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—Financial Statements and Supplementary Data 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.

Financial overview. Our as-reported U.S. GAAP and non-GAAP net income and diluted earnings per share are as follows:

	For the Years Ended September 30,												% Change**(1)**
	2019				2018				2017				2019 vs. 2018			2018 vs. 2017
	(in millions, except percentages and per share data)
Net income, as reported	$	12,080			$	10,301			$	6,699			17	%		54	%
Diluted earnings per share, as reported	$	5.32			$	4.42			$	2.80			20	%		58	%
Non-GAAP net income(2)	$	12,367			$	10,729			$	8,335			15	%		29	%
Non-GAAP diluted earnings per share(2)	$	5.44			$	4.61			$	3.48			18	%		32	%

(1)	Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.

(2)	Non-GAAP net income and non-GAAP diluted earnings per share in fiscal 2019, 2018 and 2017 exclude the impact of certain significant items that we believe are not indicative of our operating performance in these or future periods, as they are either non-recurring or have no cash impact. For a full reconciliation of our non-GAAP financial results, see tables in Non-GAAP financial results below.

Highlights for fiscal 2019. Our business is affected by overall economic conditions and consumer spending. Our business performance during fiscal 2019 reflects continued global consumer spending growth amidst uneven global economic conditions. We recorded net revenues of $23.0 billion for fiscal 2019, an increase of 11% over the prior year, primarily reflecting continued growth in nominal payments volume, nominal cross-border volume and processed transactions. Exchange rate movements in fiscal 2019, partially mitigated by our hedging program, negatively impacted our net revenues growth by approximately one-and-a-half percentage points.

Total operating expenses for fiscal 2019 were $8.0 billion, compared to $7.7 billion in fiscal 2018. The increase over the prior year was primarily driven by higher personnel and marketing as we continue to invest in growing our business, offset by a lower litigation provision.

Non-GAAP financial results. Our financial results for fiscal 2019, 2018 and 2017 reflect the impact of certain significant items that we do not believe are indicative of our ongoing operating performance in these or future periods, as they are either non-recurring or have no cash impact. As such, we believe the presentation of our non-GAAP financial results excluding the following items provides a clearer understanding of our operating performance for the periods presented.

•

Litigation provision. During fiscal 2019 and 2018, we recorded a litigation provision of $370 million and $600 million, respectively, and related tax benefits of $83 million and $137 million, respectively, associated with the interchange multidistrict litigation. The tax impact is determined by applying applicable federal and state tax rates to the litigation provision. Under the U.S. retrospective responsibility plan, we recover the monetary liabilities related to the U.S. covered litigation through a reduction to the conversion rate of our class B common stock to shares of class A common stock. See Note 5—U.S. and Europe Retrospective Responsibility Plans and Note 20—Legal Matters to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data.

•	Charitable contributions

▪

During fiscal 2018, we donated investment securities to the Visa Foundation and recognized a non-cash general and administrative expense of $195 million, before tax, and recorded $193 million of realized gain on the donation of these investments as non-operating income. Net of the related cash tax benefit of $51 million, determined by applying applicable tax rates, adjusted net income decreased by $49 million.

▪

During fiscal 2017, associated with our legal entity reorganization, we recognized a 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.

•

Remeasurement of deferred tax balances. During fiscal 2018, in connection with the Tax Cuts and Jobs Act (the “Tax Act”) reduction of the corporate income tax rate, we remeasured our net deferred tax liabilities as of the enactment date, resulting in the recognition of a non-recurring, non-cash income tax benefit of $1.1 billion. See Note 19—Income Taxes to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data.

•

Transition tax on foreign earnings. During fiscal 2018, in connection with the Tax Act requirement that we include certain untaxed foreign earnings of non-U.S. subsidiaries in our fiscal 2018 taxable income, we recorded a one-time transition tax estimate of approximately $1.1 billion. See Note 19—Income Taxes to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data.

•

Elimination of deferred tax balances. During 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. See Note 19—Income Taxes to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data.

Non-GAAP operating expenses, operating margin, non-operating income (expense), income before income taxes, income tax provision, effective income tax rate, net income and diluted earnings per share 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 financial measures for fiscal 2019, 2018 and 2017:

	Year ended September 30, 2019
	Operating Expenses				Operating Margin (1),(2)			Non-operating Income (Expense)				Income Before Income Taxes				Income Tax Provision				Effective Income Tax Rate**(2)**			Net Income				Diluted Earnings Per Share**(2)**
	(in millions, except percentages and per share data)
As reported	$	7,976			65	%		$	(117	)		$	14,884			$	2,804			18.8	%		$	12,080			$	5.32
Litigation provision	(370		)		2	%		—				370				83							287				0.13
Non-GAAP	$	7,606			67	%		$	(117	)		$	15,254			$	2,887			18.9	%		$	12,367			$	5.44

	Year ended September 30, 2018
	Operating Expenses				Operating Margin (1),(2)			Non-operating Income (Expense)				Income Before Income Taxes				Income Tax Provision				Effective Income Tax Rate**(2)**			Net Income				Diluted Earnings Per Share**(2)**
	(in millions, except percentages and per share data)
As reported	$	7,655			63	%		$	(148	)		$	12,806			$	2,505			19.6	%		$	10,301			$	4.42
Charitable contribution	(195		)		1	%		(193		)		2				51							(49		)		(0.02		)
Litigation provision	(600		)		3	%		—				600				137							463				0.20
Remeasurement of deferred tax balances	—				—	%		—				—				1,133							(1,133		)		(0.49		)
Transition tax on foreign earnings	—				—	%		—				—				(1,147		)					1,147				0.49
Non-GAAP	$	6,860			67	%		$	(341	)		$	13,408			$	2,679			20.0	%		$	10,729			$	4.61

	Year ended September 30, 2017
	Operating Expenses				Operating Margin (1),(2)			Non-operating Income (Expense)				Income Before Income Taxes				Income Tax Provision				Effective Income Tax Rate**(2)**			Net Income				Diluted Earnings Per Share**(2)**
	(in millions, except percentages and per share data)
As reported	$	6,214			66	%		$	(450	)		$	11,694			$	4,995			42.7	%		$	6,699			$	2.80
Charitable contribution	(192		)		1	%		—				192				71							121				0.05
Elimination of deferred tax balances	—				—	%		—				—				(1,515		)					1,515				0.63
Non-GAAP	$	6,022			67	%		$	(450	)		$	11,886			$	3,551			29.9	%		$	8,335			$	3.48

(1)	Operating margin is calculated as operating income divided by net revenues.

(2)	Figures in the table may not recalculate exactly due to rounding. Operating margin, effective income tax rate, diluted earnings per share and their respective totals are calculated based on unrounded numbers.

Interchange multidistrict litigation. During fiscal 2019, we recorded an additional accrual of $370 million to address claims associated with the interchange multidistrict litigation, resulting in an accrued litigation balance related to U.S. covered litigation of $1.2 billion at September 30, 2019. We also deposited $300 million of operating cash into the U.S. litigation escrow account. See Note 5—U.S. and Europe Retrospective Responsibility Plans and Note 20—Legal Matters to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data*.*

Reduction in as-converted shares. During fiscal 2019, total as-converted class A common stock was reduced by 58 million shares at an average price of $154.62 per share. Of the 58 million shares, 56 million were repurchased in the open market using $8.6 billion of operating cash on hand. Additionally, in September 2019, we deposited $300 million of operating cash into the litigation escrow account previously established under the U.S. retrospective responsibility plan. Also, we recovered $8 million of VE territory covered losses in accordance with the Europe retrospective responsibility plan during fiscal 2019. The deposit and recovery have the same economic effect on earnings per share as repurchasing our class A common stock because they reduce the class B common stock conversion rate and the UK&I and Europe preferred stock conversion rates and consequently, reduce the as-converted class A common stock share count. See Note 5—U.S. and Europe Retrospective Responsibility Plans and Note 14—Stockholders’ Equity to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data.

Common stock repurchases. In January 2019, our board of directors authorized an additional $8.5 billion share repurchase program. As of September 30, 2019, the program had remaining authorized funds of $4.1 billion for share repurchase. All share repurchase programs authorized prior to January 2019 have been completed. See Note 14—Stockholders’ Equity to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data.

Payments volume and processed transactions. 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. During the three months ended December 31, 2018, we updated our definition of payments volume to now include all disbursement volume related to Visa Direct, in addition to the funding volume previously included. All prior periods presented have been adjusted accordingly. Please refer to the Operational Performance Data section of Exhibit 99.1 on Form 8-K filed on January 30, 2019 for more details on the impact from this update in payments volume definition.

Nominal payments volume over the prior year posted low double-digit growth in the U.S. and in line with 2018 growth. Nominal international payments volume growth of 3% for the 12 months ended June 30, 2019(1) was negatively impacted by the overall strengthening of the U.S. dollar. On a constant-dollar basis, which excludes the impact of exchange rate movements, our international payments volume growth rate for the 12 months ended June 30, 2019 and 2018 was 10% and 11%, respectively. Growth in processed transactions reflects the ongoing worldwide shift to electronic payments.

The following tables(2) present nominal payments and cash volume:

	U.S.											International											Visa Inc.
	12 months ended June 30,****(1)											12 months ended June 30,****(1)											12 months ended June 30,****(1)
	2019				2018				% Change			2019				2018				% Change			2019				2018				% Change
	(in billions, except percentages)
Nominal payments volume
Consumer credit	$	1,540			$	1,441			7	%		$	2,487			$	2,457			1	%		$	4,027			$	3,898			3	%
Consumer debit(3)	1,702				1,521				12	%		1,876				1,792				5	%		3,577				3,313				8	%
Commercial(4)	633				564				12	%		381				364				5	%		1,015				927				9	%
Total nominal payments volume	$	3,875			$	3,527			10	%		$	4,744			$	4,612			3	%		$	8,619			$	8,139			6	%
Cash volume	573				563				2	%		2,260				2,437				(7	)%		2,833				3,000				(6	)%
Total nominal volume**(5)**	$	4,448			$	4,089			9	%		$	7,004			$	7,049			(1	)%		$	11,452			$	11,139			3	%

	U.S.											International											Visa Inc.
	12 months ended June 30,****(1)											12 months ended June 30,****(1)											12 months ended June 30,****(1)
	2018				2017				% Change			2018				2017				% Change			2018				2017				% Change
	(in billions, except percentages)
Nominal payments volume
Consumer credit	$	1,441			$	1,309			10	%		$	2,457			$	2,186			12	%		$	3,898			$	3,495			12	%
Consumer debit(3)	1,521				1,379				10	%		1,792				1,510				19	%		3,313				2,888				15	%
Commercial(4)	564				507				11	%		364				306				19	%		927				812				14	%
Total nominal payments volume	$	3,527			$	3,194			10	%		$	4,612			$	4,002			15	%		$	8,139			$	7,196			13	%
Cash volume	563				544				3	%		2,437				2,348				4	%		3,000				2,892				4	%
Total nominal volume**(5)**	$	4,089			$	3,738			9	%		$	7,049			$	6,350			11	%		$	11,139			$	10,088			10	%

The following table(2) presents nominal and constant payments and cash volume growth:

	International												Visa Inc.
	12 months ended June 30, 2019 vs 2018**(1)**						12 months ended June 30, 2018 vs 2017**(1)**						12 months ended June 30, 2019 vs 2018**(1)**						12 months ended June 30, 2018 vs 2017**(1)**
	Nominal			Constant**(6)**			Nominal			Constant**(6)**			Nominal			Constant**(6)**			Nominal			Constant**(6)**
Payments volume growth
Consumer credit	1	%		8	%		12	%		9	%		3	%		7	%		12	%		10	%
Consumer debit(3)	5	%		11	%		19	%		13	%		8	%		12	%		15	%		12	%
Commercial(4)	5	%		13	%		19	%		14	%		9	%		13	%		14	%		13	%
Total payments volume growth	3	%		10	%		15	%		11	%		6	%		10	%		13	%		11	%
Cash volume growth	(7	)%		—	%		4	%		2	%		(6	)%		—	%		4	%		2	%
Total volume growth	(1	)%		6	%		11	%		8	%		3	%		7	%		10	%		8	%

(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, 2019, 2018 and 2017, were based on nominal payments volume reported by our financial institution clients for the 12 months ended June 30, 2019, 2018 and 2017, respectively.

(2)	Figures in the tables may not recalculate exactly due to rounding. Percentage changes and totals 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)

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.

(6)	Growth on a constant-dollar basis excludes the impact of foreign currency fluctuations against the U.S. dollar.

The following table(1) provides the number of transactions involving cards and other form factors carrying the Visa, Visa Electron, Interlink, VPAY and PLUS cards processed on Visa’s networks during the fiscal periods presented:

	2019			2018			2017			2019 vs. 2018 % Change			2018 vs. 2017 % Change
	(in millions, except percentages)
Visa processed transactions	138,329			124,320			111,215			11	%		12	%

(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.

Financial Information Presentation

Net Revenues

Our net 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 acquirers, including the merchant discount rate. Our acquiring clients are generally responsible for soliciting merchants as well as establishing and earning these fees.

The following sets forth the components of our net revenues:

Service revenues consist mainly of revenues earned for services provided in support of client usage of Visa payment services. Current quarter service revenues are primarily assessed using a calculation of current quarter’s 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 volumes are transacted.

Data processing revenues are earned for authorization, clearing, settlement, value-added services, 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 performed.

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, or financial institution originating the transaction, is different from that of the beneficiary. International transaction revenues are recognized in the same period the cross-border transactions occur or services are performed.

Other revenues consist mainly of value-added services, license fees for use of the Visa brand or technology, account holder services, certification, licensing and product enhancements, such as extended account holder protection and concierge services. Other revenues are recognized in the same period the related transactions occur or services are performed.

Client incentives consist of incentives provided in contracts with financial institution clients, merchants and strategic partners for various programs designed to grow 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 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 consist mainly of product enhancements, facilities costs, travel activities, indirect taxes, foreign exchange gains and losses and other corporate expenses incurred in support of our business.

Litigation provision represents litigation expenses 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.

Non-operating Income (Expense)

Non-operating income (expense) primarily includes interest expense, gains and losses earned on investments, income from derivative instruments not associated with our core business, as well as the non-service components of net periodic pension income and expenses.

For discussion related to the results of operations and liquidity and capital resources for fiscal 2018 compared to fiscal 2017 refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2018 Form 10-K, filed with the United States Securities and Exchange Commission on November 16, 2018.

Results of Operations

Net Revenues

The following table sets forth our net revenues earned in the U.S. and internationally:

	For the Years Ended September 30,												$ Change								% Change**(1)**
	2019				2018				2017				2019 vs. 2018				2018 vs. 2017				2019 vs. 2018			2018 vs. 2017
	(in millions, except percentages)
U.S.	$	10,279			$	9,332			$	8,704			$	947			$	628			10	%		7	%
International	12,698				11,277				9,654				1,421				1,623				13	%		17	%
Net revenues	$	22,977			$	20,609			$	18,358			$	2,368			$	2,251			11	%		12	%

(1)	Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.

The increase in net revenues in fiscal 2019 reflects the continued growth in nominal payments volume, nominal cross-border volume, and processed transactions. The increase in revenues were partially offset by increases in client incentives in fiscal 2019.

Our net revenues are impacted by the overall strengthening or weakening of the U.S. dollar as payments volume and related revenues denominated in local currencies are converted to U.S. dollars. Exchange rate movements in fiscal 2019, as partially mitigated by our hedging program, negatively impacted our net revenues growth by approximately one-and-a-half percentage points.

The following table sets forth the components of our net revenues:

	For the Years Ended September 30,												$ Change								% Change**(1)**
	2019				2018				2017				2019 vs. 2018				2018 vs. 2017				2019 vs. 2018			2018 vs. 2017
	(in millions, except percentages)
Service revenues	$	9,700			$	8,918			$	7,975			$	782			$	943			9	%		12	%
Data processing revenues	10,333				9,027				7,786				1,306				1,241				14	%		16	%
International transaction revenues	7,804				7,211				6,321				593				890				8	%		14	%
Other revenues	1,313				944				841				369				103				39	%		12	%
Client incentives	(6,173		)		(5,491		)		(4,565		)		(682		)		(926		)		12	%		20	%
Net revenues	$	22,977			$	20,609			$	18,358			$	2,368			$	2,251			11	%		12	%

(1)	Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.

•	Service revenues increased primarily due to 6% growth in nominal payments volume and select pricing modifications.

•	Data processing revenues increased mainly due to overall growth in processed transactions of 11% as well as select pricing modifications.

•	International transaction revenues increased primarily due to nominal cross-border volume growth of 2% and select pricing modifications.

•	Other revenues increased primarily due to changes in the classification and timing of recognition of revenue as a result of the adoption of the new revenue standard and an increase in revenues from value-added services.

•

Client incentives increased mainly due to incentives recognized on long-term client contracts that were initiated or renewed during fiscal 2019 and overall growth in global payments volume. As a result of the adoption of the new revenue standard, client incentives were also impacted by changes in classification and timing of recognition. 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:

	For the Years Ended September 30,												$ Change								% Change**(1)**
	2019				2018				2017				2019 vs. 2018				2018 vs. 2017				2019 vs. 2018			2018 vs. 2017
	(in millions, except percentages)
Personnel	$	3,444			$	3,170			$	2,628			$	274			$	542			9	%		21	%
Marketing	1,105				988				922				117				66				12	%		7	%
Network and processing	721				686				620				35				66				5	%		11	%
Professional fees	454				446				409				8				37				2	%		9	%
Depreciation and amortization	656				613				556				43				57				7	%		10	%
General and administrative	1,196				1,145				1,060				51				85				4	%		8	%
Litigation provision	400				607				19				(207		)		588				(34	)%		NM
Total operating expenses**(2)**	$	7,976			$	7,655			$	6,214			$	321			$	1,441			4	%		23	%

(1)	Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.

(2)	Operating expenses for fiscal 2019, 2018 and 2017 include significant items that we do not believe are indicative of our operating performance as they are related to the interchange multidistrict litigation provision or charitable donations. See Overview within this Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations*.*

•	Personnel expenses increased due to continued headcount growth in support of our investment strategy for future growth.

•	Marketing expenses increased mainly due to changes in the classification and timing of recognition of certain marketing expenses as a result of the adoption of the new revenue standard. The increase was partially offset by spend for the 2018 Winter Olympics in PyeongChang and 2018 FIFA World CupTM in fiscal 2018, which did not recur in fiscal 2019.

•

General and administrative expenses increased primarily as a result of unfavorable foreign currency fluctuations, changes in the classification and timing of recognition of certain general and administrative expenses as a result of the adoption of the new revenue standard, higher indirect taxes, higher product enhancement costs and global facilities expansion in support of our business growth.The increase was partially offset by a $195 million charitable contribution to the Visa Foundation in fiscal 2018, which did not recur in fiscal 2019.

•	Litigation provision decreased primarily due to a $370 million accrual in fiscal 2019 compared to a $600 million accrual in fiscal 2018 related to the interchange multidistrict litigation. See Note 5—U.S. and Europe Retrospective Responsibility Plans and Note 20—Legal Matters to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report.

Non-operating Income (Expense)

The following table sets forth the components of our non-operating income (expense):

	For the Years Ended September 30,												$ Change								% Change**(1)**
	2019				2018				2017				2019 vs. 2018				2018 vs. 2017				2019 vs. 2018			2018 vs. 2017
	(in millions, except percentages)
Interest expense, net	$	(533	)		$	(612	)		$	(563	)		$	79			$	(49	)		(13	)%		9	%
Investment income and other	416				464				113				(48		)		351				(10	)%		311	%
Total non-operating income (expense)	$	(117	)		$	(148	)		$	(450	)		$	31			$	302			(20	)%		(67	)%

(1)	Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.

•	Interest expense decreased primarily as a result of entering into derivative instruments in fiscal 2019 that lowered the average cost of borrowing on a portion of our outstanding debt. See Note 9—Debt and Note 12—Derivative and Non-derivative Financial Instruments to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report.

•

Investment income and other decreased primarily due to gains of $193 million from the donation of investment securities to the Visa Foundation in fiscal 2018 which did not recur fiscal 2019, offset by higher gains on our equity investments and interest income on our cash and investments. See Note 6—Fair Value Measurements and Investments to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report.

Effective Income Tax Rate

	For the Years Ended September 30,									Change
	2019			2018			2017			2019 vs. 2018			2018 vs. 2017
Effective income tax rate	19	%		20	%		43	%		(1	)%		(23	)%

The effective tax rate in fiscal 2019 differs from the effective tax rate in fiscal 2018 primarily due to:

•	a decrease in federal statutory tax rate as a result of the Tax Act, from a blended rate of 24.5% in fiscal 2018 to a rate of 21% in fiscal 2019, as discussed below;

•	new provisions enacted as part of the Tax Act, including the deduction for foreign-derived intangible income (“FDII”) and tax on global intangible low-tax income (“GILTI”); and

•	the absence of the following items recorded in fiscal 2018:

▪	a $1.1 billion one-time transition tax expense on certain untaxed foreign earnings in accordance with the Tax Act;

▪	a $1.1 billion non-recurring, non-cash benefit from the remeasurement of deferred tax balances due to the reduction in U.S. federal tax rate enacted by the Tax Act; and

▪	$161 million of tax benefits due to various non-recurring audit settlements.

The Tax Act, enacted on December 22, 2017, transitioned the U.S. tax system to a territorial system and lowered the statutory federal corporate income tax rate from 35% to 21%. The reduction of the statutory federal corporate tax rate to 21% became effective on January 1, 2018. In fiscal 2018, our statutory federal corporate tax rate was a blended rate of 24.5%, which was reduced to 21% in fiscal 2019. The Tax Act enacted several new tax provisions effective for us on October 1, 2018, most notably FDII and GILTI.

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:

	For the Years Ended September 30,
	2019				2018				2017
	(in millions)
Total cash provided by (used in):
Operating activities	$	12,784			$	12,941			$	9,317
Investing activities	(591		)		(3,084		)		735
Financing activities	(12,061		)		(10,790		)		(5,924		)
Effect of exchange rate changes on cash and cash equivalents	(277		)		(101		)		236
Increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents	$	(145	)		$	(1,034	)		$	4,364

Operating activities. Cash provided by operating activities in fiscal 2019 was positively impacted by continued growth in our underlying business. Fiscal 2019 was lower than the prior fiscal year primarily due to higher payments in the current year from the litigation escrow account and the first installment payment of the transition tax in connection with the Tax Act, partially offset by continued growth in our underlying business.

Investing activities. Cash used in investing activities in fiscal 2019 was lower than the prior year due to higher proceeds from sales and maturities of investment securities, combined with fewer purchases, partially offset by $0.7 billion of purchase consideration paid for acquisitions, net of cash and restricted cash acquired, and $0.5 billion of purchases of other investments.

Financing activities. Cash used in financing activities in fiscal 2019 increased primarily due to higher class A common stock repurchases, higher dividends paid and a $1.2 billion payment of the deferred purchase consideration related to the Visa Europe acquisition. See Note 14—Stockholders’ Equity, 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.

Foreign Earnings. Pursuant to the Tax Act, we are required to pay U.S. tax on most of the undistributed and untaxed foreign earnings of non-U.S. subsidiaries accumulated as of December 31, 2017. The transition tax will be paid over a period of eight years as permitted by the Tax Act. As a result of the Tax Act, we are no longer subject to incremental U.S. federal tax on foreign earnings of non-U.S. subsidiaries in the event that we repatriate these earnings back to the U.S.

Available-for-sale debt securities. Our investment portfolio is designed to invest cash in securities which enables us to meet our working capital and liquidity needs. Our investment portfolio consists of debt securities issued by the U.S. Treasury or U.S. government-sponsored agencies. The majority of these investments, $4.1 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, they 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, 2019. See Note 9—Debt to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report.

Credit facility. We have an unsecured $5.0 billion revolving credit facility (the “Credit Facility”) which expires on July 25, 2024. There were no borrowings under the Credit Facility as of September 30, 2019. See Note 9—Debt to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report.

Universal shelf registration statement. In July 2018, 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 2021.

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. In September 2019, we deposited $300 million into the U.S. litigation escrow account to address claims associated with the interchange multidistrict litigation. See Note 5—U.S. and Europe Retrospective Responsibility Plans and Note 20—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, 2019, was $1.2 billion and is reflected as restricted cash equivalents in our consolidated balance sheets. 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, 2019, 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	AA-		Stable		Aa3		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 2019, we were not required to fund settlement-related working capital. Our average daily net settlement position was a net payable of $574 million. We hold approximately $7.5 billion of available liquidity globally as of September 30, 2019, 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. In September 2018, Visa and other defendants entered into an Amended Settlement Agreement with plaintiffs in the interchange multidistrict litigation purporting to represent a class of plaintiffs seeking monetary damages, which superseded and amended the 2012 Settlement Agreement. On November 7, 2019, the district court held a hearing on whether to approve the Amended Settlement Agreement. We expect a decision by the district court in the first half of calendar year 2020. If approved, the final settlement amount would be approximately $5.5 billion. Our share represents approximately $3.6 billion, which would be satisfied through funds previously deposited with the court. No additional funds are required for this class settlement. Under the Amended Settlement Agreement, defendants are entitled to receive takedown payments of up to 25% of the original cash payments made into the settlement fund, based on the percentage of payment card sales volume attributable to merchants who have chosen to opt out of the settlement class. Visa’s portion of the maximum takedown payments, which we expect to receive and is calculated to be $467 million, would be returned to our U.S. litigation escrow account. This will increase our taxable income, thereby increasing our taxes paid.

During September 2019, we deposited $300 million into the U.S. litigation escrow account to address individual claims for members who have chosen to opt out of the Amended Settlement Agreement. At September 30, 2019, the U.S. litigation escrow account had an available balance of $1.2 billion. The funds in the U.S. litigation escrow account as well as the $467 million takedown payments that we expect to be returned will be available for settlement with these opt-out merchants. Under the terms of the U.S. retrospective responsibility plan, when we make a deposit into the litigation escrow account, the shares of class B common stock are subject to dilution through a reduction to the conversion rate of the shares of class B common stock to shares of class A common stock. The U.S. retrospective responsibility plan was created to insulate Visa and our class A common shareholders from financial liability for certain litigation cases. See Note 5—U.S. and Europe Retrospective Responsibility Plans and Note 20—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.

Reduction in as-converted shares. During fiscal 2019, share repurchases and escrow deposits reduced as-converted class A common stock by 58 million at an average price of $154.62 per share. Of the 58 million shares, 56 million were repurchased in the open market using $8.6 billion of cash on hand. Additionally, we deposited $300 million of operating cash into the U.S. litigation escrow account previously established under the U.S. retrospective responsibility plan. The deposit has the same economic effect on earnings per share as repurchasing our class A common stock because it reduces the class B conversion rate and consequently the as-converted class A common stock share count. See Note 5—U.S. and Europe Retrospective Responsibility Plans and Note 14—Stockholders’ Equity to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report.

In January 2019, our board of directors authorized a share repurchase program for $8.5 billion. This authorization has no expiration date. As of September 30, 2019, we had remaining authorized funds of $4.1 billion. All share repurchase programs authorized prior to January 2019 have been completed. See Note 14—Stockholders’ Equity to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report.

Dividends. During fiscal 2019, we declared and paid $2.3 billion in dividends. On October 22, 2019, our board of directors declared a quarterly cash dividend of $0.30 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 $673 million in connection with this dividend on December 3, 2019. See Note 14—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 U.S. 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 2019, we made contributions to our U.S. pension and other postretirement benefit plans of $3 million. For Visa Europe’s UK pension plans, we made contributions of $10 million in fiscal 2019, subsequent to the acquisition date as agreed upon with the trustees to improve the funding level of the plans. In fiscal 2020, 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 $10 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 10—Pension and Other Postretirement 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 2019, 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 fiscal 2019, we acquired businesses using $0.7 billion of cash on hand, primarily reflecting total purchase price less cash and restricted cash received. These acquisitions will help Visa’s clients and merchant partners accelerate digital commerce. In connection with our purchase of Visa Europe in June 2016, we were required to pay an additional €1.0 billion, plus 4% compound annual interest, on the third anniversary of the closing of the Visa Europe acquisition. In June 2019, we paid €1.1 billion in fulfillment of this obligation. See Note 2—Acquisitions and Note 8—Intangible Assets and Goodwill to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report.

Derivative Financial Instruments

In fiscal 2019, we entered into interest rate and cross-currency swap agreements on a portion of our outstanding 3.15% Senior Notes due December 2025 that allow us to manage our interest rate exposure through a combination of fixed and floating rates and reduce our overall cost of borrowing. Together these swap agreements effectively convert a portion of our U.S. dollar denominated fixed-rate payments into euro denominated floating-rate payments. See Note 6—Fair Value Measurements and Investments and Note 12—Derivative and Non-derivative Financial Instruments 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, 2019, our financial instruments measured at fair value on a recurring basis included approximately $13.5 billion of assets and $0.2 billion of liabilities. None of these instruments were valued using significant unobservable inputs. See Note 6—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 arrangements, other than lease and purchase order commitments, as discussed and reflected in our contractual obligations table below.

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 11—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, 2019. 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)	$	537			$	4,975			$	3,056			$	15,332			$	23,900
Purchase obligations(2)	1,598				782				406				857				3,643
Leases(3)	143				227				178				250				798
Transition tax(4)	—				164				243				474				881
Dividends(5)	673				—				—				—				673
Total**(6),(7),(8)**	$	2,951			$	6,148			$	3,883			$	16,913			$	29,895

(1)	Amounts presented include payments for both interest and principal. Also see Note 9—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. 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.

(3)	Includes operating leases for premises, equipment and software licenses, which range in terms from less than one year to twenty-six years.

(4)	Amounts presented relate to the estimated transition tax, net of foreign tax credit carryovers, on certain foreign earnings of non-U.S. subsidiaries. See Note 19—Income Taxes to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data of this report.

(5)	Includes expected dividend amount of $673 million as dividends were declared on October 22, 2019 and will be paid on December 3, 2019 to all holders of record of Visa’s common stock as of November 15, 2019.

(6)

We have liabilities for uncertain tax positions of $1.7 billion as of September 30, 2019. At September 30, 2019, we had also accrued $165 million of interest and $26 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.

(7)

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 10—Pension and Other Postretirement 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.

(8)

Future cash payments for long-term contracts with financial institution clients and other business partners are not included in the table as the amounts are unknowable due to the inherent unpredictability of payment and transaction volume. These agreements, which range in terms from one to fifteen years, can provide card issuance and/or conversion support, volume/growth targets or marketing and program support based on specific performance requirements. As of September 30, 2019, we have $4.1 billion of client incentives liability recorded on the consolidated balance sheet related to these arrangements.

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 long-term incentive agreements with financial institution clients, merchants and other business partners for various programs designed to increase revenue by growing payments volume, increasing Visa product acceptance, winning merchant routing transactions over to our network and driving innovation. These incentives are primarily accounted for as reductions to net revenues; however, if a separate identifiable benefit at fair value can be established, they are accounted for as operating expenses. Incentives are recognized systematically and rationally based on management’s estimate of each client’s performance. These estimates are regularly reviewed and 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 and transaction volume, card issuance and card conversion. Performance is estimated using client-reported information, transactional information accumulated from our systems, historical information, market and economic conditions and discussions with our clients, merchants and business partners.

Impact if actual results differ from assumptions. If actual performance is 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, 2019, client incentives represented 21% of gross 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 estimate the 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 a potential loss is reasonably estimable. Our judgments are subjective based on management’s understanding of the litigation profile, the specifics of each case, our history with similar proceedings, advice of in-house and outside legal counsel to the extent appropriate and management’s best estimate of incurred loss. As additional information becomes available, we reassess the potential loss related to pending claims and may revise our estimates.

We have entered into loss sharing agreements that reduce our potential liability under certain litigation. However, 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. 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 5—U.S. and Europe Retrospective Responsibility Plans and Note 20—Legal Matters to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data.

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 20—Legal Matters to our consolidated financial statements included in Item 8—Financial Statements and Supplementary Data.

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.