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| V > SEC Filings for V > Form 10-K on 16-Nov-2012 | All Recent SEC Filings |
16-Nov-2012
Annual Report
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," "our" and the "Company") on a historical
basis and outlines the factors that have affected recent earnings, as well as
those factors that may affect future earnings. The following discussion and
analysis should be read in conjunction with the consolidated financial
statements and related notes included in Item 8 of this report.
Overview
Visa is a global payments technology company that connects consumers,
businesses, financial institutions and governments around the world to fast,
secure and reliable electronic payments. We provide our clients with payment
processing platforms that encompass consumer credit, debit, prepaid and
commercial payments. We facilitate global commerce through the transfer of value
and information among financial institutions, merchants, consumers, businesses
and government entities. Each of these constituencies has played a key role in
the ongoing worldwide migration from paper-based to electronic forms of payment,
and we believe that this transformation continues to yield significant growth
opportunities, particularly outside the United States. We continue to explore
additional opportunities to enhance our competitive position by expanding the
scope of payment services we provide.
Overall economic conditions and regulatory environment. Our business is affected
by overall economic conditions and consumer spending. Our business performance
during fiscal 2012 reflects the impacts of a modest global economic recovery.
The Dodd-Frank Act. As of October 1, 2011, in accordance with the Dodd-Frank
Act, the Federal Reserve capped the maximum U.S. debit interchange reimbursement
fee assessed for cards issued by large financial institutions at twenty-one
cents plus five basis points, before applying an interim fraud adjustment up to
an additional one cent. This amounted to a significant reduction from the
average system-wide interchange fees charged before the Dodd-Frank Act was
implemented. The Federal Reserve has also issued regulations requiring issuers
to make at least two unaffiliated networks available for processing debit
transactions on each debit card. The rules also prohibit us and issuers from
restricting a merchant's ability to direct the routing of electronic debit
transactions over any of the networks that an issuer has enabled to process
those transactions.
The interchange, exclusivity and routing regulations have impacted our pricing,
reduced the number and volume of U.S. debit payments we process and decreased
associated revenues. A number of our clients have sought fee reductions or
increased incentives from us to offset their own lost revenue. Some have reduced
the number of debit cards they issue and reduced investments they make in
marketing and rewards programs. Some have imposed new or higher fees on debit
cards or demand-deposit account relationships. Some have elected to issue fewer
cards enabled with Visa-affiliated networks. Additionally, the routing
regulations have allowed merchants to redirect transactions or steer cardholders
to other networks based on lowest cost or other factors.
We have had to re-examine and renegotiate certain of our client contracts to
ensure that their terms comply with new regulations and will continue to do so
with others. As a result, our clients have sought and will continue to seek to
renegotiate terms relating to fees, incentives and routing. In some cases, we
may lose placement completely on issuers' debit cards.
During the third quarter of fiscal 2012, we began implementation of our strategy
to mitigate the negative impacts from the Dodd-Frank Act to some extent by
making pricing modifications and working with our clients and other business
partners to win merchant preference to route transactions over our network. For
fiscal 2012, the overall net impact of the Dodd-Frank Act, including
restructured pricing, incentives, other mitigation strategies and volume loss,
was a decrease of approximately $0.15 in diluted earnings per class A common
share.
Our broad platform of payment products continues to provide substantial value to
both merchants and consumers. We believe that the continuing worldwide secular
shift to electronic currency may help buffer the impacts of the Dodd-Frank Act,
as reflected in our overall payments volume growth, particularly outside the
United States. As a leader in the U.S. debit industry, we continue to develop
and refine our competitive business models to adapt to the Dodd-Frank Act and
mitigate some of its negative impacts. We remain committed and prepared to adapt
to and compete effectively under this new U.S. debit regulatory environment.
Notice of Proposed Adjustment. On May 23, 2012, the U.S. Internal Revenue
Service (the "IRS") issued a Notice of Proposed Adjustment (NOPA) to our fiscal
2008 U.S. federal income tax return seeking to disallow the
deduction of settlement payments associated with the American Express litigation
made during that fiscal year. However, on August 15, 2012, the IRS issued a
Chief Counsel Advice (CCA), supporting our position that Visa is entitled to the
deduction, and subsequently the IRS issued a revised Revenue Agent Report (RAR)
effectively withdrawing the NOPA. The IRS may still challenge any income tax
return position taken, including the deductibility of covered litigation
payments made in fiscal 2008 or any future year, until the statute of
limitations has closed for each applicable year. The statute of limitations for
fiscal 2008 is expected to expire in June of 2013. However, given the CCA and
revised RAR, during the fourth quarter of fiscal 2012, we reevaluated and
reversed all previously recorded tax reserves and accrued interest associated
with uncertainties related to the deductibility of covered litigation expense
recorded in fiscal 2007 through the third quarter of fiscal 2012. This increased
our net income for the fourth quarter of fiscal 2012 by $627 million. The
reversal of tax reserves and related interest included $301 million related to
reserves taken in the current year, and $326 million related to reserves taken
in previous years.
Multidistrict Litigation Proceedings (MDL). On October 19, 2012, Visa,
MasterCard, various U.S. financial institution defendants and the class
plaintiffs signed a settlement agreement to resolve the class plaintiffs' claims
in the interchange MDL. We also signed a settlement agreement to resolve the
claims brought by a group of individual merchants which were consolidated with
the MDL for coordination of pre-trial proceedings. The settlement with the class
plaintiffs is subject to final court approval, which we cannot assure will be
received, and to the adjudication of any appeals. See Note 3-Retrospective
Responsibility Plan and Note 21-Legal Matters to our consolidated financial
statements.
Adjusted financial results. Our financial results for fiscal 2012 and 2011
reflect the impact of several significant items that we believe are not
indicative of our financial performance in the current or future years, as they
either are non-recurring, have no cash impact or are related to amounts covered
by the retrospective responsibility plan. As such, we believe the presentation
of adjusted financial results excluding the following amounts provides a clearer
understanding of our operating performance for the periods presented.
• Reversal of tax reserves. During the fourth quarter of fiscal 2012, we
reevaluated and reversed all previously recorded tax reserves and accrued
interest associated with uncertainties related to the deductibility of
covered litigation expense recorded in fiscal 2007 through the third
quarter of fiscal 2012. This increased our net income for the fourth
quarter of fiscal 2012 by $627 million. The reversal of tax reserves and
related interest included $301 million related to reserves taken in the
current year, and $326 million related to reserves taken in previous
years.
• Litigation provision. During the third quarter of fiscal 2012, we recorded a litigation provision of $4.1 billion and related tax benefits associated with the interchange MDL, which is covered by the retrospective responsibility plan. Monetary liabilities from settlements of, or judgments in, the covered litigation will be paid from the litigation escrow account. See Note 3-Retrospective Responsibility Plan and Note 21-Legal Matters to our consolidated financial statements.
• Deferred tax adjustment. During the second quarter of fiscal 2012, our reported financial results benefited from a one-time, non-cash adjustment of $208 million related to the remeasurement of our net deferred tax liabilities attributable to changes in the California state apportionment rules.
• Revaluation of Visa Europe put option. During fiscal 2011, we recorded a decrease of $122 million in the fair value of the Visa Europe put option, which resulted in the recognition of non-cash, non-operating other income in our financial results. This amount is not subject to income tax and therefore had no impact on our reported income tax provision. The reduction in the fair value of the put option was the result of declines in our estimated long-term price-to-earnings ratio as compared to the estimated ratio applicable to Visa Europe and did not reflect any change in the likelihood that Visa Europe will exercise its option.
The following table presents our adjusted financial results for the years ended September 30, 2012 and 2011.
Fiscal 2012 Fiscal 2011
(in millions, except margin ratio and per share data)
Operating Operating Margin Net Income Attributable Diluted Earnings Per Operating Operating Margin Net Income Attributable Diluted Earnings Per
Expenses (1) to Visa Inc. Share (2) Expenses (1) to Visa Inc. Share (2)
As reported $ 8,282 21 % $ 2,144 $ 3.16 $ 3,732 59 % $ 3,650 $ 5.16
Reversal of tax
reserves - - (326 ) (0.48 ) - - - -
Litigation
provision (4,098 ) 39 % 2,593 3.82 - - - -
Impact of
deferred tax
adjustment - - (208 ) (0.31 ) - - - -
Revaluation of
Visa Europe put
option - - - - - - (122 ) (0.17 )
Adjusted $ 4,184 60 % $ 4,203 $ 6.20 $ 3,732 59 % $ 3,528 $ 4.99
Diluted
weighted-average
shares
outstanding (as
reported) 678 707
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(1) Operating margin is calculated as operating income divided by total operating revenues.
(2) Figures in the table may not recalculate exactly due to rounding. Diluted earnings per share figures are calculated based on whole numbers, not the rounded numbers presented.
Reduction in as-converted shares. During fiscal 2012, total as-converted class A
common stock was reduced by 22.8 million shares, using $2.4 billion of operating
cash on hand. Of the $2.4 billion, $710 million was used to repurchase class A
common stock in the open market. In addition, we made deposits totaling $1.7
billion of operating cash into the litigation escrow account previously
established under the retrospective responsibility plan. These deposits have the
same economic effect on earnings per share as repurchasing our class A common
stock, because they reduce the class B conversion rate and consequently the
as-converted class A common stock share count.
In July 2012, our board of directors authorized a $1 billion share repurchase
program to be in effect through July 2013. As of September 30, 2012, the program
had remaining authorized funds of $865 million. In October 2012, our board of
directors authorized an additional $1.5 billion share repurchase program to be
in effect through October 2013. All share repurchase programs authorized prior
to July 2012 have been completed.
Nominal payments volume and transaction counts. Payments volume is the primary
driver for our service revenues, and processed transactions are the primary
driver for our data processing revenues. Compared to the prior year, overall
payments volume increased as a result of continuing double-digit percentage
growth in consumer credit and commercial payments volume worldwide. These
increases were moderated by an anticipated deceleration in consumer debit
growth, primarily due to the impacts of the Dodd-Frank Act. Excluding U.S. debit
transactions, which reflect the impacts of the Dodd-Frank Act, the number of
processed transactions continues to increase at a healthy rate, reflecting the
continuing worldwide shift to electronic currency.
The following tables set forth nominal payments volume for the periods presented
in nominal dollars(1).
U.S. Rest of World Visa Inc.
12 months 12 months 12 months 12 months 12 months 12 months
ended ended ended ended ended ended
June 30, June 30, % June 30, June 30, % June 30, June 30, %
2012 (2) 2011 (2) Change 2012 (2) 2011 (2) Change 2012 (2) 2011 (2) Change
(in billions, except percentages)
Nominal Payments
Volume
Consumer credit $ 710 $ 641 11 % $ 1,370 $ 1,188 15 % $ 2,081 $ 1,829 14 %
Consumer debit(3) 1,045 1,037 1 % 333 265 26 % 1,378 1,302 6 %
Commercial and
other(3) 311 282 10 % 130 116 12 % 440 398 11 %
Total Nominal
Payments Volume $ 2,066 $ 1,961 5 % $ 1,833 $ 1,569 17 % $ 3,899 $ 3,530 10 %
Cash volume 430 404 7 % 1,921 1,704 13 % 2,351 2,108 12 %
Total Nominal
Volume(4) $ 2,496 $ 2,364 6 % $ 3,753 $ 3,273 15 % $ 6,250 $ 5,638 11 %
U.S. Rest of World Visa Inc.
12 months 12 months 12 months 12 months 12 months 12 months
ended ended ended ended ended ended
June 30, June 30, % June 30, June 30, % June 30, June 30, %
2011(2) 2010 (2) Change 2011 (2) 2010 (2) Change 2011 (2) 2010 (2) Change
(in billions, except percentages)
Nominal Payments
Volume
Consumer credit $ 641 $ 599 7 % $ 1,188 $ 987 20 % $ 1,829 $ 1,586 15 %
Consumer debit(3) 1,037 909 14 % 265 197 34 % 1,302 1,107 18 %
Commercial and
other(3) 282 243 16 % 116 100 15 % 398 344 16 %
Total Nominal
Payments Volume $ 1,961 $ 1,752 12 % $ 1,569 $ 1,285 22 % $ 3,530 $ 3,037 16 %
Cash volume 404 374 8 % 1,704 1,411 21 % 2,108 1,785 18 %
Total Nominal
Volume(4) $ 2,364 $ 2,125 11 % $ 3,273 $ 2,696 21 % $ 5,638 $ 4,821 17 %
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(1) Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on whole numbers, not the rounded numbers presented.
(2) Service revenues in a given quarter are assessed based on payments volume in the prior quarter. Therefore, service revenues reported for the twelve months ended September 30, 2012, 2011 and 2010, were based on payments volume reported by our financial institution clients for the twelve months ended June 30, 2012, 2011 and 2010, respectively.
(3) Includes prepaid volume.
(4) 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. 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 verification by Visa. From time to time, previously submitted volume information may be updated. Prior year volume information presented in these tables has not been updated, as subsequent adjustments were not material.
The table below provides the number of transactions processed by our VisaNet system, and billable transactions processed by CyberSource's network during the fiscal periods presented.
2012 vs. 2011 2011 vs. 2010
2012 2011 2010 % Change (1) % Change (1)
(in millions)
Visa processed transactions(2) 53,324 50,922 45,411 5 % 12 %
CyberSource billable transactions(3) 5,182 4,137 3,032(4) 25 % 36 %
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(1) Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on whole numbers, not the rounded numbers presented.
(2) Represents transactions involving Visa, Visa Electron, Interlink and PLUS cards processed on Visa's networks.
(3) Transactions include, but are not limited to, authorization, settlement payment network connectivity, fraud management, payment security management, tax services and delivery address verification. Since its July 2010 acquisition, CyberSource activity has primarily contributed to our data processing revenues.
(4) Includes CyberSource transactions prior to the July 2010 acquisition.
Results of Operations
Operating Revenues
Our operating revenues are primarily generated from payments volume on
Visa-branded cards for goods and services, as well as the number, size and type
of transactions processed on our payment processing platforms. We do not earn
revenues from, or bear credit risk with respect to, interest or fees paid by
cardholders on Visa-branded cards. Our issuing clients have the responsibility
for issuing cards and determining the interest rates and fees paid by
cardholders, and most other competitive card features. We generally do not earn
revenues from the fees that merchants are charged for card acceptance by the
issuing bank, including the merchant discount rate. Our acquiring clients, which
are generally responsible for soliciting merchants, establish and earn these
fees.
The following sets forth the components of our operating revenues:
Service revenues consist primarily of revenues earned for providing clients with
a supported global business infrastructure and for services which support the
various product platforms that enable clients to deliver Visa products and
payment services. Current quarter service revenues are primarily assessed using
a calculation of pricing applied to the prior quarter's payments volume. Service
revenues also include assessments designed to support ongoing acceptance and
volume growth initiatives, which are recognized in the same period the related
volume is transacted.
Data processing revenues are earned for authorization, clearing, settlement,
transaction processing services, network access and other maintenance and
support services that facilitate transaction and information processing among
our clients globally and Visa Europe. Data processing revenues are also earned
for transactions processed by CyberSource's online payment gateway and
PlaySpan's virtual goods payment platform. Data processing revenues are
recognized in the same period the related transactions occur or services are
rendered.
International transaction revenues are earned for processing cross-border
transactions, and currency conversion activities. Cross-border transactions
arise when the cardholder's issuer country is different from the merchant's
country. International transaction revenues are generally driven by cross-border
payments and cash volume.
Other revenues consist primarily of license fees for use of the Visa brand,
revenues earned from Visa Europe in connection with the Visa Europe Framework
Agreement, fees from cardholder services, licensing and certification and
certain activities related to our acquired entities. Other revenues also include
optional service or product enhancements, such as extended cardholder protection
and concierge services.
Client incentives represent contracts with clients and other business partners
for various programs designed to build payments volume, increase product
acceptance and win merchant preference to route transactions over our network.
These incentives are primarily accounted for as reductions to operating
revenues.
Operating Expenses
Personnel includes salaries, incentive compensation, stock-based compensation,
fringe benefits and contractor expense.
Network and processing primarily represents expenses for the operation of our
processing network, including maintenance, equipment rental and fees for other
data processing services.
Marketing includes expenses associated with advertising and marketing campaigns,
sponsorships and other related promotions to promote the Visa brand.
Professional fees consist of fees for consulting, legal and other professional
services.
Depreciation and amortization includes 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 primarily consists of facilities costs, foreign
exchange gains and losses and other corporate expenses in support of our
business.
Litigation provision is an estimate of litigation expense and is based on
management's understanding of our litigation profile, the specifics of the
cases, advice of counsel to the extent appropriate and management's best
estimate of incurred loss at the balance sheet dates.
Other Income (Expense)
Interest income (expense) primarily includes accrued interest and penalties
related to reserves for uncertain tax positions.
Investment income represents returns on our fixed-income securities and other
investments. Investment income also includes gains on the sale of and cash
dividends received from other investments.
Other non-operating income primarily relates to gains and losses earned on
equity method investments and the change in the fair value of the Visa Europe
put option.
Visa Inc. Fiscal 2012, 2011 and 2010
Operating Revenues
The following table sets forth our operating revenues earned in the United
States, in the rest of the world and from Visa Europe. Revenues earned from Visa
Europe are a result of our contractual arrangement with Visa Europe, as governed
by the Framework Agreement that provides for trademark and technology licenses
and bilateral services. See Note 2-Visa Europe to our consolidated financial
statements.
Fiscal Year ended
September 30, $ Change % Change(1)
2012 2011 2012 2011
vs. vs. vs. vs.
2012 2011 2010 2011 2010 2011 2010
(in millions, except percentages)
U.S. $ 5,720 $ 5,135 $ 4,718 $ 585 $ 417 11 % 9 %
Rest of world 4,478 3,846 3,137 632 709 16 % 23 %
Visa Europe 223 207 210 16 (3 ) 7 % (1 )%
Total Operating Revenues $ 10,421 $ 9,188 $ 8,065 $ 1,233 $ 1,123 13 % 14 %
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(1) Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on whole numbers, not the rounded numbers presented.
The increase in operating revenues primarily reflects continued growth in our
underlying business drivers: nominal payments volume, processed transactions and
cross-border volume. Operating revenues also benefited from pricing
modifications made on various services. These benefits were partially offset by
volume loss and increases to client incentives implemented in the U.S. during
fiscal 2012 as part of our strategy to mitigate the impacts of the Dodd-Frank
Act. We expect low double-digit percentage growth in our operating revenues for
the full 2013 fiscal year.
Our operating revenues, primarily service revenues and international transaction
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. There was no significant impact on the
year-over-year growth for fiscal 2012, 2011 and 2010, as the effect of exchange
rate movements was substantially mitigated through our
hedging program. We expect the impacts of our hedging program to continue to . . .
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