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Note 1—Summary of Significant Accounting Policies
Organization. Visa Inc. (“Visa” or the “Company”) is a global payments technology company that connects consumers, businesses, banks and governments around the world, enabling them to use digital currency instead of cash and checks. 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 (“VWPL”), Visa Canada Corporation (“Visa Canada”), Inovant LLC (“Inovant”) and CyberSource Corporation (“CyberSource”), operate the world’s largest retail electronic payments network. The Company provides its clients with payment processing platforms that encompass consumer credit, debit, prepaid and commercial payments, and facilitates global commerce through the transfer of value and information among financial institutions, merchants, consumers, businesses and government entities. The Company does not issue cards, set fees, or determine the interest rates consumers will be charged on Visa-branded cards, which are the independent responsibility of the Company’s issuing clients. On March 1, 2011, the Company acquired PlaySpan Inc. (“PlaySpan”), and its results are included in the Company’s consolidated results of operations from the acquisition date. See Note 4—PlaySpan Acquisition.
Consolidation and basis of presentation. The accompanying unaudited consolidated financial statements include the accounts of Visa Inc. and its consolidated entities and are presented in accordance with accounting principles generally accepted in the United States of America (“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 VIEs have not been material to its consolidated financial statements as of and for the periods presented. Non-controlling interests are reported as a component of equity. All significant intercompany accounts and transactions are eliminated in consolidation. Beginning with the first quarter of fiscal 2011, equity in earnings of unconsolidated affiliates is combined with other in the other income (expense) line on the consolidated statements of operations. Prior period information has been reclassified to conform to this presentation. The Company also updated selected captions within the consolidated financial statements beginning with the first quarter of fiscal 2011 to better reflect underlying activities; however, the grouping of underlying financial accounts remains unchanged.
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 GAAP. Reference should be made to the Visa Inc. Annual Report on Form 10-K for the year ended September 30, 2010, for additional disclosures, including a summary of the Company’s significant accounting policies.
Goodwill and indefinite-lived intangible assets. The Company has historically performed its annual impairment testing of goodwill and indefinite-lived intangible assets as of July 1 of each year. During the second quarter of fiscal 2011, the Company changed the annual impairment testing date from July 1 to February 1. The Company believes this change, which represents a change in the method of applying an accounting principle, is preferable as the earlier date allows the Company additional time to perform the annual impairment testing after its annual forecast and budget are completed and approved. A preferability letter from the Company’s independent registered public accounting firm regarding this change in the method of applying an accounting principle has been filed as an exhibit to this quarterly report on Form 10-Q for the quarter ended March 31, 2011.
The Company performed its annual impairment review of goodwill and indefinite-lived intangible assets as of February 1, 2011, and concluded there was no impairment as of that date. Subsequent to this annual assessment, the Company acquired PlaySpan, which resulted in additional goodwill. No recent events or changes in circumstances indicate that impairment existed as of March 31, 2011.
|
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Note 2—Retrospective Responsibility Plan
The Company deposited $1.2 billion into the litigation escrow account during the first half of fiscal 2011. Under the terms of the retrospective responsibility plan, when the Company makes deposits into the escrow account, the shares of class B common stock are subject to dilution through an adjustment to the conversion rate of the shares of class B common stock to shares of class A common stock. This has the same effect on earnings per share as repurchasing the Company’s class A common stock, by reducing the as-converted class B common stock share count. See Note 7—Stockholders’ Equity.
The following table sets forth the changes in the escrow account during the six months ended March 31, 2011.
| (in millions) | ||||
|
Balance at October 1, 2010 |
$ | 1,936 | ||
|
Deposits into the litigation escrow account |
1,200 | |||
|
American Express settlement payments |
(140 | ) | ||
|
Interest earned, less applicable taxes |
1 | |||
|
Balance at March 31, 2011 |
$ | 2,997 | ||
An accrual for covered litigation is recorded when loss is deemed to be probable and reasonably estimable. In making this determination, the Company evaluates information, including but not limited to actions taken by the litigation committee. The accrual related to covered litigation could be either higher or lower than the escrow account balance. The Company did not record an additional accrual for covered litigation during the six months ended March 31, 2011.
|
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Note 3—Fair Value Measurements
Assets and Liabilities Measured at Fair Value on a Recurring Basis.
| Fair Value Measurements Using Inputs Considered as |
||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
| March 31, 2011 |
September 30, 2010 |
March 31, 2011 |
September 30, 2010 |
March 31, 2011 |
September 30, 2010 |
|||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
|
Assets |
||||||||||||||||||||||||
|
Cash equivalents and restricted cash |
||||||||||||||||||||||||
|
Money market funds and time deposits |
$ | 6,097 | $ | 5,448 | ||||||||||||||||||||
|
Investment securities |
||||||||||||||||||||||||
|
U.S. government-sponsored debt securities |
$ | 131 | $ | 135 | ||||||||||||||||||||
|
Equity securities |
66 | 60 | ||||||||||||||||||||||
|
Auction rate securities |
$ | 7 | $ | 13 | ||||||||||||||||||||
|
Prepaid and other current assets |
||||||||||||||||||||||||
|
Foreign exchange derivative instruments |
4 | 5 | ||||||||||||||||||||||
| $ | 6,163 | $ | 5,508 | $ | 135 | $ | 140 | $ | 7 | $ | 13 | |||||||||||||
|
Liabilities |
||||||||||||||||||||||||
|
Accrued liabilities |
||||||||||||||||||||||||
|
Visa Europe put option |
$ | 267 | $ | 267 | ||||||||||||||||||||
|
Earn-out related to PlaySpan acquisition |
$ | 24 | $ | — | ||||||||||||||||||||
|
Foreign exchange derivative instruments |
$ | 44 | $ | 56 | ||||||||||||||||||||
There were no transfers between Level 1 and Level 2 assets during the first half of fiscal 2011.
Level 2 assets and liabilities measured at fair value on a recurring basis. The fair value of the government-sponsored debt securities is based on quoted prices in active markets for similar assets. Foreign exchange derivative instruments are valued using inputs that are observable in the market or can be derived principally from or corroborated with observable market data. There was no substantive change to the valuation techniques and related inputs used to measure fair value during the first half of fiscal 2011.
Level 3 assets and liabilities measured at fair value on a recurring basis. Auction rate securities are classified as Level 3 due to a lack of trading in active markets and a lack of observable inputs in measuring fair value. During the three months ended March 31, 2011, one of the auction rate securities was called. As a result, the Company received proceeds of $10 million and recorded a pre-tax gain of $4 million in investment income, net, on the consolidated statements of operations. There was no change to the valuation techniques and related inputs used to measure fair value during the first half of fiscal 2011.
Visa Europe put option agreement. The Company has granted Visa Europe a perpetual put option which, if exercised, will require Visa Inc. to purchase all of the outstanding shares of capital stock of Visa Europe from its members. The put option provides a formula for determining the purchase price of the Visa Europe shares, which, subject to certain adjustments, applies Visa Inc.’s forward price-to-earnings multiple, or the P/E ratio (as defined in the option agreement), at the time the option is exercised, to Visa Europe’s projected adjusted sustainable income for the forward 12-month period, or the adjusted sustainable income (as defined in the option agreement). The calculation of Visa Europe’s adjusted sustainable income under the terms of the put option agreement includes potentially material adjustments for cost synergies and other negotiated items. Upon exercise, the key inputs to this formula, including Visa Europe’s adjusted sustainable income, will be the result of negotiation between the Company and Visa Europe. The put option provides an arbitration mechanism in the event that the two parties are unable to agree on the ultimate purchase price.
The fair value of the put option represents the value of Visa Europe’s option, which under certain conditions could obligate the Company to purchase its member equity interest for an amount above fair value. While the put option is in fact non-transferable, its fair value represents the Company’s estimate of the amount the Company would be required to pay a third-party market participant to transfer the potential obligation in an orderly transaction at the measurement date. At March 31, 2011 and September 30, 2010, the Company determined the fair value of the put option to be $267 million. In determining the fair value of the put option on these dates, the Company assumed a 40% probability of exercise by Visa Europe at some point in the future and an estimated long-term differential of 3.5x between the P/E ratio and the P/E ratio applicable to Visa Europe on a standalone basis at the time of exercise, which the Company refers to as the “P/E differential”. While $267 million represents the fair value of the put option at March 31, 2011, it does not represent the actual purchase price that the Company may be required to pay if the option is exercised, which could be several billion dollars or more.
The put option is exercisable at any time at the sole discretion of Visa Europe. As such, the put option liability is included in accrued liabilities on our consolidated balance sheet at March 31, 2011. Classification in current liabilities is not an indication of management’s expectation of exercise and simply reflects the fact that the obligation resulting from the exercise of the instrument could become payable within 12 months. The liability is classified within Level 3, as the assumed probability that Visa Europe will elect to exercise its option, the estimated P/E differential, and other inputs used to value the put option are unobservable. Changes in fair value are included in other income (expense) on the Company’s consolidated statements of operations. There was no change to the fair value of the put option during the first half of fiscal 2011.
Earn-out related to PlaySpan acquisition. In connection with the PlaySpan acquisition, the Company recorded a liability of $24 million to reflect the fair value of a potential earn-out provision included in the purchase agreement. The liability is classified as Level 3 due to a lack of observable inputs, such as the likelihood of meeting certain future revenue targets and other milestones. There was no change to the fair value as of March 31, 2011. Changes in fair value will be included in general and administrative expense on the consolidated statements of operations. See Note 4—PlaySpan Acquisition.
A separate roll-forward of Level 3 investments measured at fair value on a recurring basis is not presented because the only activities during the first half of fiscal 2011 are related to the auction rate securities and the addition of the PlaySpan earn-out liability already described above. Activity in the prior year comparable period was immaterial.
Assets measured at fair value on a nonrecurring basis. Certain financial assets are measured at fair value on a nonrecurring basis.
Non-marketable equity investments and investments accounted for under the equity method. Strategic investments are classified as Level 3 due to the absence of quoted market prices, inherent lack of liquidity, and the fact that inputs used to measure fair value are unobservable and require management judgment. The Company applies fair value measurement to its strategic investments when certain events or circumstances indicate that these investments may be impaired. The Company revalues the investments using various assumptions, including financial metrics and ratios of comparable public companies. There were no events or circumstances that indicated these investments have become impaired during the first half of fiscal 2011, compared with a $1 million impairment loss recognized during the prior year comparable period. At March 31, 2011 and September 30, 2010, non-marketable equity security investments and investments accounted for under the equity method totaled $93 million and $114 million, respectively, and were classified as other assets on the consolidated balance sheets.
On January 24, 2011, the Company’s wholly-owned subsidiary, Visa International, sold its 10 percent investment in Visa Vale issuer Companhia Brasileira de Soluções e Serviços, or CBSS, to Banco do Brasil and Bradesco. The Company received gross proceeds of $103 million. Prior to the sale, the Company accounted for the investment under the cost method with a book value of $17 million. The sale is subject to regulatory approval by Brazil’s Conselho Administrativeo de Defesa Econômica, which we expect to receive in the third quarter of fiscal 2011. Upon this approval, the Company will recognize an estimated pre-tax gain, net of transaction costs, of $85 million in investment income, net on the consolidated statements of operations. The amount of the gain net of tax is estimated to be $44 million.
Debt. The estimated fair value of the Company’s debt at March 31, 2011 and September 30, 2010 was $43 million and $50 million, respectively, based on credit ratings for similar notes.
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 significant non-financial liabilities. Indefinite-lived intangible assets consist of Visa’s tradename, customer relationships, and Visa Europe franchise right acquired in the October 2007 reorganization. Finite-lived intangible assets primarily consist of customer relationships, reseller relationships and tradenames acquired in the July 2010 acquisition of CyberSource and the March 2011 acquisition of PlaySpan. See Note 4—PlaySpan Acquisition. The Company completed its annual impairment review of its indefinite-lived intangible assets and goodwill as of February 1, 2011, and concluded there was no impairment. No recent events or changes in circumstances indicate that impairment existed at March 31, 2011.
|
|||
Note 4—PlaySpan Acquisition
On March 1, 2011, the Company acquired PlaySpan, a privately held company whose payments platform processes transactions for digital goods in online games, digital media and social networks around the world. The acquisition of PlaySpan complements Visa’s acquisition of CyberSource in July 2010 and extends the Company’s capabilities in digital, e-Commerce and mobile commerce.
The following table summarizes the allocation of the accounting purchase consideration, which is preliminary pending finalization of the valuation analysis.
| Fair Value | ||||
| (in millions) | ||||
|
Tangible assets, net(1) |
$ | 67 | ||
|
Finite-lived intangible assets with a weighted-average useful life of 2.8 years |
15 | |||
|
Goodwill |
141 | |||
|
Net deferred tax liabilities |
(19 | ) | ||
|
Net assets acquired |
$ | 204 | ||
| (1) |
Tangible assets, net include $56 million of technology assets acquired, which have a weighted-average useful life of 5 years, and are recognized in property, equipment and technology, net on the consolidated balance sheets. |
The following table presents the total purchase consideration for the PlaySpan acquisition.
| Potential Purchase Consideration |
Accounting Purchase Consideration |
|||||||
| (in millions) | ||||||||
|
Cash paid |
$ | 180 | $ | 180 | ||||
|
Earn-out provision(1) |
40 | 40 | ||||||
|
Less: Employee compensation(2) |
(12) | |||||||
|
Valuation adjustment(3) |
(4) | |||||||
|
Fair value of earn-out provision (See Note 3—Fair Value Measurements) |
24 | |||||||
|
Fair value of stock options issued(4) |
5 | |||||||
|
Total purchase consideration |
$ | 225 | $ | 204 | ||||
| (1) |
The acquisition agreement includes a potential earn-out provision of up to $40 million, should PlaySpan achieve certain future revenue targets and other milestones. |
| (2) |
The amount reflects personnel expense related to the earn-out provision that will be recognized over the performance period. |
| (3) |
Adjustment to reflect the earn-out provision at fair value based on the assumed likelihood of the future revenue targets and other milestones being met. |
| (4) |
The Company issued non-qualified stock options to replace unvested, in-the-money stock options held by PlanSpan employees. See Note 9—Share-based Compensation. |
|
|||
Note 5—Pension and Other Postretirement Benefits
The Company sponsors various qualified and non-qualified defined benefit pension and other postretirement benefit plans which provide retirement and health benefits for substantially all employees residing in the United States.
The components of net periodic benefit cost are as follows:
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||||||
| 3 months ended March 31, |
6 months ended March 31, |
3 months ended March 31, |
6 months ended March 31, |
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| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
|
Service cost |
$ | 11 | $ | 10 | $ | 20 | $ | 23 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
|
Interest cost |
9 | 10 | 19 | 20 | 1 | 1 | 1 | 1 | ||||||||||||||||||||||||
|
Expected return on assets |
(13 | ) | (13 | ) | (27 | ) | (25 | ) | — | — | — | — | ||||||||||||||||||||
|
Amortization of: |
||||||||||||||||||||||||||||||||
|
Prior service credit |
(2 | ) | (2 | ) | (4 | ) | (4 | ) | (1 | ) | (2 | ) | (2 | ) | (2 | ) | ||||||||||||||||
|
Actuarial loss |
4 | 3 | 9 | 9 | — | — | — | — | ||||||||||||||||||||||||
|
Total net periodic benefit cost |
$ | 9 | $ | 8 | $ | 17 | $ | 23 | $ | — | $ | (1 | ) | $ | (1 | ) | $ | (1 | ) | |||||||||||||
|
|||
Note 6—Settlement Guarantee Management
The indemnification for settlement losses that Visa provides to its customers 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. The Company’s exposure is limited to the amount of unsettled Visa payment transactions. The Company requires certain customers that do not meet its credit standards to post collateral equivalent to their estimated unsettled transactions. The Company’s estimated maximum settlement exposure was $44.5 billion at March 31, 2011, compared to $38.7 billion at September 30, 2010. Of these settlement exposure amounts, $3.3 billion at March 31, 2011, and $3.0 billion at September 30, 2010, were covered by collateral.
The Company maintained collateral as follows:
| March 31, 2011 |
September 30, 2010 |
|||||||
| (in millions) | ||||||||
|
Cash equivalents |
$ | 870 | $ | 899 | ||||
|
Pledged securities at market value |
409 | 470 | ||||||
|
Letters of credit |
851 | 869 | ||||||
|
Guarantees |
2,008 | 1,803 | ||||||
|
Total |
$ | 4,138 | $ | 4,041 | ||||
The total available collateral balances presented in the table above are greater than the settlement exposure covered by customer collateral due to instances in which the available collateral exceeds the total settlement exposure for certain financial institutions at each date presented.
The fair value of the settlement risk guarantee is estimated based on a proprietary probability-weighted model and was less than $1 million at March 31, 2011, and September 30, 2010. These amounts are reflected in accrued liabilities on the consolidated balance sheets.
|
|||
Note 7—Stockholders’ Equity
The number of shares of each class and the number of shares of class A common stock outstanding on an as-converted basis at March 31, 2011 are as follows:
| (in millions, except conversion rate) | Shares Outstanding at March 31, 2011 |
Conversion Rate Into Class A Common Stock |
Class A Common Stock As Converted(1) |
|||||||||
|
Class A common stock |
521 | — | 521 | |||||||||
|
Class B common stock |
245 | 0.4881 | 120 | |||||||||
|
Class C common stock |
64 | 1.0000 | 64 | |||||||||
|
Total |
704 | |||||||||||
| (1) |
Figures may not sum due to rounding. As-converted class A common stock count calculated based on whole numbers. |
Share repurchases. During the first half of fiscal 2011, the Company effectively repurchased 24.0 million shares at an average price of $72.26 per share, for a total cost of $1.7 billion. Of the $1.7 billion, $536 million was executed through the repurchase of class A common stock in the open market, and $1.2 billion was effectively executed through two separate deposits into the litigation escrow account previously established under the retrospective responsibility plan.
The open market repurchases were made under the repurchase program previously authorized by the board of directors in October 2010. All repurchased shares have been retired and constitute authorized but unissued shares.
The following table presents share repurchases in the open market for the three months ended:
| March 31, 2011 |
December 31, 2010 |
|||||||
| (in millions, except per share data) | ||||||||
|
Shares repurchased in the open market |
3.3 | 4.3 | ||||||
|
Weighted-average repurchase price per share |
$ | 70.53 | $ | 70.40 | ||||
|
Total cost |
$ | 230 | $ | 306 | ||||
The Company made deposits into the litigation escrow account of $800 million and $400 million on October 8, 2010, and March 31, 2011, respectively. Under the terms of the retrospective responsibility plan, when the Company makes deposits into the escrow account, the shares of class B common stock are subject to dilution through an adjustment to the conversion rate of the shares of class B common stock to shares of class A common stock. This has the same effect on earnings per share as repurchasing the Company’s class A common stock, by reducing the as-converted class B common stock share count as shown in the table below.
| Fiscal 2011 | ||||||||
| March 2011 |
October 2010 |
|||||||
| (in millions, except per share data and conversion rate) |
||||||||
|
Deposits under the retrospective responsibility plan |
$ | 400 | $ | 800 | ||||
|
Effective price per share(1) |
$ | 73.81 | $ | 72.74 | ||||
|
Equivalent shares of class A common stock effectively repurchased |
5.4 | 11.0 | ||||||
|
Conversion rate of class B common stock to class A common stock after deposits |
0.4881 | 0.5102 | ||||||
|
As-converted class B common stock outstanding after deposits |
120 | 125 | ||||||
| (1) |
Effective price per share 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 amended and restated certificate of incorporation. |
In accordance with the authorization from the board of directors, the $400 million deposit into the litigation escrow in March 2011 reduced funds previously allocated to the Company’s October 2010 share repurchase program by an equivalent amount. At March 31, 2011, the October 2010 share repurchase program had remaining authorized funds of $64 million. This authorization will be in effect through September 30, 2011, and the terms of the program are subject to change at the discretion of the board of directors.
On May 5, 2011, the Company announced an additional $1.0 billion share repurchase program as authorized by the board of directors. The authorization will be in effect through April 20, 2012, and the terms of the program are subject to change at the discretion of the board of directors.
Class B common stock. Under the Company’s certificate of incorporation, shares of class B common stock are subject to transfer restrictions until the date on which certain covered litigation has been finally resolved. See Note 11—Legal Matters.
Accelerated class C share release programs. On January 26, 2011, the Company’s board of directors approved an accelerated class C share release program, as permitted under Visa’s certificate of incorporation. Such approval by the Company’s board of directors permitted an early release of the remaining 55 million shares of class C common stock on February 7, 2011, which would have otherwise become automatically eligible for public sale on March 25, 2011, under the Company’s certificate of incorporation. Pursuant to the terms of the accelerated class C share release program, class C common stock sold in the public market automatically converts to class A common stock without a separate shareholder application process. The early release of the class C common stock did not increase the number of outstanding shares on an as-converted basis, and there was no dilutive effect to the outstanding class A common stock share count on an as-converted basis from these transactions.
Of the 152 million shares of class C common stock released from transfer restrictions under the Company’s 2009, 2010 and the most recent accelerated class C share release programs, 88 million shares have been converted from class C to class A common stock upon their sale into the public market through March 31, 2011. Approximately 29 million and 33 million shares were converted during the three and six months ended March 31, 2011, respectively.
Dividends. On April 21, 2011, the Company’s board of directors declared a dividend in the amount of $0.15 per share of class A common stock (determined in the case of class B and class C common stock on an as-converted basis), which will be paid on June 7, 2011, to all holders of record of the Company’s class A, class B and class C common stock as of May 20, 2011. The Company paid $215 million in dividends during the first half of fiscal 2011.
|
|||
Note 10—Income Taxes
The effective income tax rate was 36% for the three and six months ended March 31, 2011 and 2010.
During the second quarter of fiscal 2011, the Company’s unrecognized tax benefits increased by $12 million, all of which would impact the effective tax rate if recognized. During the same period, the Company accrued $6 million of interest related to uncertain tax positions.
During the six months ended March 31, 2011, total unrecognized tax benefits decreased by $29 million, primarily due to the effective settlement of uncertainties related to the timing of certain deductions in the fiscal first quarter, partially offset by the aforementioned increase in the second quarter of fiscal 2011. The effective settlement did not impact the effective tax rate. During the six months ended March 31, 2011, total reserves for potential interest and penalties decreased by $6 million and $2 million, respectively.
|
|||
Note 11—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 amounts 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 consolidated results of operations, financial position 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.
There was no significant provision activity for the three and six months ended March 31, 2011. The Company’s litigation provision was ($41) million for the six months ended March 31, 2010. The credit to the provision for the six months ended March 31, 2010, was primarily the result of a $41 million pre-tax gain recognized related to the prepayment of the remaining obligations under the Retailers’ litigation. 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 at the balance sheet date.
The following table summarizes the activity related to accrued litigation for both covered and non-covered litigation for the six months ended March 31:
| 2011 | 2010 | |||||||
| (in millions) | ||||||||
|
Balance at October 1 |
$ | 697 | $ | 1,717 | ||||
|
Provision for settled matters(1) |
6 | (41 | ) | |||||
|
Reclassification of settled matters(2) |
12 | — | ||||||
|
Interest accretion on settled matters |
7 | 16 | ||||||
|
Payments on settled matters(3) |
(142 | ) | (826 | ) | ||||
|
Balance at March 31 |
$ | 580 | $ | 866 | ||||
| (1) |
The amount for the six months ended March 31, 2010 includes the reduction to the provision for the $41 million pre-tax gain recognized related to the prepayment of the remaining obligations under the Retailers’ litigation. |
| (2) |
Reclassification of amount previously recorded in accrued liabilities. |
| (3) |
The amount for the six months ended March 31, 2010 includes the Company’s October 2009 prepayment of its remaining $800 million in payment obligations in the Retailers’ litigation at a discounted amount of $682 million. |
Covered Litigation
Visa Inc., Visa U.S.A. and Visa International are parties to certain legal proceedings that are subject to the retrospective responsibility plan, which the Company refers to as the covered litigation. See Note 2—Retrospective Responsibility Plan. An accrual for covered litigation is recorded when loss is deemed to be probable and reasonably estimable. In making this determination the Company evaluates available information, including funding decisions made by the litigation committee. The accrual related to covered litigation could be either higher or lower than the escrow account balance. The Company has not recorded an additional accrual for covered litigation during fiscal 2011.
The Attridge Litigation. On January 12, 2011, the court issued an order reassigning the case to the Honorable John E. Munter. On February 15, 2011, the court ordered that the case be stayed until 30 days following the final resolution of the appeals in the California Credit/Debit Card Tying Cases.
The Interchange Litigation.
Multidistrict Litigation Proceedings (MDL). On February 7, 2011, Visa entered into an omnibus agreement that confirmed and memorialized the signatories’ intentions with respect to the loss sharing agreement, the judgment sharing agreement and other agreements relating to certain interchange litigation. Under the omnibus agreement, the monetary portion of any settlement of the interchange litigation covered by the omnibus agreement would be divided into a MasterCard portion at 33.3333% and a Visa portion at 66.6667%. In addition, the monetary portion of any judgment assigned to Visa-related claims in accordance with the omnibus agreement would be treated as a Visa portion. Visa would have no liability for the monetary portion of any judgment assigned to MasterCard-related claims in accordance with the omnibus agreement, and if a judgment is not assigned to Visa-related claims or MasterCard-related claims in accordance with the Omnibus agreement, then any monetary liability would be divided into a MasterCard portion at 33.3333% and a Visa portion at 66.6667%. The Visa portion of a settlement or judgment covered by the omnibus agreement would be allocated in accordance with specified provisions of the Company’s retrospective responsibility plan. The litigation provision on the consolidated statements of operations is not impacted by the execution of the omnibus agreement.
On February 11, 2011, the parties filed motions for summary judgment on a number of issues. Visa, jointly with other defendants, moved for summary judgment against the claims in the Supplemental Complaint and the Second Consolidated Amended Class Action Complaint. Visa and other defendants also moved for summary judgment against the claims in the individual plaintiffs’ complaints. The class plaintiffs sought summary judgment on all of their intra-network damages claims under Section 1 of the Sherman Act in the Second Consolidated Amended Class Action Complaint, including by arguing that Visa’s post-IPO conduct constitutes a continuing conspiracy. Finally, the individual plaintiffs moved for partial summary judgment on their claims that (i) agreements by banks to enforce certain Visa rules are per se unlawful under Section 1 of the Sherman Act, and (ii) Visa’s imposition of those rules post-IPO constitutes a continuing conspiracy under Section 1 of the Sherman Act.
On February 17, 2011, the Court ordered that the parties identify any objections to a trial date of September 12, 2012.
Other Litigation
Morgan Stanley Dean Witter/Discover Litigation. On April 14, 2011, the European Union General Court denied Visa’s appeal of the €10.2 million fine levied in 2007. As previously reported, pursuant to existing agreements, Visa Europe has acknowledged full responsibility for the defense of this action, including any fines that may be payable.
Merchant Acceptance Rules Investigations. On October 4, 2010, Visa announced a settlement with the United States Department of Justice and the attorneys general of seven states to resolve their investigations. On December 20, 2010, eleven additional states joined the settlement. As part of the settlement, Visa will allow U.S. merchants to offer discounts or other incentives to steer customers to a particular form of payment including to a specific network brand or to any card product, such as a “non-reward” Visa credit card. Visa’s rules always have allowed U.S. merchants to steer customers to other forms of payment and offer discounts to customers who choose to pay with cash, check or PIN debit. The new rules will expand U.S. merchants’ ability to discount for their preferred form of payment, though they will not be able to pick and choose amongst issuing banks. The settlement agreement does not address Visa’s rule prohibiting U.S. merchants from surcharging consumers. Apart from a partial reimbursement to some of the state attorneys general of their attorneys’ fees and expenses, there is no monetary obligation associated with the settlement. The reimbursement amount is not considered material to the consolidated financial statements.
The consent decree setting forth the terms of settlement is subject to court approval. Visa will make formal rule changes after the court enters a final judgment following a public comment period, but will refrain from enforcing its current discounting rules in the interim.
Venezuela Interchange Proceedings. On December 29, 2010, the Superintendencia para la Promoción y Protección de la Libre Competencia (“Competition Authority”) of Venezuela issued a decision, subject to appeal, that it had found no violation of Venezuelan competition law by Visa or any of the other defendants.
European Interchange Proceedings. After public consultation, on December 8, 2010, the European Commission concluded that the proposed agreement with Visa Europe addressed its competition concerns, made the agreement legally binding upon Visa Europe, and closed its investigation with regard to interchange fees for debit card transactions. For credit card and deferred debit card payments, the European Commission announced that it will “continue to investigate.” Meanwhile, it has issued further requests for information to Visa Europe, Visa Inc. and Visa International and commissioned a cost-of-cash study. Pursuant to existing agreements among the parties, Visa Europe is obligated to indemnify Visa International and Visa Inc. in connection with this proceeding, including payment of any fines that may be imposed.
Canadian Competition Proceedings.
Competition Bureau. On December 15, 2010, the Commissioner of Competition filed a Notice of Application against Visa Canada Corporation (“Visa Canada”) and MasterCard. The proceeding challenges certain Visa policies regarding merchant acceptance practices, including Visa’s “no-surcharge” and “honour all cards” policies under the Competition Act. Visa Canada filed a Response to the Notice of Application on January 31, 2011. On February 10, 2011, Toronto Dominion Bank and the Canadian Bankers Association sought leave to intervene in the proceeding; Visa supported such requests. Following a hearing on March 7, 2011, the Competition Tribunal granted the intervention requests.
Merchant Litigation. On December 17, 2010, a purported civil follow-on case to the Competition Bureau’s proceeding was filed against Visa Canada and MasterCard in the Superior Court of Québec, Canada, on behalf of a class of merchants and a class of consumers. The action, 9085-4886 Quebec Inc. et al. v. Visa Canada et al., asserts claims under Section 76 of the Competition Act, which does not provide for a civil cause of action. Plaintiff seeks unspecified money damages and injunctive relief.
On March 28, 2011, Mary Watson filed a class action lawsuit in the Supreme Court of British Columbia, Canada, on behalf of merchants and others in Canada that accept payment by Visa and MasterCard. The suit, filed against Visa Canada, MasterCard, and ten financial institutions, alleges conduct contrary to section 45 of the Competition Act and also asserts claims of civil conspiracy, interference with economic interests, and unjust enrichment, among others. Plaintiff alleges that Visa and MasterCard each conspired with their member financial institutions to set supra-competitive default interchange rates and merchant discount fees, and that Visa and MasterCard’s respective “no-surcharge” and “honour all cards” rules had the anticompetitive effect of increasing merchant discount fees. The lawsuit seeks unspecified monetary damages and injunctive relief.
CyberSource securities litigation. The court held a final approval hearing on January 14, 2011 and issued an order and final judgment approving the settlement on January 21, 2011. The settlement amount is not considered material to the Company’s consolidated financial statements.
Dynamic Currency Conversion. In New Zealand, the Commerce Commission completed its investigation and concluded that Visa’s actions relating to Dynamic Currency Conversion had not breached New Zealand’s competition law.
Data pass litigation. On November 19, 2010, the plaintiff filed an amended complaint, adding GameStop Corporation as a defendant, asserting additional claims against Visa under federal and state consumer protection statutes and state common law, and seeking certification of a class of persons and entities whose credit card or debit card data was improperly accessed by Webloyalty.com since October 1, 2008. On December 23, 2010, Webloyalty.com, GameStop, and Visa each filed motions to dismiss the amended complaint. Webloyalty.com also has asked the Judicial Panel on Multi-district Litigation to consolidate with this case, for pretrial proceedings, a case pending in federal district court in California in which Webloyalty.com and Movietickets.com (but not Visa) are named as defendants. On February 8, 2011, the Judicial Panel on Multi-district Litigation denied Webloyalty.com’s application to consolidate the case.
Call center litigation. On April 28, 2011, Francisco Marenco filed a request in the U.S. District Court for the Central District of California to amend his class action complaint to name Visa Inc. as the defendant. The lawsuit alleges that Visa recorded telephone calls to call center representatives without providing a disclosure that the calls may be recorded, in alleged violation of state law in California and several other states. Together with the proposed complaint, the plaintiff filed notice that the parties had reached a settlement, which is subject to court approval, in an amount that is not material to Visa’s consolidated financial statements. This matter relates to and resolves the previously reported contractual indemnity claim tendered to Visa by a processing client in October 2010.
Intellectual Property Litigation
Restricted Spending Solutions, LLC—Prepaid and Commercial Cards. On December 22, 2010, Visa moved to recover its attorneys’ fees incurred in the litigation on grounds that, at the outset of the case, plaintiff improperly refused to acknowledge the invalidity of its patent when presented with Visa’s evidence. On January 27, 2011, plaintiff and Visa filed a stipulation of settlement, whereby plaintiff agreed to withdraw its appeal and pay Visa’s litigation costs in exchange for Visa’s withdrawal of its fee petition.
|
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Consolidation and basis of presentation. The accompanying unaudited consolidated financial statements include the accounts of Visa Inc. and its consolidated entities and are presented in accordance with accounting principles generally accepted in the United States of America (“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 VIEs have not been material to its consolidated financial statements as of and for the periods presented. Non-controlling interests are reported as a component of equity. All significant intercompany accounts and transactions are eliminated in consolidation. Beginning with the first quarter of fiscal 2011, equity in earnings of unconsolidated affiliates is combined with other in the other income (expense) line on the consolidated statements of operations. Prior period information has been reclassified to conform to this presentation. The Company also updated selected captions within the consolidated financial statements beginning with the first quarter of fiscal 2011 to better reflect underlying activities; however, the grouping of underlying financial accounts remains unchanged.
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 GAAP. Reference should be made to the Visa Inc. Annual Report on Form 10-K for the year ended September 30, 2010, for additional disclosures, including a summary of the Company’s significant accounting policies.
Goodwill and indefinite-lived intangible assets. The Company has historically performed its annual impairment testing of goodwill and indefinite-lived intangible assets as of July 1 of each year. During the second quarter of fiscal 2011, the Company changed the annual impairment testing date from July 1 to February 1. The Company believes this change, which represents a change in the method of applying an accounting principle, is preferable as the earlier date allows the Company additional time to perform the annual impairment testing after its annual forecast and budget are completed and approved. A preferability letter from the Company’s independent registered public accounting firm regarding this change in the method of applying an accounting principle has been filed as an exhibit to this quarterly report on Form 10-Q for the quarter ended March 31, 2011.
The Company performed its annual impairment review of goodwill and indefinite-lived intangible assets as of February 1, 2011, and concluded there was no impairment as of that date. Subsequent to this annual assessment, the Company acquired PlaySpan, which resulted in additional goodwill. No recent events or changes in circumstances indicate that impairment existed as of March 31, 2011.
|
|||
The following table sets forth the changes in the escrow account during the six months ended March 31, 2011.
| (in millions) | ||||
|
Balance at October 1, 2010 |
$ | 1,936 | ||
|
Deposits into the litigation escrow account |
1,200 | |||
|
American Express settlement payments |
(140 | ) | ||
|
Interest earned, less applicable taxes |
1 | |||
|
Balance at March 31, 2011 |
$ | 2,997 | ||
|
|||
Assets and Liabilities Measured at Fair Value on a Recurring Basis.
| Fair Value Measurements Using Inputs Considered as |
||||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||
| March 31, 2011 |
September 30, 2010 |
March 31, 2011 |
September 30, 2010 |
March 31, 2011 |
September 30, 2010 |
|||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
|
Assets |
||||||||||||||||||||||||
|
Cash equivalents and restricted cash |
||||||||||||||||||||||||
|
Money market funds and time deposits |
$ | 6,097 | $ | 5,448 | ||||||||||||||||||||
|
Investment securities |
||||||||||||||||||||||||
|
U.S. government-sponsored debt securities |
$ | 131 | $ | 135 | ||||||||||||||||||||
|
Equity securities |
66 | 60 | ||||||||||||||||||||||
|
Auction rate securities |
$ | 7 | $ | 13 | ||||||||||||||||||||
|
Prepaid and other current assets |
||||||||||||||||||||||||
|
Foreign exchange derivative instruments |
4 | 5 | ||||||||||||||||||||||
| $ | 6,163 | $ | 5,508 | $ | 135 | $ | 140 | $ | 7 | $ | 13 | |||||||||||||
|
Liabilities |
||||||||||||||||||||||||
|
Accrued liabilities |
||||||||||||||||||||||||
|
Visa Europe put option |
$ | 267 | $ | 267 | ||||||||||||||||||||
|
Earn-out related to PlaySpan acquisition |
$ | 24 | $ | — | ||||||||||||||||||||
|
Foreign exchange derivative instruments |
$ | 44 | $ | 56 | ||||||||||||||||||||
|
|||
The following table summarizes the allocation of the accounting purchase consideration, which is preliminary pending finalization of the valuation analysis.
| Fair Value | ||||
| (in millions) | ||||
|
Tangible assets, net(1) |
$ | 67 | ||
|
Finite-lived intangible assets with a weighted-average useful life of 2.8 years |
15 | |||
|
Goodwill |
141 | |||
|
Net deferred tax liabilities |
(19 | ) | ||
|
Net assets acquired |
$ | 204 | ||
| (1) |
Tangible assets, net include $56 million of technology assets acquired, which have a weighted-average useful life of 5 years, and are recognized in property, equipment and technology, net on the consolidated balance sheets. |
The following table presents the total purchase consideration for the PlaySpan acquisition.
| Potential Purchase Consideration |
Accounting Purchase Consideration |
|||||||
| (in millions) | ||||||||
|
Cash paid |
$ | 180 | $ | 180 | ||||
|
Earn-out provision(1) |
40 | 40 | ||||||
|
Less: Employee compensation(2) |
(12) | |||||||
|
Valuation adjustment(3) |
(4) | |||||||
|
Fair value of earn-out provision (See Note 3—Fair Value Measurements) |
24 | |||||||
|
Fair value of stock options issued(4) |
5 | |||||||
|
Total purchase consideration |
$ | 225 | $ | 204 | ||||
| (1) |
The acquisition agreement includes a potential earn-out provision of up to $40 million, should PlaySpan achieve certain future revenue targets and other milestones. |
| (2) |
The amount reflects personnel expense related to the earn-out provision that will be recognized over the performance period. |
| (3) |
Adjustment to reflect the earn-out provision at fair value based on the assumed likelihood of the future revenue targets and other milestones being met. |
| (4) |
The Company issued non-qualified stock options to replace unvested, in-the-money stock options held by PlanSpan employees. See Note 9—Share-based Compensation. |
|
|||
The components of net periodic benefit cost are as follows:
| Pension Benefits | Other Postretirement Benefits | |||||||||||||||||||||||||||||||
| 3 months ended March 31, |
6 months ended March 31, |
3 months ended March 31, |
6 months ended March 31, |
|||||||||||||||||||||||||||||
| 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
|
Service cost |
$ | 11 | $ | 10 | $ | 20 | $ | 23 | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
|
Interest cost |
9 | 10 | 19 | 20 | 1 | 1 | 1 | 1 | ||||||||||||||||||||||||
|
Expected return on assets |
(13 | ) | (13 | ) | (27 | ) | (25 | ) | — | — | — | — | ||||||||||||||||||||
|
Amortization of: |
||||||||||||||||||||||||||||||||
|
Prior service credit |
(2 | ) | (2 | ) | (4 | ) | (4 | ) | (1 | ) | (2 | ) | (2 | ) | (2 | ) | ||||||||||||||||
|
Actuarial loss |
4 | 3 | 9 | 9 | — | — | — | — | ||||||||||||||||||||||||
|
Total net periodic benefit cost |
$ | 9 | $ | 8 | $ | 17 | $ | 23 | $ | — | $ | (1 | ) | $ | (1 | ) | $ | (1 | ) | |||||||||||||
|
|||
The Company maintained collateral as follows:
| March 31, 2011 |
September 30, 2010 |
|||||||
| (in millions) | ||||||||
|
Cash equivalents |
$ | 870 | $ | 899 | ||||
|
Pledged securities at market value |
409 | 470 | ||||||
|
Letters of credit |
851 | 869 | ||||||
|
Guarantees |
2,008 | 1,803 | ||||||
|
Total |
$ | 4,138 | $ | 4,041 | ||||
|
|||
The number of shares of each class and the number of shares of class A common stock outstanding on an as-converted basis at March 31, 2011 are as follows:
| (in millions, except conversion rate) | Shares Outstanding at March 31, 2011 |
Conversion Rate Into Class A Common Stock |
Class A Common Stock As Converted(1) |
|||||||||
|
Class A common stock |
521 | — | 521 | |||||||||
|
Class B common stock |
245 | 0.4881 | 120 | |||||||||
|
Class C common stock |
64 | 1.0000 | 64 | |||||||||
|
Total |
704 | |||||||||||
| (1) |
Figures may not sum due to rounding. As-converted class A common stock count calculated based on whole numbers. |
The following table presents share repurchases in the open market for the three months ended:
| March 31, 2011 |
December 31, 2010 |
|||||||
| (in millions, except per share data) | ||||||||
|
Shares repurchased in the open market |
3.3 | 4.3 | ||||||
|
Weighted-average repurchase price per share |
$ | 70.53 | $ | 70.40 | ||||
|
Total cost |
$ | 230 | $ | 306 | ||||
The Company made deposits into the litigation escrow account of $800 million and $400 million on October 8, 2010, and March 31, 2011, respectively. Under the terms of the retrospective responsibility plan, when the Company makes deposits into the escrow account, the shares of class B common stock are subject to dilution through an adjustment to the conversion rate of the shares of class B common stock to shares of class A common stock. This has the same effect on earnings per share as repurchasing the Company’s class A common stock, by reducing the as-converted class B common stock share count as shown in the table below.
| Fiscal 2011 | ||||||||
| March 2011 |
October 2010 |
|||||||
| (in millions, except per share data and conversion rate) |
||||||||
|
Deposits under the retrospective responsibility plan |
$ | 400 | $ | 800 | ||||
|
Effective price per share(1) |
$ | 73.81 | $ | 72.74 | ||||
|
Equivalent shares of class A common stock effectively repurchased |
5.4 | 11.0 | ||||||
|
Conversion rate of class B common stock to class A common stock after deposits |
0.4881 | 0.5102 | ||||||
|
As-converted class B common stock outstanding after deposits |
120 | 125 | ||||||
| (1) |
Effective price per share 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 amended and restated certificate of incorporation. |
|
|||
The following table summarizes the activity related to accrued litigation for both covered and non-covered litigation for the six months ended March 31:
| 2011 | 2010 | |||||||
| (in millions) | ||||||||
|
Balance at October 1 |
$ | 697 | $ | 1,717 | ||||
|
Provision for settled matters(1) |
6 | (41 | ) | |||||
|
Reclassification of settled matters(2) |
12 | — | ||||||
|
Interest accretion on settled matters |
7 | 16 | ||||||
|
Payments on settled matters(3) |
(142 | ) | (826 | ) | ||||
|
Balance at March 31 |
$ | 580 | $ | 866 | ||||
| (1) |
The amount for the six months ended March 31, 2010 includes the reduction to the provision for the $41 million pre-tax gain recognized related to the prepayment of the remaining obligations under the Retailers’ litigation. |
| (2) |
Reclassification of amount previously recorded in accrued liabilities. |
| (3) |
The amount for the six months ended March 31, 2010 includes the Company’s October 2009 prepayment of its remaining $800 million in payment obligations in the Retailers’ litigation at a discounted amount of $682 million. |
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