NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1—Summary of Significant Accounting Policies
Organization. Visa Inc. (“Visa” or the “Company”) is a global payments technology company that enables fast, secure and reliable electronic payments across more than 200 countries and territories. Visa and its wholly-owned consolidated subsidiaries, including Visa U.S.A. Inc. (“Visa U.S.A.”), Visa International Service Association (“Visa International”), Visa Worldwide Pte. Limited, Visa Europe Limited (“Visa Europe”), Visa Canada Corporation (“Visa Canada”), Visa Technology & Operations LLC and CyberSource Corporation, operate one of the world’s largest electronic payments networks — VisaNet — which facilitates authorization, clearing and settlement of payment transactions and enables the Company to provide its financial institution and merchant clients a wide range of products, platforms and value-added services. Visa is not a financial institution and does not issue cards, extend credit or set rates and fees for account holders on Visa products. In most cases, account holder and merchant relationships belong to, and are managed by, Visa’s financial institution clients.
Consolidation and basis of presentation. The accompanying unaudited consolidated financial statements include the accounts of Visa and its consolidated entities and are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Company consolidates its majority-owned and controlled entities, including variable interest entities (“VIEs”) for which the Company is the primary beneficiary. The Company’s investments in VIEs have not been material to its unaudited consolidated financial statements as of and for the periods presented. All significant intercompany accounts and transactions are eliminated in consolidation.
The accompanying unaudited consolidated financial statements are presented in accordance with the U.S. Securities and Exchange Commission (“SEC”) requirements for Quarterly Reports on Form 10-Q and, consequently, do not include all of the annual disclosures required by U.S. GAAP. Reference should be made to the Visa Annual Report on Form 10-K for the year ended September 30, 2019 for additional disclosures, including a summary of the Company’s significant accounting policies.
In the opinion of management, the accompanying unaudited consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods presented.
Use of estimates. The preparation of accompanying unaudited consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions about future events. These estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited consolidated financial statements and reported amounts of revenues and expenses during the reporting period. These estimates may change, as new events occur and additional information is obtained, and will be recognized in the consolidated financial statements in the period in which such changes occur. Future actual results could differ materially from these estimates. The worldwide spread of coronavirus (“COVID-19”) has created significant uncertainty in the global economy. There have been no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of COVID-19 and the extent to which COVID-19 continues to impact the Company’s business, results of operations and financial condition will depend on future developments, which are highly uncertain and difficult to predict.
Recently Issued and Adopted Accounting Pronouncements.
In February 2016, the FASB issued ASU 2016-02, which requires the recognition of lease assets and lease liabilities arising from operating leases on the balance sheet. Subsequently, the FASB also issued a series of amendments to this new leases standard that address the transition methods available and clarify the guidance for lessor costs and other aspects of the new leases standard. The Company adopted the standard effective October 1, 2019 using the modified retrospective transition method with comparative periods continuing to be reported using the prior leases standard. The Company elected to apply the package of practical expedients permitted under the transition guidance, allowing the Company to carry forward the historical assessment of whether a contract was or
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
contains a lease, lease classification and capitalization of initial direct costs. The adoption did not have a material impact on the consolidated financial statements.
In accordance with ASU 2016-02, the Company determines if an arrangement is a lease at its inception. Right-of-use (“ROU”) assets, and corresponding lease liabilities, are recognized at the commencement date based on the present value of remaining lease payments over the lease term. For this purpose, the Company considers only payments that are fixed and determinable at the time of commencement. As a majority of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The ROU asset also includes any lease payments made prior to commencement and is recorded net of any lease incentives received. The lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise such options. The Company does not record a ROU asset and corresponding liability for leases with terms of 12 months or less.
The Company does not include renewals in the determination of the lease term unless the renewals are deemed to be reasonably assured at lease commencement. Lease agreements generally contain lease and non-lease components. Non-lease components primarily include payments for maintenance and utilities. The Company does not combine lease payments with non-lease components for any of its leases. Operating leases are recorded as ROU assets, which are included in other assets. The current portion of lease liabilities are included in accrued liabilities and the long-term portion is included in other liabilities on the consolidated balance sheet. The Company’s lease cost consists of amounts recognized under lease agreements in the results of operations adjusted for impairment and sublease income.
In February 2018, the FASB issued ASU 2018-02, which allows a reclassification from accumulated other comprehensive income to retained earnings for adjustments to tax effects that were originally recorded in other comprehensive income due to changes in the U.S. federal corporate income tax rate resulting from the enactment of the U.S. tax reform legislation, commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Company adopted the ASU effective October 1, 2019. The adoption did not have a material impact on the consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in the existing guidance for income taxes and making other minor improvements. The amendments in the ASU are effective for the Company on October 1, 2021. The Company does not plan to early adopt the ASU at this time. The adoption is not expected to have a material impact on the consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, which clarifies that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting for the purposes of applying the fair value measurement alternative. The amendments in the ASU are effective for the Company on October 1, 2021. The adoption is not expected to have a material impact on the consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, which provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate or another reference rate expected to be discontinued because of reference rate reform. The amendments in the ASU are effective for the Company upon issuance through December 31, 2022. The Company is evaluating the effect ASU 2020-04 will have on its consolidated financial statements.
Note 2—Acquisitions
Pending Acquisition. On January 13, 2020, the Company entered into a definitive agreement to acquire Plaid, Inc. for $5.3 billion. The Company will pay approximately $4.9 billion of cash and $0.4 billion of retention equity and deferred equity consideration. This acquisition is subject to customary closing conditions, including ongoing regulatory reviews and approvals, which are expected to be completed by the end of 2020.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
Note 3—Revenues
The nature, amount, timing and uncertainty of the Company’s revenues and cash flows and how they are affected by economic factors are most appropriately depicted through the Company’s revenue categories and geographical markets. The following tables disaggregate the Company’s net revenues by revenue category and by geography for the three and nine months ended June 30, 2020 and 2019:
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|
|
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|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Nine Months Ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(in millions)
|
|
|
|
|
|
|
|
Service revenues
|
$
|
2,409
|
|
|
$
|
2,405
|
|
|
$
|
7,587
|
|
|
$
|
7,164
|
|
|
Data processing revenues
|
2,525
|
|
|
2,662
|
|
|
8,100
|
|
|
7,564
|
|
|
International transaction revenues
|
1,102
|
|
|
1,977
|
|
|
4,953
|
|
|
5,624
|
|
|
Other revenues
|
314
|
|
|
342
|
|
|
1,071
|
|
|
968
|
|
|
Client incentives
|
(1,513)
|
|
|
(1,546)
|
|
|
(4,966)
|
|
|
(4,480)
|
|
|
Net revenues
|
$
|
4,837
|
|
|
$
|
5,840
|
|
|
$
|
16,745
|
|
|
$
|
16,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Nine Months Ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(in millions)
|
|
|
|
|
|
|
|
U.S.
|
$
|
2,380
|
|
|
$
|
2,587
|
|
|
$
|
7,747
|
|
|
$
|
7,573
|
|
|
International
|
2,457
|
|
|
3,253
|
|
|
8,998
|
|
|
9,267
|
|
|
Net revenues
|
$
|
4,837
|
|
|
$
|
5,840
|
|
|
$
|
16,745
|
|
|
$
|
16,840
|
|
Note 4—Cash, Cash Equivalents, Restricted Cash and Restricted Cash Equivalents
The Company’s cash and cash equivalents include cash and certain highly liquid investments with original maturities of 90 days or less from the date of purchase. Cash equivalents are primarily recorded at cost, which approximates fair value due to their generally short maturities. The Company defines restricted cash and restricted cash equivalents as cash and cash equivalents that cannot be withdrawn or used for general operating activities.
The Company reconciles cash, cash equivalents, restricted cash and restricted cash equivalents reported in the consolidated balance sheets that aggregate to the beginning and ending balances shown in the consolidated statements of cash flows as follows:
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|
June 30,
2020
|
|
September 30,
2019
|
|
|
(in millions)
|
|
|
|
Cash and cash equivalents
|
$
|
13,898
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|
|
$
|
7,838
|
|
|
Restricted cash and restricted cash equivalents:
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|
U.S. litigation escrow
|
1,148
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|
|
1,205
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|
|
Customer collateral
|
1,759
|
|
|
1,648
|
|
|
Prepaid expenses and other current assets
|
129
|
|
|
141
|
|
|
Cash, cash equivalents, restricted cash and restricted cash equivalents
|
$
|
16,934
|
|
|
$
|
10,832
|
|
Note 5—U.S. and Europe Retrospective Responsibility Plans
U.S. Retrospective Responsibility Plan
Under the terms of the U.S. retrospective responsibility plan, the Company maintains an escrow account from which settlements of, or judgments in, certain litigation referred to as the “U.S. covered litigation” are paid. The escrow funds are held in money market investments along with interest income earned, less applicable taxes, and are classified as restricted cash equivalents on the consolidated balance sheets.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
On December 13, 2019, the district court entered the final judgment order approving the Amended Settlement Agreement with the Damages Class plaintiffs in the Interchange Multidistrict Litigation proceedings. A takedown payment of approximately $467 million was received on December 27, 2019, and deposited into the Company’s litigation escrow account. The deposit into the litigation escrow account and reestablishment of a prior accrual to address opt-out claims was recorded during the nine months ended June 30, 2020. The accrual related to the U.S. covered litigation could be either higher or lower than the litigation escrow account balance. See Note 14—Legal Matters.
The following table sets forth the changes in the restricted cash equivalents—U.S. litigation escrow account:
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|
|
|
|
Nine Months Ended
June 30,
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|
|
|
|
2020
|
|
2019
|
|
|
(in millions)
|
|
|
|
Balance at beginning of period
|
$
|
1,205
|
|
|
$
|
1,491
|
|
|
Return of takedown payment to the litigation escrow account
|
467
|
|
|
—
|
|
|
Payments to class plaintiffs’ settlement fund(1)
|
—
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|
|
(600)
|
|
|
Payments to opt-out merchants(1) and interest earned on escrow funds
|
(524)
|
|
|
11
|
|
|
Balance at end of period
|
$
|
1,148
|
|
|
$
|
902
|
|
(1)These payments are associated with the Interchange Multidistrict Litigation. See Note 14—Legal Matters.
Europe Retrospective Responsibility Plan
Visa Inc., Visa International and Visa Europe are parties to certain existing and potential litigation relating to the setting of multilateral interchange fee rates in the Visa Europe territory (the “VE territory covered litigation”). Under the terms of the Europe retrospective responsibility plan, the Company is entitled to recover certain losses resulting from VE territory covered litigation (the “VE territory covered losses”) through a periodic adjustment to the class A common stock conversion rates applicable to the UK&I and Europe preferred stock. VE territory covered losses are recorded in “right to recover for covered losses” within equity before the corresponding adjustment to the applicable conversion rate is effected. Adjustments to the conversion rate may be executed once in any six-month period unless a single, individual loss greater than €20 million is incurred, in which case, the six-month limitation does not apply. When the adjustment to the conversion rate is made, the amount previously recorded in “right to recover for covered losses” as contra-equity is then recorded against the book value of the preferred stock within stockholders’ equity.
During the three and nine months ended June 30, 2020, the Company recovered $164 million of VE territory covered losses through adjustments to the class A common stock conversion rates applicable to the UK&I and Europe preferred stock. The conversion rates applicable to the UK&I and Europe preferred stock were reduced from 12.936 and 13.884, respectively, as of September 30, 2019 to 12.775 and 13.722, respectively, as of June 30, 2020.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
The following table sets forth the activities related to VE territory covered losses in preferred stock and “right to recover for covered losses” within equity during the nine months ended June 30, 2020.
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Preferred Stock
|
|
|
|
Right to Recover for Covered Losses
|
|
|
UK&I
|
|
Europe
|
|
|
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|
(in millions)
|
|
|
|
|
|
Balance as of September 30, 2019
|
$
|
2,285
|
|
|
$
|
3,177
|
|
|
$
|
(171)
|
|
|
VE territory covered losses incurred(1)
|
—
|
|
|
—
|
|
|
(22)
|
|
|
Recovery through conversion rate adjustment(2)
|
(72)
|
|
|
(92)
|
|
|
169
|
|
|
Balance as of June 30, 2020
|
$
|
2,213
|
|
|
$
|
3,085
|
|
|
$
|
(24)
|
|
(1)VE territory covered losses incurred reflect settlements with merchants and additional legal costs. See Note 14—Legal Matters.
(2)Adjustment to right to recover for covered losses for the conversion rate adjustment differs from the actual recovered amount due to differences in foreign exchange rates between the time the losses were incurred and the subsequent recovery through the conversion rate adjustment.
The following table sets forth the as-converted value of the preferred stock available to recover VE territory covered losses compared to the book value of preferred shares recorded in stockholders’ equity within the Company’s consolidated balance sheets as of June 30, 2020 and September 30, 2019:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
September 30, 2019
|
|
|
|
|
As-Converted Value of Preferred Stock(1),(2)
|
|
Book Value of Preferred Stock(1)
|
|
As-Converted Value of Preferred Stock(1),(3)
|
|
Book Value of Preferred Stock(1)
|
|
|
(in millions)
|
|
|
|
|
|
|
|
UK&I preferred stock
|
$
|
6,121
|
|
|
$
|
2,213
|
|
|
$
|
5,519
|
|
|
$
|
2,285
|
|
|
Europe preferred stock
|
8,368
|
|
|
3,085
|
|
|
7,539
|
|
|
3,177
|
|
|
Total
|
14,489
|
|
|
5,298
|
|
|
13,058
|
|
|
5,462
|
|
|
Less: right to recover for covered losses
|
(24)
|
|
|
(24)
|
|
|
(171)
|
|
|
(171)
|
|
|
Total recovery for covered losses available
|
$
|
14,465
|
|
|
$
|
5,274
|
|
|
$
|
12,887
|
|
|
$
|
5,291
|
|
(1)Figures in the table may not recalculate exactly due to rounding. As-converted and book values are based on unrounded numbers.
(2)The as-converted value of preferred stock is calculated as the product of: (a) 2 million and 3 million shares of the UK&I and Europe preferred stock outstanding, respectively, as of June 30, 2020; (b) 12.775 and 13.722, the class A common stock conversion rate applicable to the UK&I and Europe preferred stock as of June 30, 2020, respectively; and (c) $193.17, Visa’s class A common stock closing stock price as of June 30, 2020.
(3)The as-converted value of preferred stock is calculated as the product of: (a) 2 million and 3 million shares of the UK&I and Europe preferred stock outstanding, respectively, as of September 30, 2019; (b) 12.936 and 13.884, the class A common stock conversion rate applicable to the UK&I and Europe preferred stock as of September 30, 2019, respectively; and (c) $172.01, Visa’s class A common stock closing stock price as of September 30, 2019.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
Note 6—Fair Value Measurements and Investments
Assets and Liabilities Measured at Fair Value on a Recurring Basis
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|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
Using Inputs Considered as
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
September 30,
2019
|
|
June 30,
2020
|
|
September 30,
2019
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents and restricted cash equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
12,739
|
|
|
$
|
6,494
|
|
|
|
|
|
|
|
|
|
|
U.S. government-sponsored debt securities
|
|
|
|
|
$
|
—
|
|
|
$
|
150
|
|
|
|
|
|
|
Investment securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable equity securities
|
140
|
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government-sponsored debt securities
|
|
|
|
|
2,892
|
|
|
5,592
|
|
|
|
|
|
|
U.S. Treasury securities
|
254
|
|
|
675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current and non-current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
|
|
|
672
|
|
|
437
|
|
|
|
|
|
|
Total
|
$
|
13,133
|
|
|
$
|
7,295
|
|
|
$
|
3,564
|
|
|
$
|
6,179
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued compensation and benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation liability
|
$
|
128
|
|
|
$
|
113
|
|
|
|
|
|
|
|
|
|
|
Accrued and other liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative instruments
|
|
|
|
|
$
|
247
|
|
|
$
|
52
|
|
|
|
|
|
|
Total
|
$
|
128
|
|
|
$
|
113
|
|
|
$
|
247
|
|
|
$
|
52
|
|
|
|
|
|
There were no transfers between Level 1 and Level 2 assets during the nine months ended June 30, 2020.
Level 1 assets. Money market funds, marketable equity securities and U.S. Treasury securities are classified as Level 1 within the fair value hierarchy, as fair value is based on quoted prices in active markets. The Company’s deferred compensation liability is measured at fair value based on marketable equity securities held under the deferred compensation plan.
Level 2 assets and liabilities. The fair value of U.S. government-sponsored debt securities, as provided by third-party pricing vendors, is based on quoted prices in active markets for similar, not identical, assets. The pricing data obtained from outside sources is reviewed internally for reasonableness, compared against benchmark quotes from independent pricing sources, then confirmed or revised accordingly. Derivative instruments are valued using inputs that are observable in the market or can be derived principally from or corroborated by observable market data. There were no substantive changes to the valuation techniques and related inputs used to measure fair value during the nine months ended June 30, 2020.
U.S. government-sponsored debt securities and U.S. Treasury securities. The Company considers U.S. government-sponsored debt securities and U.S. Treasury securities to be available-for-sale and held $3.1 billion and $6.3 billion of these investment securities as of June 30, 2020 and September 30, 2019, respectively. All of the Company’s long-term available-for-sale investment securities are due within one to five years.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
Assets Measured at Fair Value on a Non-recurring Basis
Non-marketable equity securities. The Company’s non-marketable equity securities are investments in privately held companies without readily determinable market values. These investments are classified as Level 3 due to the absence of quoted market prices, the inherent lack of liquidity and the fact that inputs used to measure fair value are unobservable and require management’s judgment.
During the three and nine months ended June 30, 2020, $56 million and $65 million, respectively, of upward adjustments were included in the carrying value of non-marketable equity securities. No material downward adjustments were included during the same periods. During the three and nine months ended June 30, 2020, $6 million in impairment was recognized. There was no impairment recognized during the same prior-year comparable periods. The following table summarizes the total carrying value of the Company’s non-marketable equity securities held as of June 30, 2020 including cumulative unrealized gains and losses:
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
(in millions)
|
|
Initial cost basis
|
$
|
834
|
|
|
Upward adjustments
|
175
|
|
|
Downward adjustments (including impairment)
|
(11)
|
|
|
Carrying amount, end of period
|
$
|
998
|
|
Non-financial assets and liabilities. Long-lived assets such as goodwill, indefinite-lived intangible assets, finite-lived intangible assets and property, equipment and technology are considered non-financial assets. The Company does not have any non-financial liabilities measured at fair value on a non-recurring basis. Finite-lived intangible assets primarily consist of customer relationships and trade names, all of which were obtained through acquisitions.
If the Company were required to perform a quantitative assessment for impairment testing of goodwill and indefinite-lived intangible assets, the fair values would generally be estimated using an income approach. As the assumptions employed to measure these assets on a non-recurring basis are based on management’s judgment using internal and external data, these fair value determinations are classified as Level 3 in the fair value hierarchy. The Company completed its annual impairment review of its indefinite-lived intangible assets and goodwill as of February 1, 2020, and concluded that there was no impairment. No recent events or changes in circumstances indicate that impairment existed at June 30, 2020.
Gains and Losses on Marketable and Non-marketable Equity Securities
Gains and losses on the Company’s equity securities are summarized below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Nine Months Ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(in millions)
|
|
|
|
|
|
|
|
Net gain (loss) on equity securities sold during the period
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
5
|
|
|
$
|
16
|
|
|
Unrealized gain (loss) on equity securities held as of the end of the period
|
68
|
|
|
10
|
|
|
59
|
|
|
69
|
|
|
Total gain (loss) recognized in non-operating income (expense), net
|
$
|
68
|
|
|
$
|
11
|
|
|
$
|
64
|
|
|
$
|
85
|
|
Other Fair Value Disclosures
Long-term debt. Debt instruments are measured at amortized cost on the Company’s consolidated balance sheets. The fair value of the debt instruments, as provided by third-party pricing vendors, is based on quoted prices in active markets for similar, not identical, assets. The pricing data obtained from outside sources is reviewed internally for reasonableness, compared against benchmark quotes from independent pricing sources, then confirmed or revised accordingly. If measured at fair value in the financial statements, these instruments would be classified as Level 2 in the fair value hierarchy. The carrying value and estimated fair value of long-term debt was $20.9 billion and $23.4 billion, respectively, as of June 30, 2020. The carrying value and estimated fair value of long-term debt was $16.7 billion and $18.4 billion, respectively, as of September 30, 2019.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
Other financial instruments not measured at fair value. The following financial instruments are not measured at fair value on the Company’s unaudited consolidated balance sheet at June 30, 2020, but disclosure of their fair values is required: settlement receivable and payable, accounts receivable and customer collateral. The estimated fair value of such instruments at June 30, 2020 approximates their carrying value due to their generally short maturities. If measured at fair value in the financial statements, these financial instruments would be classified as Level 2 in the fair value hierarchy.
Note 7—Leases
The Company entered into various operating lease agreements primarily for real estate. The Company's leases have original lease periods expiring between fiscal 2020 and 2030. Many leases include one or more options to renew. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants. Payments under the Company’s lease arrangements are generally fixed. At June 30, 2020, the Company had no finance leases.
During the three and nine months ended June 30, 2020, total operating lease cost was $29 million and $84 million, respectively. At June 30, 2020, the weighted average remaining lease term for operating leases was approximately 7 years and the weighted average discount rate for operating leases was 2.28%.
At June 30, 2020, the present value of future minimum lease payments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
(in millions)
|
|
Remainder of 2020
|
|
$
|
29
|
|
|
2021
|
|
107
|
|
|
2022
|
|
100
|
|
|
2023
|
|
93
|
|
|
2024
|
|
80
|
|
|
Thereafter
|
|
226
|
|
|
Total undiscounted lease payments
|
|
635
|
|
|
Less: imputed interest
|
|
(52)
|
|
|
Present value of lease liabilities
|
|
$
|
583
|
|
At June 30, 2020, the Company had additional operating leases that had not yet commenced with lease obligations of $465 million. These operating leases will commence between fiscal 2020 and 2023 with non-cancellable lease terms of 1 to 15 years.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
Note 8—Debt
The Company had outstanding debt as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
September 30,
2019
|
|
Effective Interest Rate(1)
|
|
|
(in millions, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
2.20% Senior Notes due December 2020
|
$
|
3,000
|
|
|
$
|
3,000
|
|
|
2.30
|
%
|
|
2.15% Senior Notes due September 2022
|
1,000
|
|
|
1,000
|
|
|
2.30
|
%
|
|
2.80% Senior Notes due December 2022
|
2,250
|
|
|
2,250
|
|
|
2.89
|
%
|
|
3.15% Senior Notes due December 2025
|
4,000
|
|
|
4,000
|
|
|
3.26
|
%
|
|
1.90% Senior Notes due April 2027
|
1,500
|
|
|
—
|
|
|
2.02
|
%
|
|
2.75% Senior Notes due September 2027
|
750
|
|
|
750
|
|
|
2.91
|
%
|
|
2.05% Senior Notes due April 2030
|
1,500
|
|
|
—
|
|
|
2.13
|
%
|
|
4.15% Senior Notes due December 2035
|
1,500
|
|
|
1,500
|
|
|
4.23
|
%
|
|
2.70% Senior Notes due April 2040
|
1,000
|
|
|
—
|
|
|
2.80
|
%
|
|
4.30% Senior Notes due December 2045
|
3,500
|
|
|
3,500
|
|
|
4.37
|
%
|
|
3.65% Senior Notes due September 2047
|
750
|
|
|
750
|
|
|
3.73
|
%
|
|
Total debt
|
20,750
|
|
|
16,750
|
|
|
|
|
Unamortized discounts and debt issuance costs
|
(134)
|
|
|
(108)
|
|
|
|
|
Hedge accounting fair value adjustments(2)
|
263
|
|
|
87
|
|
|
|
|
Total carrying value of debt
|
$
|
20,879
|
|
|
$
|
16,729
|
|
|
|
|
|
|
|
|
|
|
|
Reported as:
|
|
|
|
|
|
|
Current maturities of debt
|
$
|
2,999
|
|
|
$
|
—
|
|
|
|
|
Long-term debt
|
17,880
|
|
|
16,729
|
|
|
|
|
Total carrying value of debt
|
$
|
20,879
|
|
|
$
|
16,729
|
|
|
|
(1)Effective interest rates disclosed do not reflect hedge accounting adjustments.
(2)Represents the change in fair value of interest rate swap agreements entered into on a portion of certain outstanding senior notes.
Commercial Paper Program
Visa maintains a commercial paper program to support its working capital requirements and for other general corporate purposes. Under the program, the Company is authorized to issue up to $3.0 billion in outstanding notes, with maturities up to 397 days from the date of issuance. During the three months ended June 30, 2020, the Company repaid $1.0 billion of commercial paper that was issued during the three months ended March 31, 2020. The Company had no outstanding obligations under the program at June 30, 2020 and September 30, 2019.
Senior Notes
In April 2020, the Company issued fixed-rate senior notes in a public offering for an aggregate principal amount of $4.0 billion, with maturities ranging between 7 and 20 years. The April 2027 Notes, 2030 Notes and 2040 Notes, or collectively, the "2020 Notes", have interest rates of 1.90%, 2.05% and 2.70%, respectively. Interest on the 2020 Notes is payable semi-annually on April 15 and October 15 of each year, commencing October 15, 2020. The net aggregate proceeds, after deducting discounts and debt issuance costs, were approximately $4.0 billion. The Company plans to use the net proceeds for general corporate purposes.
The 2020 Notes are senior unsecured obligations of the Company, ranking equally with the Company's other senior unsecured indebtedness. The Company may redeem the 2020 Notes as a whole or in part at any time and from time to time at specified redemption prices.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
Future principal payments on the Company’s outstanding debt are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ending September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
|
Thereafter
|
|
Total
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future principal payments
|
|
$
|
—
|
|
|
$
|
3,000
|
|
|
$
|
1,000
|
|
|
$
|
2,250
|
|
|
$
|
—
|
|
|
$
|
14,500
|
|
|
$
|
20,750
|
|
Note 9—Settlement Guarantee Management
The Company indemnifies its clients for settlement losses suffered due to failure of any other client to fund its settlement obligations in accordance with the Visa operating rules. This indemnification creates settlement risk for the Company due to the difference in timing between the date of a payment transaction and the date of subsequent settlement.
Historically, the Company has experienced minimal losses as a result of its settlement risk guarantee. However, the Company’s future obligations, which could be material under its guarantees, are not determinable as they are dependent upon future events.
The Company’s settlement exposure is limited to the amount of unsettled Visa payment transactions at any point in time, which vary significantly day to day. The Company’s maximum daily settlement exposure was $97.3 billion and the average daily settlement exposure was $54.4 billion during the nine months ended June 30, 2020.
The Company maintains and regularly reviews global settlement risk policies and procedures to manage settlement exposure, which may require clients to post collateral if certain credit standards are not met. At June 30, 2020 and September 30, 2019, the Company held collateral as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
September 30,
2019
|
|
|
(in millions)
|
|
|
|
Restricted cash and restricted cash equivalents
|
$
|
1,759
|
|
|
$
|
1,648
|
|
|
Pledged securities at market value
|
281
|
|
|
259
|
|
|
Letters of credit
|
1,273
|
|
|
1,293
|
|
|
Guarantees
|
704
|
|
|
477
|
|
|
Total
|
$
|
4,017
|
|
|
$
|
3,677
|
|
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
Note 10—Stockholders’ Equity
As-converted class A common stock. The following table presents the number of shares of each series and class of stock and the number of shares of class A common stock on an as-converted basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
|
|
|
September 30, 2019
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
Conversion Rate Into
Class A
Common Stock
|
|
As-converted Class A
Common
Stock(1)
|
|
Shares
Outstanding
|
|
Conversion Rate Into
Class A
Common Stock
|
|
As-converted Class A
Common
Stock(1)
|
|
|
|
(in millions, except conversion rates)
|
|
|
|
|
|
|
|
|
|
|
|
|
UK&I preferred stock
|
2
|
|
|
12.7750
|
|
|
32
|
|
|
2
|
|
|
12.9360
|
|
|
32
|
|
|
|
Europe preferred stock
|
3
|
|
|
13.7220
|
|
|
43
|
|
|
3
|
|
|
13.8840
|
|
|
44
|
|
|
|
Class A common stock(2)
|
1,687
|
|
|
—
|
|
1,687
|
|
|
1,718
|
|
|
—
|
|
|
1,718
|
|
|
|
Class B common stock
|
245
|
|
|
1.6228
|
|
(3)
|
398
|
|
|
245
|
|
|
1.6228
|
|
(3)
|
398
|
|
|
|
Class C common stock
|
11
|
|
|
4.0000
|
|
|
43
|
|
|
11
|
|
|
4.0000
|
|
|
45
|
|
|
|
Total
|
|
|
|
|
2,203
|
|
|
|
|
|
|
2,237
|
|
|
(1)Figures in the table may not recalculate exactly due to rounding. As-converted class A common stock is calculated based on unrounded numbers.
(2)Class A common stock shares outstanding reflect repurchases that settled on or before June 30, 2020 and September 30, 2019.
(3)The class B to class A common stock conversion rate is presented on a rounded basis. Conversion calculations for dividend payments are based on a conversion rate rounded to the tenth decimal.
Reduction in as-converted shares. Under the terms of the Europe retrospective responsibility plan, the Company is entitled to recover VE territory covered losses through periodic adjustments to the class A common stock conversion rates applicable to the UK&I and Europe preferred stock. The recovery has the same economic effect on earnings per share as repurchasing the Company’s class A common stock, because it reduces the UK&I and Europe preferred stock conversion rates and consequently, reduces the as-converted class A common stock share count.
The following table presents the reduction in equivalent number of as-converted shares of class A common stock, effective price per share and recovery of VE territory covered losses through conversion rate adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
June 30, 2020
|
|
|
|
Nine Months Ended
June 30, 2019
|
|
|
|
|
|
UK&I
|
|
Europe
|
|
UK&I
|
|
Europe
|
|
|
|
(in millions, except per share data)
|
|
|
|
|
|
|
|
|
Reduction in equivalent number of as-converted class A common stock
|
—
|
|
(1)
|
1
|
|
—
|
|
(1)
|
—
|
|
(1)
|
|
Effective price per share(2)
|
$
|
180.00
|
|
|
$
|
180.00
|
|
|
$
|
141.32
|
|
|
$
|
150.26
|
|
|
|
Recovery through conversion rate adjustment
|
$
|
72
|
|
|
$
|
92
|
|
|
$
|
6
|
|
|
$
|
2
|
|
|
(1)The reduction in equivalent number of shares of class A common stock was less than one million shares.
(2)Effective price per share for the quarter is calculated using the volume-weighted average price of the Company’s class A common stock over a pricing period in accordance with the Company’s current certificates of designations for its series B and C convertible participating preferred stock. Effective price per share is calculated using the weighted-average effective prices of the respective adjustments made during the year.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
Common stock repurchases. The following table presents share repurchases in the open market for the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
|
|
Nine Months Ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
(in millions, except per share data)
|
|
|
|
|
|
|
|
Shares repurchased in the open market(1)
|
6
|
|
|
13
|
|
|
37
|
|
|
44
|
|
|
Average repurchase price per share(2)
|
$
|
177.86
|
|
|
$
|
162.97
|
|
|
$
|
179.91
|
|
|
$
|
147.66
|
|
|
Total cost(2)
|
$
|
1,069
|
|
|
$
|
2,149
|
|
|
$
|
6,572
|
|
|
$
|
6,480
|
|
(1)Shares repurchased in the open market reflect repurchases that settled during the three and nine months ended June 30, 2020 and 2019. All shares repurchased in the open market have been retired and constitute authorized but unissued shares.
(2)Figures in the table may not recalculate exactly due to rounding. Average repurchase price per share and total cost is calculated based on unrounded numbers.
In January 2019, the Company’s board of directors authorized an $8.5 billion share repurchase program and in January 2020, authorized an additional $9.5 billion share purchase program (the “January 2020 Program”). These authorizations have no expiration date. As of June 30, 2020, the Company’s January 2020 Program had remaining authorized funds of $7.0 billion for share repurchase. All share repurchase programs authorized prior to the January 2020 Program have been completed.
Dividends. On July 20, 2020, the Company’s 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 UK&I and Europe preferred stock on an as-converted basis). The cash dividend will be paid on September 1, 2020, to all holders of record as of August 14, 2020. The Company declared and paid $663 million and $565 million during the three months ended June 30, 2020 and 2019, respectively and $2.0 billion and $1.7 billion during the nine months ended June 30, 2020 and 2019, respectively, in dividends to holders of the Company’s common and preferred stocks.
Note 11—Earnings Per Share
Basic earnings per share is computed by dividing net income available to each class of shares by the weighted-average number of shares of common stock outstanding and participating securities during the period. Net income is allocated to each class of common stock and participating securities based on its proportional ownership on an as-converted basis. The weighted-average number of shares outstanding of each class of common stock reflects changes in ownership over the periods presented. See Note 10—Stockholders’ Equity.
Diluted earnings per share is computed by dividing net income available by the weighted-average number of shares of common stock outstanding, participating securities and, if dilutive, potential class A common stock equivalent shares outstanding during the period. Dilutive class A common stock equivalents may consist of: (1) shares of class A common stock issuable upon the conversion of UK&I and Europe preferred stock and class B and C common stock based on the conversion rates in effect through the period, and (2) incremental shares of class A common stock calculated by applying the treasury stock method to the assumed exercise of employee stock options, the assumed purchase of stock under the Company’s Employee Stock Purchase Plan and the assumed vesting of unearned performance shares.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
The following table presents earnings per share for the three months ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share
|
|
|
|
|
|
Diluted Earnings Per Share
|
|
|
|
|
|
|
(in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Allocation
(A)(1)
|
|
Weighted-
Average
Shares
Outstanding (B)
|
|
Earnings per
Share =
(A)/(B)(2)
|
|
Income
Allocation
(A)(1)
|
|
Weighted-
Average
Shares
Outstanding (B)
|
|
Earnings per
Share =
(A)/(B)(2)
|
|
Class A common stock
|
$
|
1,814
|
|
|
1,690
|
|
|
$
|
1.07
|
|
|
$
|
2,373
|
|
|
2,214
|
|
(3)
|
$
|
1.07
|
|
|
Class B common stock
|
428
|
|
|
245
|
|
|
$
|
1.74
|
|
|
$
|
427
|
|
|
245
|
|
|
$
|
1.74
|
|
|
Class C common stock
|
46
|
|
|
11
|
|
|
$
|
4.29
|
|
|
$
|
47
|
|
|
11
|
|
|
$
|
4.29
|
|
|
Participating securities(4)
|
85
|
|
|
Not presented
|
|
Not presented
|
|
$
|
85
|
|
|
Not presented
|
|
Not presented
|
|
Net income
|
$
|
2,373
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents earnings per share for the nine months ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share
|
|
|
|
|
|
Diluted Earnings Per Share
|
|
|
|
|
|
|
(in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Allocation
(A)(1)
|
|
Weighted-
Average
Shares
Outstanding (B)
|
|
Earnings per
Share =
(A)/(B)(2)
|
|
Income
Allocation
(A)(1)
|
|
Weighted-
Average
Shares
Outstanding (B)
|
|
Earnings per
Share =
(A)/(B)(2)
|
|
Class A common stock
|
$
|
6,679
|
|
|
1,702
|
|
|
$
|
3.92
|
|
|
$
|
8,729
|
|
|
2,227
|
|
(3)
|
$
|
3.92
|
|
|
Class B common stock
|
1,564
|
|
|
245
|
|
|
$
|
6.37
|
|
|
$
|
1,561
|
|
|
245
|
|
|
$
|
6.36
|
|
|
Class C common stock
|
172
|
|
|
11
|
|
|
$
|
15.70
|
|
|
$
|
172
|
|
|
11
|
|
|
$
|
15.68
|
|
|
Participating securities(4)
|
314
|
|
|
Not presented
|
|
Not presented
|
|
$
|
314
|
|
|
Not presented
|
|
Not presented
|
|
Net income
|
$
|
8,729
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents earnings per share for the three months ended June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share
|
|
|
|
|
|
Diluted Earnings Per Share
|
|
|
|
|
|
|
(in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Allocation
(A)(1)
|
|
Weighted-
Average
Shares
Outstanding (B)
|
|
Earnings per
Share =
(A)/(B)(2)
|
|
Income
Allocation
(A)(1)
|
|
Weighted-
Average
Shares
Outstanding (B)
|
|
Earnings per
Share =
(A)/(B)(2)
|
|
Class A common stock
|
$
|
2,379
|
|
|
1,735
|
|
|
$
|
1.37
|
|
|
$
|
3,101
|
|
|
2,265
|
|
(3)
|
$
|
1.37
|
|
|
Class B common stock
|
549
|
|
|
245
|
|
|
$
|
2.23
|
|
|
$
|
548
|
|
|
245
|
|
|
$
|
2.23
|
|
|
Class C common stock
|
63
|
|
|
12
|
|
|
$
|
5.48
|
|
|
$
|
63
|
|
|
12
|
|
|
$
|
5.48
|
|
|
Participating securities(4)
|
110
|
|
|
Not presented
|
|
Not presented
|
|
$
|
110
|
|
|
Not presented
|
|
Not presented
|
|
Net income
|
$
|
3,101
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents earnings per share for the nine months ended June 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share
|
|
|
|
|
|
Diluted Earnings Per Share
|
|
|
|
|
|
|
(in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Allocation
(A)(1)
|
|
Weighted-
Average
Shares
Outstanding (B)
|
|
Earnings per
Share =
(A)/(B)(2)
|
|
Income
Allocation
(A)(1)
|
|
Weighted-
Average
Shares
Outstanding (B)
|
|
Earnings per
Share =
(A)/(B)(2)
|
|
Class A common stock
|
$
|
6,956
|
|
|
1,748
|
|
|
$
|
3.98
|
|
|
$
|
9,055
|
|
|
2,278
|
|
(3)
|
$
|
3.97
|
|
|
Class B common stock
|
1,592
|
|
|
245
|
|
|
$
|
6.49
|
|
|
$
|
1,590
|
|
|
245
|
|
|
$
|
6.48
|
|
|
Class C common stock
|
186
|
|
|
12
|
|
|
$
|
15.92
|
|
|
$
|
185
|
|
|
12
|
|
|
$
|
15.90
|
|
|
Participating securities(4)
|
321
|
|
|
Not presented
|
|
Not presented
|
|
$
|
321
|
|
|
Not presented
|
|
Not presented
|
|
Net income
|
$
|
9,055
|
|
|
|
|
|
|
|
|
|
|
|
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
(1)Net income is allocated based on proportional ownership on an as-converted basis. The weighted-average number of shares of as-converted class B common stock used in the income allocation was 398 million for the three and nine months ended June 30, 2020 and 400 million for the three and nine months ended June 30, 2019. The weighted-average number of shares of as-converted class C common stock used in the income allocation was 43 million and 44 million for the three and nine months ended June 30, 2020, respectively, and 46 million and 47 million for the three and nine months ended June 30, 2019, respectively. The weighted-average number of shares of preferred stock included within participating securities was 32 million of as-converted UK&I preferred stock for the three and nine months ended June 30, 2020 and 2019, and 44 million of as-converted Europe preferred stock for the three and nine months ended June 30, 2020 and 2019.
(2)Figures in the table may not recalculate exactly due to rounding. Earnings per share is calculated based on unrounded numbers.
(3)Weighted-average diluted shares outstanding are calculated on an as-converted basis and include incremental common stock equivalents, as calculated under the treasury stock method. The computation includes common stock equivalents of 3 million for the three and nine months ended June 30, 2020 and 2019, because their effect would have been dilutive. The computation excludes common stock equivalents of 1 million for the three and nine months ended June 30, 2020, and less than 1 million for the three and nine months ended June 30, 2019, because their effect would have been anti-dilutive.
(4)Participating securities include preferred stock outstanding and unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, such as the UK&I and Europe preferred stock and restricted stock units. Participating securities’ income is allocated based on the weighted-average number of shares of as-converted stock.
Note 12—Share-based Compensation
The Company granted the following equity awards to employees and non-employee directors under the 2007 Equity Incentive Compensation Plan, or the EIP, during the nine months ended June 30, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
Weighted-Average
Grant Date Fair
Value
|
|
Weighted-Average
Exercise Price
|
|
Non-qualified stock options
|
1,247,982
|
|
|
$
|
29.37
|
|
|
$
|
182.50
|
|
|
Restricted stock units
|
2,287,483
|
|
|
$
|
183.22
|
|
|
|
|
Performance-based shares(1)
|
470,128
|
|
|
$
|
211.08
|
|
|
|
(1)Represents the maximum number of performance-based shares which could be earned.
The Company recorded share-based compensation cost related to the EIP of $102 million and $106 million for the three months ended June 30, 2020 and 2019, respectively, and $306 million and $307 million for the nine months ended June 30, 2020 and 2019, respectively, net of estimated forfeitures.
Note 13—Income Taxes
The effective income tax rates were 19% for the three and nine months ended June 30, 2020, and 20% and 19% for the three and nine months ended June 30, 2019, respectively. The difference in the effective tax rates between the three-month periods was primarily due to the change in geographic mix of income.
During the three and nine months ended June 30, 2020, the Company’s gross unrecognized tax benefits increased by $55 million and $230 million, respectively. The Company’s net unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate, increased by $31 million and $70 million, respectively. The change in unrecognized tax benefits is primarily related to various tax positions across several jurisdictions. The Company’s accrued interest related to uncertain tax positions increased by $18 million and $56 million during the three and nine months ended June 30, 2020, respectively, and $19 million and $51 million during the three and nine months ended June 30, 2019, respectively. During the three and nine months ended June 30, 2020 and 2019, there were no significant changes in penalties related to uncertain tax positions.
The Company’s tax filings are subject to examination by the U.S. federal, state and foreign taxing authorities. The timing and outcome of the final resolutions of the various ongoing income tax examinations are highly uncertain. It is not reasonably possible to estimate the increase or decrease in unrecognized tax benefits within the next twelve months.
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in the U.S. on March 27, 2020. The CARES Act includes several U.S. income tax provisions related to, among other things, net operating loss carrybacks, alternative minimum tax credits, modifications to the net interest deduction limitations, and technical amendments regarding the income tax depreciation of qualified improvement property placed in service after December 31, 2017. The CARES Act is not expected to have a material impact on the Company’s financial results.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
On July 22, 2020, UK enacted a legislation that repealed the previous tax rate reduction from 19% to 17% that was effective on April 1, 2020. The repeal of the UK tax rate reduction is not expected to significantly increase the Company’s ongoing effective tax rate, however, it will result in a one-time non-cash tax expense in the fourth quarter of fiscal 2020, due to the re-measurement of deferred taxes which are primarily related to intangibles recorded in purchase accounting upon the acquisition of Visa Europe in fiscal 2016.
Note 14—Legal Matters
The Company is party to various legal and regulatory proceedings. Some of these proceedings involve complex claims that are subject to substantial uncertainties and unascertainable damages. Accordingly, except as disclosed, the Company has not established reserves or ranges of possible loss related to these proceedings, as at this time in the proceedings, the matters do not relate to a probable loss and/or the amount or range of losses are not reasonably estimable. Although the Company believes that it has strong defenses for the litigation and regulatory proceedings described below, it could, in the future, incur judgments or fines or enter into settlements of claims that could have a material adverse effect on the Company’s financial position, results of operations or cash flows. From time to time, the Company may engage in settlement discussions or mediations with respect to one or more of its outstanding litigation matters, either on its own behalf or collectively with other parties.
The litigation accrual is an estimate and is based on management’s understanding of its litigation profile, the specifics of each case, advice of counsel to the extent appropriate and management’s best estimate of incurred loss as of the balance sheet date.
The following table summarizes the activity related to accrued litigation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
|
(in millions)
|
|
|
|
Balance at beginning of period
|
$
|
1,203
|
|
|
$
|
1,434
|
|
|
Provision for uncovered legal matters
|
7
|
|
|
37
|
|
|
Provision for covered legal matters
|
14
|
|
|
165
|
|
|
Reestablishment of prior accrual related to interchange multidistrict litigation
|
467
|
|
|
—
|
|
|
Payments for legal matters
|
(535)
|
|
|
(780)
|
|
|
Balance at end of period
|
$
|
1,156
|
|
|
$
|
856
|
|
Accrual Summary—U.S. Covered Litigation
Visa Inc., Visa U.S.A. and Visa International are parties to certain legal proceedings that are covered by the U.S. retrospective responsibility plan, which the Company refers to as the U.S. covered litigation. See further discussion below under U.S. Covered Litigation and Note 5—U.S. and Europe Retrospective Responsibility Plans. An accrual for the U.S. covered litigation and a charge to the litigation provision are recorded when a loss is deemed to be probable and reasonably estimable. In making this determination, the Company evaluates available information, including but not limited to actions taken by the litigation committee. The total accrual related to the U.S. covered litigation could be either higher or lower than the escrow account balance.
The following table summarizes the accrual activity related to U.S. covered litigation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
|
(in millions)
|
|
|
|
Balance at beginning of period
|
$
|
1,198
|
|
|
$
|
1,428
|
|
|
|
|
|
|
|
Reestablishment of prior accrual related to interchange multidistrict litigation
|
467
|
|
|
—
|
|
|
Payments for U.S. covered litigation
|
(529)
|
|
|
(600)
|
|
|
Balance at end of period
|
$
|
1,136
|
|
|
$
|
828
|
|
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
In fiscal 2019, the Company paid $600 million from its litigation escrow account into a settlement fund established pursuant to the Amended Settlement Agreement with the Damages Class plaintiffs in the Interchange Multidistrict Litigation. Under the Amended Settlement Agreement, if class members opt out of the Damages Class, the defendants are entitled to receive takedown payments of up to $700 million (up to $467 million for Visa), based on the percentage of payment card sales volume attributable to merchants who have chosen to opt out. On December 13, 2019, the district court entered a final judgment order approving the Amended Settlement Agreement with the Damages Class plaintiffs. A takedown payment of approximately $467 million was received on December 27, 2019, and deposited into the Company’s litigation escrow account. The deposit into the litigation escrow account and reestablishment of a prior accrual to address opt-out claims was recorded during the nine months ended June 30, 2020. See further discussion below under U.S. Covered Litigation.
Accrual Summary—VE Territory Covered Litigation
Visa Inc., Visa International and Visa Europe are parties to certain legal proceedings that are covered by the Europe retrospective responsibility plan. Unlike the U.S. retrospective responsibility plan, the Europe retrospective responsibility plan does not have an escrow account that is used to fund settlements or judgments. The Company is entitled to recover VE territory covered losses through periodic adjustments to the conversion rates applicable to the UK&I preferred stock and Europe preferred stock. An accrual for the VE territory covered losses and a reduction to stockholders’ equity will be recorded when the loss is deemed to be probable and reasonably estimable. See further discussion below under VE Territory Covered Litigation and Note 5—U.S. and Europe Retrospective Responsibility Plans.
The following table summarizes the accrual activity related to VE territory covered litigation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
|
(in millions)
|
|
|
|
Balance at beginning of period
|
$
|
5
|
|
|
$
|
—
|
|
|
Provision for VE territory covered litigation
|
14
|
|
|
165
|
|
|
Payments for VE territory covered litigation
|
(5)
|
|
|
(156)
|
|
|
Balance at end of period
|
$
|
14
|
|
|
$
|
9
|
|
U.S. Covered Litigation
Interchange Multidistrict Litigation (MDL) – Putative Class Actions
On November 20, 2019, the district court denied the bank defendants’ motion to dismiss the claims brought against them by the putative Injunctive Relief Class.
On December 13, 2019, the district court granted final approval of the Amended Settlement Agreement relating to claims by the Damages Class, which was subsequently appealed.
On May 29, 2020, a complaint was filed by Old Jericho Enterprise, Inc. against Visa and Mastercard on behalf of a purported class of gasoline retailers operating in 24 states and the District of Columbia. The complaint alleges violations of the antitrust laws of those jurisdictions and seeks recovery for plaintiffs as indirect purchasers. Visa believes Plaintiffs’ claims are released by the Amended Settlement Agreement and are, nevertheless, covered by the U.S. Retrospective Responsibility Plan.
On June 1, 2020, Visa, jointly with other defendants, served a motion for summary judgment regarding the claims in the Injunctive Relief Class complaint. The putative Injunctive Relief Class plaintiffs served a motion for partial summary judgment.
Interchange Multidistrict Litigation (MDL) - Individual Merchant Actions
Visa has reached settlements with a number of merchants representing approximately 30% of the Visa-branded payment card sales volume of merchants who opted out of the Amended Settlement Agreement with the Damages Class plaintiffs.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
On June 1, 2020, Visa, jointly with other defendants, served motions for summary judgment regarding the claims in certain of the individual merchant actions, as well as certain declaratory judgment claims brought by Visa, Mastercard, and some U.S. financial institutions. Plaintiffs in certain of the individual merchant actions served motions for partial summary judgment.
VE Territory Covered Litigation
Europe Merchant Litigation
Since July 2013, in excess of 500 Merchants (the capitalized term “Merchant,” when used in this section, means a merchant together with subsidiary/affiliate companies that are party to the same claim) have commenced proceedings against Visa Europe, Visa Inc. and other Visa subsidiaries in the UK, Germany, Belgium and Poland primarily relating to interchange rates in Europe and in some cases relating to fees charged by Visa and certain Visa rules. As of the filing date, Visa Europe, Visa Inc. and other Visa subsidiaries have settled the claims asserted by over 100 Merchants, leaving more than 400 Merchants with outstanding claims. In addition, over 30 additional Merchants have threatened to commence similar proceedings. Standstill agreements have been entered into with respect to some of those threatened Merchant claims, several of which have been settled.
On June 17, 2020, the Supreme Court of the United Kingdom found that Visa’s UK domestic interchange restricted competition. The case will now continue before the UK Competition Appeals Tribunal to determine the lawful level of interchange and the amount the plaintiff may be entitled to recover.
Other Litigation
Canadian Merchant Litigation
Between August 2019 and January 2020, the Courts of Appeal in British Columbia, Quebec, Ontario and Saskatchewan rejected the appeals filed by Wal-Mart Canada and Home Depot of Canada Inc. In January 2020, Wal-Mart Canada and Home Depot of Canada Inc. filed applications to appeal the decisions of the British Columbia, Quebec and Ontario courts to the Supreme Court of Canada and those applications were denied on March 26, 2020. Wal-Mart Canada and Home Depot of Canada Inc. also filed an application seeking the Supreme Court’s review of the Saskatchewan court's decision. The application and an appeal to the Alberta Court of Appeal remain pending.
Pulse Network
On June 5, 2020, the U.S. Court of Appeals for the Fifth Circuit set the case for re-argument during the week of August 31, 2020.
Nuts for Candy
On December 31, 2019, plaintiff filed a motion to dismiss and for attorneys’ fees and costs based on the settlement reached between the parties and the grant of final approval of the 2018 Amended Settlement Agreement as discussed above in Interchange Multidistrict Litigation (MDL) - Putative Class Actions.
On February 25, 2020, the court granted plaintiff’s motion to dismiss and for attorneys’ fees and costs. The case has been dismissed with prejudice.
Federal Trade Commission Civil Investigative Demand (Formerly Voluntary Access Letter)
On June 9, 2020, the Federal Trade Commission issued a Civil Investigative Demand to Visa requesting additional documents and information.
VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)
Euronet Litigation
On December 13, 2019, Euronet 360 Finance Limited, Euronet Polska Spolka z.o.o. and Euronet Services spol. s.r.o. (“Euronet”) served a claim in the UK alleging that certain rules affecting ATM access fees in Poland, the Czech Republic and Greece by Visa Inc. and Mastercard Incorporated, and certain of their subsidiaries, breach various competition laws. Euronet seeks damages, costs, and injunctive relief to prevent the defendants from enforcing the aforementioned rules.
European Commission Staged Digital Wallets Investigation
On June 26, 2020, the European Commission (“EC”) informed Visa that it has opened a preliminary investigation into Visa’s rules regarding staged digital wallets and issued a request for information regarding such rules. Visa is cooperating with the EC.