filings.toolsItem 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
This management’s discussion and analysis provides a review of the results of operations, financial condition and liquidity and capital resources of Visa Inc. and its subsidiaries (“Visa,” “we,” "us," “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 following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes included in Item 8 of this report.
Overview
Visa is a global payments technology company that enables fast, secure and reliable electronic payments across more than 200 countries and territories. We facilitate global commerce through the transfer of value and information among a global network of consumers, merchants, financial institutions, businesses, strategic partners and government entities. Our advanced transaction processing network, VisaNet, enables authorization, clearing and settlement of payment transactions and allows us to provide our financial institution and merchant clients a wide range of products, platforms and value-added services.
Overall economic conditions. Our business is affected by overall economic conditions and consumer spending. Our business performance during fiscal 2017 reflects continued uneven economic growth around the world.
Legal entity reorganization. In February 2017, we completed a reorganization of Visa Europe and certain other legal entities to align our corporate structure to the geographic jurisdictions in which we conduct business operations. As a result of the reorganization, during fiscal 2017, we recorded a non-recurring, non-cash income tax provision of $1.5 billion primarily related to the elimination of deferred tax balances originally recognized upon the acquisition of Visa Europe. Associated with this reorganization, the newly-formed Visa Foundation received all Visa Inc. shares held by Visa Europe, which were previously recorded as treasury stock.
Debt issuance. In September 2017, we issued fixed-rate senior notes in an aggregate principal amount of $2.5 billion, with maturities ranging between 5 and 30 years. Subsequent to our fiscal year-end, in October 2017, we used the majority of the proceeds from this new debt to redeem the $1.75 billion of senior notes that was scheduled to mature in December 2017. See Note 8—Debt to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report.
Financial highlights. Our financial results for fiscal 2017 include the impact of several significant one-time items. Our as-reported U.S. GAAP and adjusted non-GAAP net income and diluted earnings per share are shown in the table below.
| Fiscal Year Ended September 30, | % Change(1) | ||||||||||||||||
| 2017 | 2016 | 2015 | 2017 vs. 2016 | 2016 vs. 2015 | |||||||||||||
| (in millions, except percentages) | |||||||||||||||||
| Net income, as reported | $ | 6,699 | $ | 5,991 | $ | 6,328 | 12 | % | (5 | )% | |||||||
| Diluted earnings per share, as reported(2) | $ | 2.80 | $ | 2.48 | $ | 2.58 | 13 | % | (4 | )% | |||||||
| Net income, as adjusted(3) | $ | 8,335 | $ | 6,862 | $ | 6,438 | 21 | % | 7 | % | |||||||
| Diluted earnings per share, as adjusted(2),(3) | $ | 3.48 | $ | 2.84 | $ | 2.62 | 22 | % | 8 | % |
| (1) | Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers. |
| (2) | The per share amounts for the prior periods presented have been retroactively adjusted to reflect the four-for-one stock split effected in the second quarter of fiscal 2015. |
| (3) | Adjusted net income and adjusted diluted earnings per share in fiscal 2017, 2016 and 2015 exclude the impact of certain significant items that we believe are not indicative of our operating performance, as they were either non-recurring or had no cash impact. For a full reconciliation of our adjusted financial results, see tables in Adjusted financial results below. |
We recorded net operating revenues of $18.4 billion for fiscal 2017, an increase of 22% over the prior year primarily reflecting the operating revenues of Visa Europe and continued growth in nominal payments volume, processed transactions and nominal cross-border volume. The effect of exchange rate movements, as partially mitigated by our hedging program, resulted in an approximately negative one and a half percentage point impact to our total operating growth.
Total operating expenses for fiscal 2017 were $6.2 billion, compared to $7.2 billion in fiscal 2016. The decrease over the prior year was primarily due to the $1.9 billion loss in fiscal 2016 resulting from the effective settlement of the Framework Agreement between us and Visa Europe upon consummation of the transaction, offset by the inclusion of Visa Europe's operating expenses following the acquisition.
During fiscal 2015, we recognized a tax benefit of $296 million resulting from the resolution of uncertain tax positions with taxing authorities. Of the $296 million benefit, $239 million relates to prior fiscal years. See Note 18—Income Taxes to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report.
Adjusted financial results. Our financial results for fiscal 2017, 2016 and 2015 reflect the impact of certain significant items that we do not believe are indicative of our ongoing operating performance in the prior or future years, as they were either non-recurring or had no cash impact. As such, we believe the presentation of adjusted financial results excluding the following items provides a clearer understanding of our operating performance for the periods presented.
| • | Elimination of deferred tax balances. During the second quarter of fiscal 2017, in connection with our legal entity reorganization, we eliminated deferred tax balances originally recognized upon the acquisition of Visa Europe, resulting in the recognition of a non-recurring, non-cash income tax provision of $1.5 billion. |
| • | Charitable contribution. During the second quarter of fiscal 2017, associated with our legal entity reorganization, we recognized a non-recurring, non-cash general and administrative expense of $192 million, before tax, related to the charitable donation of Visa Inc. shares that were acquired as part of the Visa Europe acquisition and held as treasury stock. Net of the related cash tax benefit of $71 million, determined by applying applicable tax rates, adjusted net income increased by $121 million. |
| • | Severance cost. In the fourth quarter of fiscal 2016, we recorded a $110 million charge for severance costs related to personnel reductions, including planned reductions at Visa Europe. Although we routinely record severance expenses, these charges are larger than any past quarterly accrual due to the acquisition and integration of Visa Europe. Net of related tax benefit of $38 million, determined by applying applicable tax rates, the adjustment to net income was an increase of $72 million. |
| • | Remeasurement of deferred tax liability. In September 2016, we recorded a non-cash, non-recurring $88 million gain upon the remeasurement of a deferred tax liability, recorded upon the acquisition of Visa Europe, to reflect a tax rate change in the United Kingdom. |
| • | Acquisition-related costs. During fiscal 2016, we incurred $152 million of non-recurring acquisition costs in operating expense as a result of the Visa Europe transaction. This amount is comprised of $60 million of transaction expenses recorded in professional fees, and $92 million of UK stamp duty recorded in general and administrative expenses. Net of related tax benefit of $56 million, determined by applying applicable federal and state tax rates, the adjustment to net income was an increase of $96 million. |
| • | Visa Europe Framework Agreement loss. Upon consummation of the transaction, on June 21, 2016, we recorded a non-recurring loss of $1.9 billion, before tax, in operating expense resulting from the effective settlement of the Framework Agreement between us and Visa Europe. Net of related tax benefit of $693 million, determined by applying applicable federal and state tax rates, the adjustment to net income was an increase of $1.2 billion. |
| • | Net gains on currency forward contracts. During fiscal 2016, we entered into currency forward contracts to mitigate a portion of our foreign currency exchange rate risk associated with the upfront cash consideration paid in the Visa Europe acquisition. As a result, we recorded non-recurring, net gains of $74 million, before tax, in other non-operating income. Net of related tax expense of $27 million, determined by applying applicable federal and state tax rates, the adjustment to net income was a decrease of $47 million. |
| • | Foreign exchange gain on euro deposits. During fiscal 2016, we recorded a non-recurring foreign exchange gain of $145 million, before tax, in other non-operating income as a result of holding euro-denominated bank balances for a short period in advance of the closing of the Visa Europe acquisition. Net of related tax expense of $54 million, determined by applying applicable federal and state tax rates, the impact to net income was a decrease of $91 million. |
| • | Revaluation of Visa Europe put option. During the first quarter of fiscal 2016 and the third quarter of fiscal 2015, we recorded a decrease of $255 million and an increase of $110 million, respectively, in the fair value of the Visa Europe put option, resulting in the recognition of non-cash income and expense in other non-operating income. These amounts are not subject to income tax and therefore have no impact on our reported income tax provision. |
Adjusted operating expenses, operating margin, non-operating (expense) income, income taxes, net income and diluted earnings per share are non-GAAP financial measures and should not be relied upon as substitutes for measures calculated in accordance with U.S. GAAP. The following tables reconcile our as-reported financial measures calculated in accordance with U.S. GAAP to the respective non-GAAP adjusted financial measures for fiscal 2017, 2016 and 2015:
| Fiscal 2017 | ||||||||||||||||||||||
| (in millions, except percentages and per share data) | Operating Expenses | Operating Margin (1),(2) | Non-operating (Expense) Income | Income Taxes | Net Income | Diluted Earnings Per Share(2) | ||||||||||||||||
| As reported | $ | 6,214 | 66 | % | $ | (450 | ) | $ | 4,995 | $ | 6,699 | $ | 2.80 | |||||||||
| Elimination of deferred tax balances | — | — | % | — | (1,515 | ) | 1,515 | 0.63 | ||||||||||||||
| Charitable contribution | (192 | ) | 1 | % | — | 71 | 121 | 0.05 | ||||||||||||||
| As adjusted | $ | 6,022 | 67 | % | $ | (450 | ) | $ | 3,551 | $ | 8,335 | $ | 3.48 |
| Fiscal 2016 | ||||||||||||||||||||||
| (in millions, except percentages and per share data) | Operating Expenses | Operating Margin (1),(2) | Non-operating (Expense) Income | Income Taxes | Net Income | Diluted Earnings Per Share(2) | ||||||||||||||||
| As reported | $ | 7,199 | 52 | % | $ | 129 | $ | 2,021 | $ | 5,991 | $ | 2.48 | ||||||||||
| Severance cost | (110 | ) | 1 | % | — | 38 | 72 | 0.03 | ||||||||||||||
| Remeasurement of deferred tax liability | — | — | % | — | 88 | (88 | ) | (0.04 | ) | |||||||||||||
| Acquisition-related costs | (152 | ) | 1 | % | — | 56 | 96 | 0.04 | ||||||||||||||
| Visa Europe Framework Agreement loss | (1,877 | ) | 12 | % | — | 693 | 1,184 | 0.49 | ||||||||||||||
| Net gains on currency forward contracts | — | — | % | (74 | ) | (27 | ) | (47 | ) | (0.02 | ) | |||||||||||
| Foreign exchange gain on euro deposits | — | — | % | (145 | ) | (54 | ) | (91 | ) | (0.04 | ) | |||||||||||
| Revaluation of Visa Europe put option | — | — | % | (255 | ) | — | (255 | ) | (0.11 | ) | ||||||||||||
| As adjusted | $ | 5,060 | 66 | % | $ | (345 | ) | $ | 2,815 | $ | 6,862 | $ | 2.84 |
| Fiscal 2015 | ||||||||||||||||||||||
| (in millions, except percentages and per share data) | Operating Expenses | Operating Margin (1),(2) | Non-operating (Expense) Income | Income Taxes | Net Income | Diluted Earnings Per Share (2),(3) | ||||||||||||||||
| As reported | $ | 4,816 | 65 | % | $ | (69 | ) | $ | 2,667 | $ | 6,328 | $ | 2.58 | |||||||||
| Revaluation of Visa Europe put option | — | — | % | 110 | — | 110 | 0.04 | |||||||||||||||
| As adjusted | $ | 4,816 | 65 | % | $ | 41 | $ | 2,667 | $ | 6,438 | $ | 2.62 |
| (1) | Operating margin is calculated as operating income divided by net operating revenues. |
| (2) | Figures in the table may not recalculate exactly due to rounding. Operating margin, diluted earnings per share and their respective totals are calculated based on unrounded numbers. |
| (3) | The per share amounts for the prior periods presented have been retroactively adjusted to reflect the four-for-one stock split effected in the second quarter of fiscal 2015. |
Common stock repurchases. During fiscal 2017, we repurchased 77 million shares of our class A common stock in the open market using $6.9 billion of cash on hand. As of September 30, 2017, we had remaining authorized funds of $3.9 billion. All share repurchase programs authorized prior to April 2017 have been completed. See Note 13—Stockholders' Equity to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report.
Nominal payments volume and transaction counts. Payments volume is the primary driver for our service revenues, and the number of processed transactions is the primary driver for our data processing revenues. Nominal payments volume over the prior year posted double-digit growth in the United States, driven mainly by consumer credit. Nominal international payments volume growth was positively impacted due to the inclusion of nominal payments volume related to Visa Europe for the 12 months ended June 30, 2017(1). Growth on a constant-dollar basis, which excludes the impact of exchange rate movements, on our international payments volume was not significantly different from growth on a nominal-dollar basis for the 12 months ended June 30, 2017(1) and was 13% for the 12 months ended June 30, 2016(1). Growth in processed transactions reflects the inclusion of Visa Europe's processed transactions for the 12 months ended September 30, 2017 and three months ended September 30, 2016.
The following tables present nominal payments volume.(2)
| United States | International | Visa Inc. | ||||||||||||||||||||||||||||||
| 12 months ended June 30,(1) | 12 months ended June 30,(1) | 12 months ended June 30,(1) | ||||||||||||||||||||||||||||||
| 2017 | 2016 | % Change | 2017 | 2016 | % Change | 2017 | 2016 | % Change | ||||||||||||||||||||||||
| (in billions, except percentages) | ||||||||||||||||||||||||||||||||
| Nominal payments volume | ||||||||||||||||||||||||||||||||
| Consumer credit | $ | 1,309 | $ | 1,079 | 21 | % | $ | 2,224 | $ | 1,720 | 29 | % | $ | 3,533 | $ | 2,799 | 26 | % | ||||||||||||||
| Consumer debit(3) | 1,372 | 1,320 | 4 | % | 1,545 | 454 | 241 | % | 2,917 | 1,774 | 64 | % | ||||||||||||||||||||
| Commercial(4) | 506 | 450 | 12 | % | 309 | 147 | 110 | % | 815 | 598 | 36 | % | ||||||||||||||||||||
| Total nominal payments volume(5) | $ | 3,187 | $ | 2,849 | 12 | % | $ | 4,078 | $ | 2,321 | 76 | % | $ | 7,265 | $ | 5,170 | 41 | % | ||||||||||||||
| Cash volume | 543 | 520 | 5 | % | 2,357 | 1,775 | 33 | % | 2,900 | 2,294 | 26 | % | ||||||||||||||||||||
| Total nominal volume(5),(6) | $ | 3,730 | $ | 3,369 | 11 | % | $ | 6,435 | $ | 4,095 | 57 | % | $ | 10,165 | $ | 7,464 | 36 | % |
| United States | International | Visa Inc. | ||||||||||||||||||||||||||||||
| 12 months ended June 30,(1) | 12 months ended June 30,(1) | 12 months ended June 30,(1) | ||||||||||||||||||||||||||||||
| 2016 | 2015 | % Change | 2016 | 2015 | % Change | 2016 | 2015 | % Change | ||||||||||||||||||||||||
| (in billions, except percentages) | ||||||||||||||||||||||||||||||||
| Nominal payments volume | ||||||||||||||||||||||||||||||||
| Consumer credit | $ | 1,079 | $ | 980 | 10 | % | $ | 1,720 | $ | 1,676 | 3 | % | $ | 2,799 | $ | 2,656 | 5 | % | ||||||||||||||
| Consumer debit(3) | 1,320 | 1,201 | 10 | % | 454 | 462 | (2 | )% | 1,774 | 1,663 | 7 | % | ||||||||||||||||||||
| Commercial(4) | 450 | 412 | 9 | % | 147 | 150 | (2 | )% | 598 | 562 | 6 | % | ||||||||||||||||||||
| Total nominal payments volume(5) | $ | 2,849 | $ | 2,594 | 10 | % | $ | 2,321 | $ | 2,288 | 1 | % | $ | 5,170 | $ | 4,882 | 6 | % | ||||||||||||||
| Cash volume | 520 | 491 | 6 | % | 1,775 | 2,015 | (12 | )% | 2,294 | 2,506 | (8 | )% | ||||||||||||||||||||
| Total nominal volume(5),(6) | $ | 3,369 | $ | 3,085 | 9 | % | $ | 4,095 | $ | 4,303 | (5 | )% | $ | 7,464 | $ | 7,388 | 1 | % |
The following table presents nominal and constant payments volume growth.(2)
| International | Visa Inc. | ||||||||||||||||||||||
| 12 months ended June 30, 2017 vs 2016(1) | 12 months ended June 30, 2016 vs 2015(1) | 12 months ended June 30, 2017 vs 2016(1) | 12 months ended June 30, 2016 vs 2015(1) | ||||||||||||||||||||
| Nominal | Constant(7) | Nominal | Constant(7) | Nominal | Constant(7) | Nominal | Constant(7) | ||||||||||||||||
| Payments volume growth | |||||||||||||||||||||||
| Consumer credit | 29 | % | 30 | % | 3 | % | 13 | % | 26 | % | 27 | % | 5 | % | 12 | % | |||||||
| Consumer debit(3) | 241 | % | 238 | % | (2 | )% | 15 | % | 64 | % | 64 | % | 7 | % | 11 | % | |||||||
| Commercial(4) | 110 | % | 105 | % | (2 | )% | 12 | % | 36 | % | 36 | % | 6 | % | 10 | % | |||||||
| Total payments volume growth(5) | 76 | % | 76 | % | 1 | % | 13 | % | 41 | % | 41 | % | 6 | % | 11 | % | |||||||
| Cash volume growth | 33 | % | 33 | % | (12 | )% | 4 | % | 26 | % | 26 | % | (8 | )% | 4 | % | |||||||
| Total volume growth(5) | 57 | % | 57 | % | (5 | )% | 9 | % | 36 | % | 36 | % | 1 | % | 9 | % |
| (1) | Service revenues in a given quarter are assessed based on nominal payments volume in the prior quarter. Therefore, service revenues reported for the 12 months ended September 30, 2017, 2016 and 2015, were based on nominal payments volume reported by our financial institution clients for the 12 months ended June 30, 2017, 2016 and 2015, respectively. |
| (2) | Figures in the tables may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers. |
| (3) | Includes consumer prepaid volume and interlink volume. |
| (4) | Includes large, middle and small business credit and debit, as well as commercial prepaid volume. |
| (5) | Our nominal payments volume, total payments volume growth and total volume growth for the 12 months ended June 30, 2016 does not reflect the related nominal payments volume of $477 billion and cash volume of $177 billion for Visa Europe for the three months ended June 30, 2016, which impacts our service revenues for the fourth quarter of fiscal 2016. |
| (6) | Total nominal volume is the sum of total nominal payments volume and cash volume. Total nominal payments volume is the total monetary value of transactions for goods and services that are purchased on cards carrying the Visa, Visa Electron, Interlink and V PAY brands. Cash volume generally consists of cash access transactions, balance access transactions, balance transfers and convenience checks. Total nominal volume is provided by our financial institution clients, subject to review by Visa. On occasion, previously presented volume information may be updated. Prior period updates are not material. |
| (7) | Growth on a constant-dollar basis excludes the impact of foreign currency fluctuations against the U.S. dollar. |
The following table provides the number of transactions involving Visa, Visa Electron, Interlink, VPAY and PLUS cards processed on Visa's networks during the fiscal periods presented.(1),(2)
| 2017 | 2016(3) | 2015(3) | 2017 vs. 2016 % Change | 2016 vs. 2015 % Change(3) | ||||||||||
| (in millions, except percentages) | ||||||||||||||
| Visa processed transactions | 111,215 | 83,159 | 70,968 | 34 | % | 17 | % |
| (1) | Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers. On occasion, previously presented information may be updated. Prior period updates are not material. Our operating revenues and related processed transactions for fiscal 2016 do not reflect the financial results or related processed transactions of Visa Europe from the acquisition date, June 21, 2016, through June 30, 2016 as the impact was immaterial. See Note 2—Visa Europe to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report. |
| (2) | Visa processed transactions in fiscal 2017 and fourth quarter of fiscal 2016 include transactions processed by Visa Europe. |
| (3) | As a result of changes in Russian National Payment System law, we transitioned the processing of Russian domestic transactions to the Russian NSPK during the third quarter of fiscal 2015. The number of transactions processed by the Visa network does not reflect Russian domestic transactions processed after this transition. |
Results of Operations
Operating Revenues
Our operating revenues are primarily generated from payments volume on Visa products for purchased goods and services, as well as the number of transactions processed on our network. We do not earn revenues from, or bear credit risk with respect to, interest or fees paid by account holders on Visa products. Our issuing clients have the responsibility for issuing cards and other payment products, and determining the interest rates and fees paid by account holders. We generally do not earn revenues from the fees that merchants are charged for acceptance by the acquirers, including the merchant discount rate. Our acquiring clients are generally responsible for soliciting merchants, and establishing and earning these fees.
The following sets forth the components of our operating revenues:
Service revenues consist mainly of revenues earned for services provided in support of client usage of Visa products. Current quarter service revenues are primarily assessed using a calculation of current pricing applied to the prior quarter's payments volume. Service revenues also include assessments designed to support ongoing acceptance and volume growth initiatives, which are recognized in the same period the related volume is transacted.
Data processing revenues are earned for authorization, clearing, settlement, network access and other maintenance and support services that facilitate transaction and information processing among our clients globally. Data processing revenues are recognized in the same period the related transactions occur or services are rendered.
International transaction revenues are earned for cross-border transaction processing and currency conversion activities. Cross-border transactions arise when the country of origin of the issuer is different from that of the merchant. International transaction revenues are primarily generated by cross-border payments and cash volume.
Other revenues consist mainly of license fees for use of the Visa brand, fees for account holder services, certification and licensing, and other activities related to our acquired entities, and with respect to fiscal 2016 and 2015, revenues earned from Visa Europe in accordance with the Visa Europe Framework Agreement prior to the completion of the Visa Europe acquisition. Other revenues also include optional service or product enhancements, such as extended account holder protection and concierge services.
Client incentives consist of long-term contracts with financial institution clients, merchants and strategic partners for various programs designed to build payments volume, increase Visa product acceptance, win merchant routing transactions over our network and drive innovation. These incentives are primarily accounted for as reductions to operating revenues.
Operating Expenses
Personnel expenses include salaries, employee benefits, incentive compensation, share-based compensation, severance charges and contractor expense.
Marketing expenses include expenses associated with advertising and marketing campaigns, sponsorships and other related promotions of the Visa brand.
Network and processing expenses mainly represent expenses for the operation of our processing network, including maintenance, equipment rental and fees for other data processing services.
Professional fees mainly consist of fees for consulting, legal and other professional services.
Depreciation and amortization expenses include depreciation expense for property and equipment, as well as amortization of purchased and internally developed software. Also included in this amount is amortization of finite-lived intangible assets primarily obtained through acquisitions.
General and administrative expenses mainly consist of product enhancements, facilities costs, travel activities, foreign exchange gains and losses and other corporate expenses incurred in support of our business, and with respect to fiscal 2016, transaction costs related to the Visa Europe acquisition.
Litigation provision is an estimate of litigation expense and is based on management's understanding of our litigation profile, the specifics of the cases, advice of counsel to the extent appropriate and management's best estimate of incurred loss as of the balance sheet date.
Visa Europe Framework Agreement loss is a one-time loss incurred upon consummation of the Visa Europe acquisition on June 21, 2016, resulting from the effective settlement of the Framework Agreement between us and Visa Europe.
Non-operating (Expense) Income
Non-operating (expense) income primarily includes interest expense, gains and losses earned on investments and derivative instruments not associated with our core operations, and with respect to fiscal 2016 and 2015, changes in the fair value of the Visa Europe put option and income.
Visa Inc. Fiscal 2017, 2016 and 2015
Operating Revenues
The following table sets forth our operating revenues earned in the United States, internationally and in accordance with the Framework Agreement prior to the Visa Europe acquisition on June 21, 2016. Visa Europe revenue earned for fiscal 2017 and the fourth quarter of fiscal 2016 is included in International.
| Fiscal Year Ended September 30, | $ Change | % Change(1) | |||||||||||||||||||||||
| 2017 | 2016(2) | 2015 | 2017 vs. 2016 | 2016 vs. 2015 | 2017 vs. 2016 | 2016 vs. 2015 | |||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||
| United States | $ | 8,704 | $ | 7,851 | $ | 7,406 | $ | 853 | $ | 445 | 11 | % | 6 | % | |||||||||||
| International | 9,654 | 7,040 | 6,219 | 2,614 | 821 | 37 | % | 13 | % | ||||||||||||||||
| Revenues earned under the Framework Agreement(3) | — | 191 | 255 | (191 | ) | (64 | ) | (100 | )% | (25 | )% | ||||||||||||||
| Net operating revenues | $ | 18,358 | $ | 15,082 | $ | 13,880 | $ | 3,276 | $ | 1,202 | 22 | % | 9 | % |
| (1) | Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers. |
| (2) | Our operating revenues for fiscal 2016 do not reflect revenues earned by Visa Europe from the acquisition date, June 21, 2016, through June 30, 2016 as the impact was immaterial. |
| (3) | Reflects revenues earned from Visa Europe prior to the acquisition, in accordance with the Framework Agreement that provided for trademark and technology licenses and bilateral services. The Framework Agreement was effectively settled upon the closing of the acquisition. |
The increase in operating revenues primarily reflects the operating revenues of Visa Europe and continued growth in nominal payments volume, processed transactions and nominal cross-border volume. These benefits were partially offset by increases in client incentives.
Our operating revenues, primarily service revenues, international transaction revenues, and client incentives, are impacted by the overall strengthening or weakening of the U.S. dollar as payments volume and related revenues denominated in local currencies are converted to U.S. dollars. The effect of exchange rate movements in fiscal 2017, as partially mitigated by our hedging program, resulted in an approximately negative one and a half percentage point impact to our net operating revenue growth.
The following table sets forth the components of our net operating revenues, including operating revenues earned by Visa Europe for fiscal 2017 and the fourth quarter of fiscal 2016. Other revenues in fiscal 2016 and 2015 also included revenue earned from Visa Europe in accordance with the Framework Agreement prior to its acquisition on June 21, 2016.
| Fiscal Year Ended September 30, | $ Change | % Change(1) | |||||||||||||||||||||||
| 2017 | 2016(2) | 2015 | 2017 vs. 2016 | 2016 vs. 2015 | 2017 vs. 2016 | 2016 vs. 2015 | |||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||
| Service revenues | $ | 7,975 | $ | 6,747 | $ | 6,302 | $ | 1,228 | $ | 445 | 18 | % | 7 | % | |||||||||||
| Data processing revenues | 7,786 | 6,272 | 5,552 | 1,514 | 720 | 24 | % | 13 | % | ||||||||||||||||
| International transaction revenues | 6,321 | 4,649 | 4,064 | 1,672 | 585 | 36 | % | 14 | % | ||||||||||||||||
| Other revenues | 841 | 823 | 823 | 18 | — | 2 | % | — | % | ||||||||||||||||
| Client incentives | (4,565 | ) | (3,409 | ) | (2,861 | ) | (1,156 | ) | (548 | ) | 34 | % | 19 | % | |||||||||||
| Net operating revenues | $ | 18,358 | $ | 15,082 | $ | 13,880 | $ | 3,276 | $ | 1,202 | 22 | % | 9 | % |
| (1) | Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers. |
| (2) | Our operating revenues for fiscal 2016 do not reflect revenues earned by Visa Europe from the acquisition date, June 21, 2016, through June 30, 2016 as the impact was immaterial. |
| • | Service revenues increased in fiscal 2017 and 2016 primarily due to 41% and 6% growth in nominal payments volume, respectively. The growth in service revenues was slower than the growth in payments volume during fiscal 2017, reflecting the inclusion of Visa Europe revenue and the resulting impact on our service revenue yield. Fiscal 2017 and 2016 growth also reflected select pricing modifications. |
| • | Data processing revenues increased in fiscal 2017 and 2016 due to overall growth in processed transactions of 34% and 17%, respectively. The growth in data processing revenues was slower than the growth in processed transactions, reflecting the inclusion of data processing revenues earned by Visa Europe and the resulting impact on our data processing revenue yield. |
| • | International transaction revenues increased in fiscal 2017 and 2016 primarily due to nominal cross-border volume growth of 79% and 37%, respectively, which includes revenues earned by Visa Europe and the resulting impact on our corresponding yield. International transaction revenue growth in fiscal 2017 and 2016 also reflected select pricing modifications, which was partially offset in fiscal 2017 by lower volatility in a broad range of currencies. |
| • | Client incentives increased in fiscal 2017 and 2016, reflecting overall growth in global payments volume, incentives incurred on long-term client contracts that were initiated or renewed during fiscal 2017 and 2016 and the inclusion of Visa Europe's incentives for fiscal 2017 and the fourth quarter of fiscal 2016. The amount of client incentives we record in future periods will vary based on changes in performance expectations, actual client performance, amendments to existing contracts or the execution of new contracts. |
Operating Expenses
The following table sets forth the components of our total operating expenses.
| Fiscal Year Ended September 30, | $ Change | % Change(1) | |||||||||||||||||||||||
| 2017 | 2016(2) | 2015 | 2017 vs. 2016 | 2016 vs. 2015 | 2017 vs. 2016 | 2016 vs. 2015 | |||||||||||||||||||
| (in millions, except percentages) | |||||||||||||||||||||||||
| Personnel | $ | 2,628 | $ | 2,226 | $ | 2,079 | $ | 402 | $ | 147 | 18 | % | 7 | % | |||||||||||
| Marketing | 922 | 869 | 872 | 53 | (3 | ) | 6 | % | — | % | |||||||||||||||
| Network and processing | 620 | 538 | 474 | 82 | 64 | 15 | % | 13 | % | ||||||||||||||||
| Professional fees | 409 | 389 | 336 | 20 | 53 | 5 | % | 16 | % | ||||||||||||||||
| Depreciation and amortization | 556 | 502 | 494 | 54 | 8 | 11 | % | 2 | % | ||||||||||||||||
| General and administrative | 1,060 | 796 | 547 | 264 | 249 | 33 | % | 46 | % | ||||||||||||||||
| Litigation provision | 19 | 2 | 14 | 17 | (12 | ) | NM | (86 | )% | ||||||||||||||||
| Visa Europe Framework Agreement loss | — | 1,877 | — | (1,877 | ) | 1,877 | (100 | )% | NM | ||||||||||||||||
| Total operating expenses(3) | $ | 6,214 | $ | 7,199 | $ | 4,816 | $ | (985 | ) | $ | 2,383 | (14 | )% | 49 | % |
| (1) | Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers. |
| (2) | Our operating expenses for fiscal 2016 do not reflect the expenses incurred by Visa Europe from the acquisition date, June 21, 2016, through June 30, 2016 as the impact was immaterial. |
| (3) | Operating expenses for fiscal 2017 and 2016 include significant items that we do not believe are indicative of our operating performance as they are related to the charitable donation or the Visa Europe acquisition. See Overview within this Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations. |
Total operating expenses decreased primarily due to the $1.9 billion loss related to the effective settlement of the Framework Agreement between Visa and Visa Europe recorded during fiscal 2016. The remaining components of total operating expenses increased in fiscal 2017 primarily due to the inclusion of Visa Europe expenses. Additional factors impacting our operating expenses are discussed below.
| • | Personnel expenses increased in fiscal 2017 driven by higher incentive compensation, combined with continued increase in headcount reflecting our strategy to invest for future growth. The increase in fiscal 2016 was primarily due to a severance charge related to personnel reductions including planned reductions at Visa Europe. This increase was partially offset by a decrease in contractor costs, an increase in personnel costs that were invested in and capitalized as part of technology development projects and lower incentive compensation. |
| • | Network and processing expenses increased in fiscal 2017 and 2016 due to fees associated with the processing of Russian domestic transactions that transitioned to the Russian NSPK during the third quarter of fiscal 2015. |
| • | Professional fees increased in fiscal 2016 primarily due to transaction costs incurred in connection with our acquisition of Visa Europe in 2016. |
| • | Depreciation and amortization expenses increased in fiscal 2017 primarily due to additional depreciation from our ongoing investments in technology assets and infrastructure to support our digital solutions and core business initiatives. |
| • | General and administrative expenses increased in fiscal 2017 primarily due to $192 million of expense related to the Visa Inc. shares held by Visa Europe that were received by the newly-formed Visa Foundation, as well as an increase in expense to provide product benefits to our account holders as a result of business growth. The increase in 2016 was mainly due to costs incurred related to our acquisition of Visa Europe in 2016 as well as net foreign exchange losses incurred as a result of changes in the U.S. dollar exchange rate against other currencies in which we transact. |
Non-operating (Expense) Income
The following table sets forth the components of our non-operating (expense) income.
| Fiscal Year Ended September 30, | $ Change | % Change(1) | ||||||||||||||||||||||
| 2017 | 2016(2) | 2015 | 2017 vs. 2016 | 2016 vs. 2015 | 2017 vs. 2016 | 2016 vs. 2015 | ||||||||||||||||||
| (in millions, except percentages) | ||||||||||||||||||||||||
| Interest expense | $ | (563 | ) | $ | (427 | ) | $ | (3 | ) | $ | (136 | ) | $ | (424 | ) | 32 | % | NM | ||||||
| Other | 113 | 556 | (66 | ) | (443 | ) | 622 | (80 | )% | NM | ||||||||||||||
| Total non-operating (expense) income | $ | (450 | ) | $ | 129 | $ | (69 | ) | $ | (579 | ) | $ | 198 | NM | NM |
| (1) | Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers. |
| (2) | Fiscal 2016 non-operating (expense) income includes financial results of Visa Europe for the fourth quarter of fiscal 2016, but does not reflect the financial results of Visa Europe from the acquisition date, June 21, 2016, through June 30, 2016 as the impact was immaterial. |
| • | Interest expense increased during fiscal 2017 and 2016 primarily due to the issuance of fixed-rate senior notes in each respective period. See Note 8—Debt to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report. |
| • | Other non-operating (expense) income in fiscal 2016 and 2015 was primarily comprised of the following: |
| ▪ | net gains of $74 million in fiscal 2016 related to currency forward contracts entered into to mitigate a portion of our foreign currency exchange rate risk associated with the upfront cash consideration paid in the Visa Europe acquisition; |
| ▪ | a foreign exchange gain of $145 million in fiscal 2016 on euro deposits as a result of holding euro-denominated bank balances for a short period in advance of the closing of the Visa Europe acquisition; |
| ▪ | a non-cash adjustment of $255 million in the first quarter of fiscal 2016 to decrease the fair value of the Visa Europe put option, which is not subject to tax, reducing the fair value of the liability to zero; and |
| ▪ | a non-cash adjustment of $110 million in the third quarter of fiscal 2015 to increase the fair value of the unamended Visa Europe put option, which is not subject to tax. |
See Note 4—Fair Value Measurements and Investments and Note 11—Derivative and Non-derivative Financial Instruments to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report.
Effective Income Tax Rate
In February 2017, to align our corporate structure to the geographic jurisdictions in which we conduct business operations, we completed a reorganization of Visa Europe and certain other legal entities. As a result of the reorganization, we recorded a non-recurring, non-cash income tax provision of $1.5 billion primarily related to the elimination of deferred tax balances originally recognized upon the acquisition of Visa Europe. Associated with this reorganization, the newly-formed Visa Foundation received all Visa Inc. shares held by Visa Europe that were previously recorded as treasury stock.
The effective income tax rate was 43% in fiscal 2017 and 25% in fiscal 2016. The effective tax rate in fiscal 2017 differs from the effective tax rate in fiscal 2016 primarily due to:
| • | the aforementioned $1.5 billion non-recurring, non-cash income tax provision related to the legal entity reorganization recorded in fiscal 2017; |
| • | $71 million tax benefit related to Visa Foundation's receipt of Visa Inc. shares mentioned above, recorded in fiscal 2017; |
| • | $70 million of excess tax benefits related to share-based payments recorded in fiscal 2017, as a result of the early adoption of Accounting Standards Update 2016-09. See Note 1—Summary of Significant Accounting Policies to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report; and |
| • | the absence of: |
| ▪ | the effect of one-time items related to the Visa Europe acquisition recorded during fiscal 2016, the most significant of which was the $1.9 billion U.S. loss related to the effective settlement of the Framework Agreement between Visa and Visa Europe. These one-time items impacted the geographic mix of our global income, resulting in a reduced effective tax rate in fiscal 2016; |
| ▪ | an $88 million one-time tax benefit due to the remeasurement of deferred tax liabilities as a result of the reduction in the UK tax rate enacted in fiscal 2016; and |
| ▪ | the non-taxable $255 million revaluation of the Visa Europe put option recorded in fiscal 2016. |
The effective income tax rate was 25% in fiscal 2016 and 30% in fiscal 2015. The effective rate in fiscal 2016 differs from the effective tax rate in fiscal 2015 primarily due to:
| • | the effect of one-time items related to the Visa Europe acquisition, as mentioned above, that impacted the geographic mix of global income resulting in a reduced effective tax rate in fiscal 2016; |
| • | an $88 million one-time tax benefit due to the remeasurement of deferred tax liabilities as a result of the reduction in the UK tax rate enacted in fiscal 2016; |
| • | the non-taxable $255 million revaluation of the Visa Europe put option recorded in fiscal 2016; and |
| • | the absence of a $296 million tax benefit recognized in fiscal 2015 resulting from the resolution of uncertain tax positions with taxing authorities. Included in the $296 million was a one-time $239 million tax benefit that related to prior fiscal years. |
Adjusted effective income tax rate. Our financial results for fiscal 2017 and 2016 reflect the impact of certain significant items that we do not believe are indicative of our ongoing operating performance in the prior or future years, as they are either non-recurring or have no cash impact. As such, we have presented our adjusted effective income tax rate in the tables below, which we believe provides a clearer understanding of our operating performance in fiscal 2017 and 2016. See Overview—Adjusted financial results within this Management's Discussion and Analysis of Financial Condition and Results of Operations for descriptions of the adjustments in the table below.
| Fiscal 2017 | ||||||||||
| Income Before Income Taxes | Income Tax Provision | Effective Income Tax Rate(1) | ||||||||
| As reported | $ | 11,694 | $ | 4,995 | 42.7 | % | ||||
| Elimination of deferred tax balances | — | (1,515 | ) | |||||||
| Charitable contribution | 192 | 71 | ||||||||
| As adjusted | $ | 11,886 | $ | 3,551 | 29.9 | % |
| Fiscal 2016 | ||||||||||
| Income Before Income Taxes | Income Tax Provision | Effective Income Tax Rate(1) | ||||||||
| As reported | $ | 8,012 | $ | 2,021 | 25.2 | % | ||||
| Severance cost | 110 | 38 | ||||||||
| Remeasurement of deferred tax liability | — | 88 | ||||||||
| Acquisition-related costs | 152 | 56 | ||||||||
| Visa Europe Framework Agreement loss | 1,877 | 693 | ||||||||
| Net gains on currency forward contracts | (74 | ) | (27 | ) | ||||||
| Foreign exchange gain on euro deposits | (145 | ) | (54 | ) | ||||||
| Revaluation of Visa Europe put option | (255 | ) | — | |||||||
| As adjusted | $ | 9,677 | $ | 2,815 | 29.1 | % |
| (1) | Figures in the table may not recalculate exactly due to rounding. Effective income tax rate changes are calculated based on unrounded numbers. |
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 our corporate objectives.
The objectives of our treasury policies are to:
| • | provide adequate liquidity to cover operating expenditures and liquidity contingency scenarios; |
| • | ensure timely completion of payments settlement activities; |
| • | ensure payments on required litigation settlements; |
| • | make planned capital investments in our business; |
| • | pay dividends and repurchase our shares at the discretion of our board of directors; and |
| • | invest excess cash in securities that enable us to first meet our working capital and liquidity needs, and earn additional income. |
Based on our current cash flow budgets and forecasts of our short-term and long-term liquidity needs, we believe that our projected sources of liquidity will be sufficient to meet our projected liquidity needs for more than the next 12 months. We will continue to assess our liquidity position and potential sources of supplemental liquidity in view of our operating performance, current economic and capital market conditions, and other relevant circumstances.
Cash Flow Data
The following table summarizes our cash flow activity for the fiscal years presented:
| 2017 | 2016 | 2015 | |||||||||
| (in millions) | |||||||||||
| Total cash provided by (used in): | |||||||||||
| Operating activities | $ | 9,208 | $ | 5,574 | $ | 6,584 | |||||
| Investing activities | 735 | (10,916 | ) | (1,435 | ) | ||||||
| Financing activities | (5,924 | ) | 7,477 | (3,603 | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 236 | (34 | ) | 1 | |||||||
| Increase in cash and cash equivalents | $ | 4,255 | $ | 2,101 | $ | 1,547 |
Operating activities. Cash provided by operating activities in fiscal 2017 was impacted by the inclusion of Visa Europe in our results for the full year, while fiscal 2016 had one quarter of results that included Visa Europe. Other factors impacting cash provided by operating activities include:
| • | $1.9 billion of the consideration paid in the Visa Europe acquisition during fiscal 2016 related to the effective settlement of the Framework Agreement between us and Visa Europe; |
| • | payments of $489 million and $244 million of interest on the outstanding senior notes during fiscal 2017 and 2016, respectively; and |
| • | payments of $426 million made from the U.S. litigation escrow account and a related decrease of approximately $157 million of income taxes paid during fiscal 2015. |
The cash inflows and outflows related to the U.S. litigation escrow account are also reflected as offsetting cash flows within financing activities for their respective years as they are covered by the U.S. retrospective responsibility plan. See Note 3—U.S. and Europe Retrospective Responsibility Plans and Note 19—Legal Matters to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report.
Investing activities. Cash provided by investing activities in fiscal 2017 reflected net proceeds from maturities and sales of available-for-sale investment securities. Cash used in investing activities in fiscal 2016 primarily reflected the up-front cash consideration paid in the Visa Europe acquisition, offset by $2.8 billion of cash held by Visa Europe at the closing of the transaction in fiscal 2016. See Note 2—Visa Europe to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report. Cash used in investing activities in fiscal 2015 reflected net purchases of available-for-sale securities.
Financing activities. Cash used in financing activities in fiscal 2017 primarily reflected $6.9 billion used to repurchase class A common stock in the open market and $1.6 billion of dividend payments, partially offset by $2.5 billion net aggregate proceeds received from our debt issuance completed in September 2017. Cash provided by financing activities in fiscal 2016 primarily reflected $15.9 billion net aggregate proceeds received from our debt issuance completed in December 2015, partially offset by $7.0 billion used to repurchase class A common stock in the open market and $1.4 billion of dividend payments. Cash used in financing activities in fiscal 2015 reflected payments of $426 million made from the U.S. litigation escrow account in connection with the interchange multidistrict litigation that offset the impacts discussed above within operating activities, as they are covered by the U.S. retrospective responsibility plan. See Note 3—U.S. and Europe Retrospective Responsibility Plans, Note 8—Debt, Note 13—Stockholders' Equity and Note 19—Legal Matters to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report.
Sources of Liquidity
Our primary sources of liquidity are cash on hand, cash flow from our operations, our investment portfolio and access to various equity and borrowing arrangements. Funds from operations are maintained in cash and cash equivalents and short-term or long-term available-for-sale investment securities based upon our funding requirements, access to liquidity from these holdings, and the return that these holdings provide. We believe that cash flow generated from operations, in conjunction with access to our other sources of liquidity, will be more than sufficient to meet our ongoing operational needs.
Cash and cash equivalents and short-term and long-term available-for-sale investment securities held by our foreign subsidiaries, primarily attributable to undistributed earnings, totaled $6.9 billion at September 30, 2017. Following our legal entity reorganization in the second quarter of fiscal 2017, we returned net $5.0 billion of cash held by our foreign subsidiaries to the United States in fiscal 2017. This transaction did not constitute a return of undistributed earnings and was not subject to U.S. income taxes. If it were necessary to repatriate the undistributed earnings of our foreign subsidiaries for use in the United States, we would be required to pay U.S. income taxes on the repatriated earnings. It is our intent to indefinitely reinvest the majority of the undistributed earnings outside of the United States. As such, we have not accrued any U.S. income tax provision in our financial results related to approximately $12.9 billion of undistributed earnings of our foreign subsidiaries. The amount of income taxes that would have resulted had these undistributed earnings been repatriated is not practicably determinable.
Available-for-sale investment securities. Our investment portfolio is designed to invest excess cash in securities which enables us to meet our working capital and liquidity needs. Our investment portfolio primarily consists of debt securities issued by the U.S. Treasury or U.S. government-sponsored agencies. The majority of these investments, $3.5 billion, are classified as current and are available to meet short-term liquidity needs. The remaining non-current investments have stated maturities of more than one year from the balance sheet date, however, are also generally available to meet short-term liquidity needs.
Factors that may impact the liquidity of our investment portfolio include, but are not limited to, changes to credit ratings of the securities, uncertainty related to regulatory developments, actions by central banks and other monetary authorities, and the 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.
Commercial paper program. We maintain a commercial paper program to support our working capital requirements and for other general corporate purposes. Under the program, we are authorized to issue up to $3.0 billion in outstanding notes, with maturities up to 397 days from the date of issuance. We had no outstanding obligations under the program at September 30, 2017. See Note 8—Debt to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report.
Credit facility. On January 27, 2016, we entered into an unsecured $4.0 billion revolving credit facility. On January 27, 2017, we extended the term of the credit facility, which will now expire on January 27, 2022. There were no borrowings under the credit facility as of September 30, 2017 and we were in compliance with all related covenants as of and during the year ended September 30, 2017. See Note 8—Debt to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report.
Universal shelf registration statement. In July 2015, we filed a registration statement with the SEC using a shelf registration process. As permitted by the registration statement, we may, from time to time, sell shares of debt or equity securities in one or more transactions. This registration statement expires in July 2018.
Long-term debt. In September 2017, we issued fixed-rate senior notes in an aggregate principal amount of $2.5 billion, with maturities ranging between 5 and 30 years. We also issued in December 2015 fixed-rate senior notes in an aggregate principal amount of $16.0 billion, with maturities ranging between 2 and 30 years. Subsequent to our fiscal year-end, in October 2017, we used the majority of the proceeds from the September 2017 debt issuance to redeem the $1.75 billion of senior notes that was scheduled to mature in December 2017. We are not subject to any financial covenants and did not experience any changes to our investment credit ratings as a result of these debt issuances. See Note 8—Debt to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report.
U.S. Litigation escrow account. Pursuant to the terms of the U.S. retrospective responsibility plan, we maintain a U.S. litigation escrow account from which monetary liabilities from settlements of, or judgments in, the U.S. covered litigation will be payable. When we fund the U.S. litigation 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 shares of class A common stock. See Note 3—U.S. and Europe Retrospective Responsibility Plans and Note 19—Legal Matters to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report. The balance in this account at September 30, 2017, was $1.0 billion and is reflected as restricted cash in our consolidated balance sheet. As these funds are restricted for the sole purpose of making payments related to the U.S. covered litigation matters, as described below under Uses of Liquidity, we do not rely on them for other operational needs.
Credit Ratings
At September 30, 2017, our credit ratings by Standard and Poor’s and Moody’s were as follows:
| Standard and Poor’s | Moody’s | ||||||
| Debt type | Rating | Outlook | Rating | Outlook | |||
| Short-term unsecured debt | A-1 | Stable | P-1 | Stable | |||
| Long-term unsecured debt | A+ | Stable | A1 | Stable |
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 to and from our financial institution clients can represent a substantial daily liquidity requirement. Most U.S. dollar settlements are settled within the same day and do not result in a net receivable or payable balance, while settlements in currencies other than the U.S. dollar generally remain outstanding for one to two business days, which is consistent with industry practice for such transactions. In general, during fiscal 2017, we were not required to fund settlement-related working capital. Our average daily net settlement position was a net payable of $426 million. We hold about $7 billion of available liquidity, in the form of cash, cash equivalents and available-for-sale investment securities, to fund daily settlement in the event one or more of our financial institution clients are unable to settle.
U.S. 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 the U.S. covered litigation. As noted above, monetary liabilities from settlements of, or judgments in, the U.S. covered litigation are payable from the U.S. litigation escrow account. During fiscal 2017, we made no covered litigation payments that were funded from the U.S. litigation escrow account. At September 30, 2017, the U.S. litigation escrow account had an available balance of $1.0 billion. In June 2016, the approval of the 2012 Settlement Agreement was reversed by the U.S. Court of Appeals for the Second Circuit. Until the appeals process is complete, it is uncertain whether the Company will be able to resolve the class plaintiffs' claims as contemplated by the Settlement Agreement. If the Settlement Agreement is terminated and no further agreement is reached regarding funds previously paid from the litigation account into settlement funds pursuant to the Settlement Agreement, we will have the right to approximately $3.0 billion, which would be returned to the U.S. litigation escrow account. This will increase our taxable income, thereby increasing our taxes to be paid by approximately $1.1 billion. See Note 3—U.S. and Europe Retrospective Responsibility Plans and Note 19—Legal Matters to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report.
Other litigation. Judgments in and settlements of litigation, other than the U.S. covered litigation, including VE territory covered litigation or other fines imposed in investigations and proceeding, could give rise to future liquidity needs.
Common stock repurchases. During fiscal 2017, we repurchased 77 million shares of our class A common stock in the open market using $6.9 billion of cash on hand. As of September 30, 2017, we had remaining authorized funds of $3.9 billion. In April 2017 our board of directors authorized a share repurchase program for $5.0 billion. This authorization has no expiration date. All share repurchase programs authorized prior to April 2017 have been completed. See Note 13—Stockholders' Equity to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report.
Dividends. During fiscal 2017, we declared and paid $1.6 billion in dividends. In October 2017, our board of directors declared a quarterly dividend in the aggregate amount of $0.195 per share of class A common stock (determined in the case of class B and C common stock and series B and C preferred stock on an as-converted basis). We expect to pay approximately $459 million in connection with this dividend on December 5, 2017. See Note 13—Stockholders' Equity to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report. We expect to continue paying quarterly dividends in cash, subject to approval by the board of directors. All preferred and class B and C common stock will share ratably on an as-converted basis in such future dividends.
Pension and other postretirement benefits. We sponsor 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. As a result of the acquisition of Visa Europe, we assumed the obligations related to Visa Europe's defined benefit plan, primarily consisting of the UK pension plans. Our policy with respect to our U.S. qualified pension plan is to contribute annually in September of each year, an amount not less than the minimum required under the Employee Retirement Income Security Act. Our U.S. non-qualified pension and other postretirement benefit plans are funded on a current basis. In relation to the Visa Europe UK pension plans, our funding policy is to contribute in accordance with the appropriate funding requirements agreed with the trustees of our UK pension plans. Additional amounts may be agreed with the UK pension plan trustees. In fiscal 2017, 2016 and 2015, we made contributions to our U.S. pension and other postretirement benefit plans of $12 million, $4 million and $19 million, respectively. For Visa Europe's UK pension plans, we made contributions of $5 million and $102 million in fiscal 2017 and 2016, respectively, subsequent to the acquisition date as agreed upon with the trustees to improve the funding level of the plans. In fiscal 2018, given current projections and assumptions, we anticipate funding our U.S. pension and other postretirement benefit plans and Visa Europe's UK defined benefit pension plans by approximately $3 million and $5 million, respectively. The actual contribution amount will vary depending upon the funded status of the pension plan,
movements in the discount rate, performance of the plan assets and related tax consequences. See Note 9—Pension, Postretirement and Other Benefits to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report.
Capital expenditures. Our capital expenditures increased during fiscal 2017, due to investments in technology, infrastructure and growth initiatives. We expect to continue investing in technology assets and payments system infrastructure to support our digital solutions and core business initiatives.
Acquisitions. In February 2017, we acquired a business using $302 million of cash on hand, primarily reflecting total purchase price less cash received. The acquisition will help Visa's clients and merchant partners accelerate digital commerce. On June 21, 2016, we acquired 100% of the share capital of Visa Europe, a payments technology business. The acquisition positions us to create additional value through increased scale, efficiencies realized by the integration of both businesses, and benefits related to Visa Europe's transition from an association to a for-profit enterprise. We paid up-front cash consideration of €12.2 billion ($13.9 billion) and issued preferred stock convertible upon certain conditions into approximately 79 million shares of class A common stock, equivalent to a value of €5.3 billion ($6.1 billion) at the closing stock price of $77.33 on June 21, 2016. Also, in connection with the purchase, we will pay an additional €1.0 billion, plus 4% compound annual interest, on the third anniversary of the closing of the acquisition. See Note 2—Visa Europe and Note 6—Intangible Assets and Goodwill to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report.
Fair Value Measurements—Financial Instruments
The assessment of fair value of our financial instruments is based on 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, 2017, our financial instruments measured at fair value on a recurring basis included approximately $14.3 billion of assets and $98 million of liabilities. None of these instruments were valued using significant unobservable inputs. See Note 4—Fair Value Measurements and Investments to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements are primarily comprised of guarantees and indemnifications. Visa has no off-balance sheet debt, other than lease and purchase order commitments, as discussed below and reflected in our contractual obligations table.
Indemnifications
We indemnify our financial institution clients for settlement losses suffered due to the failure of any other client to fund its settlement obligations in accordance with our rules. The amount of the indemnification is limited to the amount of unsettled Visa payment transactions at any point in time. We maintain global credit settlement risk policies and procedures to manage settlement risk, which may require clients to post collateral if certain credit standards are not met. See Note 1—Summary of Significant Accounting Policies and Note 10—Settlement Guarantee Management to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report.
In the ordinary course of business, we enter into contractual arrangements with financial institutions and other clients and partners under which we may agree to indemnify the client for certain types of losses incurred relating to the services we provide or otherwise relating to our performance under the applicable agreement.
Contractual Obligations
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 as of September 30, 2017. We believe that we will be able to fund these obligations through cash generated from our operations and available credit facilities.
| Payments Due by Period | |||||||||||||||||||
| Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years | Total | |||||||||||||||
| (in millions) | |||||||||||||||||||
| Long-term debt(1) | $ | 2,298 | $ | 1,074 | $ | 4,974 | $ | 18,386 | $ | 26,732 | |||||||||
| Purchase orders(2) | 827 | 124 | 26 | 2 | 979 | ||||||||||||||
| Leases(3) | 155 | 187 | 121 | 163 | 626 | ||||||||||||||
| Client incentives(4) | 6,306 | 8,475 | 6,663 | 5,344 | 26,788 | ||||||||||||||
| Marketing and sponsorship(5) | 124 | 235 | 73 | — | 432 | ||||||||||||||
| Dividends(6) | 459 | — | — | — | 459 | ||||||||||||||
| Deferred purchase consideration(7) | — | 1,331 | — | — | 1,331 | ||||||||||||||
| Total(8),(9) | $ | 10,169 | $ | 11,426 | $ | 11,857 | $ | 23,895 | $ | 57,347 |
| (1) | Amounts presented include payments for both interest and principal. Also see Note 8—Debt to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report. |
| (2) | Represents agreements to purchase goods and services that specify significant terms, including: fixed or minimum quantities to be purchased, minimum or variable price provisions, and the approximate timing of the transaction. |
| (3) | Includes operating leases for premises, equipment and software licenses, which range in terms from less than one year to twenty years. |
| (4) | Future cash payments for long-term contracts with financial institution clients and other business partners is unknowable due to the inherent unpredictability of payment and transaction volume. These agreements, which range in terms from one to sixteen years, can provide card issuance and/or conversion support, volume/growth targets and marketing and program support based on specific performance requirements. These payment amounts are our best estimates and will likely change materially based on actual client performance, amendments to existing contracts or the execution of new contracts. Related amounts disclosed in Note 16—Commitments and Contingencies to our consolidated financial statements represent the associated expected reduction of revenue related to these agreements, which are also estimates that will likely change materially due to the same factors described above. |
| (5) | Visa is a party to contractual sponsorship agreements ranging from approximately two to sixteen years. These contracts are designed to increase Visa brand recognition, drive Visa product usage, and differentiate Visa against competition. Over the life of these contracts, Visa is required to make payments in exchange for certain advertising and promotional rights. In connection with these contractual commitments, Visa has an obligation to spend certain minimum amounts for advertising and marketing promotion over the life of the contract. For obligations where the individual years of spend are not specified in the contract, we have estimated the timing of when these amounts will be spent. |
| (6) | Includes expected dividend amount of $459 million as dividends were declared in October 2017 and will be paid on December 5, 2017 to all holders of record of Visa's common stock as of November 17, 2017. |
| (7) | On June 21, 2016, we acquired 100% of the share capital of Visa Europe. In connection with the purchase, we will pay an additional €1.0 billion, plus 4% compound annual interest, on the third anniversary of the closing of the Visa Europe acquisition. Amount presented was converted to U.S. dollar at the September 30, 2017 exchange rate. See Note 2—Visa Europe to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report. |
| (8) | We have liabilities for uncertain tax positions of $1.1 billion. At September 30, 2017, we had also accrued $84 million of interest and $34 million of penalties associated with our uncertain tax positions. We cannot determine the range of cash payments that will be made and the timing of the cash settlements, if any, associated with our uncertain tax positions. Therefore, no amounts related to these obligations have been included in the table. |
| (9) | We evaluate the need to make contributions to our pension plan after considering the funded status of the pension plan, movements in the discount rate, performance of the plan assets and related tax consequences. Expected contributions to our pension plan have not been included in the table as such amounts are dependent upon the considerations discussed above, and may result in a wide range of amounts. See Note 9—Pension, Postretirement and Other Benefits to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report and the Liquidity and Capital Resources section of this Management's Discussion and Analysis of Financial Condition and Results of Operations. |
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America which require us to make judgments, assumptions and estimates that affect the amounts reported. See Note 1—Summary of Significant Accounting Policies to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report. 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 Recognition—Client Incentives
Critical estimates. We enter into incentive agreements with financial institution clients, merchants and other business partners for various programs designed to build payments volume, increase Visa product acceptance and win merchant routing transactions over our network. These incentives are primarily accounted for as reductions to operating revenues; however, if a separate identifiable benefit at fair value can be established, they are accounted for as operating expenses. We generally capitalize advance incentive payments under these agreements if select criteria are met. The capitalization criteria include the existence of future economic benefits to Visa, the existence of legally enforceable recoverability language (e.g., early termination clauses), management's ability and intent to enforce the recoverability language and the ability to generate future earnings from the agreement in excess of amounts deferred. Capitalized amounts are amortized over the shorter of the period of contractual recoverability or the corresponding period of economic benefit. Incentives not yet paid are accrued systematically and rationally based on management's estimate of each client's performance. These accruals are regularly reviewed and estimates of performance are adjusted as appropriate, based on changes in performance expectations, actual client performance, amendments to existing contracts or the execution of new contracts.
Assumptions and judgment. Estimation of client incentives relies on forecasts of payments volume, card issuance and card conversion. Performance is estimated using client-reported information, transactional information accumulated from our systems, historical information and discussions with our clients, merchants and business partners.
Impact if actual results differ from assumptions. If actual performance or recoverable cash flows are not consistent with our estimates, client incentives may be materially different than initially recorded. Increases in incentive payments are generally driven by increased payments and transaction volume, which drive our net revenues. 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, 2017, client incentives represented 20% of gross operating revenues.
Legal and Regulatory Matters
Critical estimates. We are currently involved in various 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 legal or regulatory proceedings to which we are a party. We record a liability for such claims when a loss is deemed probable and the amount can be reasonably estimated. Significant judgment may be required in the determination of both 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 may revise our estimates.
Our U.S. retrospective responsibility plan only addresses monetary liabilities from settlements of, or final judgments in, the U.S. covered litigation. The plan's mechanisms include the use of the U.S. litigation escrow account. The accrual related to the U.S. covered litigation could be either higher or lower than the U.S. litigation escrow account balance. We did not record an accrual for the U.S. covered litigation during fiscal 2017. Our Europe retrospective responsibility plan only covers Visa Europe territory covered litigation (and resultant liabilities and losses) relating to the covered period, subject to certain limitations, and does not cover any fines or penalties incurred in the European Commission proceedings or any other matter. See Note 3—U.S. and Europe Retrospective Responsibility Plans and Note 19—Legal Matters to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report.
Impact if actual results differ from assumptions. Due to the inherent uncertainties of the legal and regulatory processes 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 conditions and results of operations. See Note 19—Legal Matters to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report.
Income Taxes
Critical estimates. In calculating our effective income 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 liabilities for uncertain tax positions 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 be partially 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. 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 adverse effect on our financial results and cash flows.
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