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V > SEC Filings for V > Form 10-K on 16-Nov-2012All Recent SEC Filings

Show all filings for VISA INC.

Form 10-K for VISA INC.


16-Nov-2012

Annual Report


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," "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


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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.


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                                                     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

(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).


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                                       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 %

(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.


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                                                                         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 %

(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.


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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  %

(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


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hedging program. We expect the impacts of our hedging program to continue to . . .

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