see Item 8Financial Statements and Supplementary DataNote 15Stockholders Equity.
The Global Payments Industry
We operate in the global payments industry, which is undergoing a major shift from paper-based payments, such as cash and checks, to card-based and other electronic payments. For more than 30 years, Visa has played a central role in driving this migration by providing payment products and services that we believe deliver significant benefits to consumers, businesses, governments and merchants. We believe that consumers are increasingly attracted to the convenience, security, enhanced services and rewards associated with electronic payment forms. We also believe that corporations and governments are shifting to electronic payments to improve efficiency, control and security, and that a growing number of merchants are accepting electronic payments to improve sales and customer convenience.
The global payments industry consists of all forms of payment and value transfer, including:
The most common card-based forms of payment are general-purpose cards, which offer widespread merchant acceptance. General purpose cards are typically categorized as:
The primary global general purpose card brands include Visa, MasterCard, American Express, Discover, JCB and Diners Club. While these brandsincluding Visawere historically associated primarily with consumer credit or charge cards in the United States and other major international markets, Visa and others have, over time, broadened their offerings to include debit, ATM, prepaid and commercial cards.
Our Primary Operations
We generate revenue from the transaction processing services we offer to our customers. Our customers deliver Visa products and payment services to consumers and merchants based on the product platforms we define and manage. Payments network management is a core part of our operations, as it ensures that our payments system provides a safe, efficient, consistent, and interoperable service to cardholders, merchants, and financial institutions worldwide.
Transaction Processing Services
We own and operate VisaNet, which consists of three synchronized processing centers, including a new data center on the east coast of the United States that replaced an existing data center in March 2009. In addition, Visa Europe operates one processing center in the United Kingdom, which is part of our synchronized system in accordance with the terms of our Framework Agreement with Visa Europe. These centers are linked by a global telecommunications network and are engineered for redundancy. Intelligent access points around the world complete our global processing infrastructure and enable merchants and financial institutions worldwide to access our core processing and value-added services.
VisaNet is built on a centralized architecture, enabling us to view and analyze each authorization transaction we process in real time and provide value-added information, such as risk scoring or loyalty applications, while the transaction data is being routed through our system.
Core Processing Services
Our core processing services involve the routing of payment information and related data to facilitate the authorization, clearing and settlement of transactions between Visa issuers, which are the financial institutions that issue Visa cards to cardholders, and acquirers, which are the financial institutions that offer Visa network connectivity and payments acceptance services to merchants. In addition, we offer a range of value-added processing services to support our customers Visa programs and to promote the growth and security of the Visa payments network.
Authorization is the process of approving or declining a transaction before a purchase is finalized or cash is disbursed. Clearing is the process of delivering final transaction data from an acquirer to an issuer for posting to the cardholders account, the calculation of certain fees and charges that apply to the issuer and acquirer involved in the transaction, and the conversion of transaction amounts to the appropriate settlement currencies. Settlement is the process of calculating, determining, reporting and transferring the net financial position of our issuers and acquirers for all transactions that are cleared.
The issuer and acquirer involved in a typical Visa transaction perform additional functions that we do not generally perform or monitor. For example, the acquirer credits the merchants account for the amount of the transaction less any fees the acquirer charges in accordance with the contractual agreement between the merchant and the acquirer. In addition, the issuer sends a statement to the cardholder and collects payment, in the case of a credit or deferred debit card, or collects payment directly from the cardholders deposit account, in the case of a debit card.
We process virtually all Visa transactions occurring in the United States. We also process virtually all Visa cross-border transactions (that is, transactions where the issuer and the merchant are located in different countries). In many countries outside the United States, domestic transactions may be processed outside of our systems, generally by government-controlled payments networks, our financial institution customers, independent companies or joint ventures owned in whole or in part by our financial institution customers.
We perform clearing and settlement through VisaNet for transactions involving an issuer that is located in Visa Europes region and an acquirer that is located in the rest of the world, or vice versa. In addition, we currently provide clearing and settlement services for Visa transactions occurring entirely within Visa Europes region and will continue to provide such services until completion and deployment of Visa Europes own processing system which is expected to be fully deployed in fiscal 2010. The impact to our consolidated financial results as a result of this deployment is not expected to be material. Visa Europe authorizes transactions for its members through its own processing system.
Other Value-Added Processing Services
We offer a range of other value-added services in certain countries, including risk management, debit issuer processing, loyalty services, dispute management and value-added information services.
Risk Management Services. We provide customers in certain countries with a number of value-added risk-management services. These services, including Visa Advanced Authorization, include preventive, monitoring, investigative and predictive tools, which are intended to mitigate and help eliminate fraud at the cardholder and merchant level.
Issuer Processing Services. Visa Debit Processing Services, or DPS, provides comprehensive issuer processing services for participating U.S. issuers of Visa debit, prepaid and ATM payment products. In addition to core issuer authorization processing, DPS offers card management services, exception processing, PIN and ATM network gateways, call center services, fraud detection services and ATM terminal driving. Through VPS, we provide credit, debit and prepaid issuer processing services, including multicurrency processing functionality, outside the United States.
Loyalty Services. We offer loyalty services, such as the Visa Incentive Network and Visa Extras, that allow our customers to differentiate their Visa program offerings, enhance the attractiveness of their Visa payment programs and strengthen their relationships with cardholders and merchants.
Dispute Management Services. We manage Visa Resolve Online, an automated web-based service that allows our customers back-office analysts and customer service representatives to manage and resolve Visa transaction disputes more efficiently than with paper-based processes.
Value-Added Information Services. We provide our customers with a range of additional information-based business analytics and applications, as well as the transaction data and associated infrastructure required to support them.
We offer a broad range of product platforms to enable our customers to build differentiated, competitive payment programs for their consumer, business, government and merchant clients. Our principal payment platforms enable credit, charge, deferred debit, debit and prepaid payments, as well as cash access, for consumers, businesses and government entities. Our payment platforms are offered under our Visa, Visa Electron, Interlink and PLUS brands.
Our consumer credit product platforms allow our issuers to offer deferred payment and financing products that can be customized to meet the needs of all consumer segments. Our baseline consumer credit platform is marketed to our issuers as Visa Classic. In addition, we offer premium credit platforms, which enable our issuers to tailor programs to consumers requiring higher credit lines or enhanced benefits, such as loyalty programs. Our premium consumer credit platforms are marketed to issuers, and in some cases, to cardholders, as Visa Gold, Visa Platinum, Visa Signature, Visa Signature Preferred and Visa Infinite.
Consumer Deposit Access
Our deposit access product platforms enable our issuers to offer consumer payment and cash access products that draw upon consumer deposit accounts, such as checking, demand deposit, asset or other pre-funded accounts.
Consumer Debit. Our primary consumer debit platform in the United States and many other countries uses the Visa brand mark. Our customers in Asia Pacific, or AP, Latin America and Caribbean, or LAC, and Central and Eastern Europe, Middle East and Africa, or CEMEA, can use the Visa Electron debit platform, which permits issuers to require all transactions initiated from the card to be authorized electronically. It is primarily used by issuers offering payment programs to higher risk customer segments or in countries where electronic authorization is less prevalent. In the United States, we also provide the Interlink debit product platform, which generally requires a cardholder to enter a personal identification number, or PIN, for authentication. Interlink may be enabled through an acceptance mark on a Visa debit card or issued as a standalone debit card.
Prepaid. Our prepaid product platform enables issuers to offer products that access a pre-funded account, allowing cardholders to enjoy the convenience and security of a payment card in lieu of cash or checks. Our prepaid platform includes gift, travel, youth, payroll, money transfer, corporate incentive, insurance reimbursement and government benefits cards.
Cash Access. Our customers can provide global cash access to their cardholders by issuing products accepted at Visa and PLUS branded ATMs. Most Visa and Visa Electron branded cards offer customers cash access at ATMs, as well as at branches of our participating financial institution customers. The PLUS brand may also be included on issuers non-Visa branded cards to offer international cash access as a complement to domestic cash access services.
Our commercial product platforms enable multinational, large, medium and small companies and government organizations to streamline payment processes, manage total spend, access information reporting, automate their supply chain, and reduce administrative costs.
Small Businesses. The Visa Business credit and debit platforms provide small businesses with cash flow tools, purchasing savings, rewards and management reporting. Visa Business Electron is an electronic authorization platform used in many countries outside North America.
Large and Medium Companies. The Visa Corporate platform offers payment options primarily for employee travel and entertainment charges, including cash advances, and provides detailed transaction data as well as information and expense management tools. The Visa Purchasing platform provides card and non-card electronic payment products that allow companies to easily procure goods and services, while streamlining resource- and paper-intensive purchase order and invoice processing. The Visa Fleet platform offers a fuel and ground fleet-related payment program, including extensive transaction detail and tax reclamation services. Through Syncada, our joint venture with US Bank, we market an integrated invoice processing, payment and financing platform for financial institutions to offer to their corporate and government commercial clients around the world.
Government Organizations. In addition to the products mentioned above, Visa offers government organizations unique information-and expense-management tools, employee-fraud-and misuse-management tools and strategic sourcing tools for their card programs. In certain countries, Visa offers specialized commercial products for specific government-sponsored programs, typically targeting agriculture, small-business, freight or construction loan programs.
Product Platform Innovation
We invest in the development and enhancement of payment product platforms with the goal of increasing the migration of consumer and business spending to electronic payments. We believe that innovation results in more secure and versatile payment program options for customers, merchants and consumers. We focus on new payment channels, card technologies, payment account access devices and authentication methods, and have recently made significant investments in the development of eCommerce payment platforms; contact and contactless chip cards and devices; card product enhancements; authentication and security technologies and platforms; and money transfer.
Payments Network Management
We devote significant resources to ensure that Visa is the payments network of choice for customers, merchants and cardholders. We seek to accomplish this by promoting our brand through marketing and sponsorship activities, increasing acceptance of Visa cards around the world and ensuring that the system operates reliably and securely for all of our network participants.
Brand Management and Promotion
We engage in a variety of activities designed to maintain and enhance the value of our brand. Our integrated approach to brand management and promotion combines advertising, sponsorships, promotions and public relations to create programs that build active preference for products carrying our brand, promote product usage, increase product acceptance and support cardholder acquisition and retention. For merchants, we work to ensure that the Visa brand represents timely and guaranteed payment, as well as a way to increase sales. For our customers, our marketing is designed to support their card issuance, activation and usage efforts while complementing and enhancing the value of their own brands. For cardholders, we work to ensure that Visa is a symbol of security, convenience and acceptance.
We establish global marketing relationships to promote the Visa brand and to allow customers to conduct marketing programs in conjunction with major sporting and entertainment events. Our primary global sponsorship platforms are the Olympic Games, for which we have been the exclusive payment card sponsor since 1986, and the FIFA World Cup. Through these marketing relationships, our customers may develop marketing programs that include the Visa brand and mention our sponsorship status. In addition, we engage in marketing and sponsorship activities with other regional, national and local companies, sports leagues or events, such as the National Football League in the United States, or with associations and companies, to provide customized marketing platforms to customers in certain countries and regions.
Our merchant marketing activities bring added value to our merchant partners through the development of marketing programs customized for specific merchants and industry segments. These programs, which we develop in conjunction with merchants, generate awareness for new acceptance channels and locations and increase cardholder spending and merchant sales revenue through special offers and promotions.
Merchant Acceptance Initiatives
We aim to maintain and expand our merchant base by focusing on the needs of merchants and consumers and enhancing our programs to increase acceptance in attractive and fast-growing segments, such as bill payment. Our efforts to address these needs include supporting the development of technological innovations, delivering value-added information services, such as the Visa Incentive Network, and evaluating potential modifications to our operating rules and interchange rates to enhance the value of our payments network compared to other forms of payment.
We enter into arrangements with certain merchants under which they receive monetary incentives and rebates for acceptance of products carrying our brands and increasing their payments volume of products carrying our brands or indicating a preference for our cards.
Our customers are generally required to be financial institutions or other deposit-taking institutions organized under local banking laws or wholly-owned by such institutions. Certain of our customers participate in the full range of functions available to participants in the Visa network, such as soliciting cardholders and issuing cards, soliciting and signing merchants and acquiring merchant transactions. These financial institutions may also sponsor other financial institutions for more limited participation in our network.
Rulemaking and Enforcement
In general, our customers are granted licenses to use our brands and to access our transaction processing systems. Our customers are obligated to honor our rules and standards through agreements with, and in certain cases non-equity membership interests in, our subsidiaries. These rules and standards relate to such matters as the use of our brands and trademarks, the standards, design and features of payment cards and programs, merchant acquiring activities, including acceptance standards applicable to merchants, use of agents, disputes between members, risk management, guaranteed settlement, customer financial failures and allocation of losses among customers.
We establish dispute management procedures between customers relating to specific transactions. For example, after a transaction is presented to an issuer, the issuer may determine that the transaction is invalid for a variety of reasons, including fraud. If the issuer believes there is a defect in a transaction, the issuer may return, or charge back, the transaction to the acquirer. We enforce rules relating to chargebacks and maintain a dispute resolution process with respect to chargeback disputes.
Credit Risk Management
We indemnify our customers for any settlement loss suffered due to another customers failure to fund its daily settlement obligations. In certain instances, we may indemnify customers even in situations in which a transaction is not processed by our system. No material loss related to settlement risk has been incurred in recent years.
To manage our exposure in the event our customers fail to fund their settlement obligations, we have a credit risk policy with a formalized set of credit standards and risk control measures. We regularly evaluate customers with significant settlement exposure to assess risk. In certain instances, we may require a customer to post collateral or provide other guarantees. If a customer becomes unable or unwilling to meet its obligations, we are able to draw upon such collateral or guarantee in order to minimize any potential loss. We may also apply other risk control measures, such as blocking the authorization and settlement of transactions, limiting the use of certain types of agents, prohibiting initiation of acquiring relationships with certain high-risk merchants or suspending or terminating a customers rights to participate in our payments network. The exposure to settlement losses is accounted for as a settlement risk guarantee. The fair value of the settlement risk guarantee is estimated using our proprietary model. Key inputs to the model include the probability of customers becoming insolvent, statistically derived loss factors based on historical experience and estimated settlement exposures at period end.
Payment System Integrity
The integrity of our payments system is affected by fraudulent activity and other illegal uses of our products. Fraud is most often committed in connection with lost, stolen or counterfeit cards or stolen account information resulting from security breaches of systems that store cardholder or account data, including systems operated by merchants, financial institutions and other third-party data processors.
Our fraud detection and prevention offerings include Verified by Visa, a global internet authentication product, which permits cardholders to authenticate themselves to their issuing financial institution using a unique personal code; Visa Advanced Authorization, which adds additional fraud detection capability by adding real-time risk scores to authorization messages; and chip and PIN programs that have been demonstrated to reduce the incidence of certain types of fraud at physical point-of-sale locations. We have also implemented rules that require the use of more secure PIN encryption standards for ATMs and point-of-sale PIN entry devices installed after 2002 and 2003. We have also mandated that all PINs transmitted through VisaNet to the issuer be encrypted using the Triple DES, or Data Encryption Standard, by July 1, 2010.
Interchange Reimbursement Fees
Interchange represents a transfer of value between the financial institutions participating in an open-loop payments network such as ours. On purchase transactions, interchange reimbursement fees are typically paid to issuers by acquirers in connection with transactions initiated with cards in our payments system. We set default interchange rates in the United States and other regions. In certain jurisdictions, interchange rates are subject to government regulation. Although we administer the collection and remittance of interchange reimbursement fees through the settlement process, we generally do not receive any portion of the interchange reimbursement fees. Interchange reimbursement fees are often the largest component of the costs that acquirers charge merchants in connection with the acceptance of payment cards. We believe that interchange reimbursement fees are an important driver of system volume.
We believe the interchange rates that we use promote the efficient operation of our payments network by enabling both the issuer and the acquirer to understand the economics of a given transaction before entering into it and by eliminating the need for each of our customers to negotiate transfer pricing with each other. By establishing and modifying default interchange rates in response to marketplace conditions and strategic demands, we seek to ensure a competitive value proposition for transactions using our cards in order to encourage electronic transactions and to maximize participation in the Visa payments system by issuers and acquirers and, ultimately, consumers and merchants. We believe that proper management of interchange rates benefits consumers, merchants,
our customers and us by promoting the overall growth of our payments network in competition with other payment card systems and other forms of payment and creating incentives for innovation, enhanced data quality and security.
Interchange reimbursement fees and related practices also have come to the attention of, or have been or are being reviewed by, regulatory authorities and/or central banks in a number of jurisdictions, including the United States, the European Union, Australia, Brazil, Canada, Colombia, Germany, Honduras, Hungary, Mexico, New Zealand, Norway, Poland, Portugal, Romania, Singapore, South Africa, Spain, Sweden, Switzerland and the United Kingdom. In certain countries, such as Australia and Mexico, interchange rates have been adjusted in advance of, or in response to, government regulation. We are currently devoting substantial management and financial resources to explain the importance of and defend interchange reimbursement fees and other legal and regulatory challenges we face relating to interchange reimbursement fees. See Item 1ARisk FactorsInterchange reimbursement fees and related practices are subject to significant legal and regulatory scrutiny worldwide, which may have a material adverse impact on our revenues, our prospects for future growth and our overall business, and Item 8Financial Statements and Supplementary DataNote 21Legal Matters elsewhere in this report.
Merchant Discount Rates. Merchants do not pay interchange reimbursement fees. A merchants cost of acceptance is determined by its acquirer and is called a merchant discount or merchant discount rate. The merchant discount typically covers the costs that acquirers incur for participation in four-party payments networks, including those relating to interchange, and compensates them for various other services they provide to merchants. Merchant discount rates and other merchant fees are set by our acquirers without our involvement and by agreement with their merchant customers and are established in competition with other acquirers, other payment card systems and other forms of payment. We do not establish or regulate merchant discount rates or any other fees charged by our acquirers.
We are subject to government regulation of the payments industry in many countries in which our cards are used. Our customers are also subject to numerous regulations applicable to banks and other financial institutions in the United States and elsewhere, and as a consequence our business is affected by such regulations. For more information on government regulations that may affect our business, see Item 1ARisk Factors.
We rely on a combination of patent, trademark, copyright and trade secret laws in the United States and other jurisdictions, as well as confidentiality procedures and contractual provisions, to protect our proprietary technology.
We own a number of valuable trademarks and designs, which are essential to our business, including Visa, Interlink, PLUS, Visa Electron, the Winged V design, the Dove design and the Bands DesignBlue, White & Gold. We also own numerous other valuable trademarks and designs covering various brands, products, programs and services. Through agreements with our customers, we authorize and monitor the use of our trademarks in connection with their participation in our payments network.
In addition, we own a number of patents and patent applications relating to payments solutions, transaction processing, security systems and other matters.
We compete in the global payment marketplace against all forms of payment, including paper-based forms (principally cash and checks), card-based payments (including credit, charge, debit, ATM, prepaid, private-label and other types of general-purpose and limited-use cards) and other electronic payments (including wire transfers, electronic benefits transfers, automatic clearing house, or ACH, payments and electronic data interchange).
Within the general purpose payment card industry, we face substantial and intense competition worldwide in the provision of payments services to financial institution customers and their cardholder merchants. The leading global card brands in the general purpose payment card industry are Visa, MasterCard, American Express and Diners Club. Other general-purpose card brands are more concentrated in specific geographic regions, such as JCB in Japan and Discover in the United States. In certain countries, our competitors have leading positions, such as China UnionPay in China, which is the sole domestic inter-bank bankcard processor and operates the sole domestic bankcard acceptance mark in China due to local regulation. We also compete against private-label cards, which can generally be used to make purchases solely at the sponsoring retail store, gasoline retailer or other merchant.
In the debit card market segment, Visa and MasterCard are the primary global brands. In addition, our Interlink and Visa Electron brands compete with Maestro, owned by MasterCard, and various regional and country-specific debit network brands. In addition to our PLUS brand, the primary cash access card brands are Cirrus, owned by MasterCard, and many of the online debit network brands referenced above. In many countries, local debit brands are the primary brands, and our brands are used primarily to enable cross-border transactions, which typically constitute a small portion of overall transaction volume. See Item 8Financial Statements and Supplementary Data for financial information about geographic areas.
Based on payments volume, total volume, number of transactions and number of cards in circulation, Visa is the largest retail electronic payments network in the world. The following chart compares our network with those of our major general-purpose payment network competitors for calendar year 2008:
Source: The Nilson Report, issue 924 (April 2009) and issue 925 (May 2009).
Note: Visa Inc. figures exclude Visa Europe. Figures for competitors include their respective European operations. Visa figures include Visa, Visa Electron, and Interlink brands. The Visa card figure includes PLUS-only cards (with no Visa logo) in all regions except the United States, but PLUS cash volume is not included. Domestic China figures including commercial funds transfers are excluded. MasterCard includes PIN-based debit card figures on MasterCard cards, but not Maestro or Cirrus figures. American Express includes business from third-party issuers. JCB figures are for April 2007 through March 2008, but cards are as of September 2008. Transaction figures are estimates. Figures include business from third-party issuers.
Concentration of Business and Financial Information About Geographic Areas
For more information on the concentration of our operating revenues and for financial information about the geographic areas in which we operate, see Item 8Financial Statements and Supplementary DataNote 14Enterprise-wide Disclosures and Concentration of Business.
Working Capital Requirements
Payments settlement due from and due to issuing and acquiring customers generally represents our most consistent and substantial liquidity requirement, arising primarily from the payments settlement of certain credit and debit transactions and the timing of payments settlement between financial institution customers with settlement currencies other than the U.S. dollar. These settlement receivables and payables generally remain outstanding for one to two business days, consistent with standard market conventions for domestic transactions and foreign currency transactions. We maintain working capital sufficient to enable uninterrupted daily settlement. During fiscal 2009, we funded average daily net settlement receivable balances of $117 million, with the highest daily balance being $322 million.
We do not expect to experience any pronounced seasonality in our business. No individual quarter of fiscal 2009 or fiscal 2008 accounted for more than 30% of our fiscal 2009 or fiscal 2008 operating revenues.
At September 30, 2009, we employed approximately 5,700 persons worldwide. We consider our relationships with our employees to be good.
Additional Information and SEC Reports
Our Internet address is http://www.visa.com. On our investor relations website, accessible at http://investor.visa.com, we make available free of charge our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and amendments to those reports as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The information contained on our website, including the information contained on our investor relations website, is not incorporated by reference into this report or any other report filed with, or furnished to, the SEC.
Legal and Regulatory Risks
Interchange reimbursement fees and related practices are subject to significant legal and regulatory scrutiny worldwide, which may have a material adverse impact on our revenues, our prospects for future growth and our overall business.
Interchange represents a transfer of value between the financial institutions participating in an open-loop payments network such as ours. On purchase transactions, interchange reimbursement fees are typically paid to issuers, which are the financial institutions that issue Visa cards to cardholders, by acquirers, which are the financial institutions that offer Visa network connectivity and payments acceptance services to merchants, in connection with transactions initiated with cards in our payments system. We set default interchange rates in the United States and other regions. In certain
jurisdictions, interchange rates are subject to government regulation. Although we administer the collection and remittance of interchange reimbursement fees through the settlement process, we generally do not receive any portion of the interchange reimbursement fees. Interchange reimbursement fees are often the largest component of the costs that acquirers charge merchants in connection with the acceptance of payment cards. We believe that interchange reimbursement fees are an important driver of system volume.
As the volume of card-based payments has increased in recent years, interchange reimbursement fees, including our default interchange rates, have become subject to increased regulatory scrutiny worldwide. We believe that regulators are increasingly adopting a similar approach to interchange reimbursement fees, and, as a result, developments in any one jurisdiction may influence regulatory approaches in other jurisdictions.
Interchange reimbursement fees and related practices have been the topic of recent committee hearings in the U.S. House of Representatives and the U.S. Senate, as well as conferences held by a number of U.S. Federal Reserve Banks. In 2009, legislation concerning interchange, entitled the Credit Card Fair Fee Act of 2009, was introduced in the U.S. House of Representatives and referred to the House Judiciary Committee, but no further action has been taken on the measure. In 2008, a similar bill was reported out of the Judiciary Committee on a divided vote of 19-16, but was not taken up by the full U.S. House of Representatives. In its current iteration, the legislation seeks to regulate interchange by allowing merchants to collectively seek to lower their interchange costs by exempting such action from the U.S. antitrust laws. The Credit Card Fair Fee Act of 2009 also requires the U.S. Department of Justice, or DOJ, to oversee collective merchant negotiations with the Company and its customer financial institutions (and separately with MasterCard and its customer financial institutions) and report results of those negotiations back to the U.S. Congress. A companion bill has been introduced in the U.S. Senate Judiciary Committee, but there have not been any hearings on, or further movement of, the legislation.
Additional interchange legislation also has been introduced in the U.S. House of Representatives that would prohibit specified electronic payment system network practices, including the imposition of additional charges on merchants and consumers for premium payment cards. The bill also directs the Federal Trade Commission, or FTC, to prescribe regulations to ensure that the rules, terms, and conditions to which a merchant or consumer is subject under an agreement with an electronic payment system network are neither unfair nor deceptive to consumers and merchants, nor anticompetitive. There has, however, been no further action on or developments with respect to this legislation.
The Credit Card Accountability, Responsibility, and Disclosure Act of 2009, or the Credit CARD Act, which was passed by both houses of the U.S. Congress and became law, commissioned a study by the Comptroller General of the United States of the extent to which interchange reimbursement fees are disclosed, the effect of fees and disclosure on merchants, the impact on consumer prices of interchange regulation in other jurisdictions, the relationship between interchange reimbursement fees and bank and merchant costs, and the role of interchange in promoting competition in the provision of payment cards. The resulting report was issued by the U.S. Government Accountability Office in November 2009. Individual state legislatures in the United States are also reviewing interchange reimbursement fees, and legislators in a number of states have proposed bills that purport to limit interchange reimbursement fees or merchant discount rates or to prohibit their application to portions of a transaction.
In addition, the Merchants Payments Coalition, a coalition of trade associations representing businesses that accept credit and debit cards, is mounting a challenge to interchange reimbursement fees in the United States by seeking additional legislative and regulatory intervention. Interchange reimbursement fees and related practices also have been or are being reviewed by regulatory authorities and/or central banks in a number of other jurisdictions, including the European Union,
Australia, Brazil, Canada, Colombia, Honduras, New Zealand, Norway, Singapore, South Africa, United Kingdom and Venezuela. For example:
Regulatory actions such as these, even if not directed at us or if affecting a geographic region in which we do not operate, may nonetheless increase regulatory scrutiny of interchange reimbursement fees. If we cannot successfully defend our ability to set default interchange rates to maximize system volume, our payments system may become unattractive to issuers and/or acquirers. This could reduce the number of financial institutions willing to participate in our open-loop multi-party payments system, lower overall transaction volumes and/or make closed-loop payments systems or other forms of payment more attractive. Issuers could also begin to charge higher fees to consumers, thereby making our card programs less desirable and reducing our transaction volumes and profitability. Acquirers could elect to charge higher merchant discount rates to merchants, regardless of the level of Visa interchange, leading merchants not to accept cards for payment or to steer Visa cardholders to alternate payment systems. In addition, issuers or acquirers could attempt to decrease the expense of their card programs by seeking incentives from us or a reduction in the fees that we charge. Any of the foregoing could have a material adverse impact on our revenues, operating results, prospects for future growth and overall business.
A finding of liability in the interchange litigation may result in substantial damages.
Since 2005, approximately 55 class action and individual complaints have been filed on behalf of merchants against us, Visa U.S.A., Visa International, MasterCard and/or other defendants, including certain Visa U.S.A. member financial institutions, which we refer to as the interchange litigation. Among other antitrust allegations, the plaintiffs allege that Visas setting of default interchange rates violated federal and state antitrust laws. The lawsuits have been transferred to a multidistrict litigation in the U.S. District Court for the Eastern District of New York. The class action complaints have been consolidated into a single amended class action complaint and the individual complaints are also being consolidated in the same multidistrict litigation.
The plaintiffs in the interchange litigation seek damages for alleged overcharges in merchant discount fees, as well as injunctive and other relief. The plaintiffs have not yet quantified the damages they seek, although several of the complaints allege that the plaintiffs expect that damages will range in the tens of billions of dollars. Because these lawsuits were brought under the U.S. federal antitrust laws, any actual damages will be trebled and we, Visa U.S.A. and/or Visa International may be subject to joint and several liability among the defendants if liability is established, which could significantly magnify the effect of any adverse judgment. The interchange litigation is part of the covered litigation, which our retrospective responsibility plan is intended to address; however, the retrospective responsibility plan may not adequately insulate us from the impact of settlements of, or judgments in, the interchange litigation. Failure to successfully defend or settle the interchange litigation would result in liability that to the extent not covered by our retrospective responsibility plan could have a material adverse effect on our results of operations, financial condition and cash flows, or, in certain circumstances, even cause us to become insolvent. In addition, even if our direct financial exposure were covered by our retrospective responsibility plan, settlements or judgments involving the multidistrict litigation could include restrictions on our ability to conduct business, which could increase our cost of doing business and limit our prospects for future growth. See Item 1A Risk FactorsOur retrospective responsibility plan may not adequately insulate us from the impact of settlements and judgments in the covered litigation and will not insulate us from other pending or future litigation and See Note 21Legal Matters to our consolidated financial statements included in Item 8 in this report.
Our retrospective responsibility plan may not adequately insulate us from the impact of settlements and judgments in the covered litigation and will not insulate us from other pending or future litigation.
Our retrospective responsibility plan is intended to address monetary liabilities from settlements of, or final judgments in, the covered litigation described in Note 21Legal Matters to our consolidated financial statements included in Item 8 of this report. The retrospective responsibility plan consists of several related mechanisms to fund settlements of, or judgments in, the covered litigation, including an escrow account funded with a portion of the net proceeds of our initial public offering and potential follow-on offerings of our class A common stock (or deposits of cash to the escrow account in lieu of such follow-on offerings), a loss sharing agreement, a judgment sharing agreement and the indemnification obligation of Visa U.S.A. members pursuant to Visa U.S.A.s certificate of incorporation and bylaws and in accordance with their membership agreements. These mechanisms are unique and complex, and if we are prevented from using one or more of these mechanisms under our retrospective responsibility plan, we could have difficulty funding the payment of a settlement or final judgment against us in a covered litigation, which could have a material adverse effect on our results of operations, financial condition and cash flows, or, in certain circumstances, even cause us to become insolvent.
The retrospective responsibility plan does not address litigation other than the covered litigation that we currently face, including state court litigation relating to interchange, and will not cover litigation that we may face in the future, except for cases that include claims for damages relating to the period prior to our initial public offering that are transferred for pre-trial proceedings or otherwise included in the interchange litigation. In addition, our retrospective responsibility plan is designed to cover only the potential monetary liability from settlements of, or judgments in, the covered litigation. Settlements and judgments in covered litigation may require us to modify the way we do business in the future, which could adversely affect our revenues, increase our expenses and/or limit our prospects for growth. Therefore, even if our retrospective responsibility plan adequately safeguards us from the monetary impact of settlements of, or judgments in, the covered litigation, it may not be sufficient to insulate us from all potential adverse consequences of settlements of, and judgments in, the covered litigation.
If the settlements of Visa U.S.A.s and Visa Internationals currency conversion cases do not become final and we are unsuccessful in any of the various lawsuits relating to Visa U.S.A.s and Visa Internationals currency conversion practices, our business may be materially and adversely affected.
Visa U.S.A. and Visa International are defendants in several state and federal lawsuits alleging that their currency conversion practices are or were deceptive, anti-competitive or otherwise unlawful.
On July 20, 2006 and September 14, 2006, Visa U.S.A. and Visa International entered into agreements to settle or otherwise dispose of these matters. Pursuant to the settlement agreements, Visa U.S.A. paid approximately $100 million as part of the defendants settlement fund for the federal actions and approximately $19 million to fund settlement of the state cases. While the federal court has granted final approval of the settlement agreements, the settlements are subject to resolution of any appeals. If an appeal is filed and we are unsuccessful in that appellate proceeding, all of the agreements resolving the federal and state actions will terminate. If that occurs, and we are unsuccessful in defending against some or all of these lawsuits, we may have to pay restitution and/or damages, and may be required to modify our currency conversion practices. The potential amount of damages and/or restitution could be substantial. In addition, although Visa U.S.A. and Visa International have substantially changed the practices that were at issue in these litigations, if the courts require further changes to our currency conversion and cross-border transaction practices, it could materially and adversely affect our business. See Note 21Legal Matters to our consolidated financial statements included in Item 8 in this report.
If we, Visa U.S.A. or Visa International is found liable in certain other lawsuits that have been brought against us or if we are found liable in other litigation to which we may become subject in the future, we may be forced to pay substantial damages and/or change our business practices or pricing structure, any of which could have a material adverse effect on our financial condition, revenues and profitability.
In recent years, numerous civil actions and investigations have been filed or initiated against Visa alleging or seeking information as to alleged violations of competition/antitrust, consumer protection, intellectual property and other laws. These actions and investigations have been filed or initiated by a variety of different parties, including the DOJ, U.S. state attorneys general, merchants and consumers. Examples of such claims are described more fully in Note 21Legal Matters to our consolidated financial statements included in Item 8 in this report.
In addition, in the United States, private plaintiffs often seek class action certification in cases against us, particularly in cases involving merchants and consumers, due to the size and scope of our business and the large number of parties involved in our payment system.
We have also received, and we may in the future receive, notices or inquiries from other companies suggesting that we may be infringing a pre-existing patent or that we need to license use of their patents to avoid infringement. Such notices may, among other things, threaten litigation against us.
We cannot predict whether or to what extent we will be subject to liability arising from these or other actions, nor can we predict how much of this liability would not be covered by our retrospective responsibility plan. If we are unsuccessful in our defense against any material current or future proceedings, we may be forced to pay substantial damages, limit the fees we charge, or change other business practices, limiting our payments volume resulting in a material and adverse effect on our revenues, operating results, prospects for future growth and overall business.
Limitations on our business and other penalties resulting from litigation or litigation settlements may materially and adversely affect our revenues and profitability.
Certain limitations have been placed on our business in recent years as a result of litigation and litigation settlements. For example, as a result of the June 2003 settlement of a U.S. merchant lawsuit against Visa U.S.A., merchants are able to reject Visa consumer debit cards in the United States while still accepting other Visa-branded cards, and vice versa. In addition, following the final judgment entered in the litigation the DOJ brought against Visa U.S.A. and Visa International in 1998, as of October 2004, members of Visa U.S.A. may issue certain competing payment cards. Since this final judgment, several members of Visa U.S.A. have begun to issue, or have announced that they will issue, American Express or Discover-branded cards. See Note 21Legal Matters to our consolidated financial statements included in Item 8 of this report.
These and any future limitations on our business resulting from settlements of, or judgments in, pending or potential litigation could limit the fees we charge and reduce our payments volume, which could materially and adversely affect our revenues, operating results, prospects for future growth and overall business.
Tax audits or disputes, or changes in the tax laws applicable to us, could materially increase our tax payments.
We exercise significant judgment in calculating our worldwide provision for income taxes and other tax liabilities. Although we believe our tax estimates are reasonable, many factors may decrease their accuracy. We are currently under audit by the IRS and other tax authorities and may be subject to additional audits in the future. The tax authorities may disagree with our tax treatment of certain material items and thereby increase our tax liability. In addition, changes in existing laws, such as recent proposals for fundamental U.S. and international tax reform, may also increase our effective tax rate. A substantial increase in our tax burden could have an adverse effect on our financial results. See also Note 20Income Taxes to our consolidated financial statements included in Item 8 in this report.
The payments industry is the subject of increasing global regulatory focus, which may result in the imposition of costly new compliance burdens on our customers and us and may lead to increased costs and decreased payments volume and revenues.
Regulation of the payments industry has increased significantly in recent years. Examples of such regulation include:
Increased regulatory focus in connection with these matters may increase our costs, which could materially and adversely affect our financial performance. Similarly, increased regulatory focus on our customers may cause a reduction in payments volume, which could materially and adversely affect our revenues, operating results, prospects for future growth and overall business.
Regulation in the areas of consumer privacy and data use and security could decrease the number of payment cards issued, our payments volume and our revenues.
Recently, there has been heightened legislative and regulatory focus in the United States (at the federal and state level) and elsewhere on privacy and data use and security, including requiring consumer notification in the event of a data breach. These measures may materially increase our costs and our customers costs and may decrease the number of our cards that our customers issue, materially and adversely affecting our profitability. Our failure, or the failure of our customers, to comply with the privacy and data use and security laws and regulations to which we are subject could result in fines, sanctions, litigation, and damage to our global reputation and our brand.
Government actions may prevent us from competing effectively against providers of domestic payments services in certain countries, which could adversely affect our ability to maintain or increase our revenues.
Governments in certain countries have acted, or could act, to provide resources or protection to selected national payment card and processing providers in order to support them or to displace us from, prevent us from entering into, or substantially restrict us from participating in their countries. Our efforts to effect change in these countries may not succeed. This could adversely affect our ability to maintain or increase our revenues and extend our global brand.
If government regulators determine that we are a systemically important payments system, we may have to change our settlement procedures or other operations, which could make it more costly to operate our business and reduce our operational flexibility.
A number of international initiatives are underway to maintain financial stability by strengthening financial infrastructure. The Committee on Payment and Settlement Systems of the central banks of the Group of Ten countries has developed a set of core principles for systemically important payment systems. Government regulators in the United States or elsewhere may determine that we are a systemically important payments system and impose settlement risk management requirements on us, including new settlement procedures or other operational rules to address credit and operational risks or new criteria for member participation and merchant access to our payments system. Any of these developments could make it more costly to operate our business.
Our Framework Agreement with Visa Europe includes indemnity obligations that could expose us to significant liabilities.
Under our Framework Agreement with Visa Europe, we are required to indemnify Visa Europe for losses resulting from any claims in the United States or anywhere else outside of Visa Europes region arising from our or their activities that relate to our payments business or the payments business of Visa Europe. This obligation applies even if neither we nor any of our related parties or agents participated in the actions that gave rise to such claims. Such an obligation could expose us to significant liabilities for activities over which we have little or no control. Our retrospective responsibility plan would not cover these liabilities.
We face intense competitive pressure on customer pricing, which may materially and adversely affect our revenues and profitability.
In order to increase payments volume, enter new market segments and expand our card base, we offer incentives to customers such as up-front cash payments, fee discounts, credits, performance-based growth incentives, marketing support payments and other support, such as marketing consulting and market research studies. Over the past several years, we have increased our use of incentives such as up-front cash payments and fee discounts in many countries, including the United States. In order to stay competitive, we may have to continue to increase our use of incentives. Such pressure may make the provision of certain products and services less profitable or unprofitable and materially and adversely affect our operating revenues and profitability if we continue to increase incentives to our customers, we will need to further increase payments volume or the amount of services we provide in order to benefit incrementally from such arrangements and to increase revenues and profit, and we may not be successful in doing so. In addition, we enter into long-term contracts with certain customers. Continued pressure on fees could prevent us from entering into such agreements in the future on terms we consider favorable and may require us to modify existing agreements in order to maintain relationships. Increased pricing pressure also enhances the importance of cost containment and productivity initiatives in areas other than those relating to customer incentives, and we may not succeed in these efforts.
Our operating results may suffer because of intense competition in the global payments industry.
The global payments industry is intensely competitive. Our payment programs compete against all forms of payment, including cash, checks and electronic transactions such as wire transfers and automatic clearing house payments. In addition, our payment programs compete against the card- based payments systems of our competitors, such as MasterCard, American Express, Discover and private-label cards issued by merchants. Some of our competitors may develop substantially greater financial and other resources than we have, may offer a wider range of programs and services than we offer, may use more effective advertising and marketing strategies to achieve broader brand recognition or merchant acceptance than we have or may develop better security solutions or more favorable pricing arrangements. Our competitors may also introduce more innovative programs and services than us.
Certain of our competitors, including American Express, Discover, private-label card networks and certain alternative payments systems, operate closed-loop payments systems with direct connections to both merchants and consumers, without involving intermediaries. These competitors seek to derive competitive advantages from their business models. In addition, these competitors have not attracted the same level of legal or regulatory scrutiny of their pricing and business practices as have operators of open-loop multi-party payments systems such as ours.
Our customers can reassess their commitments to us at any time or develop their own competitive services. Most of our larger customer relationships (including those with our largest customers, JPMorgan Chase and Bank of America) are not exclusive and in certain circumstances (including, in some cases, on relatively short notice) may be terminated by our customers. Because a significant portion of our operating revenues are concentrated among our largest customers, our operating revenues would decline significantly if we lost one or more of our largest customers for any reason, which could have a material adverse impact on our business.
We also expect that there may be changes in the competitive landscape in the future, including:
Our failure to compete effectively against any of these threats, could materially and adversely affect our revenues, operating results, prospects for future growth and overall business.
Consolidation of the banking industry could result in our losing business and may create pressure on the fees we charge our customers, which may materially and adversely affect our revenues and profitability.
The banking industry has recently undergone substantial, accelerated consolidation, which is likely to continue. Significant ongoing consolidation in the banking industry may result in one or more of our largest customers being acquired by an institution that has a strong relationship with a competitor, resulting in a substantial loss of business. In addition, one or more of our customers could seek to merge with or acquire one of our competitors, and any such transaction could have a material adverse effect on our business and prospects.
Continued consolidation in the banking industry would also reduce the overall number of our customers and potential customers and could increase the bargaining power of our remaining customers and potential customers. This consolidation could lead financial institutions to seek greater pricing discounts or other incentives with us. In addition, consolidation could prompt our existing customers to seek to renegotiate their pricing agreements with us to obtain more favorable terms. We may also be adversely affected by price compression should one of our financial institution customers absorb another financial institution and qualify for higher volume-based discounts on the combined volumes of the merged businesses. Pressure on the fees we charge our customers caused by such consolidation could materially and adversely affect our revenues, operating results, prospects for future growth and overall business. In addition, the current economic environment could lead some customers to curtail or postpone near-term investments in growing their card portfolios, limit credit lines, or take other actions that affect adversely the growth of our volume and revenue streams from these customers.
Merchants are pursuing litigation and supporting regulatory proceedings relating to the costs associated with payment card acceptance and are negotiating incentive arrangements, including pricing discounts, all of which may increase our costs and materially and adversely affect our profitability.
We rely in part on merchants and their relationships with our customers to maintain and expand the acceptance of our payment cards. We believe that consolidation in the retail industry is producing a set of larger merchants that are having a significant impact on all participants in the global payments industry. The emphasis merchants are placing on the costs associated with payment card acceptance may lead to additional regulation and litigation, which would not be covered by our retrospective responsibility plan and which could impair our revenues, operating results, prospects for future growth and overall business.
We, along with our customers, negotiate pricing discounts and other incentive arrangements with certain large merchants to increase acceptance of our payment cards. If merchants continue to consolidate, our customers and we may have to increase the incentives provided to certain larger merchants, which could materially and adversely affect our revenues, operating results, prospects for future growth and overall business.
Certain financial institutions have exclusive, or nearly-exclusive, relationships with our competitors to issue payment cards, and these relationships may adversely affect our ability to maintain or increase our revenues.
Certain financial institutions have long-standing exclusive, or nearly-exclusive, relationships with our competitors to issue payment cards, and these relationships may make it difficult or cost-prohibitive for us to do material amounts of business with them in order to increase our revenues. In addition, these financial institutions may be more successful and may grow faster than the financial institutions that primarily issue our cards, which could put us at a competitive disadvantage.
Failure to maintain relationships with our customers and other third parties and failure of customers to provide services on our behalf could materially and adversely affect our business.
We depend and will continue to depend significantly on relationships with our customers and their relationships with cardholders and merchants to support our programs and services. We do not issue cards, extend credit to cardholders or determine the interest rates (if applicable) or other fees charged to cardholders using cards that carry our brands. Each issuer determines these and most other competitive card features. In addition, we do not generally solicit merchants to accept our cards and we do not establish the discount rates merchants are charged for card acceptance, which are the responsibility of acquirers. As a result, the success of our business significantly depends on the continued success and competitiveness of our customers and the strength of our relationships with them.
In many countries outside of the United States our customers or other processors authorize, clear and settle most domestic (as opposed to cross-border) transactions using our payment cards without involving our processing systems. We depend on our close working relationships with our customers to effectively manage the processing of transactions involving our cards, because we do not provide domestic transaction processing services in these countries, do not generally have direct relationships with merchants and never have direct relationships with cardholders. Our inability to control the end-to-end processing on cards carrying our brands in these countries may put us at a competitive disadvantage by limiting our ability to ensure the quality of the services supporting our brand.
In addition, we depend on third parties to provide various services on our behalf, and to the extent that third-party vendors fail to deliver services, our business and reputation could be impaired.
Our perception in the marketplace may affect our brands and reputation, which are key assets of our business.
Our brands and their attributes are key assets of our business. The ability to attract and retain consumer cardholders and corporate clients to Visa-branded products depends highly upon the external perceptions of our company and our industry. Our business may be affected by actions taken by our customers that change the perception of our brands. From time to time, our customers may take actions that we do not believe to be in the best interests of our brands, such as creditor practices that may be viewed as predatory, which may materially and adversely affect our business. Further, Visa Europe has very broad latitude to operate the Visa business in and use our brands and technology within Visa Europes region and we have only limited control over the operation of the Visa business there. Visa Europe is not required to spend any minimum amount of money promoting or building the Visa brand in its region, and the strength of the Visa global brand is contingent, in part, on the efforts of Visa Europe to maintain product and service recognition and quality in Europe. Finally, adverse developments with respect to our industry may also, by association, impair our reputation, or result in greater regulatory or legislative scrutiny.
Global economic, political, health and other conditions may adversely affect trends in consumer spending and cross-border travel, which may materially and adversely affect our revenues, operating results, prospects for future growth and overall business.
We depend heavily upon the overall level of consumer, business and government spending. The current economic environment could lead some customers to curtail or postpone near-term investments in growing their card portfolios, limit credit lines, or take other actions that affect adversely the growth of our volume and revenue streams from these customers. A significant portion of the revenues we earn outside the United States results from cross-border business and leisure travel. In particular, revenues from processing foreign currency transactions fluctuate with cross-border travel and our customers need for transactions to be converted into their base currency. Cross-border travel may be adversely affected by world geopolitical, economic and other conditions. These include the threat of terrorism and outbreaks of flu, such as H1N1 and avian flu, viruses, such as SARS, and other diseases.
In addition, as we are principally domiciled in the United States, a negative perception of the United States could harm the perception of our company, which could materially and adversely affect our revenues, operating results, prospects for future growth and overall business.
We are exposed to a risk of loss or insolvency if our customers fail to fund settlement obligations we have guaranteed.
We indemnify Visa customers for any settlement loss suffered due to the failure of a customer to fund its daily settlement obligations. In certain instances, we may indemnify customers even in situations in which a transaction is not processed by our system. This indemnification creates settlement risk for us due to the difference in timing between the date of a payment transaction and the date of subsequent settlement. The term and amount of the indemnification are unlimited.
Concurrent settlement failures of more than one of our largest customers or of several of our smaller customers, or systemic operational failures that last for more than a single-day, may exceed our available resources and could materially and adversely affect our business and financial condition. In addition, even if we have sufficient liquidity to cover a settlement failure, we may not be able to recover the amount of such payment and may therefore be exposed to significant losses, which could materially and adversely affect our results of operations, cash flow and financial condition.
Settlement at risk (or exposure) is estimated based on the sum of the following inputs: (1) average daily volumes during the quarter multiplied by the estimated number of days to settle plus a safety margin; and (2) four months of rolling average chargebacks volume; and (3) the total balance for outstanding travelers cheques. See Note 12Settlement Guarantee Management to our consolidated financial statements included in Item 8 of this report.
Some Visa customers are composed of groups of financial institutions. Some of these customers have elected to limit their responsibility for settlement losses arising from the failure of their constituent financial institutions in exchange for managing their constituent financial institutions in accordance with our credit risk policy. To the extent that any settlement failure resulting from a constituent financial institution exceeds the limits established by our credit risk policy, we would have to absorb the cost of such settlement failure, which could materially and adversely affect our cash flow.
If our transaction processing systems are disrupted or we cannot process transactions efficiently, the perception of our brands and our revenues or operating results could be materially and adversely affected.
Our transaction processing systems may experience service interruptions or degradation because of processing or other technology malfunction, fire, natural disasters, power loss, disruptions in long distance or local telecommunications access, fraud, terrorism or accident. Our visibility in the global payments industry may attract terrorists and hackers to conduct physical or computer-based attacks, leading to an interruption in service, increased costs or the compromise of data security. Additionally, we rely on service providers for the timely transmission of information across our global data network. If a service provider fails to provide the communications capacity or services we require, as a result of natural disaster, operational disruption, terrorism or any other reason, the failure could interrupt our services, adversely affect the perception of our brands reliability and materially reduce our revenues or profitability.
If we are not able to keep pace with the rapid technological developments in the payments industry to provide customers, merchants and cardholders with new and innovative payment programs and services, the use of our cards could decline, which could reduce our revenues and income.
The payments industry is subject to rapid, significant technological changes, including continuing developments of technologies in the areas of smart cards, radio frequency and proximity payment devices (such as contactless cards), e-commerce and mobile commerce. We cannot predict the effect of technological changes on our business. We rely in part on third parties, including some of our competitors and potential competitors, for the development of and access to new technologies. We expect that new services and technologies applicable to the payments industry will continue to emerge, and these new services and technologies may be superior to, or render obsolete, the technologies we currently use in our card products and services. In addition, our ability to adopt new services and technologies that we develop may be inhibited by a need for industry-wide standards, by resistance from customers or merchants to such changes or by third parties intellectual property. Our success will depend, in part, on our ability to develop new technologies and adapt to technological changes and evolving industry standards.
Account data breaches involving card data stored by us or third parties could adversely affect our reputation and revenues.
We, our customers, merchants and other third parties store cardholder account information in connection with our payment cards. In addition, our customers may use third-party processors to process transactions generated by cards carrying our brands. Breach of the systems on which
sensitive cardholder data and account information are stored could lead to fraudulent activity involving our cards, reputational damage and claims against us. If we are sued in connection with any data security breach, we could be involved in protracted litigation. If unsuccessful in defending such lawsuits, we may be forced to pay damages and/or change our business practices or pricing structure, any of which could have a material adverse effect on our revenues and profitability. In addition, any reputational damage resulting from an account data breach at one or more of our customers, merchants or other third parties could decrease the use and acceptance of our cards, which could have a material adverse impact on our payments volume, revenues and future growth prospects. Finally, any data security breach could result in additional regulation, which could materially increase our costs.
An increase in fraudulent and other illegal activity involving our cards could lead to reputational damage to our brands and could reduce the use and acceptance of our cards.
Criminals are using increasingly sophisticated methods to capture cardholder account information to engage in illegal activities such as fraud and identity theft. As outsourcing and specialization become a more acceptable way of doing business in the payments industry, there are more third parties involved in processing transactions using our cards. If fraud levels involving our cards were to rise, it could lead to reputational damage to our brands, which could reduce the use and acceptance of our cards, or to greater regulation, which could increase our compliance costs.
Failure to maintain interoperability between Visa Inc.s and Visa Europes authorization and clearing and settlement systems could damage the business and global perception of the Visa brand.
With the completion of the deployment of Visa Europes own authorization and clearing and settlement systems expected in fiscal 2010, it is incumbent upon both service providers, Visa Inc. and Visa Europe, to ensure their systems can process every transaction regardless of where it originates. The increasingly independent payments system operations of Visa Europe could present challenges to our business due to the heightened difficulty of maintaining the interoperability of our respective systems as they diverge over time. Failure to authorize or clear and settle transactions in a timely and accurate manner could impair the global perception of the Visa brand.
Material changes in our customers performance compared to our estimates could have a material and adverse impact on our results of operations.
In certain instances, we offer our customers financial incentives, which are typically tied to their payments volume or transaction messages processed, often under particular programs. These financial incentives are typically recorded as a reduction of revenues. We generally make estimates of our customers performance under these programs (sometimes over several years) in order to derive our estimates of the financial incentives that we will pay them. The reduction of revenues that we record each quarter under volume and support agreements is based on these estimates. Material differences between our customers performance and our estimates could have a material adverse impact on our results of operations. For example, if a customer performs better than expected, we may be required to reduce future period revenues to account for the fact that we did not reduce revenues enough in prior periods. On the other hand, if a customer performs worse than expected, we may conclude that we reduced revenues by too much in previous period.
Risks Related to our Structure and Organization
We have a limited ability to control Visa Europes operations and limited recourse in the event of a breach of its obligations to us.
Our relationship with Visa Europe is governed by a Framework Agreement, which gives Visa Europe very broad rights to operate the Visa business in its region. Since our reorganization, Visa Europe has not been subject to the same global operating rules as our subsidiaries and customers. If we want to change a global rule or require Visa Europe to implement certain changes that would not have a positive return for Visa Europe and its members, then Visa Europe is not required to implement that rule or change unless we agree to pay for the implementation costs and expenses that Visa Europe and its members will incur as a consequence of the implementation. Our remedies under this agreement, if Visa Europe fails to meet its obligations, are limited. We cannot terminate the Framework Agreement even upon Visa Europes material uncured breach, and we can exercise our call right to purchase Visa Europe under only extremely limited circumstances.
These and other features of the licenses granted under the Framework Agreement may also raise issues concerning the characterization of the licenses for purposes of tax treatment of entry into the licenses and payments received thereunder. Any inconsistency in the payment processing services and products that we are able to provide could negatively affect cardholders from Visa Europe using cards in our regions or our cardholders using cards in Visa Europes region.
If Visa Europe makes us acquire all of its outstanding stock, we will incur substantial costs and may suffer a material and adverse effect on our operations and net income.
We have granted Visa Europe a put option, which, if exercised, will require us to purchase all of Visa Europes outstanding capital stock from its members. We will incur a substantial financial obligation if Visa Europe exercises the put option, which it may do at any time. We cannot estimate the amount of this obligation due to the nature and number of factors involved and the range of important assumptions that would be required, but it 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 meet our obligation. Sufficient financing may not be available to us, on reasonable terms, within the 285 days we would have to pay the exercise price. An equity offering or the payment of part of the exercise price in our stock would dilute the ownership interests of our stockholders. See Note 3Visa Europe to our consolidated financial statements include in Item 8 of this report.
If Visa Europe exercises the put option, we may encounter difficulties in integrating Visa Europes business and systems into our existing operations. If we cannot do so quickly and cost-effectively, the integration could divert the time and attention of senior management, disrupt our current operations and adversely affect our results of operations.
We are required to record quarterly any change in the fair value of the put option. These adjustments will be recorded through our consolidated statements of operations, which will therefore affect our reported net income and earnings per share. These quarterly adjustments and their resulting impact on our reported statements of operations could be significant. The existence of these charges could adversely affect our ability to raise capital or the price at which we can raise it. See Note 3Visa Europe to our consolidated financial statements include in Item 8 of this report.
We depend on key employees and may be unable to retain them.
Our employees are vital to our success, and our key management and other employees are difficult to replace. We may not be able to retain highly qualified employees in the future, which could adversely affect our business.
Any acquisitions or strategic investments that we make could disrupt our business and harm our financial condition.
We may make strategic acquisitions or investments in complementary businesses, products or technologies, although we have entered into relatively few such transactions in the past. We may not be able to successfully finance, partner with or integrate any such businesses, products or technologies. Furthermore, the integration of any acquisition or investment may divert managements time and resources from our core business and disrupt our operations. We may spend time and money on projects that do not increase our revenues. Our cash reserves would be reduced to the extent we pay the purchase price of any acquisition or investment in cash. If we pay the purchase price with our stock, it could be dilutive to our stockholders. While we from time to time evaluate potential acquisitions of and investments in businesses, products and technologies, and anticipate continuing to make these evaluations, we cannot guarantee that we will be able to execute and integrate any such acquisitions and investments.
Future sales of our class A common stock or convertible securities, or the expiration or waiver of transfer restrictions on our class B and class C common stock, could result in dilution to our existing class A common stock holders, which may adversely affect their rights and depress the market price of our class A common stock.
The market price of our class A common stock and the voting power of our outstanding shares of class A common stock could decline because of increases in the number of such shares outstanding. The market price of our class A common stock may also be adversely affected by the perception that such an increase could occur, such as upon the issuance or conversion of securities convertible to shares of our class A common stock.
If funds are released from escrow after the resolution of the litigation covered by our retrospective responsibility plan, holders of our class A common stock will suffer dilution because of a favorable adjustment to the conversion rate of our class B common stock.
Our retrospective responsibility plan provides that any amounts remaining in the escrow account after the date on which all of the covered litigation is resolved will be released back to us and that the conversion rate of the class B common stock then outstanding will be adjusted in favor of the holders of the class B common stock. The adjustment would be through a formula based on the released escrow amount and the market price of our class A common stock. If any funds remain in the escrow account and are released back to us, the resulting adjustment in the conversion rate of the class B common stock will result in each share of class B common stock then outstanding becoming convertible into an increased number of shares of class A common stock. This in turn will result in dilution of the interest in Visa Inc. held by the holders of class A common stock. The amount of this dilution will depend on the amount, if any, of the funds released from the escrow account and the market price of our class A common stock at the time those funds are released.
All shares of class A common stock acquired by a Visa member, an affiliate of a Visa member or a similar person will be converted automatically into class C common stock and, as a result, will generally not be transferable until March 25, 2011, and they will lose substantially all their voting rights.
All shares of common stock acquired by a Visa member, an affiliate of a Visa member or any person that is a competitor or its affiliate, in each case to the extent acting as a principal investor, will be converted automatically into class C common stock. Under the terms of our amended and restated certificate of incorporation, class C common stock is generally not transferable until March 25, 2011. After this date has passed, the class C common stock will be convertible into class A common stock only if transferred to a person that was not, immediately after our reorganization, a Visa member, an
affiliate of a Visa member or a competitor or its affiliate. Upon such transfer, each share of class C common stock will convert into one share of class A common stock.
Holders of our class B and class C common stock have voting rights concerning certain significant corporate transactions, and their interests in our business may be different from those of holders of our class A common stock.
Although holders of our class B and class C common stock do not have any right to vote on those matters on which stockholders generally are entitled to vote, such as the election of directors, such holders do have the right to vote on certain significant transactions, such as a proposed consolidation or merger, a decision to exit our core payments business or any other vote required by law. The holders of the class B and class C common stock may not have the same incentive to approve a corporate action that may be favorable to the holders of class A common stock, and their interests may otherwise conflict with those of the holders of class A common stock.
Anti-takeover provisions in our governing documents and Delaware law could delay or prevent entirely a takeover attempt or a change in control.
Provisions contained in our amended and restated certificate of incorporation, our bylaws and Delaware law could delay or prevent a merger or acquisition that our stockholders consider favorable. For instance, except for limited exceptions, no person may beneficially own more than 15% of our class A common stock (or 15% of our total outstanding shares on an as-converted basis), unless our board of directors approves the acquisition of such shares in advance. In addition, except for common stock issued to a member in connection with our reorganization or shares issuable on conversion of such common stock, shares held by a competitor or an affiliate of a competitor may not exceed 5% of our total outstanding shares on an as-converted basis.
Our ability to pay regular dividends to holders of our common stock in the future is subject to the discretion of our board of directors and will be limited by our ability to generate sufficient earnings and cash flows.
In August 2008, we commenced quarterly payment of cash dividends on our class A, class B and class C common stock. Any future payment of dividends will depend upon our ability to generate earnings and cash flows. However, sufficient cash may not be available to pay such dividends. Payment of future dividends, if any, would be at the discretion of our board of directors after taking into account various factors, including our financial condition, operating results, capital requirements, covenants in our debt instruments and other factors that our board of directors deems relevant. If, because of these factors, we are unable to generate sufficient earnings and cash flows from our business, we may not be able to make payments of dividends of our common stock. Furthermore, no dividend may be declared or paid on any class or series of common stock unless an equivalent dividend is contemporaneously declared and paid on each other class and series of common stock.
At September 30, 2009, we owned and leased approximately 2.8 million square feet of office and processing center space in 31 countries around the world, of which approximately 2.0 million square feet are owned and the remaining 860,000 square feet are leased. Our corporate headquarters is located in the San Francisco Bay Area and consists of four buildings that we own, totaling 944,000 square feet. We also own a 164,000 square foot office building in Miami.
In addition, we operate three processing centers. We own a processing center and an adjacent office facility in two locations, Virginia and Colorado, totaling 482,000 and 268,000 square feet, respectively. Construction of the Virginia facilities was completed in 2009 with the data center becoming fully operational in October 2009 following the migration from our former east coast processing center. We also lease a 13,000 square foot processing center in Japan.
We believe that these facilities are suitable and adequate to support our business needs.
Refer to Note 21Legal Matters to our consolidated financial statements included in Item 8 in this report.
Price Range of Common Stock
Our class A common stock has been listed on the New York Stock Exchange under the symbol V since March 19, 2008. The following table sets forth the intra-day high and low sale prices for our class A common stock from March 19, 2008 and for the two full quarterly periods in fiscal 2008 following the Companys IPO as well as for the four quarterly periods in fiscal 2009, as reported by the New York Stock Exchange. At September 30, 2009, the Company had 391 stockholders of record of its class A common stock. We believe that the number of beneficial owners is substantially greater than the number of record holders, because a large portion of our class A common stock is held in street name by brokers.
There is currently no established public trading market for our class B or class C common stock. There were approximately 1,749 and 1,568 holders of record of our class B common stock and class C common stock, respectively, as of September 30, 2009.
Dividend Declaration and Policy
During the fiscal years ended September 30, 2009 and 2008, we paid the following quarterly cash dividends per share of our class A common stock (determined in the case of class B and C common stock, on an as-converted basis) to all holders of record of our class A, B and C common stock.
In addition, on October 20, 2009, our board of directors declared a quarterly cash dividend of $0.125 per share of class A common stock (determined in the case of class B and C common stock, on an as-converted basis) payable on December 1, 2009 to holders of record as of November 16, 2009 of our class A, B and C common stock.
Subject to legally available funds, we intend to pay quarterly cash dividends on our outstanding class A, B and C common stock in the future. However, the declaration and payment of future dividends is at the sole discretion of our board of directors after taking into account various factors, including our financial condition, settlement guarantees, operating results, available cash and current and anticipated cash needs. Prior to the IPO, we did not pay any cash dividends on our shares of outstanding common stock.
EQUITY COMPENSATION PLAN INFORMATION
The table below presents information as of September 30, 2009 for the Visa 2007 Equity Incentive Compensation Plan, or the EIP, which was approved by our stockholders. We do not have any equity compensation plans that have not been approved by our stockholders. For a description of the EIP, see Note 17Share-based Compensation to our consolidated financial statements included in Item 8 of this report.
The following table presents selected Visa Inc. financial data for fiscal 2009 and 2008 and selected Visa U.S.A. financial data for fiscal 2007, 2006 and 2005. In October 2007, we consummated a reorganization in which Visa U.S.A., the accounting acquirer, Visa International, Visa Canada and Inovant became direct or indirect subsidiaries of Visa Inc. The operating results of the acquired interests are included in the consolidated financial results of Visa Inc. beginning October 1, 2007. The data below should be read in conjunction with Item 7Managements Discussion and Analysis and Results of Operations and the Visa Inc. fiscal 2009 consolidated financial statements and notes included in Item 8 of this report.
Selected Financial Data
This managements discussion and analysis (MD&A) provides a review of the results of operations, financial condition, the liquidity and capital resources of Visa Inc. and its subsidiaries (Visa, we, our and 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 MD&A should be read in conjunction with the consolidated financial statements and related notes included in Item 8.
Visa is a global payments technology company that connects consumers, businesses, banks and governments around the world, enabling them to use digital currency instead of checks and cash. We provide financial institutions with payment processing platforms that encompass consumer credit, debit, prepaid and commercial payments. 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. We continue to explore additional opportunities to enhance our competitive position by expanding the scope of payment services to benefit our existing customers and to position Visa to serve more and different constituencies.
In order to respond to industry dynamics and enhance Visas ability to compete, we consummated a reorganization in October 2007, and in March 2008 completed our IPO. The global alignment of various functions and best practices provides us the business scale to effectively deliver our existing core products across more and different geographies and to accelerate the delivery of product innovations across different market segments.
Overall Economic Conditions
Our business is affected by overall economic conditions and consumer spending. We expect that soft economic conditions will continue to moderate consumer and commercial spending, and our rate of payments volume growth, in the near term. Regulatory measures enacted in the United States during the third quarter of fiscal 2009 expected to take effect in fiscal 2010 will impact our financial institution customers. Should financial institutions constrict credit offerings in response to these measures, this could ultimately impact consumer spending and our payments volumes. However, we believe that the continuing secular shift to electronic payment products for non-discretionary spending will buffer the impact to our overall payments volume growth. This shift is particularly clear in debit products, where Visa has a strong market position in the United States and significant growth opportunities internationally.
Funding of the Litigation Escrow Account
During December 2008 and July 2009, we deposited $1.1 billion and $0.7 billion, respectively, into the litigation escrow account (the Escrow Account) previously established under the Retrospective Responsibility Plan (the Plan). Under the terms of the Plan, when Visa funds the Escrow Account, the shares of class B common stock retained by our U.S. financial institution customers and their affiliates are subject to dilution through an adjustment to the conversion rate of the shares of class B common stock to shares of class A common stock. On that basis, fundings of the Escrow Account in December 2008 and July 2009 had the effect of repurchasing 20,800,824 and 11,578,878 class A common stock equivalents, respectively. See Note 4Retrospective Responsibility Plan to our consolidated financial statements.
Share Repurchase Plan
In October 2009 our board of directors authorized a $1.0 billion share repurchase plan. The authorization will be in place through September 30, 2010, and is subject to extension or expansion at the determination of our board of directors. See the Liquidity and Capital Resources section for further discussion.
Sale of Investment in Companhia Brasileira de Meois de Pagamento (VisaNet do Brasil)
In June 2009, Visa International Service Association, a wholly-owned subsidiary of the Company sold its 10% ownership interest in VisaNet do Brasil in connection with its initial public offering. As a result of this transaction, we received approximately $1 billion in net proceeds and recognized a pre-tax gain of $473 million in investment income, net on our statement of operations. The amount of the gain net of tax was $237 million. Following their initial public offering, we amended an existing agreement with VisaNet do Brasil which grants a license to use Visa trademarks and technology intellectual property. We expect the license fees to be earned during fiscal 2010 to offset the loss of dividend income as a result of the sale of our ownership interest.
Expansion of Our Processing Capabilities
Expanding our processing capabilities worldwide is a core component of our long-term growth strategy. As part of this strategy, we created Visa Processing Services Pte. Ltd. (VPS), a joint venture with Yalamanchili International Pte. Ltd. (Yalamanchili). We hold a 70% interest in VPS. Yalamanchili is a payments processor and software company with operations in Asia. VPS will allow us to extend our industry-leading processing capabilities in geographies where electronic payments are growing rapidly, providing multi-currency and multi-language debit, credit and prepaid processing services to financial institutions, processors and payment companies. VPS will also have capabilities to provide ATM, money transfer and private label processing, as well as a range of payments services, including risk and fraud management, mobile applications, loyalty and cardholder support. VPS provides prepaid and debit processing solutions and complements our Debit Processing Service.
Nominal Payments Volume and Transaction Counts
We believe that payments volume and processed transactions are key drivers of our business. Payments volume is the basis for service revenues and processed transactions are the basis for data processing revenues. As anticipated, for fiscal 2009 as compared to fiscal 2008, nominal payments volume declined in credit and commercial products, which was offset by growth in debit resulting in minimal year over year nominal payments volume impact.
This table sets forth nominal product payments volumes for the periods presented in nominal dollars(1):
This table sets forth transaction volumes processed by our VisaNet system during the following fiscal periods:
Results of Operations
Our operating revenues are primarily generated from payment volume on Visa-branded cards for goods and services, as well as the number, size and type of transactions processed on our VisaNet system. We do not earn revenues from, or bear credit risk with respect to, interest and fees paid by cardholders on Visa-branded cards. Our issuing customers have the responsibility for issuing cards and determining interest rates and fees paid by cardholders, and most other competitive card features. We do not earn revenues from the fees that merchants are charged for card acceptance, including the merchant discount rate. Our acquiring customers, which are generally responsible for soliciting merchants, establish and earn these fees.
The following sets forth the components of our operating revenues:
Service revenues are earned from customers for their participation in card programs carrying marks of the Visa brand. Service revenues are assessed using a calculation of pricing applied to the prior quarters payments volume.
Data processing revenues are earned for authorization, clearing, settlement, transaction processing services and other maintenance and support services that facilitate transaction and information processing among our customers globally and Visa Europe. Data processing revenues are based on information we accumulate from VisaNet, our secure, centralized, global processing platform, which provides transaction processing services linking issuers and acquirers.
International transaction revenues are assessed to customers on transactions where the cardholders issuer country is different from the merchants country. International transaction revenues are generally driven by cross-border payments volume, which includes single currency transactions, and currency conversion activities for transactions involving more than one currency.
Other revenues consist primarily of optional service or product enhancements, such as extended cardholder protection and concierge services, cardholder services and fees for licensing and certification. Other revenues also include revenues earned from Visa Europe in connection with the Visa Europe Framework Agreement.
Volume and support incentives represent contracts with financial institution customers, merchants and other business partners for various programs designed to build payments volume and to increase product acceptance. These incentives are accounted for as reductions of operating revenues.
Personnel includes salaries, stock-based compensation, incentives and various fringe benefits.
Network, EDP and communications primarily represents expenses for the operation of our electronic payments network, including maintenance, equipment rental and fees for other data processing services.
Advertising, marketing and promotion includes expenses associated with advertising and marketing campaigns, sponsorships, and other related promotions to promote the Visa brand.
Visa International fees represents fees that Visa U.S.A. paid to Visa International prior to our reorganization for services primarily related to global brand management, global product enhancements, management of global system development and interoperability, and corporate support to the entire Visa enterprise. These fees ceased as a result of our reorganization.
Professional and consulting fees consist of fees for consulting, contractors, legal and other professional services.
Depreciation and amortization includes depreciation expenses of properties and equipment, as well as amortization of purchased and internally developed software. Also included in this amount are depreciation and amortization of the incremental basis in technology and other assets acquired in our reorganization.
Administrative and other primarily consists of facilities costs, foreign exchange gains and losses and other corporate and overhead expenses in support of our business.
Litigation provision is an estimate of litigation expense and is based on managements understanding of our litigation profile, the specifics of the case, advice of counsel to the extent appropriate, and managements best estimate of incurred loss at the balance sheet dates.
Other Income (Expense)
Interest expense primarily includes accretion associated with litigation settlements to be paid over periods longer than one year and interest incurred on outstanding debt.
Investment income, net represents returns on our fixed-income securities and other investments. Investment income also includes cash dividends received from other cost and equity method investments.
Other non-operating income primarily relates to the change in fair value of the liability under the Framework Agreement with Visa Europe. This liability was fully discharged in October 2008.
Visa Inc. Fiscal 2009 and 2008 and Visa U.S.A. Fiscal 2007
The following discussion of results of operations compares Visa Inc. consolidated results for fiscal 2009 and 2008 and Visa U.S.A. results for fiscal 2007. Visa U.S.A. was the accounting acquirer in the reorganization that took place on October 1, 2007, and therefore Visa U.S.A. results are considered the historical predecessor for those of Visa Inc., and are included for comparison.
The following table sets forth our operating revenues earned in the U.S., throughout the rest of the world, and from Visa Europe. Operating revenues for periods prior to October 1, 2007 are for Visa U.S.A., and are not presented in the table below, Revenues earned from Visa Europe are a result of our contractual arrangement with Visa Europe.
Operating revenues globally reflect the impact of pricing modifications made on various services as a result of innovations in our product line and improvements in our service model. U.S. revenues also reflect volume and support incentives incurred on initiation or early renewal of significant long term customer contracts. We regularly review our pricing strategy to ensure that it competitively aligns with the value and growth opportunities provided to our customers.
A significant portion of the revenues we earn outside the United States results from cross-border business and leisure travel, which has moderated in the current economic environment. Revenues from processing foreign currency transactions for our customers fluctuate with cross-border travel and the extent to which Visa-branded products are utilized for travel purposes.
Our operating revenues are impacted by fluctuations in foreign currency rates. Operating revenues are impacted by the overall strengthening or weakening of the U.S. dollar compared to local or regional currencies in which our payments volumes are denominated. The strengthening of the U.S. dollar in fiscal 2009 over the prior year resulted in a 3% decline in total operating revenues, including the impact from our hedging activities. The decline primarily impacted service and international transaction revenues.
The following table sets forth the components of our total operating revenues:
Revenue growth in fiscal 2009 primarily reflects a moderate increase in nominal payments volume, solid growth of processed transactions and strategic pricing modifications. Operating revenues increased during fiscal 2008 from fiscal 2007, primarily due to the inclusion of operating revenues from acquired regions, double digit growth in nominal payments volume, processed transactions and cross-border nominal payments volume, combined with competitive pricing adjustments. The discussion below comparing fiscal 2008 and 2007 focuses on factors other than the inclusion of $2.4 billion of the acquired regions operating revenues in fiscal 2008.
The net asset (liability) of volume and support incentives changed during the year as follows:
The following table sets forth components of our total operating expenses for the periods presented.
Operating expenses decreased during fiscal 2009, driven by the absence of the litigation provision in connection with our Discover settlement in fiscal 2008, coupled with lower costs in personnel, marketing and professional fees. Operating expenses remained flat in fiscal 2008 compared to fiscal 2007. Fiscal 2008 and 2007 comparisons below focus on factors other than the inclusion of acquired regions operating expenses in fiscal 2008, which totaled $1.3 billion. This increase was substantially offset by a decrease in litigation provision of $1.2 billion.
Other Income (Expense)
The following table sets forth the components of our other income (expense) for the periods presented.
Effective Income Tax Rate
The effective tax rate increased to 41% in fiscal 2009, compared with 40% in fiscal 2008 and 23% for Visa U.S.A. in fiscal 2007. The increase in the effective tax rate in fiscal 2009 compared to fiscal 2008 was primarily due to the additional foreign tax in fiscal 2009 on the sale of our investment in VisaNet do Brasil, which increased the overall effective tax rate by approximately 1%. Our Singapore subsidiary began operating under a tax incentive agreement in fiscal 2009, which had an insignificant impact on the fiscal 2009 effective tax rate. The increase in the effective income tax rate in fiscal 2008 compared to fiscal 2007 was due primarily to tax reserves related to litigation, and the combined effect of the loss of certain special deductions in California for which we were eligible prior to our IPO, the change in state tax apportionment, and a one-time benefit attributable to the remeasurement of deferred taxes. We expect our effective tax rate in fiscal 2010 to decrease to below 40% due to changes in the geographic mix of our global income.
Liquidity and Capital Resources
Management of Our Liquidity
We regularly evaluate cash requirements for current operations, commitments, development activities and capital expenditures and we may elect to raise additional funds for these purposes in the future through the issuance of either debt or equity. Our treasury policies provide management with the guidelines and authority to manage liquidity risk in a manner consistent with corporate objectives.
The objectives of our treasury policies are to provide adequate liquidity to cover operating expenditures and liquidity contingency scenarios, to ensure payment of required litigation settlement payments, to ensure timely completion of payments settlement activities, to make planned capital investments in our business, to pay dividends, to repurchase our shares at the discretion of our board of directors, to service the payments of principal and interest on outstanding debt and to optimize income earned by investing excess cash in securities that we believe are high-quality and marketable in the short term.
Based on our current cash flow budgets and forecasts of our short-term and long-term liquidity needs, management believes that our projected sources of liquidity will be sufficient to meet our projected liquidity needs for more than the next 12 months. Management 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.
Cash Flow Data
This table summarizes cash flow activity for the following fiscal years:
Operating Activities. Cash provided by operating activities for fiscal 2009 consisted of net income of $2.4 billion and adjustments for non-cash items of $1.5 billion. Standard non-cash adjustments for volume and support incentive accruals and depreciation and amortization were offset by a $473 million book gain on the sale of our investment in VisaNet do Brasil which is reflected in investing activities. Cash from operating activities also reflects the use of $3.3 billion to fund significant operational payments including litigation and volume and support incentives.
Cash provided by operating activities for fiscal 2008 consisted of net income of $804 million and adjustments for non-cash items of $3.1 billion. Cash provided by operating activities was lower than income provided by operations, reflecting the use of $92 million to satisfy payments settlement activities; $115 million of compensation benefit payments net of new accruals; and $217 million of volume and support incentive payments net of new accruals. These uses of cash were offset by deferred taxes payable, depreciation and amortization and other non-cash items, as well as changes in other operating assets and liabilities.
Investing Activities. Cash provided by investing activities for fiscal 2009 primarily reflects $884 million of cash distribution from the Reserve Primary Fund (the Fund), net cash proceeds of $290 million from the sales and maturities of investment securities and $1.0 billion from the sale of our 10% ownership in VisaNet do Brasil, all of which were reinvested in money market funds. We also purchased $306 million of property, equipment and technology primarily related to construction of our east coast data center.
Cash provided by investing activities for fiscal 2008, reflects $1,002 million of cash acquired through the reorganization, $949 million of net cash proceeds from the sales and maturities of investment securities that were re-invested in shorter-term cash equivalents and $415 million of property, equipment and technology purchases primarily related to construction of our data center. In addition, we reclassified our $953 million investment in the Fund from cash equivalents to other current assets on our consolidated balance sheet. See further discussion under Sources of Liquidity, below, and Note 6Prepaid Expenses and Other Assets to our consolidated financial statements.
Financing Activities. Cash used in financing activities during fiscal 2009 primarily reflects contractually-required redemption of our class C (series II) and class C (series III) common shares for $2.6 billion, funding of $1.8 billion to the litigation Escrow Account and dividend payments of $318 million, offset by funding of covered litigation payments totaling $2.0 billion from the litigation Escrow Account.
Cash provided by financing activities for fiscal 2008 is attributed to IPO related activities including $19.1 billion in net proceeds from the issuance of class A common stock, offset by $13.4 billion used for the partial redemption of class B and class C (series I) common stock, and $3.0 billion payment to the litigation Escrow Account for the covered litigation matters in accordance with the Retrospective Responsibility Plan. See Note 4Retrospective Responsibility Plan to our consolidated financial statements. In addition, there was a source of cash of $1.1 billion, reflecting funding of covered litigation payments from the litigation Escrow Account, offset by $93 million and $22 million for dividend and routine debt payments, respectively.
Sources of Liquidity
Our primary sources of liquidity are cash on hand, cash flow from our operations, an investment portfolio, and access to various equity and borrowing arrangements. Funds from operations are maintained in cash and cash equivalents, short-term available-for-sale investment securities, or long-
term available-for-sale investment securities based upon our funding requirements, access to liquidity from these holdings, and return that these holdings provide.
Investment Portfolio. Our investment portfolio primarily comprises of securities which enable us to meet a desired level of liquidity to meet working capital needs. Our investment portfolio primarily consists of liquid securities, including money market funds, debt securities issued by U.S. government-sponsored agencies and Canadian government debt securities. The liquidity of our investment portfolio is subject to uncertainties that are difficult to predict. Uncertainties in the credit markets have affected a number of these holdings.
In September 2008, the Fund was unable to honor our request for the full redemption of our investment totaling $983 million. The Fund was subsequently placed into liquidation and announced that it would distribute funds to investors on a pro-rata basis in proportion to the number of shares held by each investor. Since the announcement, we have received distributions totaling $903 million, including $19 million received in October of fiscal 2010. We believe that the fund will distribute its remaining assets within twelve months, and have therefore classified our remaining investment of $69 million, which reflects an impairment of $29 million, as a current asset at September 30, 2009. See Note 6Prepaid Expenses and Other Assets to our consolidated financial statements.
Other factors that may impact the liquidity of our investment portfolio include changes to credit ratings of the securities as well as to the underlying assets supporting those securities, rates of default of the underlying assets, underlying collateral value, discount rates, and ongoing strength and quality of credit markets. We will continue to review our portfolio in light of evolving market and economic conditions. However, if current market conditions deteriorate, the liquidity of our investment portfolio may be impacted and we could determine that some of our investments are impaired, which could adversely impact our financial results. We have policies that limit the amount of credit exposure to any one financial institution or type of investment.
Revolving Credit Facilities. On February 15, 2008, we entered into a $3.0 billion five-year revolving credit facility with a syndicate of banks including affiliates of certain of our class B and class C stockholders and certain of our customers and affiliates of our customers. Loans under the five-year facility may be in the form of: (1) Base Rate Advance, which will bear interest at a rate equal to the higher of the Federal Funds Rate plus 0.5% or the Bank of America prime rate; (2) Eurocurrency Advance, which will bear interest at a rate equal to LIBOR (as adjusted for applicable reserve requirements) plus an applicable cost adjustment and an applicable margin of 0.11% to 0.30% based on our credit rating; or (3) U.S. Swing Loan, Euro Swing Loan, or Foreign Currency Swing Loan, which will bear interest at the rate equal to the applicable Swing Loan rate for that currency plus the same applicable margin plus additionally for Euro and Sterling loans, an applicable reserve requirement and cost adjustment. We also agreed to pay a facility fee on the aggregate commitment amount, whether used or unused, at a rate ranging from 0.04% to 0.10% and a utilization fee on loans at a rate ranging from 0.05% to 0.10% based on our credit rating. Currently, the applicable margin is 0.15%, the facility fee is 0.05% and the utilization fee is 0.05%. This facility contains certain covenants, including financial covenant requirements relating to a maximum level of debt to EBITDA and events of default customary for financings of this type. This facility expires on February 15, 2013. There have been no borrowings under this facility. At September 30, 2009, we were in compliance with all covenants with respect to this facility.
U.S. Commercial Paper Programs. We maintain a $500 million U.S. commercial paper program, which provides for the issuance of unsecured debt with maturities up to 270 days from the date of issuance at interest rates generally extended to companies with comparable credit ratings. The commercial paper program is a source of short-term borrowed funds that may be used from time to time to cover short-term cash needs. At September 30, 2009, we had no obligations outstanding under this program. There are no financial covenants related to this program.
Universal Shelf Registration Statement. On May 6, 2009 we filed a registration statement with the U.S. Securities and Exchange Commission using a shelf registration process. Per the registration statement, we may, from time to time, sell shares of debt or equity securities in one or more transactions. The registration statement expires on May 5, 2012.
Escrow Account. We maintain an Escrow Account for use in the payment of covered litigation matters. When the Company funds the Escrow Account the shares of class B common stock held by our shareholders are subject to dilution through an adjustment to the conversion rate of the shares of class B common stock to shares of class A common stock. See Note 4Retrospective Responsibility Plan to our consolidated financial statements. The balance in this account at September 30, 2009 was $1.7 billion and is reflected as restricted cash on our consolidated balance sheet ($1.4 billion in current assets and $350 million in long-term assets). As these funds are restricted for use solely for the purpose of making payments related to covered litigation matters, we have not included them as part of our liquid assets. However, they should be viewed as a source of cash for purposes of making payments related to settlement of or judgment in covered litigation matters, as described below under Uses of Liquidity.
At September 30, 2009, Standard and Poors and Moodys rated our unsecured debt as follows:
Various factors affect our credit ratings, including, changes in our operating performance, the economic environment, conditions in the electronic payment industry, our financial position and changes in our business strategy. We do not currently foresee any reasonable circumstances under which our credit ratings would be significantly downgraded. If a downgrade were to occur, it could adversely impact, among other things, our future borrowing costs and access to capital markets.
Uses of Liquidity
Payments Settlement. Payments settlement due from and due to issuing and acquiring customers represents our most consistent liquidity requirement, arising primarily from settlement currencies other than the U.S. dollar. U.S. dollar settlements are settled within the same day and do not result in a net receivable or payable balance. These settlement receivables and payables generally remain outstanding for one to two business days, consistent with standard market conventions for domestic transactions and foreign currency transactions. We maintain a liquidity position sufficient to enable uninterrupted daily net settlement. Typically, the highest seasonal liquidity demand is experienced in December and early January during the holiday shopping season.
Covered Litigation. We are parties to legal and regulatory proceedings with respect to a variety of matters, including certain litigation that we refer to as covered litigation. As part of the Plan, we deposited $3.0 billion of our IPO proceeds into an Escrow Account from which settlements of, or judgments in, covered litigation will be paid. During fiscal 2009, we deposited an additional $1.8 billion into the Escrow Account. Under the Plan, when the Company funds the Escrow Account, the shares of class B common stock held by our stockholders are subject to dilution through an adjustment to the conversion rate of the shares of class B common stock to the shares of class A common stock. See Note 4Retrospective Responsibility Plan and Note 21Legal Matters to our consolidated financial
statements. In fiscal 2009 we made $2.0 billion in covered litigation payments that were funded from the Escrow Account.
Other Litigation. Judgments in and settlements of litigation, other than covered litigation, could give rise to future liquidity needs. For example, in connection with our retailers litigation settlement in fiscal 2003, we were required to make annual settlement payments of $200 million through fiscal 2012. In fiscal 2009, we entered into an agreement (the Prepayment Agreement) to modify our remaining payment obligations under the original retailers litigation settlement agreement. Pursuant to the Prepayment Agreement, on October 5, 2009 we made a payment of $682 million to fully satisfy the remaining $800 million obligation.
Redemption of Stock. In fiscal 2008, we redeemed 154,738,487 shares of class B common stock for $6.6 billion and 159,657,751 shares of our class C (series I) common stock for $6.8 billion. In fiscal 2009 we completed the redemption of 79,748,857 shares of our class C (series II) common stock and 35,263,585 shares of our class C (series III) common stock held by Visa Europe for $2.6 billion, less dividends and certain other adjustments. In October 2009, our board of directors authorized a $1.0 billion share repurchase plan. The authorization will be in place through September 30, 2010 and is subject to extension or expansion at the determination of our board of directors.
Dividends. During fiscal 2009, we paid $318 million in dividends. On October 20, 2009, our board of directors declared a quarterly dividend in the aggregate amount of $0.125 per share of class A common stock (determined in the case of class B and class C common stock on an as-converted basis). We expect to pay approximately $93 million in connection with this dividend in December 2009. See Note 15Stockholders Equity to our consolidated financial statements for further information regarding the dividend declarations. We intend to continue paying quarterly dividends in cash, subject to approval by our board of directors, at an annual rate equal to $0.50 per share of class A common stock. Class B and class C common stock will share ratably on an as-converted basis in such future dividends.
Visa Europe Put Option. 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. The purchase price of the Visa Europe shares under the put option is based upon a formula that, subject to certain adjustments, applies Visa Inc.s forward price-to-earnings multiple (the P/E ratio) at the time the option is exercised (as defined in the option agreement) to Visa Europes projected sustainable adjusted net operating income for the forward 12-month period (adjusted sustainable income). Visa Europes adjusted sustainable income is calculated under the terms of the put option agreement and includes potentially material adjustments for cost synergies and other negotiated items.
At September 30, 2009, the fair value of the put option liability was $346 million. While this amount represents the fair value of the put option at September 30, 2009, 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 undertaking a subsequent equity offering in order to fund this payment. The amount of that potential obligation could vary dramatically based on, among other things, Visa Europes adjusted sustainable income and our P/E ratio, in each case, as determined at the time the put option is exercised.
Given the perpetual nature of the put option and the various economic conditions which could be present at the time of exercise, our ultimate obligation in the event of exercise cannot be reliably estimated. The following table calculates our total obligation assuming, for illustrative purposes only, a range of P/E ratios for Visa Inc. and assuming that Visa Europe demonstrates $75 million of adjusted
sustainable income at the date of exercise. The $75 million of assumed adjusted sustainable income provided below for illustrative purposes only is based on Visa Europes financial results for the year ended September 30, 2008. However, this does not represent an estimate of the amount of adjusted sustainable income Visa Europe would have been able to demonstrate at September 30, 2008 or will be able to demonstrate at any point in time in the future. The table also provides the amount of increase or decrease in the payout, assuming the same range of estimated P/E ratios, for each $25 million of adjusted sustainable income above or below the assumed $75 million demonstrated at the time of exercise. At September 30, 2009, our estimated long-term P/E ratio was 22.0 and the P/E differential, the difference between this ratio and the estimated ratio applicable to Visa Europe, was 4.5x as compared to the estimated long term differential of 5.3x we used to value the put option. However these ratios are for reference purposes only and are not necessarily indicative of the ratio or differential that could be applicable if the put option were to be exercised at any point in the future.
Pension and Other Postretirement Benefits. We sponsor various qualified and nonqualified defined benefit pension plans which generally provide benefits based on years of service, age and employees final three to five years of earnings, as well as a postretirement benefit plan which provides postretirement medical benefits for retirees and dependents upon meeting minimum age and service requirements. Our policy with respect to our qualified pension plan is to contribute annually not less than the minimum required under the Employee Retirement Income Security Act, or ERISA. Our nonqualified pension and other postretirement benefit plans are funded on a current basis. We typically fund our qualified pension plan in September of each year. Funding does not impact current period pension expense but has the positive impact of reducing future period expense for the plan. In fiscal 2009, 2008 and for Visa U.S.A. in fiscal 2007, we made contributions to our pension and other postretirement plans of $170 million, $190 million and $65 million, respectively. In fiscal 2010, we intend to fund our defined benefit pension plans and postretirement plan by approximately $70 million.
Capital Expenditures. During fiscal 2009, we completed the construction of a new data center on the east coast of the United States. Upon completion in March 2009, we migrated our current east coast data center to this new facility. The new data center is intended to support our technology objectives related to reliability, scalability, security and new product development. In fiscal 2009, 2008 and 2007 we incurred total costs of $156 million, $241 million and $23 million, respectively related to the construction of this new data center. We will continue to make ongoing investments in technology and our payments system infrastructure, some of which we treat as capital expenditures.
Other Uses. In addition to the principal uses of liquidity described above, we are also required to make interest and principal payments under our outstanding indebtedness. Our total outstanding principal balance of debt at September 30, 2009, net of unamortized issuance costs, was $56 million.
Fair Value MeasurementsFinancial Instruments
Beginning in the first quarter of fiscal 2009, the assessment of fair value of our financial instruments is based on the provisions of Accounting Standards Codification (ASC) 820. ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs are obtained from independent sources and can be validated by a third party, whereas unobservable inputs reflect assumptions regarding what a third party would use in pricing an asset or liability.
As of September 30, 2009, our financial instruments measured at fair value on a recurring basis included approximately $6.3 billion of assets, of which $34 million, or less than 1%, had significant unobservable inputs. For these instruments, we lacked observable market data to corroborate either the non-binding market consensus prices or the non-binding broker quotes. Marketable debt instruments in this category include corporate debt securities, mortgage backed securities, other asset backed securities and auction rate securities. See Note 5Investments and Fair Value Measurements to our consolidated financial statements.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements are comprised of guarantees. Visa has no off-balance sheet debt, other than lease and purchase order commitments as discussed below and reflected in our contractual obligations table.
Guarantees and Indemnifications
In 2001, Visa International entered into a 20-year lease agreement for premises in London to be occupied by the EU region and Visa CEMEA. The lease is assigned to Visa Europe Services, Inc., or VESI, a wholly-owned subsidiary of Visa Europe, with Visa International acting as a guarantor to the landlord as required by the United Kingdom. In the event of a default by VESI, Visa International is obligated to make base lease payments. VESI has agreed to reimburse Visa International for any liabilities that may arise under Visa Internationals guarantee to the landlord. Visa International has not made any payments under this guarantee and the estimated fair value of this guarantee was less than $1 million at September 30, 2009.
We indemnify customers for settlement losses suffered by reason of the failure of any other customer to honor Visa cards, travelers cheques, or other instruments processed in accordance with our operating regulations. The amount of the indemnification is unlimited. We maintain global credit settlement risk policies and procedures to manage settlement risk which may require customers to post collateral if certain credit standards are not met. See Note 1Summary of Significant Accounting Policies and Note 12Settlement Guarantee Management to our consolidated financial statements.
In the ordinary course of business, we enter into contractual arrangements with financial institution and other customers under which we may agree to indemnify the customer for certain types of losses incurred relating to the services we provide or otherwise relating to our performance under the applicable agreement. Historically, payments we have made related to these indemnification obligations have been immaterial.
Our contractual commitments will have an impact on our future liquidity. The contractual obligations identified in the table below include both on- and off-balance sheet transactions that represent a material expected or contractually committed future obligation at September 30, 2009. We believe that we will be able to fund these obligations through cash generated from our operations and
available credit facilities. See Note 3Visa Europe, Note 10Debt, Note 18Commitments and Contingencies, and Note 21Legal Matters to our consolidated financial statements.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which requires us to make judgments, assumptions and estimates that affect the amounts reported. See Note 1Summary of Significant Accounting Policies to our consolidated financial statements. We have established policies and control procedures which seek to ensure that estimates and assumptions are appropriately governed and applied consistently from period to period. However, actual results could differ from our assumptions and estimates, and such differences could be material.
We believe that the following accounting estimates are the most critical to fully understand and evaluate our reported financial results, as they require our most subjective or complex management judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain and unpredictable.
Revenue RecognitionVolume and Support Incentives
Critical Estimates. We enter into incentive agreements with financial institution customers, merchants and other business partners to build payments volume and to increase product acceptance. These incentives are generally accounted for as reductions of operating revenue or expense where an identifiable benefit can be identified. Certain volume and support incentives are based on performance targets and are accrued systematically and rationally based upon estimates of future performance. Other incentives are based on fixed payments and are generally deferred, if certain criteria are met. The deferability criteria includes the existence of legally enforceable recoverability clauses, managements ability and intent to enforce the recoverability clauses and the ability to generate future earnings from the agreement in excess of the deferred amounts. Capitalized amounts are amortized over the period of contractual recoverability.
Assumptions and Judgment. Estimation of volume and support incentives relies on forecasts of payments volume, estimates of card issuance and card conversion. Performance is estimated using customer reported information, transactional information accumulated from our systems, historical information and discussions with our customers.
Impact if Actual Results Differ from Assumptions. If our customers actual performance or recoverable cash flows are not consistent with our estimates, volume and support incentives may be materially different than initially recorded. Increases in incentive payments are generally driven by increased payment and transaction volume, and as a result, in the event incentive payments exceed estimates, such payments are not expected to have a material effect on our financial condition, results of operations or cash flows. The cumulative impact of a revision in estimates is recorded in the period such revisions become probable and estimable. For the year ended September 30, 2009, performance adjustments to volume and support agreements were less than 1% of our total operating revenues.
Fair ValueVisa Europe Put Option
Critical Estimates. We have granted Visa Europe a perpetual put option under which we are required to purchase all of the share capital of Visa Europe from its members at any time. The purchase price of the Visa Europe shares under the put option is based upon a formula that, subject to certain adjustments, applies Visa Inc.s forward price-to-earnings multiple, as defined in the agreement, at the time the option is exercised to Visa Europes projected sustainable adjusted net operating income for the forward 12-month period. See Note 3Visa Europe to our consolidated financial statements for further detail regarding the calculation of the put exercise price under the agreement.
The fair value of Visa Europes option, which under certain conditions could obligate us to purchase its members equity interests for an amount greater than fair value, was determined to be
approximately $346 million at September 30, 2009. While the put option is in fact non transferable, this
amount, recorded in our financial statements represents our estimate of the amount we would be required to pay a third party market participant to transfer the put option in an orderly transaction. Our valuation methodology involves using probability weighted models designed to estimate the present value of our liability assuming various possible exercise decisions that Visa Europe could make, including the possibility it will never exercise its option, under different economic conditions in the future. While this amount represents the fair value of the put option at September 30, 2009, it does not represent the actual purchase price that we may be required to pay if the option is exercised, which could be several billion dollars or more. See the Liquidity and Capital Resources section of Managements Discussion and Analysis for further discussion.
Assumptions and Judgment. The most significant estimates used in the valuation of the fair value of the put option are the assumed probability that Visa Europe will elect to exercise its option, and the estimated differential between the forward price-to-earnings multiple applicable to our common stock, as defined in the put option agreement, and that applicable to Visa Europe on a stand alone basis at the time of exercise, which we refer to as the P/E differential.
Probability of ExerciseExercise of the put option is at the sole discretion of Visa Europe (on behalf of the Visa Europe shareholders pursuant to authority granted to Visa Europe, under its articles of association). We estimate the assumed probability of exercise based on reasonably available information including, but not limited to: (i) Visa Europes stated intentions; (ii) indications that Visa Europe is preparing to exercise as reflected in its reported financial results; (iii) evaluation of market conditions, including the regulatory environment, that could impact the potential future profitability of Visa Europe; and (iv) qualitative factors applicable to Visa Europes largest members, which could indicate a change in their need or desire to liquidate their investment holdings.
P/E DifferentialThe P/E differential is determined by estimating the relative difference in the forward price-to-earnings multiples applicable to our common stock, as defined in the put option agreement, and that applicable to Visa Europe at the time of exercise. For valuation purposes, the forward price-to-earnings multiple applicable to our common stock at the time of exercise is estimated by evaluating various quantitative measures and qualitative factors. Quantitatively, we estimate our P/E ratio by dividing the average stock price over both the shorter of the preceding 24 months or since our IPO (the long-term P/E calculation) and the last 30 trading dates (the 30-day P/E calculation) prior to the measurement date by the median estimate of our net income per share for the 12 months starting with the next calendar quarter immediately following the reporting date. This median earnings estimate is obtained from the Institutional Brokers Estimate System (I/B/E/S). We then determine the best estimate of our long term price-to-earnings multiple for valuation purposes by qualitatively evaluating the 30-day P/E calculation as compared to the long-term P/E calculation. In this evaluation we examine both measures to determine whether differences, if any, are the result of a fundamental change in long-term value of the Company or the result of short-term market volatility or other non-Company specific market factors that may not be indicative of our long-term forward P/E. We believe, given the perpetual nature of the put option, that a market participant would more heavily weight long-term value indicators, as opposed to short-term indicators.
Factors that might indicate a fundamental change in long-term value include, but are not limited to, changes in the regulatory environment, client portfolio, long-term growth rates or new product innovation. A consistent methodology is applied to a group of comparable public companies used to estimate the forward price-to-earnings multiple applicable to Visa Europe. These estimates therefore are impacted by changes in stock prices and the financial markets expectations of the future earnings of Visa Inc. and the comparable companies.
Other estimates of lesser significance applied include growth rates and foreign currency exchange rates applied in the calculation of Visa Europes projected sustainable adjusted net operating income.
The valuation model assumes a large range of annual growth rates reflecting the different economic environments and circumstances under which Visa Europe could decide to exercise. The lowest growth rates assumed reflect Visa Europes current business model as an association, owned by its member banks, while the highest reflect a successful shift to a for-profit model in anticipation of exercise. The scenarios with higher growth rates are assigned a significantly higher probability in the valuation model as we believe a market participant would more heavily weight these scenarios as it is likely that, should it choose to exercise its option, Visa Europe will seek to maximize the purchase price by adopting a for-profit business model in advance of exercising the put option. The foreign exchange rate used to translate Visa Europes results from euros to U.S. dollars reflects our estimate of long-term exchange rates and is determined based on forward foreign exchange rates available in the marketplace. The assumed timing of exercise of the put option used in the various modeled scenarios is not an overly significant assumption in the valuation as obligations calculated in later years are more heavily discounted in the calculation of present value.
Impact if Actual Results Differ from Assumptions. In the determination of the fair value of the put option at September 30, 2009, we have assumed a 40% probability of exercise by Visa Europe at some point in the future and a P/E differential, at the time of exercise, of approximately 5.3x. The use of a probability of exercise that is 5% higher than our estimate would have resulted in an increase of approximately $44 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 $71 million in the value of the put option. The put option became exercisable during fiscal 2009. 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 our consolidated balance sheet at September 30, 2009. Classification in current liabilities is not an indication of managements expectation of exercise and simply reflects the fact that this obligation could become payable within 12 months.
Fair ValueGoodwill and Intangible Assets
Critical Estimates. We are required to estimate the fair value and useful lives of assets acquired and liabilities assumed in a business combination. The difference between the purchase price and the fair value of the assets acquired and liabilities assumed is goodwill. We are subsequently required to assess assets acquired and goodwill for impairment.
Assumptions and Judgment. Judgment used in the valuation of assets and liabilities assumed in business combinations, including goodwill and intangible assets, can include the cash flows that an asset is expected to generate, the weighted average cost of capital and a discount rate determined by management. We believe that the assumptions made are comparable to those that market participants would use in making estimates of fair value. Determining the expected life of an intangible asset requires management judgment and is based on the evaluation of various factors, including the competitive environment, market share, customer history and macroeconomic situation. We determined that our brand and customer relationships intangible assets have indefinite lives, based on our significant market share, history of strong revenue and cash flow performance, and historical retention rates. Our assets acquired, liabilities assumed and related goodwill are assigned to one reporting unit, which is the level in which discrete financial information is available and reviewed by the chief operating decision maker.
Review of impairment is completed annually or whenever events and circumstances indicate that impairment may exist. Impairment testing for intangible assets requires the allocation of cash flows to those assets or asset group and if required, an estimate of fair value for the assets or asset group. Impairment exists if the fair value is less than the carrying value. Goodwill impairment is reviewed using a two-step process that involves comparing the fair value of the reporting unit to its carrying value and comparing the implied fair value of reporting unit goodwill with the carrying amount of that
goodwill. Management relies on a number of factors when completing impairment assessment including a review of discounted future cash flows, business plans and use of present value techniques. No impairment of our intangible assets or goodwill exists as of our July 1, 2009 annual assessment, and no events or circumstances indicate that impairment may exist thereafter as reflected by the overall performance of our business and market capitalization among other factors.
Impact if Actual Results Differ from Assumptions. If actual results are not consistent with our assumptions and estimates, we may be exposed to impairment charges. The carrying value of the goodwill and intangible assets was $21.1 billion, including $10.9 billion of indefinite-lived intangible assets at September 30, 2009.
Legal and Regulatory Matters
Critical Estimates. We are currently involved in various claims and legal proceedings, the outcomes of which are not within our complete control or may not be known for prolonged periods of time. Management is required to assess the probability of loss and amount of such loss, if any, in preparing our financial statements.
Assumptions and Judgment. We evaluate the likelihood of a potential loss from any claim or legal proceeding to which we are a party. We record a liability for claims and legal proceedings when a loss is considered probable and the amount can be reasonably estimated. Significant judgment may be required in both the determination of probability and whether an exposure is reasonably estimable.
Our judgments are subjective based on the status of the legal or regulatory proceedings, the merits of our defenses and consultation with in-house and outside legal counsel. As additional information becomes available, we reassess the potential liability related to pending claims and litigation and may revise our estimates.
Impact if Actual Results Differ from Assumptions. Due to the inherent uncertainties of the legal and regulatory process in the multiple jurisdictions in which we operate, our judgments may be materially different than the actual outcomes, which could have material adverse effects on our business, financial condition and results of operations.
Critical Estimates. In calculating our effective tax rate, we make judgments regarding certain tax positions, including the timing and amount of deductions and allocations of income among various tax jurisdictions.
Assumptions and Judgment. We have various tax filing positions with regard to the timing and amount of deductions and credits, the establishment of reserves for audit matters and the allocation of income among various tax jurisdictions. We are also required to inventory, evaluate and measure all uncertain tax positions taken or to be taken on tax returns, and to record liabilities for the amount of such positions that may not be sustained, or may only partially be sustained, upon examination by the relevant taxing authorities.
Impact if Actual Results Differ from Assumptions. Although we believe that our estimates and judgments are reasonable, actual results may differ from these estimates. Some or all of these judgments are subject to review by the taxing authorities, including our current and deferred tax benefits associated with the settlement of the American Express litigation and the Discover litigation and other matters. See Note 21Legal Matters to our consolidated financial statements. If one or more of the taxing authorities were to successfully challenge our right to realize some or all of the tax benefit we have recorded, and we were unable to realize this benefit, it could have a material and adverse effect on our financial results and cash flows.
Impact of Recent Accounting Pronouncements
In June 2008, the Financial Accounting Standards Board (FASB) amended FASB ASC 260-10 to address whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in calculating earnings per share under the two-class method. The amendment requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. We will adopt this amendment in the first quarter of fiscal 2010. This change will not result in any impact to fiscal 2009 and 2008 full year diluted class A net income per share.
Quantitative and Qualitative Disclosures about Market Risk
Market risk is the potential economic loss arising from adverse changes in market factors. Our exposure to financial market risks results primarily from fluctuations in foreign currency rates, interest rates and equity prices. We do not hold or enter into derivatives or other financial instruments for trading or speculative purposes. Aggregate risk exposures are monitored on an ongoing basis, and cash and cash equivalents are not considered to be subject to significant interest rate risk due to the short period of time to maturity.
Foreign Currency Exchange Rate Risk
Although most of our activities are transacted in U.S. dollars, we are exposed to adverse movements in foreign currency exchange rates. Risks from foreign currency exchange rate fluctuations are related primarily to adverse changes in the dollar value of revenues that are derived from foreign currency-denominated transactions, and to adverse changes in the dollar value of payments in foreign currencies, primarily for costs and expenses at our non-U.S. locations. We manage these risks by entering into foreign currency forward contracts with cash flow hedge accounting designation that hedges exposures of the variability in the U.S. dollar equivalent of anticipated non-U.S. dollar denominated cash flows. Our foreign currency exchange rate risk management program reduces, but does not entirely eliminate, the impact of foreign currency exchange rate movements. We do not use foreign currency forward contracts for speculative or trading purposes.
In fiscal 2009, we implemented a rolling hedge strategy program, which we anticipate utilizing going forward. Under this strategy, we seek to reduce the exchange rate risk from forecasted net exposure of revenues derived from and payments made in foreign currencies during the immediately following 12 months. The aggregate notional amount of our foreign currency forward contracts outstanding in our exchange rate risk management program was $742 million and $4 million, respectively, at September 30, 2009 and September 30, 2008. The aggregate notional amount of $742 million outstanding at September 30, 2009 is fully consistent with our strategy and treasury policy aimed at reducing foreign exchange risk below a predetermined and approved threshold. However, actual results for this period could materially differ from our forecast. The effect of a hypothetical 10% change of the U.S. dollar is estimated to create an additional fair value gain or loss of $61 million on our foreign currency forward contracts outstanding at September 30, 2009. See Note 13Derivative Financial Instruments.
We are also subject to foreign currency exchange risk in daily settlement activities. This risk arises from the timing of rate setting for settlement with customers relative to the timing of market trades for balancing currency positions. Risk in settlement activities is limited through daily operating procedures, including the utilization of Visa settlement systems and our interaction with foreign exchange trading counterparties.
Interest Rate Risk
Our investment portfolio assets are held in both fixed-rate and adjustable-rate securities. These assets are included in cash equivalents, short-term available-for-sale investments and long-term available-for-sale investments. Investments in fixed rate instruments carry a degree of interest rate risk. The fair value of fixed rate securities may be adversely impacted due to a rise in interest rates. Additionally, a falling rate environment creates reinvestment risk because as securities mature the proceeds are reinvested at a lower rate, generating less interest income. Historically, we have been able to hold investments until maturity. Operating results or cash flows have not been, and are not expected to be, materially impacted by a sudden change in market interest rates. The fair value balances of our fixed-rate investment securities in fiscal 2009 and 2008 were $176 million and $403 million, respectively.
A hypothetical 100 basis point increase or decrease in interest rates would have impacted the fair value of our investment portfolio by approximately $3 million at September 30, 2009.
The fair value balances of our adjustable-rate debt securities were $34 million and $103 million at September 30, 2009 and 2008, respectively.
We have fixed rate debt which is subject to interest rate risk. A hypothetical 100 basis point increase or decrease in rates would have impacted the fair value of these notes by approximately $2 million at September 30, 2009.
Visa Europe Put Option
We have a liability related to the put option with Visa Europe which is recorded at fair market value at September 30, 2009. We are required to record any change in the fair value of the put option on a quarterly basis. In the determination of the fair value of the put option at September 30, 2009, we have assumed a 40% probability of exercise by Visa Europe at some point in the future and a P/E differential, at the time of exercise, of approximately 5.3x. The use of a probability of exercise 5% higher than our estimate would have resulted in an increase of approximately $44 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 $71 million in the value of the put option. See Liquidity and Capital Resources and Critical Accounting Estimates above.
Pension Plan Assets Risk
Our total defined benefit pension plan assets were $703 million and $624 million at September 30, 2009 and 2008, respectively. Although these assets are not included in our financial statements, a material adverse decline in the value of pension plan assets could result in increases to our pension liability and a reduction to stockholders equity due to an increase in the underfunded status of the plan, increases in pension expense due to a decline in the expected rate of return on plan assets, and increases in required funding. We will continue to monitor the performance of pension plan assets and market conditions as we evaluate the amount of our contribution to the plan for fiscal 2010, which we expect to make in September 2010.
Quantitative and qualitative disclosures about market risk are included in Item 7Managements Discussion and Analysis of Financial Condition and Results of Operations of this report.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Visa Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheets of Visa Inc. and subsidiaries as of September 30, 2009 and 2008, and the related consolidated statements of operations, changes in stockholders equity, comprehensive income, and cash flows for each of the years in the two-year period ended September 30, 2009, and the consolidated statements of operations, changes in stockholders equity, comprehensive income, and cash flows of Visa U.S.A. Inc. and subsidiaries for the year ended September 30, 2007. We also have audited Visa Inc.s internal control over financial reporting as of September 30, 2009, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Visa Inc.s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Managements Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and an opinion on the Companys internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Visa Inc. and subsidiaries as of September 30, 2009 and 2008, and
the results of their operations and their cash flows for each of the years in the two-year period ended September 30, 2009, and the results of the operations and cash flows of Visa U.S.A. Inc. and subsidiaries for the year ended September 30, 2007, in conformity with U.S. generally accepted accounting principles. Also in our opinion, Visa Inc. maintained, in all material respects, effective internal control over financial reporting as of September 30, 2009, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
As discussed in Note 1 to the consolidated financial statements, the related consolidated statements of operations, changes in stockholders equity, comprehensive income, and cash flows for the year ended September 30, 2007 are those of Visa U.S.A. Inc. and subsidiaries, the accounting acquirer in the reorganization.
/s/ KPMG LLP
San Francisco, California
November 19, 2009
CONSOLIDATED BALANCE SHEETS
See accompanying notes, which are an integral part of these consolidated financial statements.
CONSOLIDATED BALANCE SHEETS(Continued)
See accompanying notes, which are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF OPERATIONS(Continued)
See accompanying notes, which are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY(Continued)
See accompanying notes, which are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
See accompanying notes, which are an integral part of these consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS(Continued)
See accompanying notes, which are an integral part of these consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009
(in millions, except as noted)
Note 1Summary of Significant Accounting Policies
OrganizationVisa Inc. (Visa or the Company) is a global payments technology company that connects consumers, businesses, banks and governments around the world, enabling them to use digital currency instead of check and cash. The Company provides financial institutions with payment processing platforms that encompass consumer credit, debit, prepaid and commercial payments, and facilitate global commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses and government entities. The Company does not issue cards, set fees, or determine the interest rates consumers will be charged on Visa-branded cards, which are the independent responsibility of the Companys issuing customers. In order to respond to industry dynamics and enhance Visas ability to compete, Visa undertook a reorganization in October 2007, and in March 2008 the Company completed its initial public offering (the IPO). See Note 2The Reorganization.
Consolidation and basis of presentationThe consolidated financial statements include the accounts of Visa Inc. and its consolidated entities and are presented in accordance with accounting principles generally accepted in the United States of America (GAAP). The Company consolidates all entities that are controlled by ownership of a majority voting interest as well as variable interest entities for which the Company is the primary beneficiary. All significant intercompany accounts and transactions are eliminated in consolidation. Certain reclassifications, not affecting net income, have been made to prior period information to conform to the current period presentation format.
Prior to the October 2007 reorganization, Visa operated as five corporate entities related by ownership and membership: Visa U.S.A., Visa International Service Association (Visa International comprising the operating regions of Asia Pacific (AP), Latin America and Caribbean (LAC), and Central and Eastern Europe, Middle East and Africa (CEMEA)), Visa Canada Inc. (Visa Canada), Inovant LLC (Inovant), and Visa Europe Limited (Visa Europe). See Note 2The Reorganization. Beginning October 1, 2007, the Companys consolidated results include Visa U.S.A., Visa International, Visa Canada and Inovant. Visa Europe did not become a subsidiary of Visa Inc. as part of the reorganization. See Note 3Visa Europe. Consolidated results for the year ended September 30, 2007 are those of Visa U.S.A., the accounting acquirer in the reorganization.
During the first quarter of fiscal 2009, the Company formed Visa Processing Services, Ltd. (VPS) and issued a 30% minority interest to and executed a joint venture agreement with Yalamanchili International Pte. Ltd., a payments processor and software company that will enable VPS to extend multi-currency and multi-language debit, credit and prepaid processing capabilities outside of the United States. The Company retained the remaining 70% interest in VPS, which is consolidated in the financial statements.
In fiscal 2010, the Company will report non-controlling interests (previously referred to as minority interests) as a component of equity. The adoption will primarily impact the presentation of the consolidated financial statements including all comparable periods.
The Company has one operating and reportable segment, Payment Services. The Companys activities are interrelated and each activity is dependent upon and supportive of the other. Accordingly all significant operating decisions are based on analysis of Visa Inc. as a single global business.
Use of estimatesThe preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions about future events. These estimates and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2009
(in millions, except as noted)
assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Future actual results could materially differ from these estimates. The use of estimates in specific accounting policies are described further below as appropriate.
Cash and cash equivalentsCash and cash equivalents include cash and certain highly liquid investments with original maturities of 90 days or less from the date of purchase. Cash equivalents are recorded at cost, which approximates fair value.
Restricted cashLitigation escrowThe Company deposited funds from the IPO and its own funds into an Escrow Account from which settlements of, or judgments in, the covered litigation will be paid. See Note 4Retrospective Responsibility Plan for discussion of covered litigation. The escrow funds are held in money market investments together with the income earned, less applicable taxes payable, and classified as restricted cash on the consolidated balance sheet. The amount of the Escrow Account, equivalent to the actual undiscounted amount of payments expected to be made beyond one year from the balance sheet date for settled claims, is classified as a non-current asset. Interest earned on escrow funds is included in investment income, net, on the consolidated statement of operations.
Investments and fair valueEffective October 1, 2008, the Company began to measure certain required assets and liabilities at fair value as defined in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 820. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard establishes a framework for measuring fair value, sets out a three-level fair value hierarchy to be used to classify the source of information used in fair value measurements, and requires disclosures of assets and liabilities measured at fair value based on their level in the hierarchy.
The three levels of the valuation hierarchy and the classification of the Companys financial assets and liabilities within the hierarchy are as follows:
Level 1Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities. The fair value of the Companys cash equivalents (money market funds), mutual fund equity securities and exchange-traded equity securities are based on quoted prices and are therefore classified as Level 1.
Level 2Inputs to the valuation methodology can include: (1) quoted prices in active markets for similar (not identical) assets or liabilities; (2) quoted prices for identical or similar assets in non-active markets; (3) inputs other than quoted prices that are observable for the asset or liability; or (4) inputs that are derived principally from or corroborated by observable market data.
Level 2 assets include U.S. government-sponsored debt securities, and Canadian government debt securities for which fair value is based on quoted prices in active markets for similar assets, and other observable inputs. Level 2 assets and liabilities also include foreign exchange derivative instruments in an asset or liability position and are valued using inputs that are derived principally from or corroborated with observable market data.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2009
(in millions, except as noted)
Level 3Inputs to the valuation methodology are unobservable and cannot be corroborated by observable market data. Inputs reflect the use of significant management judgment via the use of pricing models for which the assumptions include estimates of market participant assumptions. Level 3 assets include the Companys auction rate securities, corporate debt securities, mortgage backed securities and other asset backed securities. Level 3 liabilities include the Visa Europe put option. See Note 3Visa Europe.
FASB provided further guidance in April 2009 on how to determine the fair value of assets and liabilities when there is no active market or where the price inputs being used to determine fair value represent distressed sales. The adoption of this guidance did not have a material impact on the consolidated financial statements.
Available-for-sale securities include investments in debt and marketable equity securities. These securities are recorded at cost at the time of purchase and are carried at fair value. The Company classifies its debt and marketable equity securities as available-for-sale to meet its operational needs. Investments with original maturities greater than 90 days and stated maturities less than one year from the balance sheet date are current assets, while those with stated maturities greater than one year from the balance sheet date are non-current assets. Unrealized gains and losses are reported in accumulated other comprehensive income (loss) on the consolidated balance sheets. The specific identification method is used to determine realized gain or loss. Dividend and interest income are recognized when earned and are included in investment income, net on the consolidated statements of operations.
The Company evaluates its debt securities for other-than-temporary impairment (OTTI) on an ongoing basis. OTTI is assessed when fair value is below amortized cost. OTTI can be triggered when a company has the intent to sell a security, is more likely than not required to sell the security before recovery of the amortized cost basis, or does not expect to recover the entire amortized cost basis of the security. The Company has not presented required separate disclosures because its gross unrealized loss positions in debt securities for the periods presented are not material. In addition, the credit and non-credit loss components of debt securities on the balance sheet for which OTTI was previously recognized were not material. The Company recognized $9 million in OTTI during fiscal 2009 primarily related to corporate debt, mortgage backed and asset backed securities. In fiscal 2008, the Company recognized $9 million in OTTI primarily related to auction rate securities.
Trading assets include mutual fund equity security investments related to various employee compensation and benefit plans. The trading activity of these investments is dependent upon the actions of the Companys employees. On October 1, 2008, the Company adopted FASB ASC 825 and elected the fair value option to account for these investments, which had previously been reported as available-for-sale investments. There was no impact to the consolidated statements of operations as a result of this adoption. Changes in fair value are recorded in investment income, net, and offset in personnel expense on the consolidated statements of operations.
The Company uses the equity method of accounting for investments in other entities when it holds between 20% and 50% ownership in the entity or when it exercises significant influence. Under the equity method, the Companys share of each entitys profit or loss is reflected in equity in earnings of unconsolidated affiliates on the consolidated statements of operations. The equity method of accounting is also used for flow-through entities such as limited partnerships and limited liability
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2009
(in millions, except as noted)
companies when the investment ownership percentage is equal to or greater than 5% of outstanding ownership interests, regardless of whether the Company has significant influence over the investees.
The Company accounts for investments in other entities under the historical cost method of accounting when it holds less than 20% ownership in the entity or for flow-through entities when the investment ownership is less than 5%, and the Company does not exercise significant influence. These investments consist of equity holdings in non-public companies and are recorded in other assets on the consolidated balance sheets.
The Company regularly reviews investments accounted for under the cost and equity methods for possible impairment, which generally involves an analysis of the facts and circumstances influencing the investment, expectations of the entitys cash flows and capital needs, and the viability of its business model.
Financial instrumentsThe Company considers the following to be financial instruments: cash and cash equivalents, restricted cash-litigation escrow, trading and available-for sale investments, the Reserve Primary Fund (see Note 6Prepaid Expenses and Other Assets), accounts receivable, non-marketable equity investments, customer collateral, accounts payable, debt, settlement guarantees, derivative instruments, the Visa Europe put option, and settlement receivable and payable. The estimated fair value of such instruments at September 30, 2009 approximates their carrying value as reported on the consolidated balance sheets except as otherwise disclosed, or as deemed impracticable to estimate the fair value, such as for non marketable equity investments. See Note 5Investments and Fair Value Measurements.
Settlement receivable and payableThe Company operates systems for clearing and settling customer payment transactions. Net settlements are generally cleared within one to two business days, resulting in amounts due to and from financial institution customers. These settlement receivables and payables are stated at cost and are presented gross on the consolidated balance sheets.
Customer collateralThe Company holds cash deposits and other noncash assets from certain customers in order to ensure their performance of settlement obligations arising from credit, debit and travelers cheque product clearings. The cash collateral assets are restricted and fully offset by corresponding liabilities and both balances are presented on the consolidated balance sheets. Noncash collateral assets are held on behalf of the Company by a third party and are not recorded on the consolidated balance sheets. See Note 12Settlement Guarantee Management.
Property, equipment and technology, netProperty, equipment, and technology, net are recorded at historical cost less accumulated depreciation and amortization, which are computed on a straight-line basis over the assets estimated useful life. Depreciation and amortization of technology, furniture, fixtures and equipment are computed over estimated useful lives ranging from 2 to 7 years. Capital leases are amortized over the lease term and leasehold improvements are amortized over the shorter of the useful life of the asset or lease term. Building improvements are depreciated between 3 and 40 years, and buildings are depreciated over 40 years. Improvements that increase functionality of the asset are capitalized and depreciated over the assets remaining useful life. Land and construction-in-progress are not depreciated. Fully depreciated assets are retained in property, equipment and technology, net, until removed from service.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2009
(in millions, except as noted)
Technology includes both purchased and internally developed software. Internally developed software represents software primarily used by the VisaNet electronic payment network. Internal and external costs incurred during the preliminary project stage are expensed as incurred. Qualifying costs incurred during the application development stage are capitalized. Once the project is substantially complete and ready for its intended use these costs are amortized on a straight-line basis over the technologys estimated useful life.
LeasesThe Company enters into operating and capital leases for the use of premises, software and equipment. Rent expense related to lease agreements which contain lease incentives are recorded on a straight-line basis.
Intangible assetsThe Company records identifiable intangible assets at fair value on the date of acquisition and evaluates the useful life of each asset. Intangible assets with finite useful lives are amortized on a straight-line basis. Intangible assets with indefinite useful lives are not amortized but are evaluated for impairment annually or whenever events and circumstances indicate that impairment may exist. Intangible assets consist of tradename, customer relationships and Visa Europe franchise right, all of which have indefinite useful lives.
The Company tests each category of intangible assets for impairment on an aggregate basis, which may require the allocation of cash flows and/or an estimate of fair value to those assets or asset group. Impairment exists if the fair value of the indefinite-lived intangible asset is less than the carrying value. The Company relies on a number of factors when completing impairment assessment including a review of discounted future cash flows, business plans and use of present value techniques. The Company evaluated its intangible assets for impairment as of July 1, 2009 and concluded there was no impairment as of that date. No recent events or circumstances indicate that impairment may exist.
GoodwillGoodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination. Goodwill is not amortized but is evaluated for impairment at the reporting unit level annually or whenever events and circumstances indicate that impairment may exist. The Company has only one reporting unit, which is the level in which discrete financial information is available and reviewed by the chief operating decision maker.
Impairment is reviewed using a two-step process. The first step compares the fair value of the reporting unit to its carrying value. If the fair value exceeds the carrying value, no impairment exists, and the second step is not performed. If the fair value is less than the carrying value, the second step is performed to compute the amount of the impairment by comparing the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. The Company relies on a number of factors when completing impairment assessment including a review of discounted future cash flows, business plans and use of present value techniques. The Company evaluated its goodwill for impairment as of July 1, 2009 and concluded there was no impairment as of that date. No recent events or circumstances indicate that impairment may exist as reflected by the Companys overall business performance and market capitalization.
Impairment of long-lived assetsThe Company evaluates the recoverability of long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. If the sum of expected undiscounted future cash flows is less than the carrying amount of an asset or asset group, an impairment loss is recognized. The loss is measured as the amount by which the carrying amount of the asset or asset group exceeds its fair value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2009
(in millions, except as noted)
Volume and support incentivesThe Company enters into incentive agreements with financial institution customers, merchants, and other business partners designed to build payments volume and to increase product acceptance. These incentives are generally accounted for as reductions of operating revenues or expenses where an identifiable benefit can be identified. The Company generally capitalizes certain incentive payments under these agreements if certain criteria are met. The capitalization criteria includes the existence of legally enforceable recoverability clauses, such as early termination clauses, managements ability and intent to enforce the recoverability clauses and the ability to generate future earnings from the agreement in excess of the deferred amounts. Incentives are accrued systematically and rationally based on managements estimate of the customers performance. These accruals are regularly reviewed and estimates of performance are adjusted as appropriate. Capitalized amounts are amortized over the period of contractual recoverability.
Accrued litigationThe Company evaluates the likelihood of an unfavorable outcome of legal or regulatory proceedings to which it is a party and records a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These judgments are subjective, based on legal or regulatory proceedings, the merits of the Companys defenses and consultation with corporate and external legal counsel, and actual outcomes of related legal proceedings may materially differ from the Companys judgment. Accrued litigation associated with settled obligations to be paid over periods longer than one year is initially recorded using the present value of future payment obligations. The obligation is accreted to its full payment value with the corresponding accretion charge included in interest expense on the consolidated statement of operations. The Company expenses legal costs as incurred in professional and consulting fees. See also Note 21Legal Matters.
Revenue recognitionThe Companys operating revenues are comprised principally of service revenues, data processing revenues, international transaction revenues and other revenues, reduced by costs incurred under volume and support incentives. The Company recognizes revenue when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed and collectability of the resulting receivable is reasonably assured.
Service revenues predominantly represent payments by customers with respect to their card programs carrying marks of the Visa brand and are based principally upon spending on Visa-branded cards for goods and services. Current quarter service revenues are assessed using a calculation of pricing applied to the prior quarters payments volume. The Company also earns revenues from assessments designed to support ongoing acceptance and volume growth initiatives. These revenues are recognized in the same period the related volume is transacted.
Data processing revenues represent revenues earned for authorization, clearing, settlement, transaction processing services and other maintenance and support services that facilitate transaction and information processing among the Companys customers globally and Visa Europe. These revenues are recognized in the same period the related transactions occur or services are rendered.
International transaction revenues are assessed to customers on cardholder transactions where the cardholders issuer country is different from the merchants country. Revenues from these cross-border transactions are recognized in the same period the related transactions occur or services are rendered.
Other revenues include revenues earned from Visa Europe in connection with the Framework Agreement (see Note 3Visa Europe), optional card enhancements, such as extended cardholder
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2009
(in millions, except as noted)
protection and concierge services, cardholder services, and other services provided to customers. Other revenues are recognized in the same period the related transactions occur or services are rendered.
Advertising, marketing and promotionThe Company expenses costs for the production of advertising as incurred. The cost of media advertising is expensed when the advertising takes place. Sponsorship costs are recognized over the period in which the Company benefits from the sponsorship rights. Promotional items are expensed as incurred, when the related services are received, or when the related event occurs.
Income taxesThe Companys income tax expense consists of two components: current and deferred. Current income tax expense represents taxes to be paid for the current period. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts and the respective tax basis of existing assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. In assessing whether deferred tax assets are realizable, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. A valuation allowance is recorded for the portions that are not expected to be realized based on the level of historical taxable income, projections of future taxable income over the periods in which the temporary differences are deductible, and allowable tax planning strategies.
Where interpretation of the tax law may be uncertain, the Company recognizes, measures and discloses income tax uncertainties. The Company accounts for interest expense and penalties related to uncertain tax positions in other income (expense) in the consolidated statement of operations.
The Company files a consolidated federal income tax return and, in certain states, combined state tax returns. Foreign taxes paid are generally deducted to reduce federal income taxes payable.
Pension and other postretirement benefit plansThe Companys defined benefit pension and other postretirement benefit plans are actuarially evaluated, incorporating various critical assumptions including the discount rate and the expected rate of return on plan assets (for qualified pension plans). The discount rate is based on matching the duration of a pool of high quality corporate bonds to the expected benefit payment stream, and is used to determine the present value of the Companys future benefit obligations. The expected rate of return on pension plan assets considers the current and expected asset allocation, as well as historical and expected returns on each plan asset class. Any difference between actual and expected plan experience, including asset return experience, in excess of a 10% corridor is recognized in the net periodic pension calculation over the expected average employee future service period, approximately 8 years for United States plans. Other assumptions involve demographic factors such as retirement, mortality, attrition and the rate of compensation increases. The Company evaluates assumptions annually and modifies them as appropriate.
The Company recognizes the funded status of its benefit plans in its consolidated balance sheet as a separate component of accumulated other comprehensive income (loss) within stockholders equity. The Company immediately recognizes settlement losses when it settles pension benefit obligations, including making lump-sum cash payments to plan participants in exchange for their rights to receive specified pension benefits. See Note 11Pension, Postretirement and Other Benefits.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2009
(in millions, except as noted)
Foreign currency remeasurement and translationThe Companys functional currency is the U.S. dollar for the majority of its foreign operations. Transactions denominated in currencies other than the applicable functional currency are remeasured to the functional currency at the exchange rate on the transaction date. Monetary assets and liabilities are remeasured to the functional currency using exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are maintained at historical exchange rates. Gains and losses related to remeasurement are recorded in administrative and other in the consolidated statements of operations.
The functional currency in Canada is the Canadian dollar. Translation from the Canadian dollar to the U.S. dollar is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate for the period. Resulting translation adjustments are reported as a component of accumulated other comprehensive income on the consolidated balance sheets.
Derivative financial instrumentsThe Company uses forward foreign exchange contracts to reduce its exposure to foreign currency rate changes on non-functional currency denominated forecasted operating revenues and expenses. Derivatives are carried at fair value on the consolidated balance sheets. Gains and losses resulting from changes in fair value of derivative instruments are accounted for either in accumulated other comprehensive income (loss) on the consolidated balance sheets, or in the consolidated statements of operations (in the corresponding account where revenue or expense is hedged, or to administrative and other for hedge amounts determined to be ineffective) depending on whether they are designated and qualify for hedge accounting. Fair value represents the difference in the value of the contracts at the contractual rate and the value at current market rates, and generally reflects the estimated amounts that the Company would receive or pay to terminate the contracts at the reporting date based on broker quotes for the same or similar instruments.
Additional disclosures that demonstrate how derivative instruments and related hedged items affect an entitys financial position, financial performance and cash flows have not been presented because the impact of derivative instruments is immaterial to the overall consolidated balance sheets, statements of operations and statements of comprehensive income. See Note 13Derivative Financial Instruments.
Guarantees and indemnificationsThe Company recognizes an obligation for guarantees and indemnifications at inception if the fair value is estimable, regardless of the probability of occurrence. The Company indemnifies issuing and acquiring customers from settlement losses suffered by the failure of any other customer to honor drafts, travelers cheques, or other instruments processed in accordance with Visas operating regulations. The estimated fair value of the liability for settlement indemnification is included in accrued liabilities on the consolidated balance sheets and is described in Note 12Settlement Guarantee Management. The Company also indemnifies Visa Europe for any claims arising out of the provision of services brought against Visa Europe by Visa Inc.s customer financial institutions, as described in Note 18Commitments and Contingencies.
Share-based compensationThe Company recognizes share-based compensation cost using the fair value method of accounting. The Company recognizes compensation cost for awards with only service conditions on a straight-line basis over the requisite service period, which is generally the vesting period. Compensation cost for performance awards is initially estimated based on target performance and is adjusted as appropriate throughout the performance period. See Note 17Share-based Compensation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2009
(in millions, except as noted)
Net income per shareThe Company calculates net income per share using the two-class method to reflect the different rights of each class and series of outstanding common stock. See Note 16Net Income Per Share. In fiscal 2010, the Company will include unvested instruments granted in share-based payment transactions that have non-forfeitable rights to dividends or dividend equivalents in the calculation of net income per share as a separate class of security. This change will not result in any impact to fiscal 2009 and 2008 full year diluted class A net income per share.
Recently Issued Accounting Pronouncements
In December 2007, FASB ASC 805 was issued which changes the accounting for business combinations including the measurement of acquirer shares issued in consideration for a business combination, the recognition of contingent consideration, the treatment of acquisition related transaction costs, the accounting for pre-acquisition gain and loss contingencies, the accounting for acquisition-related restructuring cost accruals, and the recognition of changes in the acquirers income tax valuation allowance. In April 2009, FASB ASC 805-20 was issued with regard to the initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The Company will adopt these standards on October 1, 2009. The adoption is not expected to have a material impact on the consolidated financial statements.
In December 2008, FASB ASC 715-20 was issued which provides guidance on an employers disclosures about plan assets of a defined benefit pension or other postretirement plan. The disclosures about plan assets required by this standard are effective for fiscal years ending after December 15, 2009 and are not required for earlier periods presented for comparative purposes. Earlier application is permitted. This standard impacts disclosures only and will not have an effect on the consolidated financial position or results of operations upon adoption. The Company will adopt this standard in fiscal 2010.
In May 2009, FASB ASC 855 was issued and established standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The standard requires entities to disclose the date through which they have evaluated subsequent events and whether the date corresponds to the release of their financial statements. The Company has since adopted the standard and subsequent events have been evaluated through November 19, 2009.
In June 2009, FASB ASC 810-10 was issued. ASC 810-10 changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entitys purpose and design and a companys ability to direct the activities of the entity that most significantly impact the entitys economic performance. The Company will adopt ASC 810-10 effective October 1, 2010. Early adoption is prohibited. The Company is evaluating the impact of adopting ASC 810-10 on its consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2009
(in millions, except as noted)
Note 2The Reorganization
Description of the Reorganization and Purchase Consideration
In a series of transactions from October 1 to October 3, 2007, Visa undertook a reorganization in which Visa U.S.A., Visa International, Visa Canada and Inovant became direct or indirect subsidiaries of Visa Inc. and the Retrospective Responsibility Plan was established. See Note 4Retrospective Responsibility Plan. For accounting purposes, the Company reflected the reorganization as a single transaction occurring on October 1 (the reorganization date), using the purchase method of accounting with Visa U.S.A. as the accounting acquirer. The net assets underlying the acquired interests in Visa International, Visa Canada, and Inovant (the acquired interests) were recorded at fair value at the reorganization date with the excess purchase price over this value attributed to goodwill. Visa Europe did not become a subsidiary of Visa Inc., but rather remained owned and governed by its European member financial institutions and entered into a set of contractual arrangements with the Company in connection with the reorganization.
The Company issued different classes and series of common stock in the reorganization reflecting the different rights and obligations of the Visa financial institution members and Visa Europe. The allocation of the Companys common stock to each of Visa AP, Visa LAC, Visa CEMEA, Visa Canada (collectively the acquired regions) and Visa U.S.A. (collectively the participating regions) was based on each entitys expected relative contribution to the Companys projected fiscal 2008 net income, after giving effect to negotiated adjustments. This allocation was adjusted shortly prior to the IPO (the true-up) to reflect actual performance in the four quarters ended December 31, 2007. The allocation of the Companys common stock and other consideration conveyed to Visa Europe in exchange for its ownership interest in Visa International and Inovant was determined based on the fair value of each element exchanged in the reorganization as discussed below and in Note 3Visa Europe. Total shares authorized and issued to the financial institution member groups of the participating regions and to Visa Europe in the reorganization totaled 775,080,512 shares of class B and class C common stock.
Total purchase consideration, inclusive of the true-up, of approximately $18.4 billion comprised of the following:
Visa Inc. Common Stock Issued in Exchange for the Acquired Interests
The value of the purchase consideration conveyed to each of the member groups of the acquired regions was determined by valuing the underlying businesses contributed by each, after giving effect to negotiated adjustments. The fair value of the purchase consideration, consisting of 258,022,779 shares of class C (series I) common stock, was approximately $12.6 billion, measured at June 15, 2007, or the date on which all parties entered into the global restructuring agreement. Additional purchase consideration of $1.2 billion, consisting of 26,138,056 incremental shares of class C common stock valued at $44 per share were issued to the acquired regions shortly before the IPO in connection with the true-up. The fair value of these shares was determined based on the price per share in the IPO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2009
(in millions, except as noted)
To value the shares issued on June 15, 2007 (the measurement date), the Company primarily relied upon the analysis of comparable companies with similar industry, business model and financial profiles. This analysis considered a range of metrics including the forward multiples of revenue; earnings before interest, depreciation and amortization; and net income of these comparable companies. Ultimately, the Company determined that the forward net income multiple was the most appropriate measure to value the acquired regions and reflect anticipated changes in the Companys financial profile prospectively. This multiple was applied to the corresponding forward net income of the acquired regions to calculate their value. The most comparable company identified was MasterCard Inc. Therefore, the most significant input into this analysis was MasterCards forward net income multiple of 27 times net income at the measurement date.
Visa Inc. Common Stock Issued to Visa Europe
As part of the reorganization, Visa Europe received 62,762,788 shares of class C (series III and IV) common stock valued at $3.1 billion based on the value of the class C (series I) common stock issued to the acquired regions. Visa Europe also received 27,904,464 shares of class C (series II) common stock valued at $1.104 billion determined by discounting the redemption price of these shares using a risk-free rate of 4.9% over the period to October 2008, when these shares were redeemed by the Company. Prior to the IPO, the Company issued Visa Europe an additional 51,844,393 class C (series II) common stock at a price of $44 per share in exchange for a subscription receivable. The issuance and subscription receivable were recorded as offsetting entries in temporary equity at September 30, 2008. Completion of the Companys IPO triggered the redemption feature of this stock and in March 2008, the Company reclassified all outstanding shares of the class C (series II) common stock at its then fair value of $1.125 billion to temporary equity on the consolidated balance sheet with a corresponding reduction in additional paid-in-capital of $1.104 billion and accumulated income of $21 million. From March 2008 to October 10, 2008, the date these shares were redeemed, the Company recorded accretion of this stock to its redemption price through accumulated income.
Fair Value of Assets Acquired and Liabilities Assumed
Total purchase consideration has been allocated to the tangible and identifiable intangible assets and liabilities assumed underlying the acquired interests based on their fair value on the reorganization date. The excess of purchase consideration over net assets assumed was recorded as goodwill. The following table summarizes this allocation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
September 30, 2009
(in millions, except as noted)
Condensed Pro Forma Results of Operations
The following condensed Visa Inc. pro forma results of operations for fiscal 2007 have been prepared to give effect to the reorganization described above assuming it occurred on October 1, 2006. The condensed pro forma results below are presented for illustrative purposes only and have been prepared by applying adjustments to the historical consolidated statements of operations of Visa U.S.A., Visa International and Visa Canada for fiscal 2007.
The condensed pro forma results presented above reflect the Companys continuing eligibility to claim the special deduction afforded to companies that operate on a cooperative or mutual basis under California Revenue and Taxation Code §24405. Had ineligibility for the special deduction been reflected at October 1, 2006 in the condensed pro forma results, pro forma income tax benefit would decrease and pro forma net loss would increase by approximately $31 million.