Visa 10-Q 2012
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
For the quarterly period ended March 31, 2012
For the transition period from to
Commission file number 001-33977
(Exact name of Registrant as specified in its charter)
Registrant’s telephone number, including area code: (415) 932-2100
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 Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
As of April 27, 2012, there were 527,991,092 shares of class A common stock, par value $0.0001 per share, 245,513,385 shares of class B common stock, par value $0.0001 per share, and 40,473,739 shares of class C common stock, par value $0.0001 per share, of Visa Inc. outstanding.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
CONSOLIDATED BALANCE SHEETS
See accompanying notes, which are an integral part of these unaudited consolidated financial statements.
CONSOLIDATED BALANCE SHEETS—(Continued)
See accompanying notes, which are an integral part of these unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes, which are an integral part of these unaudited consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS—(Continued)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2012
Note 1—Summary of Significant Accounting Policies
Organization. Visa 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 cash and checks. Visa and its wholly-owned consolidated subsidiaries, including Visa U.S.A. Inc. (“Visa U.S.A.”), Visa International Service Association (“Visa International”), Visa Worldwide Pte. Limited (“VWPL”), Visa Canada Corporation (“Visa Canada”), Inovant LLC (“Inovant”), and CyberSource Corporation (“CyberSource”), operate the world’s largest retail electronic payments network. The Company provides its clients with payment processing platforms that encompass consumer credit, debit, prepaid and commercial payments, and facilitates 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 Company’s issuing clients.
Consolidation and basis of presentation. The accompanying unaudited 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 (“U.S. GAAP”). The Company consolidates its majority-owned and controlled entities, including variable interest entities (“VIEs”) for which the Company is the primary beneficiary. The Company’s VIEs have not been material to its consolidated financial statements as of and for the periods presented. Non-controlling interests are reported as a component of equity. All significant intercompany accounts and transactions are eliminated in consolidation.
The accompanying unaudited consolidated financial statements are presented in accordance with the U.S. Securities and Exchange Commission (“SEC”) requirements for Quarterly Reports on Form 10-Q and, consequently, do not include all of the annual disclosures required by U.S. GAAP. Reference should be made to the Visa Inc. Annual Report on Form 10-K for the year ended September 30, 2011, for additional disclosures, including a summary of the Company’s significant accounting policies.
In the opinion of management, the accompanying unaudited consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the Company's financial position, results of operation and cash flows for the interim period presented.
Recently adopted accounting pronouncements. In September 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2011-08, which allows an entity to first assess qualitative factors to determine when it is necessary to perform the two-step quantitative goodwill impairment test. This guidance impacts goodwill impairment testing only and does not impact impairment testing of indefinite-lived intangibles. The Company adopted ASU 2011-08 effective October 1, 2011, and applied the new guidance in its annual impairment review of goodwill as of February 1, 2012 (see Note 3—Fair Value Measurements). The adoption did not have a material impact on the consolidated financial statements.
In May 2011, the FASB issued ASU 2011-04, which provides common fair value measurement and disclosure requirements in accordance with U.S. GAAP and International Financial Reporting Standards (“IFRS”). The Company adopted ASU 2011-04 effective January 1, 2012. The adoption did not have a material impact on the consolidated financial statements. See Note 3—Fair Value Measurements.
In December 2010, the FASB issued ASU 2010-29, which provides requirements for pro forma revenue and earnings disclosures related to business combinations. The ASU requires disclosure of revenue and earnings of the combined business as if the combination occurred at the start of the prior annual reporting period only. The Company adopted ASU 2010-29 effective October 1, 2011. The adoption did not have a material impact on the consolidated financial statements.
Recently issued accounting pronouncements. In June 2011, the FASB issued ASU 2011-05, which impacts the presentation of comprehensive income. The guidance requires components of other comprehensive income to be presented with net income to arrive at total comprehensive income. This ASU impacts presentation only and does not impact the underlying components of other comprehensive income or net income. In December 2011, the FASB
issued ASU 2011-12, which defers a component of ASU 2011-05 that requires the presentation of reclassification adjustments for items that are reclassified from other comprehensive income to net income. All other components of ASU 2011-05 are effective October 1, 2012. Adoption is not expected to have a material impact on the consolidated financial statements.
Note 2—Retrospective Responsibility Plan
Under the terms of the retrospective responsibility plan, the Company maintains an escrow account from which settlements of, or judgments in, covered litigation are paid. See Note 11—Legal Matters. On December 29, 2011, using operating cash on hand, the Company made a deposit of $1.57 billion into the litigation escrow. See Note 7—Stockholders' Equity.
The following table sets forth the changes in the escrow account during the six months ended March 31, 2012.
The accrual related to covered litigation could be either higher or lower than the escrow account balance. The Company did not record an additional accrual for covered litigation during the six months ended March 31, 2012.
Note 3—Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis.
There were no transfers between Level 1 and Level 2 assets during the first half of fiscal 2012.
Level 1 assets measured at fair value on a recurring basis. Cash equivalents (money market funds), mutual fund equity securities and U.S. Treasury securities are classified as Level 1 within the fair value hierarchy, as fair value is based on quoted prices in active markets.
Level 2 assets and liabilities measured at fair value on a recurring basis. U.S. government-sponsored debt securities and foreign exchange derivative instruments are classified as Level 2 within the fair value hierarchy. The fair value of the government-sponsored debt securities is based on quoted prices in active markets for similar assets. Foreign exchange derivative instruments are valued using inputs that are observable in the market or can be derived principally from or corroborated with observable market data. There were no changes to the valuation techniques and related inputs used to measure fair value during the first half of fiscal 2012.
Level 3 assets and liabilities measured at fair value on a recurring basis. Auction rate securities are classified as Level 3 due to a lack of trading in active markets and a lack of observable inputs in measuring fair value. There were no changes to the valuation techniques and related inputs used to measure fair value during the first half of fiscal 2012. The earn-out related to the PlaySpan acquisition is classified as Level 3 due to a lack of observable inputs, such as the likelihood of meeting certain future revenue targets and other milestones. There were no significant changes to the valuation techniques and related inputs used to measure fair value during the first half of fiscal 2012.
Visa Europe put option agreement. The Company has granted Visa Europe a perpetual put option (the "put option") which, if exercised, will require Visa Inc. to purchase all of the outstanding shares of capital stock of Visa Europe from its members. The put option provides a formula for determining the purchase price of the Visa Europe shares, which, subject to certain adjustments, applies Visa Inc.’s forward price-to-earnings multiple, or the P/E ratio (as defined in the option agreement), at the time the option is exercised, to Visa Europe’s projected adjusted sustainable income for the forward 12-month period, or the adjusted sustainable income (as defined in the option agreement). The calculation of Visa Europe’s adjusted sustainable income under the terms of the put option agreement includes potentially material adjustments for cost synergies and other negotiated items. Upon exercise, the key inputs to this formula, including Visa Europe’s adjusted sustainable income, will be the result of negotiation between the Company and Visa Europe. The put option provides an arbitration mechanism in the event that the two parties are unable to agree on the ultimate purchase price.
The fair value of the put option represents the value of Visa Europe’s option, which under certain conditions could obligate the Company to purchase its member equity interest for an amount above fair value. While the put option is in fact non-transferable, its fair value represents the Company’s estimate of the amount the Company would be required to pay a third-party market participant to transfer the potential obligation in an orderly transaction at the measurement date. The liability is classified within Level 3, as the assumed probability that Visa Europe will elect to exercise its option, the estimated P/E differential, and other inputs used to value the put option are unobservable. At March 31, 2012 and September 30, 2011, the Company determined the fair value of the put option to be $145 million. While $145 million represents the fair value of the put option at March 31, 2012, it does not represent the actual purchase price that the Company may be required to pay if the option is exercised, which could be several billion dollars or more. During fiscal 2012, there were no changes to the valuation methodology used to estimate the fair value of the put option. At March 31, 2012, the key unobservable inputs include a 40% probability of exercise by Visa Europe at some point in the future and an estimated long-term P/E differential of 1.9x. The use of an assumed probability of exercise that is 5% higher than the Company's estimate would have resulted in an increase of approximately $18 million in the value of the put option. An increase of 1.0x in the assumed P/E differential would have resulted in an increase of approximately $84 million in the value of the put option.
The put option is exercisable at any time at the sole discretion of Visa Europe. As such, the put option liability is included in accrued liabilities on the Company's consolidated balance sheet at March 31, 2012. Classification in current liabilities is not an indication of management’s expectation of exercise and simply reflects the fact that the obligation resulting from the exercise of the instrument could become payable within 12 months. Any non-cash changes in fair value are recorded in other income on the consolidated statements of operations.
A separate roll-forward of Level 3 investments measured at fair value on a recurring basis is not presented because activity was immaterial during the six months ended March 31, 2012 and 2011, respectively.
Assets and Liabilities Measured at Fair Value on a Non-recurring Basis.
Non-marketable equity investments and investments accounted for under the equity method. These investments are classified as Level 3 due to the absence of quoted market prices, the inherent lack of liquidity, and the fact that inputs used to measure fair value are unobservable and require management judgment. The Company applies fair value measurement to these investments when certain events or circumstances indicate that these investments may be impaired. The Company revalues the investments using various assumptions, including financial metrics and ratios of comparable public companies. There were no events or circumstances that indicated these investments became impaired during the first half of fiscal 2012 or 2011. At March 31, 2012, and September 30, 2011, these investments totaled $92 million and $100 million, respectively, and were classified as other assets on the consolidated balance sheets.
Non-financial assets and liabilities. Long-lived assets such as goodwill, indefinite-lived intangible assets, finite-lived intangible assets, and property, equipment and technology are considered non-financial assets. The Company does not have any non-financial liabilities. The Company measures fair value of indefinite-lived intangible assets on a non-recurring basis for purpose of initial recognition, and testing for and recording impairment, if any. Goodwill is measured at fair value upon initial recognition, and subsequent fair value measurements are only performed if an impairment test is required. Finite-lived intangible assets primarily consist of customer relationships, reseller relationships and trade names, all of which were obtained through acquisitions.
The Company primarily uses an income approach for estimating the fair value of goodwill and indefinite-lived intangible assets, if such measurement is required. As the assumptions employed to measure these assets on a
non-recurring basis are based on management's judgment using internal and external data, these fair value determinations are classified in Level 3 of the fair value hierarchy. The Company completed its annual impairment review of its indefinite-lived intangible assets and goodwill as of February 1, 2012, and concluded that there was no impairment. No recent events or changes in circumstances indicate that impairment existed at March 31, 2012.
Other Financial Instruments Not Measured at Fair Value
The following financial instruments are not measured at fair value on the Company's consolidated balance sheet at March 31, 2012, but require disclosure of their fair values: cash, accounts receivable, customer collateral, accounts payable, and settlement receivable and payable. The estimated fair value of such instruments at March 31, 2012 approximates their carrying value as reported on the consolidated balance sheets except as otherwise disclosed. The fair values of such financial instruments are determined using the income approach based on the present value of estimated future cash flows. There have been no changes in our valuation technique during first half of fiscal 2012. The fair value of all of these instruments would be categorized as Level 2 of the fair value hierarchy, with the exception of cash, which would be categorized as Level 1.
Available-for-sale investments. The Company had $7 million in gross unrealized gains and no gross unrealized losses on available-for-sale investment securities at March 31, 2012. There were no gross unrealized gains or gross unrealized losses at September 30, 2011. For both periods presented, amortized cost approximates fair value. Long-term available-for-sale securities are scheduled to mature by October 2014.
Note 4—Pension and Other Postretirement Benefits
The Company sponsors various qualified and non-qualified defined benefit pension and other postretirement benefit plans that provide for retirement and medical benefits for substantially all employees residing in the United States.
The components of net periodic benefit cost are as follows:
Note 5—Settlement Guarantee Management
The indemnification for settlement losses that Visa provides to its customers creates settlement risk for the Company due to the difference in timing between the date of a payment transaction and the date of subsequent settlement. The Company’s settlement exposure is limited to the amount of unsettled Visa payment transactions at any point in time. The Company requires certain customers that do not meet its credit standards to post collateral to offset potential loss from their estimated unsettled transactions. The Company’s estimated maximum settlement exposure was $49.9 billion at March 31, 2012, compared to $47.5 billion at September 30, 2011. Of these settlement exposure amounts, $3.4 billion at March 31, 2012, and $3.2 billion at September 30, 2011, were covered by collateral.
The Company maintained collateral as follows:
The total available collateral balances presented in the table above are greater than the settlement exposure covered by customer collateral due to instances in which the available collateral exceeds the total settlement exposure for certain financial institutions at each date presented.
The fair value of the settlement risk guarantee is estimated based on a proprietary probability-weighted model and was approximately $1 million at March 31, 2012 and September 30, 2011. These amounts are reflected in accrued liabilities on the consolidated balance sheets.
Note 6—Other Liabilities
Other long-term liabilities consisted of the following:
Note 7—Stockholders' Equity
The number of shares of each class and the number of shares of class A common stock on an as-converted basis at March 31, 2012, are as follows:
Reduction in as-converted shares. There was no reduction in as-converted class A common stock shares during the three months ended March 31, 2012. During the first quarter of fiscal 2012, the Company used $1.6 billion of our operating cash on hand to reduce total as-converted class A common stock by 16.2 million shares. Of the $1.6 billion, $75 million was used to repurchase class A common stock in the open market. In addition, the Company deposited $1.57 billion$0.00 billionof operating cash into the litigation escrow account previously established under the retrospective responsibility plan. This deposit has the same economic effect on earnings per share as repurchasing the Company's class A common stock because it reduces the as-converted class B common stock share count.
In February 2012, the Company announced a new $500 million share repurchase program authorized by the
board of directors. The authorization will be in effect through February 1, 2013, and the terms of the program are subject to change at the discretion of the board of directors. The Company did not repurchase any shares under this plan during the three months ended March 31, 2012.
The following table presents share repurchases in the open market for the six months ended March 31, 2012:
Under the terms of the retrospective responsibility plan, when the Company makes a deposit into the escrow account, the shares of class B common stock are subject to dilution through an adjustment to the conversion rate of the shares of class B common stock to shares of class A common stock.
The following table presents as-converted class B common stock after the deposit of $1.57 billion into the litigation escrow account during the six months ended March 31, 2012:
The deposit reduced funds previously allocated to the amended July 2011 share repurchase program, which had no remaining authorized funds as of March 31, 2012.
Class B common stock. Under the Company’s amended and restated certificate of incorporation, shares of class B common stock are subject to transfer restrictions until the date on which certain covered litigation has been finally resolved. See Note 11—Legal Matters.
Accelerated class C share release programs. Of the 152 million shares of class C common stock released from transfer restrictions under the Company’s 2009, 2010 and 2011 accelerated class C share release programs, 110 million shares have been converted from class C to class A common stock upon their sale into the public market through March 31, 2012. Approximately 3 million and 6 million of those shares were converted during the three and six months ended March 31, 2012, respectively.
Dividends. On April 26, 2012, the Company’s board of directors declared a dividend in the amount of $0.22 per share of class A common stock (determined in the case of class B and class C common stock on an as-converted basis), which will be paid on June 5, 2012 to all holders of record of the Company's class A, class B and class C common stock as of May 18, 2012. The Company paid $300 million in dividends during the first half of fiscal 2012.
Note 8—Earnings Per Share
The following table presents basic and diluted earnings per share for the three months ended March 31, 2012.
The following table presents basic and diluted earnings per share for the six months ended March 31, 2012.
The following table presents basic and diluted earnings per share for the three months ended March 31, 2011.
The following table presents basic and diluted earnings per share for the six months ended March 31, 2011.
Note 9—Share-based Compensation
The Company granted the following awards to employees and non-employee directors under the 2007 Equity Incentive Compensation Plan during the six months ended March 31, 2012:
The Company’s non-qualified stock options, RSAs and RSUs are equity awards with service-only conditions and are accordingly expensed on a straight-line basis over the vesting period. For awards with performance conditions, the Company uses the graded-vesting method of expense attribution. Compensation expense is recorded net of estimated forfeitures, which are adjusted as appropriate.
Note 10—Income Taxes
The effective income tax rates were 20% and 28% for the three and six months ended March 31, 2012, respectively, and 36% for the three and six months ended March 31, 2011. During the three months ended March 31, 2012, the state of California approved certain changes to its state tax apportionment rules, effective retroactively to the beginning of fiscal 2012, which lowered the Company's overall state tax rate. This change was the primary cause of the overall decrease in the Company's effective income tax rates for these periods.
As a result of these rule changes in California, in the second fiscal quarter tax provision, the Company recorded the benefit of applying the lower rate retroactively to the beginning of the fiscal year and a one-time, non-cash benefit of $208 million resulting from the remeasurement of existing net deferred tax liabilities. The remeasurement of deferred taxes primarily consists of the remeasurement of deferred tax liabilities associated with $11 billion of indefinite-lived intangible assets previously recorded to reflect our reorganization in 2007.
During the three months ended March 31, 2012, the Company's unrecognized tax benefits related to tax positions taken in the current period increased by $33 million, all of which would affect the effective income tax rate if recognized. The increase is primarily due to potential audit adjustments related to various ongoing non-U.S. audits. During the same period, the Company accrued $7 million of interest and no penalties related to uncertain tax positions.
Note 11—Legal Matters
The Company is party to various legal and regulatory proceedings. Some of these proceedings involve complex claims that are subject to substantial uncertainties and unascertainable damages. Accordingly, except as disclosed, the Company has not established reserves or ranges of possible loss related to these proceedings, as at this time in the proceedings, the matters do not relate to a probable loss and/or amounts are not reasonably estimable. Although the Company believes that it has strong defenses for the litigation and regulatory proceedings described below, it could in the future incur judgments or fines or enter into settlements of claims that could have a material adverse effect on the Company's results of operations, financial position or cash flows. From time to time, the Company may engage in settlement discussions or mediations with respect to one or more of its outstanding litigation matters, either on its own behalf or collectively with other parties.
There was no significant provision activity for the six months ended March 31, 2012 and 2011. The litigation accrual is an estimate and is based on management’s understanding of its litigation profile, the specifics of each case, advice of counsel to the extent appropriate and management’s best estimate of incurred loss at the balance sheet date.
The following table summarizes the activity related to accrued litigation for the six months ended March 31, 2012 and 2011:
(1) Reclassification of amount previously recorded in accrued liabilities.
Visa Inc., Visa U.S.A. and Visa International are parties to certain legal proceedings that are subject to the retrospective responsibility plan, which the Company refers to as the covered litigation. See Note 2—Retrospective Responsibility Plan. An accrual for covered litigation and a charge to the litigation provision are recorded when loss is deemed to be probable and reasonably estimable. In making this determination, the Company evaluates available information, including but not limited to actions taken by the litigation committee.
The American Express Litigation. Visa's settlement obligations were fully satisfied with the January 2012 payment to American Express.
The Interchange Litigation
Multidistrict Litigation Proceedings (MDL). The Company remains actively involved in settlement discussions under the auspices of the court and believes the parties are continuing to make progress. Many
material uncertainties exist, however, including, among other things, uncertainties regarding the level of support for a settlement agreement, and numerous motions pending before the court. Accordingly, under generally accepted accounting principles, the Company believes some loss is reasonably possible, but not probable and reasonably estimable. On December 29, 2011, the Company deposited an additional $1.57 billion into its covered litigation escrow account, increasing the uncommitted balance of the account from $2.72 billion to $4.28 billion. The uncommitted balance of $4.28 billion is consistent with the Company's estimate of its share of the lower end of a reasonably possible loss in the event of a negotiated settlement for the entire matter. While this estimate is consistent with the Company's view of the current status of mediation discussions, the estimate of the reasonably possible loss or range of such loss could materially vary if a negotiated settlement cannot be reached that resolves all financial and business practice claims. The Company will continue to consider and reevaluate this estimate in light of the substantial uncertainties and mediation obstacles that persist. We are unable to estimate a potential loss or range of loss, if any, at trial if a negotiated resolution of the matter cannot be reached.
“Indirect Purchaser” Actions. On January 9, 2012, the Court of Appeal of the State of California reversed the judgment approving the settlement agreement in the Credit/Debit Tying Cases. The case was remanded to the trial court for reconsideration of the fairness and adequacy of the settlement in light of the inclusion of the Attridge claims in the release.
In New Mexico, on April 18, 2012, the state appellate court affirmed the trial court's dismissal of the case.
Vale Canjeable. Visa filed extraordinary appeals of the two August 10 rulings with the Supreme Court.
Canadian Competition Proceedings
Competition Bureau. Document production and examinations for discovery are complete. The hearing before the Competition Tribunal on the merits of the case is scheduled to begin on May 8, 2012.
Call Center Litigation. On November 30, 2011, the court entered a final order approving the settlement and entering judgment in the case.
U.S. ATM Access Fee Litigation.
National ATM Council class action. On January 10, 2012, plaintiffs filed an amended class action complaint against the same defendants. Like the original complaint, the amended complaint alleges that the ATM access fee rule prevents non-bank ATM operators from attracting customers to use other networks in violation of Section 1 of the Sherman Act. The amended complaint also alleges that Visa's rule has enabled Visa to charge artificially high network fees for ATM transactions, to compensate ATM operators inadequately, and to compensate member banks excessively. Plaintiffs request injunctive relief, attorneys' fees, and treble damages.
Consumer class actions. On December 1, 2011, the plaintiff in the Stoumbos case filed a corrected complaint, asserting the same claims as in the original complaint.
On January 10, 2012, the Bartron and Genese complaints were combined into a single amended complaint, now captioned Mackmin. The amended complaint challenges the same ATM access fee rules and names Visa, MasterCard, and three financial institutions as defendants, but the putative class representatives are different from those in the original Bartron and Genese complaints. Mackmin purports to represent classes and sub-classes of consumers in claims brought under Section 1 of the Sherman Act and the antitrust and/or consumer protection statutes in certain states and the District of Columbia. The amended complaint seeks injunctive relief, attorneys' fees, treble damages, and restitution where available under state law.
On January 30, 2012, Visa, MasterCard, and the defendant financial institutions filed motions to dismiss the complaints in the National ATM Council class action and the consumer class actions.
U.S. Department of Justice Civil Investigative Demand. On March 13, 2012, the Antitrust Division of the United States Department of Justice (the “Division”) issued a Civil Investigative Demand, or “CID,” to Visa Inc. seeking documents and information regarding a potential violation of Section 1 or 2 of the Sherman Act, 15 U.S.C. §§ 1, 2. The CID focuses on PIN-Authenticated Visa Debit and Visa's competitive responses to the Reform Act, including Visa's Fixed Acquirer Network Fee. In March, Visa met with the Division twice and provided materials in
response to the CID. Visa is continuing to provide materials and cooperate with the Division in connection with the CID.
This management’s discussion and analysis provides a review of the results of operations, financial condition and the liquidity and capital resources of Visa Inc. and its subsidiaries (“Visa,” “we,” “our” or the “Company”) on a historical basis and outlines the factors that have affected recent earnings, as well as those factors that may affect future earnings. The following discussion and analysis should be read in conjunction with our unaudited consolidated financial statements and related notes included elsewhere in this report.
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. These statements can be identified by the terms "believe," "continue," "could," "estimate," "expect," "intend," "may," "potential," "project," "should," "will," and similar references to the future.
Examples of such forward-looking statements include, but are not limited to, statements we make about our response to the U.S. Wall Street Reform and Consumer Protection Act, or the Reform Act; our pricing strategy; the number of transactions we process; the shift to electronic payments and our growth in the category; the growth rate of consumer and commercial spending; our liquidity needs and our ability to meet them; our online payment, fraud and security management capabilities; the relative strength of the U.S. dollar; dividend payments; and earnings per share, cash flow, revenue, incentive payments, expenses, operating margin, tax rate and capital expenditures and the growth of those items.
By their nature, forward-looking statements: (i) speak only as of the date they are made, (ii) are neither statements of historical fact nor guarantees of future performance and (iii) are subject to risks, uncertainties, assumptions and changes in circumstances that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from those forward-looking statements because of a variety of factors, including the following:
•the impact of new laws, regulations and marketplace barriers, including:
▪rules capping debit interchange reimbursement fees promulgated under the Reform Act;
▪increased regulation outside the United States and in other product categories; and
▪rules about consumer privacy and data use and security;
▪an increase or spread of the current European crisis involving sovereign debt and the euro;
▪other global economic, political and health conditions;
▪cross-border activity and currency exchange rates; and
▪material changes in our clients' performance compared to our estimates;
▪disruption of our transaction processing systems or the inability to process transactions efficiently;
▪account data breaches or increased fraudulent or other illegal activities involving our cards; and
▪issues arising at Visa Europe, including failure to maintain interoperability between our systems;
•costs arising if Visa Europe were to exercise its right to require us to acquire all of its outstanding stock;
•loss of organizational effectiveness or key employees;
•failure to integrate recent acquisitions successfully or to effectively launch new products and businesses;
•changes in accounting principles or treatments; and
the other factors discussed under the heading "Risk Factors" in our Annual Report on Form 10-K on file with the Securities and Exchange Commission. You should not place undue reliance on such statements. Unless required to do so by law, we do not intend to update or revise any forward-looking statement because of new information or future developments or otherwise.
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 our clients 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, particularly outside the United States. We continue to explore additional opportunities to enhance our competitive position by expanding the scope of payment services to benefit our existing clients and to position Visa to serve more and different constituencies.
Adjusted financial results. Our reported financial results for the three and six months ended March 31, 2012 benefited from a one-time non-cash adjustment related to the remeasurement of our net deferred tax liabilities (“deferred tax adjustment”) recorded in our income tax provision during the three months ended March 31, 2012. We believe that this non-cash benefit related to the deferred tax adjustment is not indicative of our financial performance in fiscal 2012 or any period therein. For the three and six months ended March 31, 2012, excluding the impact of the deferred tax adjustment, results in adjusted fully-diluted class A common stock earnings per share of $1.60 and $3.09, respectively.
During the three months ended March 31, 2012, the state of California approved certain changes to its state tax apportionment rules, effective retroactively to the beginning of fiscal 2012, which lowered our overall state tax rate. As a result, in our income tax provision for the three months ended March 31, 2012, we recorded the deferred tax adjustment, a one-time, non-cash benefit of $208 million resulting from the remeasurement of our existing deferred tax liabilities primarily associated with $11 billion of indefinite-lived intangible assets previously recorded to reflect our reorganization in 2007.
The following table presents our adjusted financial results for the three and six months ended March 31, 2012, which excludes the one-time non-cash benefit resulting from the deferred tax adjustment. We believe the presentation of adjusted net income and adjusted diluted earnings per share provides a clearer understanding of our operating performance for the periods. The deferred tax adjustment has no cash impact to us. We therefore believe that the resulting benefit recorded in net income is not indicative of our financial performance in the current or future periods.
Overall economic conditions and regulatory environment. Our business is affected by overall economic conditions and consumer spending. Our business performance during the first two quarters of fiscal 2012 reflects the impact of a modest global economic recovery.
The Reform Act. As of October 1, 2011, in accordance with the Reform Act, the Federal Reserve capped the maximum U.S. debit interchange reimbursement fee assessed for cards issued by large financial institutions at twenty-one cents plus five basis points, before applying an interim fraud adjustment up to an additional one cent. This amounted to a significant reduction from the average system-wide fees charged previously. The Federal Reserve has also promulgated regulations requiring issuers to make at least two unaffiliated networks available for processing debit transactions on each debit card. The rules also prohibit us and issuers from restricting a merchant's ability to direct the routing of electronic debit transactions over any of the networks that an issuer has enabled to process those transactions.
We expect the interchange, exclusivity and routing regulations to adversely affect our pricing, reduce the number and volume of U.S. debit payments we process and decrease associated revenues. A number of our clients have sought or may seek fee reductions or increased incentives from us to offset their own lost revenue. Some have announced that they may reduce the number of debit cards they issue and reduce investments they make in marketing and rewards programs. Some have imposed or may impose new or higher fees on debit cards or demand-deposit account relationships. Some have elected or may elect to issue fewer cards enabled with Visa-affiliated networks. We expect many merchants to use the routing regulations to redirect transactions or steer cardholders to other networks based on lowest cost or other factors.
We have had to re-examine and renegotiate certain of our client contracts to ensure that their terms comply with new regulations and will continue to do so with others. As a result, our clients have sought and will continue to seek to renegotiate terms relating to fees, incentives and routing. In some cases, we may lose placement completely on issuers' debit cards.
We believe that we will be able to mitigate the negative impacts from the Reform Act to some extent through pricing modifications and working with our clients and other business partners to win merchant preference to route transactions over our network. Our broad platform of payment products continues to provide substantial value to both merchants and consumers. We believe that the continuing worldwide secular shift to digital currency may help buffer the impacts of the Reform Act, as reflected in our overall payments volume growth, particularly outside the United States. As a leader in the U.S. debit industry, we continue to develop and refine our competitive business models to adapt to the Reform Act and mitigate some of the negative impacts the Reform Act would have on our current business models. We remain committed and prepared to adapt to and compete effectively under this new U.S. debit regulatory environment. We expect operating revenue to grow in the low double-digits for the full 2012 fiscal year.
Reduction in as-converted shares. There was no reduction in as-converted class A common stock shares during the three months ended March 31, 2012. During the first quarter of fiscal 2012, we used $1.6 billion of our operating cash on hand to reduce total as-converted class A common stock by 16.2 million shares. Of the $1.6 billion, $75 million was used to repurchase class A common stock in the open market. In addition, we deposited $1.57 billion of operating cash into the litigation escrow account previously established under the retrospective responsibility plan. This deposit has the same economic effect on earnings per share as repurchasing the Company's class A common stock as it reduces the as-converted class B common stock share count. The deposit
reduced funds previously allocated to the amended July 2011 share repurchase program, which had no remaining authorized funds as of March 31, 2012. See Note 2—Retrospective Responsibility Plan and Note 7—Stockholders' Equity to our unaudited consolidated financial statements.
In February 2012, we announced a new $500 million share repurchase program authorized by the board of directors. The authorization will be in effect through February 1, 2013, and the terms of the program are subject to change at the discretion of the board of directors. See Note 7—Stockholders' Equity to our unaudited consolidated financial statements. The Company did not repurchase any shares under this plan during the the three months ended March 31, 2012.
Nominal payments volume and transaction counts. Payments volume and processed transactions are key drivers of our business. Payments volume is the primary driver for service revenues, and processed transactions is the primary driver for data processing revenues. Compared to the same prior year period, nominal payments volume benefited from double-digit growth in consumer credit, and high single digit growth in debit and commercial, resulting in an increase in overall nominal payments volume. The number of processed transactions continues to increase, reflecting the continuing worldwide shift to digital currency.
The following table sets forth nominal payments volume for the periods presented in nominal dollars.(1)