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EX-32.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 906 - VISA INC.vex321123115.htm
EX-31.2 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 - VISA INC.vex312123115.htm
EX-31.1 - CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 - VISA INC.vex311123115.htm
EX-10.3 - FORM OF VISA INC. 2007 EQUITY INCENTIVE COMP PLAN - PSU AWARD AGREEMENT - VISA INC.vex103123115.htm
EX-10.1 - FORM OF VISA INC. 2007 EQUITY INCENTIVE COMP PLAN - STOCK OPTION AWARD AGREEMENT - VISA INC.vex101123115.htm
EX-32.2 - CERTIFICATION OF THE CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 906 - VISA INC.vex322123115.htm
EX-10.2 - FORM OF VISA INC. 2007 EQUITY INCENTIVE COMP PLAN - RSU AWARD AGREEMENT - VISA INC.vex102123115.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended December 31, 2015
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission file number 001-33977
VISA INC.
(Exact name of Registrant as specified in its charter)
Delaware
 
26-0267673
(State or other jurisdiction
of incorporation or organization)
 
(IRS Employer
Identification No.)
 
 
 
P.O. Box 8999
San Francisco, California
 
94128-8999
(Address of principal executive offices)
 
(Zip Code)

(650) 432-3200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  þ    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  þ    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  þ
Accelerated filer   o
Non-accelerated filer   o (Do not check if a smaller reporting company.)
Smaller Reporting Company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  o    No  þ
As of January 22, 2016 there were 1,919,130,968 shares of class A common stock, par value $0.0001 per share, 245,513,385 shares of class B common stock, par value $0.0001 per share, and 19,411,327 shares of class C common stock, par value $0.0001 per share, of Visa Inc. outstanding.

1


VISA INC.
TABLE OF CONTENTS
 
 
 
 
 
 
Page
PART I.
 
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II.
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 

2


PART I. FINANCIAL INFORMATION
 
ITEM 1.
Financial Statements
VISA INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
December 31,
2015
 
September 30,
2015
 
(in millions, except par value data)
Assets
 
 
 
Cash and cash equivalents
$
12,837

 
$
3,518

Restricted cash—litigation escrow (Note 3)
1,061

 
1,072

Investment securities (Note 4):
 
 
 
Trading
80

 
66

Available-for-sale
8,428

 
2,431

Settlement receivable
443

 
408

Accounts receivable
922

 
847

Customer collateral (Note 7)
1,041

 
1,023

Current portion of client incentives
414

 
303

Prepaid expenses and other current assets
247

 
353

Total current assets
25,473

 
10,021

Investment securities, available-for-sale (Note 4)
3,487

 
3,384

Client incentives
128

 
110

Property, equipment and technology, net
1,884

 
1,888

Other assets
832

 
778

Intangible assets, net
11,348

 
11,361

Goodwill
11,825

 
11,825

Total assets
$
54,977

 
$
39,367

Liabilities
 
 
 
Accounts payable
$
118

 
$
127

Settlement payable
744

 
780

Customer collateral (Note 7)
1,041

 
1,023

Accrued compensation and benefits
317

 
503

Client incentives
1,116

 
1,049

Accrued liabilities (Note 8)
1,009

 
849

Accrued litigation (Note 13)
1,012

 
1,024

Total current liabilities
5,357

 
5,355

Long-term debt (Note 5)
15,877

 

Deferred tax liabilities
3,344

 
3,273

Other liabilities (Note 8)
923

 
897

Total liabilities
25,501

 
9,525

 

See accompanying notes, which are an integral part of these unaudited consolidated financial statements.

3


VISA INC.
CONSOLIDATED BALANCE SHEETS—(Continued)
(UNAUDITED)
 
December 31,
2015
 
September 30,
2015
 
(in millions, except par value data)
Equity
 
 
 
Preferred stock, $0.0001 par value, 25 shares authorized and none issued
$

 
$

Class A common stock, $0.0001 par value, 2,001,622 shares authorized, 1,926 and 1,950 shares issued and outstanding at December 31, 2015 and September 30, 2015, respectively (Note 9)

 

Class B common stock, $0.0001 par value, 622 shares authorized, 245 shares issued and outstanding at December 31, 2015 and September 30, 2015 (Note 9)

 

Class C common stock, $0.0001 par value, 1,097 shares authorized, 19 and 20 shares issued and outstanding at December 31, 2015 and September 30, 2015, respectively (Note 9)

 

Additional paid-in capital
17,824

 
18,073

Accumulated income
11,701

 
11,843

Accumulated other comprehensive loss, net:
 
 
 
Investment securities, available-for-sale
23

 
5

Defined benefit pension and other postretirement plans
(131
)
 
(161
)
Derivative instruments classified as cash flow hedges
60

 
83

Foreign currency translation adjustments
(1
)
 
(1
)
Total accumulated other comprehensive loss, net
(49
)
 
(74
)
Total equity
29,476

 
29,842

Total liabilities and equity
$
54,977

 
$
39,367



See accompanying notes, which are an integral part of these unaudited consolidated financial statements.

4


VISA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
 
Three Months Ended
December 31,
 
2015
 
2014
 
(in millions, except per share data)
Operating Revenues
 
 
 
Service revenues
$
1,645

 
$
1,538

Data processing revenues
1,479

 
1,383

International transaction revenues
1,031

 
970

Other revenues
198

 
204

Client incentives
(788
)
 
(713
)
Total operating revenues
3,565

 
3,382

Operating Expenses
 
 
 
Personnel
499

 
509

Marketing
194

 
205

Network and processing
128

 
114

Professional fees
72

 
70

Depreciation and amortization
120

 
120

General and administrative
156

 
126

Total operating expenses
1,169

 
1,144

Operating income
2,396

 
2,238

Non-operating Income
 
 
 
Interest expense
(29
)
 
(3
)
Other
272

 
27

Total non-operating income
243

 
24

Income before income taxes
2,639

 
2,262

Income tax provision (Note 12)
698

 
693

Net income
$
1,941

 
$
1,569

 


See accompanying notes, which are an integral part of these unaudited consolidated financial statements.

5


VISA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS—(Continued)
(UNAUDITED)
 
 
Three Months Ended
December 31,
 
2015
 
2014
 
(in millions, except per share data)
Basic earnings per share (Note 10)
 
 
 
Class A common stock
$
0.80

 
$
0.63

Class B common stock
$
1.32

 
$
1.05

Class C common stock
$
3.20

 
$
2.54

Basic weighted-average shares outstanding (Note 10)
 
 
 
Class A common stock
1,937

 
1,974

Class B common stock
245

 
245

Class C common stock
20

 
22

Diluted earnings per share (Note 10)
 
 
 
Class A common stock
$
0.80

 
$
0.63

Class B common stock
$
1.32

 
$
1.04

Class C common stock
$
3.20

 
$
2.53

Diluted weighted-average shares outstanding (Note 10)
 
 
 
Class A common stock
2,430

 
2,478

Class B common stock
245

 
245

Class C common stock
20

 
22



See accompanying notes, which are an integral part of these unaudited consolidated financial statements.

6


VISA INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
 
Three Months Ended
December 31,
 
2015
 
2014
 
(in millions)
Net income
$
1,941

 
$
1,569

Other comprehensive income, net of tax:
 
 
 
Investment securities, available-for-sale:
 
 
 
Net unrealized gain (loss)
34

 
(10
)
Income tax effect
(16
)
 
3

Reclassification adjustment for net gain realized in net income

 
(21
)
Income tax effect

 
8

Defined benefit pension and other postretirement plans:
 
 
 
Net unrealized actuarial gain and prior service credit
56

 
6

Income tax effect
(21
)
 
(1
)
Amortization of actuarial loss and prior service credit realized in net income
(7
)
 
(1
)
Income tax effect
2

 

Derivative instruments classified as cash flow hedges:
 
 
 
Net unrealized gain
16

 
63

Income tax effect
(5
)
 
(17
)
Reclassification adjustment for net gain realized in net income
(48
)
 
(6
)
Income tax effect
14

 
2

Foreign currency translation adjustments

 
1

Other comprehensive income, net of tax
25

 
27

Comprehensive income
$
1,966

 
$
1,596




See accompanying notes, which are an integral part of these unaudited consolidated financial statements.

7


VISA INC.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
(UNAUDITED)
 
 
Common Stock
 
Additional Paid-in Capital
 
Accumulated Income
 
Accumulated
Other
Comprehensive
Loss
 
Total
Equity
 
Class A
 
Class B
 
Class C
 
 
 
 
 
(in millions, except per share data)
Balance as of September 30, 2015
1,950

 
245

 
20

 
$
18,073

 
$
11,843

 
$
(74
)
 
$
29,842

Net income
 
 
 
 
 
 
 
 
1,941

 
 
 
1,941

Other comprehensive income, net of tax
 
 
 
 
 
 
 
 
 
 
25

 
25

Comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
1,966

Conversion of class C common stock upon sale into public market
1

 
 
 
(1
)
 
 
 
 
 
 
 

Issuance and vesting of restricted stock and performance-based shares
1

 
 
 
 
 
 
 
 
 
 
 

Share-based compensation, net of forfeitures (Note 11)

(1) 
 
 
 
 
39

 
 
 
 
 
39

Restricted stock and performance-based shares settled in cash for taxes
(1
)
 
 
 
 
 
(81
)
 
 
 
 
 
(81
)
Excess tax benefit for share-based compensation
 
 
 
 
 
 
36

 
 
 
 
 
36

Cash proceeds from issuance of common stock under employee equity plans
1

 
 
 
 
 
29

 
 
 
 
 
29

Cash dividends declared and paid, at a quarterly amount of $0.14 per as-converted share (Note 9)
 
 
 
 
 
 
 
 
(340
)
 
 
 
(340
)
Repurchase of class A common stock (Note 9)
(26
)
 
 
 
 
 
(272
)
 
(1,743
)
 
 
 
(2,015
)
Balance as of December 31, 2015
1,926

 
245

 
19

 
$
17,824

 
$
11,701

 
$
(49
)
 
$
29,476

(1) 
Decrease in class A common stock related to forfeitures of restricted stock awards is less than 1 million shares.

See accompanying notes, which are an integral part of these unaudited consolidated financial statements.

8


VISA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Three Months Ended
December 31,
 
2015
 
2014
 
(in millions)
Operating Activities
 
 
 
Net income
$
1,941

 
$
1,569

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of client incentives
788

 
713

Fair value adjustment for the Visa Europe put option
(255
)
 

Share-based compensation
39

 
45

Excess tax benefit for share-based compensation
(36
)
 
(58
)
Depreciation and amortization of property, equipment, technology and intangible assets
120

 
120

Deferred income taxes
45

 
97

Other
5

 
(19
)
Change in operating assets and liabilities:
 
 
 
Settlement receivable
(35
)
 
286

Accounts receivable
(75
)
 
(78
)
Client incentives
(850
)
 
(687
)
Other assets
23

 
(141
)
Accounts payable

 
10

Settlement payable
(36
)
 
(477
)
Accrued and other liabilities
317

 
484

Accrued litigation (Note 13)
(12
)
 
(103
)
Net cash provided by operating activities
1,979

 
1,761

Investing Activities
 
 
 
Purchases of property, equipment, technology and intangible assets
(126
)
 
(104
)
Investment securities, available-for-sale:
 
 
 
Purchases
(6,803
)
 
(758
)
Proceeds from maturities and sales
739

 
226

Purchases of / contributions to other investments
(8
)
 

Proceeds / distributions from other investments
4

 

Net cash used in investing activities
(6,194
)
 
(636
)
 

See accompanying notes, which are an integral part of these unaudited consolidated financial statements.

9


VISA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
(UNAUDITED)
 
 
Three Months Ended
December 31,
 
2015
 
2014
 
(in millions)
Financing Activities
 
 
 
Repurchase of class A common stock (Note 9)
$
(2,015
)
 
$
(803
)
Dividends paid (Note 9)
(340
)
 
(297
)
Proceeds from issuance of senior notes (Note 5)
15,971

 

Debt issuance costs (Note 5)
(77
)
 

Payments from litigation escrow account—U.S. retrospective responsibility plan (Note 3 and Note 13)
11

 
100

Cash proceeds from issuance of common stock under employee equity plans
29

 
30

Restricted stock and performance-based shares settled in cash for taxes
(81
)
 
(100
)
Excess tax benefit for share-based compensation
36

 
58

Net cash provided by (used in) financing activities
13,534

 
(1,012
)
Effect of exchange rate changes on cash and cash equivalents

 
1

Increase in cash and cash equivalents
9,319

 
114

Cash and cash equivalents at beginning of year
3,518

 
1,971

Cash and cash equivalents at end of period
$
12,837

 
$
2,085

Supplemental Disclosure
 
 
 
Income taxes paid, net of refunds
$
79

 
$
57

Accruals related to purchases of property, equipment, technology and intangible assets
$
40

 
$
21






See accompanying notes, which are an integral part of these unaudited consolidated financial statements.

10


VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2015
(UNAUDITED)
Note 1—Summary of Significant Accounting Policies
Organization. Visa Inc. (“Visa” or the “Company”) is a global payments technology company that connects consumers, businesses, financial institutions and governments in more than 200 countries and territories to fast, secure and reliable electronic payments. Visa and its wholly-owned consolidated subsidiaries, including Visa U.S.A. Inc. (“Visa U.S.A.”), Visa International Service Association (“Visa International”), Visa Worldwide Pte. Limited, Visa Canada Corporation, Inovant LLC and CyberSource Corporation (“CyberSource”), operate one of the world’s most advanced processing networks — VisaNet — which facilitates authorization, clearing and settlement of payment transactions worldwide. VisaNet also offers fraud protection for account holders and assured payment for merchants. Visa is not a bank and does not issue cards, extend credit or set rates and fees for account holders on Visa-branded cards and payment products. In most cases, account holder and merchant relationships belong to, and are managed by, Visa's financial institution clients. Visa provides a wide variety of payment solutions that support payment products that issuers can offer to their account holders: pay now with debit, pay ahead with prepaid or pay later with credit products. Visa also offers a growing suite of innovative digital, eCommerce and mobile products and services. These services facilitate transactions on Visa's network among account holders, merchants, financial institutions and governments in mature and emerging markets globally.
Consolidation and basis of presentation. The accompanying unaudited consolidated financial statements include the accounts of Visa and its consolidated entities and are presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Company consolidates its majority-owned and controlled entities, including variable interest entities (“VIEs”) for which the Company is the primary beneficiary. The Company’s investments in VIEs have not been material to its consolidated financial statements as of and for the periods presented. All significant intercompany accounts and transactions are eliminated in consolidation.
The accompanying unaudited consolidated financial statements are presented in accordance with the U.S. Securities and Exchange Commission (“SEC”) requirements for Quarterly Reports on Form 10-Q and, consequently, do not include all of the annual disclosures required by U.S. GAAP. Reference should be made to the Visa Annual Report on Form 10-K for the year ended September 30, 2015 for additional disclosures, including a summary of the Company’s significant accounting policies.
In the opinion of management, the accompanying unaudited consolidated financial statements include all normal recurring adjustments necessary for a fair presentation of the Company's financial position, results of operations and cash flows for the interim periods presented.
Recently Issued and Adopted Accounting Pronouncements.
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-03, which simplifies the presentation of debt issuance costs by requiring that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The standard impacts presentation only. The Company elected to early adopt the standard effective October 1, 2015 and the carrying amount of the Company's debt liability is presented net of issuance costs on the consolidated financial statements. Also see Note 5—Debt.
In September 2015, the FASB issued ASU No. 2015-16, which simplifies the accounting for post-acquisition adjustments by eliminating the requirement to retrospectively account for the adjustments made to provisional amounts recognized in a business combination. The Company elected to early adopt this guidance on a prospective basis effective October 1, 2015. The adoption did not have a material impact on the consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17, which simplifies the presentation of deferred income taxes by requiring that deferred tax assets and liabilities be presented as non-current. The standard impacts presentation only. The Company elected to early adopt the standard on a retrospective basis effective October 1, 2015 and all deferred tax assets and liabilities are classified as non-current. Previously, current deferred tax assets had been presented separately and current deferred tax liabilities had been included in accrued liabilities on the consolidated

11

VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


balance sheets. All prior period amounts within the consolidated financial statements have been reclassed to conform to current period presentation. The reclass did not affect the Company's total equity, operating revenues, net income, comprehensive income or cash flows as of and for the periods presented.
In January 2016, the FASB issued ASU 2016-01, which amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments, including the requirement to measure certain equity investments at fair value with changes in fair value recognized in net income. The Company will adopt the standard effective October 1, 2018. The adoption is not expected to have a material impact on the consolidated financial statements.
Note 2—Visa Europe
Acquisition of Visa Europe
On November 2, 2015, the Company and Visa Europe entered into a transaction agreement (the "Transaction Agreement"), pursuant to which the Company and Visa Europe agreed on the terms and conditions of the Company’s acquisition of 100% of the share capital of Visa Europe for a total purchase price of up to €21.2 billion. The purchase price consists of: (a) at the closing of the transaction, up-front cash consideration of €11.5 billion and preferred stock of the Company convertible upon certain conditions into class A common stock or class A equivalent preferred stock of the Company, as described below, valued at approximately €5.0 billion, and (b) following the end of sixteen fiscal quarters post-closing, contingent cash consideration of up to €4.0 billion (plus up to an additional €0.7 billion in interest), determined based on the achievement of specified net revenue levels during such post-closing period. Closing is subject to regulatory approvals and other customary conditions, and is currently expected to occur in the fiscal third quarter of 2016.
Transaction agreement and option amendment. The Transaction Agreement provides for the acquisition to be effected pursuant to the exercise of the amended Visa Europe put option (the "Amended Put Option"), as described further below. In connection with the execution of the Transaction Agreement, the Company and Visa Europe entered into an amendment (the "Put Option Amendment") to the Visa Europe put option (the "Put") to align certain terms of the Put with the terms of the Transaction Agreement. Under the terms and conditions of the Transaction Agreement, the Visa Europe board of directors is required to exercise the Amended Put Option on the closing date of the transaction to effect Visa’s purchase of all of Visa Europe’s share capital. If the Transaction Agreement is terminated for any reason prior to the completion of the transaction, the Put Option Amendment will also terminate and the Put will revert to its original, unamended form. The Transaction Agreement may be terminated by the Company or Visa Europe, subject to specified exceptions, if the transaction is not consummated by August 2, 2016, or if legal restraints that prohibit the closing have become final and non-appealable.
Preferred stock. In connection with the transaction, the board of directors of the Company has authorized the creation of three new series of preferred stock of the Company:
series A convertible participating preferred stock, par value $0.0001 per share, which is designed to be economically equivalent to the Company’s class A common stock (the “class A equivalent preferred stock”);
series B convertible participating preferred stock, par value $0.0001 per share (the “U.K.&I preferred stock”); and
series C convertible participating preferred stock, par value $0.0001 per share (the “Europe preferred stock”).
The Transaction Agreement provides that, subject to the terms and conditions thereof, at closing, the Company will issue 2,480,500 shares of U.K.&I preferred stock to those of Visa Europe’s member financial institutions in the United Kingdom and Ireland that are entitled to receive preferred stock at closing, and 3,157,000 shares of Europe preferred stock to those of Visa Europe’s other member financial institutions that are entitled to receive preferred stock at closing. Subject to the reduction in conversion rates described below, the U.K.&I preferred stock will be convertible into a number of shares of class A common stock or class A equivalent preferred stock valued at approximately €2.2 billion and the Europe preferred stock will be convertible into a number of shares of class A common stock or class A equivalent preferred stock valued at approximately €2.8 billion. These approximate values of the UK&I and Europe preferred stock to be issued at closing are based on the average price of the class A common stock of $71.68 per share, and the euro-dollar exchange rate of 1.12750 for the 30 trading days ended October 19, 2015.

12

VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


The UK&I and Europe preferred stock will be convertible into shares of class A common stock or class A equivalent preferred stock, at an initial conversion rate of 13.952 shares of class A common stock for each share of U.K.&I preferred stock and Europe preferred stock. The conversion rates may be reduced from time to time to offset certain liabilities, if any, which may be incurred by the Company, Visa Europe or their affiliates as a result of certain existing and potential litigation relating to the setting of multilateral interchange fee rates in the Visa Europe territory. A reduction in the conversion rates of the U.K.&I preferred stock and the Europe preferred stock have the same economic effect on earnings per share as repurchasing the Company's class A common stock because it reduces the as-converted class A common stock share count. Additionally, the shares of U.K.&I and Europe preferred stock will be subject to restrictions on transfer and may become convertible in stages based on developments in the existing and potential litigation. The shares of U.K.&I and Europe preferred stock will become fully convertible on the 12th anniversary of closing, subject only to a holdback to cover any then-pending claims. See Note 3—U.S. Retrospective Responsibility Plan and Potential Visa Europe Liabilities.
Upon issuance of the preferred stock at closing, the holders of the U.K.&I and Europe preferred stock will have no right to vote on any matters, except for certain defined matters, including, in specified circumstances, any consolidation, merger or combination of the Company. Holders of the class A equivalent preferred stock, upon issuance at conversion, will have similar voting rights to the rights of the holders of the U.K.&I and Europe preferred stock. With respect to those limited matters on which the holders of preferred stock may vote, approval by the holders of the preferred stock requires the affirmative vote of the outstanding voting power of each such series of preferred stock, each such series voting as a single class. Once issued, all three series of preferred stock will participate on an as-converted basis in regular quarterly cash dividends declared on the Company's class A common stock.
U.K. loss sharing agreement and litigation management deed. On November 2, 2015, the Company, Visa Europe and certain of Visa Europe’s member financial institutions located in the United Kingdom (the “U.K. LSA members”) entered into a loss sharing agreement (the “U.K. loss sharing agreement”), pursuant to which each of the U.K. LSA members has agreed, on a several and not joint basis, to compensate the Company for certain losses which may be incurred by the Company, Visa Europe or their affiliates as a result of certain existing and potential litigation relating to the setting and implementation of domestic multilateral interchange fee rates in the United Kingdom, subject to the terms and conditions set forth therein and, with respect to each U.K. LSA member, up to a maximum amount of the up-front cash consideration to be received by such U.K. LSA member. The U.K. LSA members’ obligations under the U.K. loss sharing agreement are conditional upon, among other things, the acquisition closing, and additionally upon either (a) losses valued at in excess of the sterling equivalent at closing of €1.0 billion having arisen in claims relating to the U.K. domestic multilateral interchange fees (with such losses being recoverable through reductions in the conversion rate of the U.K.&I preferred stock), or (b) the conversion rate of the UK&I preferred stock having been reduced to zero pursuant to losses arising in claims relating to multilateral interchange fee rate setting in the Visa Europe territory, as described above. See Note 3—U.S. Retrospective Responsibility Plan and Potential Visa Europe Liabilities.
Prior to closing, the Company and the other parties thereto will enter into a litigation management deed, which will set forth the agreed upon procedures for the management of the existing and potential litigation, as described above, relating to the setting and implementation of multilateral interchange fee rates in the Visa Europe territory (the "Europe covered claims"), the allocation of losses resulting from the Europe covered claims, and any accelerated conversion or reduction in the conversion rate of the shares of U.K.&I and Europe preferred stock. Subject to the terms and conditions set forth therein, the litigation management deed provides that the Company will generally control the conduct of the Europe covered claims, subject to certain obligations to report and consult with newly established Europe litigation management committees. The Europe litigation management committees, which will be composed of representatives of certain Visa Europe members, will also be granted consent rights to approve certain material decisions in relation to the Europe covered claims.

13

VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Note 3—U.S. Retrospective Responsibility Plan and Potential Visa Europe Liabilities
U.S. Retrospective Responsibility Plan
Under the terms of the U.S. retrospective responsibility plan, the Company maintains an escrow account from which settlements of, or judgments in, the covered litigation are paid. The balance of the escrow account was $1.1 billion at December 31, 2015 and September 30, 2015. The Company paid $11 million to opt-out merchants from the litigation escrow account during the three months ended December 31, 2015 to settle their claims associated with the interchange multidistrict litigation. See Note 13—Legal Matters.
The accrual related to the covered litigation could be either higher or lower than the litigation escrow account balance. The Company did not record an additional accrual for the covered litigation during the three months ended December 31, 2015. See Note 13—Legal Matters.
Potential Visa Europe Liabilities
On November 2, 2015, the Company and Visa Europe entered into the Transaction Agreement pursuant to which the Company agreed to acquire Visa Europe. Closing of the acquisition is subject to various conditions including regulatory approvals, and is expected to occur in the fiscal third quarter of 2016. Visa Inc., Visa Europe or their affiliates are, or may become, a party to certain existing and potential litigation relating to the setting of multilateral interchange fee rates in the Visa Europe territory. The Company has obtained certain protection in respect of losses resulting from existing and potential litigation through the preferred stock and the U.K. loss sharing agreement, and has agreed to certain terms regarding the conduct of such litigation, all of which is conditioned on the closing of the acquisition of Visa Europe by the Company. See Note 2—Visa Europe.

14

VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Note 4—Fair Value Measurements and Investments
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
 
December 31,
2015
 
September 30,
2015
 
December 31,
2015
 
September 30,
2015
 
December 31,
2015
 
September 30,
2015
 
(in millions)
Assets
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents and restricted cash:
 
 
 
 
 
 
 
 
 
 
 
Money market funds
$
3,517

 
$
3,051

 
 
 
 
 
 
 
 
U.S. Treasury securities
5,999

 

 
 
 
 
 
 
 
 
U.S. government-sponsored debt securities
 
 
 
 
3,198

 
280

 
 
 
 
Investment securities, trading:
 
 
 
 
 
 
 
 
 
 
 
Equity securities
80

 
66

 
 
 
 
 
 
 
 
Investment securities, available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities
3,871

 
2,656

 
 
 
 
 
 
 
 
U.S. government-sponsored debt securities
 
 
 
 
7,535

 
2,615

 
 
 
 
Equity securities
59

 
4

 
 
 
 
 
 
 
 
Corporate debt securities
 
 
 
 
443

 
533

 
 
 
 
Auction rate securities
 
 
 
 
 
 
 
 
$
7

 
$
7

Prepaid and other current assets:
 
 
 
 
 
 
 
 
 
 
 
Foreign exchange derivative instruments
 
 
 
 
50

 
76

 
 
 
 
Total
$
13,526

 
$
5,777

 
$
11,226

 
$
3,504

 
$
7

 
$
7

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
 
 
 
 
Visa Europe put option
 
 
 
 
 
 
 
 
$

 
$
255

Foreign exchange derivative instruments
 
 
 
 
$
10

 
$
13

 
 
 
 
Total
$

 
$

 
$
10

 
$
13

 
$

 
$
255

There were no transfers between Level 1 and Level 2 assets during the three months ended December 31, 2015 and 2014.
Level 1 assets measured at fair value on a recurring basis. Money market funds, publicly-traded equity securities and U.S. Treasury securities are classified as Level 1 within the fair value hierarchy, as fair value is based on quoted prices in active markets.

15

VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Level 2 assets and liabilities measured at fair value on a recurring basis. The fair value of U.S. government-sponsored debt securities and corporate debt securities, as provided by third-party pricing vendors, is based on quoted prices in active markets for similar, not identical, assets. The pricing data obtained from outside sources is reviewed internally for reasonableness, compared against benchmark quotes from independent pricing sources, then confirmed or revised accordingly. Foreign exchange derivative instruments are valued using inputs that are observable in the market or can be derived principally from or corroborated by observable market data. There were no substantive changes to the valuation techniques and related inputs used to measure fair value during the three months ended December 31, 2015.
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. There were no substantive changes to the valuation techniques and related inputs used to measure fair value during the three months ended December 31, 2015.
Visa Europe put option agreement. On November 2, 2015, the Company and Visa Europe entered into the Put Option Amendment to align certain terms of the Put with the terms of the Visa Europe Transaction Agreement. Under the terms and conditions of the Transaction Agreement, the Visa Europe board of directors is required to exercise the Amended Put Option on the closing date of the transaction to effect Visa’s purchase of all of Visa Europe’s share capital. If the Transaction Agreement is terminated for any reason prior to the completion of the transaction, the Put Option Amendment will also terminate and the Put will revert to its original, unamended form.
Exercise of the Amended Put Option by the Visa Europe board of directors is mandatory, subject to the satisfaction of the terms and conditions of the Transaction Agreement. As such, for accounting purposes, it is not treated as a written put option and is not required to be recorded at fair value. At December 31, 2015, Visa expected to complete the transaction in accordance with the Transaction Agreement. Therefore, management concluded that it does not expect the Put to revert to its original, unamended form or to be unilaterally exercised by Visa Europe in the future. As a result, the value of the Put was reduced to zero at December 31, 2015.
Changes in the fair value of the Put are recorded as non-cash, non-operating income in the Company's consolidated statements of operations.
Assets Measured at Fair Value on a Non-recurring Basis
Non-marketable equity investments and investments accounted for under the equity method. These investments are classified as Level 3 due to the absence of quoted market prices, the inherent lack of liquidity, and the fact that inputs used to measure fair value are unobservable and require management's judgment. When certain events or circumstances indicate that impairment may exist, the Company revalues the investments using various assumptions, including the financial metrics and ratios of comparable public companies. There were no
events or circumstances that indicated these investments became impaired during the three months ended December 31, 2015 or 2014. At December 31, 2015 and September 30, 2015, these investments totaled $47 million and $45 million, respectively. These assets are classified in other assets on the consolidated balance sheets.
Due to the completion of an initial public offering by one of the Company's investees during the quarter ended December 31, 2015, the Company reclassified equity securities previously accounted for as a cost method investment, with a carrying value of $4 million, to short-term available-for-sale investment securities. The fair value of this investment at December 31, 2015 was $55 million, resulting in the recognition of a pre-tax unrealized gain of $51 million in other comprehensive income.
Non-financial assets and liabilities. Long-lived assets such as goodwill, indefinite-lived intangible assets, finite-lived intangible assets, and property, equipment and technology are considered non-financial assets. The Company does not have any non-financial liabilities measured at fair value on a non-recurring basis. Finite-lived intangible assets primarily consist of customer relationships, trade names and reseller relationships, all of which were obtained through acquisitions.
If the Company were required to perform a quantitative assessment for impairment testing of goodwill and indefinite-lived intangible assets, the fair values would generally be estimated using an income approach. As the assumptions employed to measure these assets on a non-recurring basis are based on management's judgment using internal and external data, these fair value determinations are classified as Level 3 in the fair value hierarchy. There were no events or changes in circumstances that indicate impairment at December 31, 2015.

16

VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Other Fair Value Disclosures
Long-term debt. In December 2015, the Company issued fixed-rate senior notes in an aggregate principal amount of $16.0 billion, with maturities ranging between 2 and 30 years. See Note 5—Debt. These debt instruments are measured at amortized cost on the Company's consolidated balance sheet at December 31, 2015. The fair value of these notes, as provided by third-party pricing vendors, is based on quoted prices in active markets for similar, not identical, assets. The pricing data obtained from outside sources is reviewed internally for reasonableness, compared against benchmark quotes from independent pricing sources, then confirmed or revised accordingly. If measured at fair value in the financial statements, these instruments would be classified as Level 2 in the fair value hierarchy.
The following table presents the carrying amount and estimated fair value of the Company’s debt in order of maturity:
 
December 31, 2015
 
Carrying Amount
 
Estimated Fair Value
1.20% Senior Notes due December 2017
$
1,745

 
$
1,748

2.20% Senior Notes due December 2020
2,986

 
2,995

2.80% Senior Notes due December 2022
2,237

 
2,259

3.15% Senior Notes due December 2025
3,962

 
4,005

4.15% Senior Notes due December 2035
1,485

 
1,514

4.30% Senior Notes due December 2045
3,462

 
3,551

 
$
15,877

 
$
16,072

Other financial instruments not measured at fair value. The following financial instruments are not measured at     fair value on the Company's consolidated balance sheet at December 31, 2015, but require disclosure of their fair values: time deposits recorded in prepaid expenses and other current assets, settlement receivable and payable, and customer collateral. The estimated fair value of such instruments at December 31, 2015 approximates their carrying value due to their generally short maturities. If measured at fair value in the financial statements, these financial instruments would be classified as Level 2 in the fair value hierarchy.
Investments
Available-for-sale investment securities. The Company had $55 million in gross unrealized gains and $14 million in gross unrealized losses at December 31, 2015. The unrealized gains were primarily related to the Company's reclassified equity investment discussed above. There were $7 million gross unrealized gains and no gross unrealized losses at September 30, 2015. A majority of the Company's available-for-sale investment securities with stated maturities are due within one to two years.

17

VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Note 5—Debt
The Company had outstanding debt as follows:
 
December 31, 2015
 
 
 
Principal Amount
 
Unamortized Discounts and Debt Issuance Costs
 
Carrying Amount
 
Effective Interest Rate
 
(in millions, except percentages)
1.20% Senior Notes due December 2017 (the "2017 Notes")
$
1,750

 
$
(5
)
 
$
1,745

 
1.36
%
2.20% Senior Notes due December 2020 (the "2020 Notes")
3,000

 
(14
)
 
2,986

 
2.30
%
2.80% Senior Notes due December 2022 (the "2022 Notes")
2,250

 
(13
)
 
2,237

 
2.89
%
3.15% Senior Notes due December 2025 (the "2025 Notes")
4,000

 
(38
)
 
3,962

 
3.26
%
4.15% Senior Notes due December 2035 (the "2035 Notes")
1,500

 
(15
)
 
1,485

 
4.23
%
4.30% Senior Notes due December 2045 (the "2045 Notes")
3,500

 
(38
)
 
3,462

 
4.37
%
Total long-term debt
$
16,000

 
$
(123
)
 
$
15,877

 
 
Senior Notes
In December 2015, the Company issued fixed-rate senior notes (the 2017 Notes, 2020 Notes, 2022 Notes, 2025 Notes, 2035 Notes and 2045 Notes, or collectively, the "Notes") in conjunction with the anticipated acquisition of Visa Europe, in an aggregate principal amount of $16.0 billion, with maturities ranging between 2 and 30 years. Interest on the Notes, at a rate ranging between 1.20% and 4.30%, is payable semi-annually on June 14 and December 14 of each year, commencing June 14, 2016. The Company recognized interest expense of $24 million for the quarter ended December 31, 2015 as non-operating expense. The net aggregate proceeds from the issuance of the Notes, after deducting discounts and debt issuance costs, were $15.9 billion. The discounts and debt issuance costs will be amortized over the respective term of each note using the effective interest method. The indenture governing the Notes contains customary event of default provisions. The Notes are senior unsecured obligations of the Company, ranking equally and ratably among themselves and with the Company's existing and future unsecured and unsubordinated debt. The Notes are not secured by any assets of the Company and are not guaranteed by any of the Company's subsidiaries. The Company was in compliance with all related covenants as of December 31, 2015.
Each series of the Notes may be redeemed as a whole or in part, at the Company’s option at any time, prior to, with respect to the 2017 Notes, their maturity date, and with respect to the 2020 Notes, the 2022 Notes, the 2025 Notes, the 2035 Notes and the 2045 Notes, the applicable par call date (as set forth in the table below), at a price equal to the greater of:
100% of the principal amount of such Notes; and
the sum of the present value of the remaining scheduled payments of principal and interest through the maturity or par call date for each of the Notes below at the treasury rate defined under the terms of the Notes, plus the applicable spread for such Notes (as set forth in the table below),
plus, in each case, accrued and unpaid interest to, but excluding, the date of redemption.

18

VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Series
 
Maturity/Par Call Date
 
Spread
2017 Notes
 
December 14, 2017
 
5 bps
2020 Notes
 
November 14, 2020
 
10 bps
2022 Notes
 
October 14, 2022
 
12.5 bps
2025 Notes
 
September 14, 2025
 
15 bps
2035 Notes
 
June 14, 2035
 
20 bps
2045 Notes
 
June 14, 2045
 
20 bps
On or after the applicable par call date, the Notes, except the 2017 Notes, may be redeemed as a whole or in part, at the Company’s option at any time, at a redemption price equal to 100% of the principal amount of the Notes being redeemed plus accrued interest.
In the event that the Visa Europe acquisition has not been consummated on or prior to February 2, 2017 (which date may be extended in accordance with the terms of the Notes), the Company will be required to redeem all outstanding 2017 Notes, 2020 Notes, 2022 Notes and 2025 Notes on the special mandatory redemption date, as defined in the terms of the Notes, at a redemption price equal to 101% of the aggregate principal amount of such Notes plus accrued and unpaid interest. The 2035 Notes and 2045 Notes are not subject to the special mandatory redemption provision.
Future principal payments on the Company's outstanding debt are as follows:
Fiscal Year
2016
 
2017
 
2018
 
2019
 
2020
 
Thereafter
 
Total
(in millions)
$

 
$

 
$
1,750

 
$

 
$

 
$
14,250

 
$
16,000

Credit Facility Renewal. On January 27, 2016, the Company, Visa International Service Association and Visa U.S.A. Inc. (collectively, the "Borrowers") entered into a 5-year, unsecured $4.0 billion revolving credit facility (the "Credit Facility") with Bank of America, N.A., as administrative agent and the lenders party thereto. JP Morgan Chase Bank, N.A., acted as syndication agent in connection with the Credit Facility; Bank of China, Los Angeles Branch, Barclays Bank PLC, Citibank, N.A., HSBC Bank USA, N.A., Royal Bank of Canada, Standard Chartered Bank, The Bank of Tokyo-Mitsubishi UFJ, Ltd., U.S. Bank National Association, Wells Fargo Bank, National Association, Deutsche Bank Securities Inc. and Toronto Dominion (New York) LLC, acted as Documentation Agents; and J.P. Morgan Securities LLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Bank of China, Los Angeles Branch, Barclays Bank PLC, Citigroup Global Markets, Inc., HSBC Bank USA, N.A., RBC Capital Markets, Standard Chartered Bank, The Bank of Tokyo-Mitsubishi UFJ, Ltd., U.S. Bank National Association, Wells Fargo Securities, LLC, Deutsche Bank Securities Inc. and TD Securities (USA) LLC, acted as joint lead arrangers and joint book runners. The Credit Facility, which expires on January 27, 2021, replaced the Company's prior $3.0 billion credit facility, which expired on January 27, 2016.
The Credit Facility provides the Borrowers with a borrowing capacity of up to $4.0 billion. Borrowings under the Credit Facility are available for general corporate purposes. Interest on the borrowings under the Credit Facility would be charged at the London Interbank Offered Rate (LIBOR) or an alternative base rate, in each case plus applicable margins that fluctuate based on the applicable rating of senior unsecured long-term debt securities of the Company. The Borrowers have agreed to pay a commitment fee which will fluctuate based on such applicable rating of the Company.

19

VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Other material terms are:
a financial covenant which requires the Company to maintain a Consolidated Indebtedness to Consolidated EBITDA Ratio (as defined in the Credit Facility) of not greater than 3.75 to 1.00;
customary restrictive covenants, which limit the Borrowers' ability to, among other things, create certain liens, effect fundamental changes to their business, or merge or dispose of substantially all of their assets, subject in each case to customary exceptions and amounts;
customary events of default, upon the occurrence of which, after any applicable grace period, the requisite lenders will have the ability to accelerate all outstanding loans thereunder and terminate the commitments; and
other customary and standard terms and conditions.
The Borrowers currently have no borrowings under the Credit Facility. The participating lenders in the Credit Facility include certain holders of the Company's class B and class C common stock, certain of the Borrowers' customers and their affiliates.
Note 6—Pension and Other Postretirement Benefits
The Company sponsors various qualified and non-qualified defined benefit pension and other postretirement benefit plans that provide for retirement and medical benefits for substantially all employees residing in the United States. The Company also sponsors other pension benefit plans that provide benefits for internationally-based employees at certain non-U.S. locations, which are not presented below as they are not material.
In October 2015, the Company's board of directors approved an amendment of the qualified defined benefit pension plan such that the Company discontinued employer provided credits after December 31, 2015. Plan participants continue to earn interest credits on existing balances at the time of the freeze. As a result, a curtailment gain totaling $8 million was recognized as part of the Company's net periodic benefit cost. The Company also recorded a net unrealized actuarial gain of $56 million from the remeasurement of its pension plan in the first quarter of fiscal 2016 within other comprehensive income.
The components of net periodic benefit cost are as follows:
 
Pension Benefits
 
Other Postretirement Benefits
 
Three Months Ended
December 31,
 
Three Months Ended
December 31,
 
2015

2014
 
2015
 
2014
 
(in millions)
Service cost
$
13

 
$
12

 
$

 
$

Interest cost
11

 
10

 

 

Expected return on assets
(17
)
 
(18
)
 

 

Amortization of:
 
 
 
 
 
 
 
       Prior service credit
(1
)
 
(2
)
 
(1
)
 
(1
)
       Actuarial loss
2

 

 

 

Curtailment gain
(8
)
 

 

 

Settlement loss

 
2

 

 

Total net periodic benefit cost
$

 
$
4

 
$
(1
)
 
$
(1
)
Note 7—Settlement Guarantee Management
The Company indemnifies its financial institution clients for settlement losses suffered due to failure of any other clients to fund its settlement obligations in accordance with the Visa Rules. This indemnification creates settlement risk for the Company due to the difference in timing between the date of a payment transaction and the date of subsequent settlement. The exposure to settlement losses through Visa's settlement indemnification is accounted for as a settlement risk guarantee. The Company’s settlement exposure is limited to the amount of unsettled Visa payment transactions at any point in time. The Company requires certain financial institution clients that do not meet its credit standards to post collateral to offset potential loss from their estimated unsettled

20

VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


transactions. The Company’s estimated maximum settlement exposure was $42.5 billion for the quarter ended December 31, 2015, compared to $43.5 billion for the quarter ended September 30, 2015. Of these amounts, $2.2 billion were covered by collateral at December 31, 2015 and September 30, 2015.
The Company maintained collateral as follows:

December 31,
2015
 
September 30,
2015
 
(in millions)
Cash equivalents
$
1,041

 
$
1,023

Pledged securities at market value
151

 
154

Letters of credit
1,131

 
1,178

Guarantees
935

 
971

Total
$
3,258

 
$
3,326

The total available collateral balances presented in the table above were greater than the settlement exposure covered by customer collateral held due to instances in which the available collateral exceeded 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 approximately $1 million at December 31, 2015 and September 30, 2015. These amounts are reflected in accrued liabilities on the consolidated balance sheets.
Note 8—Accrued and Other Liabilities
Accrued liabilities consisted of the following:
 
December 31,
2015
 
September 30,
2015
 
(in millions)
Accrued operating expenses
$
220

 
$
257

Visa Europe put option (1)

 
255

Deferred revenue
80

 
81

Accrued interest expenses (2)
23

 

Accrued income taxes (3)
522

 
75

Other (4)
164

 
181

Total
$
1,009

 
$
849

Other non-current liabilities consisted of the following:
 
December 31,
2015
 
September 30,
2015
 
(in millions)
Accrued income taxes
$
771

 
$
752

Employee benefits
82

 
77

Other
70

 
68

Total
$
923

 
$
897

(1) 
On November 2, 2015, the Company and Visa Europe entered into the Put Option Amendment to align certain terms of the Put with the terms of the Visa Europe Transaction Agreement. Exercise of the Amended Put Option by the Visa Europe board of directors is mandatory, subject to the satisfaction of the terms and conditions of the Transaction Agreement. As such, for accounting purposes, it is not treated as a written put option and is not required to be recorded at fair value. At December 31, 2015, Visa expected to complete the transaction in accordance with the Transaction Agreement. Therefore, management concluded that it does not expect the Put to revert to its original, unamended form or to be unilaterally exercised by Visa Europe in the future. As a result,

21

VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


the value of the Put was reduced to zero at December 31, 2015. See Note 2—Visa Europe and Note 4—Fair Value Measurements and Investments.
(2) 
The balance at December 31, 2015 is due to the issuance of long-term debt in conjunction with the anticipated acquisition of Visa Europe. See Note 2—Visa Europe and Note 5—Debt.
(3) 
The increase in accrued income taxes is primarily related to current income taxes accrued in the first quarter of fiscal 2016, but payable in the second quarter of fiscal 2016.
(4) 
Prior period current deferred tax liabilities have been retroactively reclassed to non-current deferred tax liabilities on the consolidated balance sheets upon adoption of FASB issued ASU 2015-17. See Note 1—Summary of Significant Accounting Policies and Note 12—Income Taxes.
Note 9—Stockholders' Equity
Class A common stock split. In January 2015, Visa’s board of directors declared a four-for-one split of its class A common stock. Each class A common stockholder of record at the close of business on February 13, 2015 ("Record Date"), received a dividend of three additional shares on March 18, 2015 for every share held as of the Record Date. Trading began on a split-adjusted basis on March 19, 2015. Holders of class B and C common stock did not receive a stock dividend. Instead, the conversion rate for class B common stock increased to 1.6483 shares of class A common stock per share of class B common stock, and the conversion rate for class C common stock increased to 4.0 shares of class A common stock per share of class C common stock. Immediately following the split, the class A, B and C stockholders retained the same relative ownership percentages that they had prior to the stock split. All per share amounts and number of shares outstanding in these unaudited consolidated financial statements and accompanying notes are presented on a post-split basis. As a result of the stock split, all historical per share data and number of shares outstanding presented have been retroactively adjusted.
As-Converted Class A Common Stock. The number of shares of each class and the number of shares of class A common stock on an as-converted basis at December 31, 2015, are as follows:
(in millions, except conversion rates)
Shares Outstanding
 
Conversion Rate
Into Class A
Common Stock
 
As-converted Class A Common
Stock(1)
Class A common stock
1,926

 

 
1,926

Class B common stock
245

 
1.6483

(2) 
405

Class C common stock
19

 
4.0000

 
78

Total
 
 
 
 
2,409

(1) 
Figures in the table may not recalculate exactly due to rounding. As-converted class A common stock is calculated based on unrounded numbers.
(2) 
The class B to class A common stock conversion rate is presented on a rounded basis. Conversion calculations for dividend payments are based on a conversion rate rounded to the tenth decimal.
Reduction in as-converted class A common stock. The following table presents share repurchases in the open market.
(in millions, except per share data)
Three Months Ended
December 31, 2015
Shares repurchased in the open market (1)
26

Average repurchase price per share (2)
$
78.52

Total cost
$
2,015

(1)  
All shares repurchased in the open market have been retired and constitute authorized but unissued shares.
(2) 
Figures in the table may not recalculate exactly due to rounding. Average repurchase price per share is calculated based on unrounded numbers.
In October 2015, the Company's board of directors authorized a new $5.0 billion share repurchase program, in addition to the existing October 2014 program. As of December 31, 2015, the Company had remaining authorized funds of $5.8 billion for share repurchase.

22

VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Dividends. The Company declared and paid $340 million in dividends during the three months ended December 31, 2015.
Note 10—Earnings Per Share
Basic earnings per share is computed by dividing net income available to each class and series by the weighted-average number of shares of common stock outstanding and participating securities in the form of unvested restricted stock awards, unvested restricted stock units and unvested earned performance-based shares during the period. Net income is allocated to each class and series of common stock based on its proportional ownership on an as-converted basis. The weighted number of shares of each class and series of common stock outstanding reflects changes in ownership over the periods presented. See Note 9—Stockholders' Equity.
Diluted earnings per share is computed by dividing net income available by the weighted-average number of shares of common stock outstanding, participating securities in the form of unvested restricted stock awards, unvested restricted stock units and unvested earned performance-based shares and, if dilutive, potential class A common stock equivalent shares outstanding during the period. Dilutive class A common stock equivalents may consist of: (1) shares of class A common stock issuable upon the conversion of class B and class C common stock based on the conversion rate in effect through the period, and (2) incremental shares of class A common stock calculated by applying the treasury stock method to the assumed exercise of employee stock options, the assumed purchase of stock under the Employee Stock Purchase Plan and the assumed vesting of unearned performance shares.
The following table presents earnings per share for the three months ended December 31, 2015.(1)     
 
Basic Earnings Per Share
 
 
Diluted Earnings Per Share
 
(in millions, except per share data)
 
Income
Allocation
(A)(2)
 
Weighted-
Average
Shares
Outstanding (B)
 
Earnings per
Share =
(A)/(B)
 
 
Income
Allocation
(A)(2)
 
Weighted-
Average
Shares
Outstanding (B)
 
Earnings per
Share =
(A)/(B)
Class A common stock
$
1,550

 
1,937

 
$
0.80

 
 
$
1,941

 
2,430

(3) 
$
0.80

Class B common stock(4)
324

 
245

 
$
1.32

 
 
$
323

 
245

 
$
1.32

Class C common stock(4)
63

 
20

 
$
3.20

 
 
$
63

 
20

 
$
3.20

Participating securities(5)
4

 
Not presented

 
Not presented

 
 
$
4

 
Not presented

 
Not presented

Net income
$
1,941

 
 
 
 
 
 
 
 
 
 
 
The following table presents earnings per share for the three months ended December 31, 2014.(1)     
 
Basic Earnings Per Share
 
 
Diluted Earnings Per Share
 
(in millions, except per share data)
 
Income
Allocation
(A)(2)
 
Weighted-
Average
Shares
Outstanding (B)
 
Earnings per
Share =
(A)/(B)
 
 
Income
Allocation
(A)(2)
 
Weighted-
Average
Shares
Outstanding (B)
 
Earnings per
Share =
(A)/(B)
Class A common stock
$
1,253

 
1,974

 
$
0.63

 
 
$
1,569

 
2,478

(3) 
$
0.63

Class B common stock(4)
257

 
245

 
$
1.05

 
 
$
257

 
245

 
$
1.04

Class C common stock(4)
55

 
22

 
$
2.54

 
 
$
55

 
22

 
$
2.53

Participating securities(5)
4

 
Not presented

 
Not presented

 
 
$
4

 
Not presented

 
Not presented

Net income
$
1,569

 
 
 
 
 
 
 
 
 
 
 
(1) 
Figures in the table may not recalculate exactly due to rounding. Earnings per share is calculated based on unrounded numbers. The number of shares and per share amounts for the prior periods presented have been retroactively adjusted to reflect the four-for-one stock split effected in the fiscal second quarter of 2015. See Note 9—Stockholders' Equity.
(2) 
Net income is allocated based on proportional ownership on an as-converted basis. The weighted-average number of shares of as-converted class B common stock used in the income allocation was 405 million for the three months ended December 31, 2015 and 2014. The weighted-average number of shares of as-converted class C

23

VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


common stock used in the income allocation was 78 million and 88 million for the three months ended December 31, 2015 and 2014, respectively.
(3) 
Weighted-average diluted shares outstanding are calculated on an as-converted basis, and include incremental common stock equivalents, as calculated under the treasury stock method. The computation includes approximately 5 million common stock equivalents for the three months ended December 31, 2015 and 2014, because their effect would be dilutive. The computation excludes 1 million and 2 million of common stock equivalents for the three months ended December 31, 2015 and 2014, respectively, because their effect would have been anti-dilutive.
(4) 
The outstanding number of shares of class B and C common stock were not impacted by the stock split as these stockholders received an adjustment to their respective conversion ratios instead of stock dividends. See Note 9—Stockholders' Equity. Weighted-average basic and diluted shares outstanding for class B and C common stock are calculated based on the common shares outstanding of each respective class rather than on an as-converted basis.
(5) 
Participating securities are unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, such as the Company's restricted stock awards, restricted stock units and unvested earned performance-based shares.
Note 11—Share-based Compensation
The Company granted the following equity awards to employees and non-employee directors under the 2007 Equity Incentive Compensation Plan during the three months ended December 31, 2015:
 
Granted
 
Weighted-Average
Grant Date Fair
Value
 
Weighted-Average
Exercise Price
Non-qualified stock options
1,362,840

 
$
15.09

 
$
80.15

Restricted stock units ("RSUs")
2,346,825

 
$
80.15

 
 
Performance-based shares(1)
604,219

 
$
92.71

 
 
(1)  
Represents the maximum number of performance-based shares which could be earned.
The Company’s non-qualified stock options and RSUs are equity awards with service-only conditions and are accordingly expensed on a straight-line basis over the vesting period. The Company's performance-based shares are equity awards with service, market and performance conditions that are accounted for using the graded-vesting method. Compensation cost is recorded net of estimated forfeitures, which are adjusted as appropriate.
Note 12—Income Taxes
The effective income tax rates were 26% and 31% for the three months ended December 31, 2015 and 2014, respectively. The effective tax rate for the three months ended December 31, 2015 differs from the effective tax rate in the same period in the prior fiscal year primarily due to:
the non-taxable revaluation of the Visa Europe put option recorded in the quarter ended December 31, 2015;
foreign tax credit benefits related to prior fiscal years recognized during the quarter ended December 31, 2015; and
the absence of the reversal of previously established state tax reserves in the quarter ended December 31, 2014.
During the three months ended December 31, 2015, the Company's gross unrecognized tax benefits increased by $20 million, which would favorably impact the effective tax rate if recognized. The increase in gross unrecognized tax benefits is primarily related to various tax positions across several jurisdictions. During the three months ended December 31, 2015 and 2014, respectively, there were no significant changes in interest and penalties related to uncertain tax positions.
The Company’s tax filings are subject to examination by the U.S. federal, state and foreign taxing authorities. The timing and outcome of the final resolutions of the various ongoing income tax examinations are

24

VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


highly uncertain. It is not reasonably possible to estimate the increase or decrease in unrecognized tax benefits within the next twelve months.
In November 2015, the FASB issued Accounting Standards Update 2015-17, which simplifies the presentation of deferred income taxes by requiring that deferred tax assets and liabilities be presented as non-current. The standard impacts presentation only. The Company elected to early adopt the standard on a retrospective basis effective October 1, 2015 and all deferred tax assets and liabilities are classified as non-current on the Company's consolidated balance sheets. All prior period amounts have been reclassified to conform with the current period presentation.
Note 13—Legal Matters
The Company is party to various legal and regulatory proceedings. Some of these proceedings involve complex claims that are subject to substantial uncertainties and unascertainable damages. Accordingly, except as disclosed, the Company has not established reserves or ranges of possible loss related to these proceedings, as at this time in the proceedings, the matters do not relate to a probable loss and/or the amount or range of losses are not reasonably estimable. Although the Company believes that it has strong defenses for the litigation and regulatory proceedings described below, it could, in the future, incur judgments or fines or enter into settlements of claims that could have a material adverse effect on the Company's financial position, results of operations or cash flows. From time to time, the Company may engage in settlement discussions or mediations with respect to one or more of its outstanding litigation matters, either on its own behalf or collectively with other parties.
The litigation accrual is an estimate and is based on management’s understanding of its litigation profile, the specifics of each case, advice of counsel to the extent appropriate and management’s best estimate of incurred loss as of the balance sheet date.
The following table summarizes the activity related to accrued litigation.
 
Fiscal 2016
 
Fiscal 2015
 
(in millions)
Balance at October 1
$
1,024

 
$
1,456

Payments on legal matters
(12
)
 
(103
)
Balance at December 31
$
1,012

 
$
1,353

U.S. Covered Litigation
Visa Inc., Visa U.S.A. and Visa International are parties to certain legal proceedings that are covered by the U.S. retrospective responsibility plan, which the Company refers to as the U.S. covered litigation. See Note 3—U.S. Retrospective Responsibility Plan and Potential Visa Europe Liabilities. An accrual for the U.S. covered litigation and a charge to the litigation provision are recorded when loss is deemed to be probable and reasonably estimable. In making this determination, the Company evaluates available information, including but not limited to actions taken by the litigation committee. The total accrual related to the U.S. covered litigation could be either higher or lower than the escrow account balance. The following table summarizes the activity related to U.S. covered litigation.
 
Fiscal 2016
 
Fiscal 2015
 
(in millions)
Balance at October 1
$
1,023

 
$
1,449

Payments on covered litigation
(11
)
 
(100
)
Balance at December 31
$
1,012

 
$
1,349

Interchange Opt-out Litigation
Beginning in May 2013, more than 50 opt-out cases have been filed by hundreds of merchants in various federal district courts, generally pursuing damages claims on allegations similar to those raised in MDL 1720. A

25

VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


number of the cases also include allegations that Visa has monopolized, attempted to monopolize, and/or conspired to monopolize debit card-related market segments, and one of the cases seeks an injunction against the fixed acquirer network fee. The cases name as defendants Visa Inc., Visa U.S.A., Visa International, MasterCard Incorporated, and MasterCard International Incorporated, although some also include certain U.S. financial institutions as defendants. Wal-Mart Stores Inc. and its subsidiaries filed an opt-out complaint that also adds Visa Europe Limited and Visa Europe Services Inc. as defendants.
Visa reached a settlement agreement with Wal-Mart Stores Inc. and its subsidiaries, which will terminate if, following all appeals, the MDL class settlement is reversed or vacated with respect to certification of the Rule 23 (b) (2) settlement class or the consideration provided to or release provided by that class. Including this settlement with Wal-Mart, as of the date of filing, Visa has reached settlement agreements with a number of merchants representing approximately 49% of the Visa-branded payment card sales volume of merchants who opted out.
European Competition Proceedings
U.K. Merchant Litigation. A total of approximately 50 merchants (together with subsidiary/affiliate companies) have now commenced proceedings against Visa Europe, Visa Inc. and Visa International relating to interchange rates in Europe.
Other Litigation
"Indirect Purchaser" Actions
On December 1, 2015, the objector's appeal from the trial court's order regarding the distribution of certain settlement funds was dismissed.
Canadian Competition Proceedings
Merchant Litigation. The court approved the settlement agreements entered into by the three named financial institutions, which are not significant Canadian issuers. A settlement with another financial institution is pending court approval.
U.S. ATM Access Fee Litigation
On January 27, 2016, defendants filed petitions for writ of certiorari with the U.S. Supreme Court seeking review of the decisions of the U.S. Court of Appeals for the District of Columbia Circuit.
Pulse Network
On December 17, 2015, the court denied Visa's motion to dismiss the complaint.


26


ITEM 2.
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 the liquidity and capital resources of Visa Inc. and its subsidiaries (“Visa,” “we,” “our” or 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 our unaudited consolidated financial statements and related notes included elsewhere in this report.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements generally are identified by words such as "believes," "estimates," "expects," "may," "projected," "could," "will," "will continue" and other similar expressions. Examples of forward-looking statements include, but are not limited to, statements we make about our revenue, client incentives, operating margin, tax rate, earnings per share, free cash flow, and the growth of those items.
By their nature, forward-looking statements: (i) speak only as of the date they are made; (ii) are not statements of historical fact or guarantees of future performance; and (iii) are subject to risks, uncertainties, assumptions or changes in circumstances that are difficult to predict or quantify. Therefore, actual results could differ materially and adversely from our forward-looking statements due to a variety of factors, including the following:
the impact of laws, regulations and marketplace barriers, including:
increased regulation of fees, transaction routing, payment card practices or other aspects of the payments industry in the United States, including new or revised regulations issued under the Dodd-Frank Wall Street Reform and Consumer Protection Act;
increased regulation in jurisdictions outside of the United States;
increased government support of national payments networks outside the United States; and
increased regulation of consumer privacy, data use and security;
developments in litigation and government enforcement, including those affecting interchange reimbursement fees, antitrust and tax;
new lawsuits, investigations or proceedings, or changes to our potential exposure in connection with pending lawsuits, investigations or proceedings;
economic factors, such as:
economic fragility in the Eurozone, the United States and in other advanced and emerging markets;
general economic, political and social conditions in mature and emerging markets globally;
general stock market fluctuations which may impact consumer spending;
material changes in cross-border activity, foreign exchange controls and fluctuations in currency exchange rates; and
material changes in our financial institution clients' performance compared to our estimates;
industry developments, such as competitive pressure, rapid technological developments and disintermediation from our payments network;
system developments, such as:
disruption of our transaction processing systems or the inability to process transactions efficiently;
account data breaches or increased fraudulent or other illegal activities involving Visa-branded cards or payment products; and

27


failure to maintain systems interoperability with Visa Europe;
the transaction with Visa Europe may not be consummated on the terms currently contemplated or at all;
Visa Europe's business may not be successfully integrated with our business or we may not achieve the anticipated benefits of the transaction;
the costs and risks associated with the transaction with Visa Europe;
matters arising in connection with Visa Europe's or our efforts to comply with and satisfy applicable regulatory approvals and closing conditions relating to the transaction;
the loss of organizational effectiveness or key employees;
the failure to integrate acquisitions successfully or to effectively develop new products and businesses;
natural disasters, terrorist attacks, military or political conflicts, and public health emergencies; and
various other factors, including those more fully described in our filings with the SEC, including our Annual Report on Form 10-K for the year ended September 30, 2015, and our subsequent reports on Forms 10-Q and 8-K.
You should not place undue reliance on such statements. Except as required by law, we do not intend to update or revise any forward-looking statements as a result of new information, future developments or otherwise.

28


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 financial institution clients with a global payments infrastructure and support services for the delivery of Visa-branded payment products, including credit, debit, and prepaid. 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 solutions we provide.
Overall economic conditions. Our business is affected by overall economic conditions and consumer spending. Our business performance during the three months ended December 31, 2015 reflects the impacts of continued uneven and tepid economic growth.
Visa Europe acquisition. On November 2, 2015, we entered into a Transaction Agreement with Visa Europe, pursuant to which we agreed to acquire 100% of the share capital of Visa Europe for a total purchase price of up to €21.2 billion. The purchase price consists of: (a) at the closing of the transaction, up-front cash consideration of €11.5 billion and preferred stock convertible upon certain conditions into class A common stock or class A equivalent preferred stock, valued at approximately €5.0 billion, and (b) following the end of sixteen fiscal quarters post-closing, contingent cash consideration of up to €4.0 billion (plus up to an additional €0.7 billion in interest), determined based on the achievement of specified net revenue levels during such post-closing period. In connection with the execution of the Transaction Agreement, the Company and Visa Europe entered into the Put Option Amendment to align certain terms of the Put with the terms of the Visa Europe Transaction Agreement. Under the terms and conditions of the Transaction Agreement, the Visa Europe board of directors is required to exercise the Amended Put Option on the closing date of the transaction to effect Visa's purchase of all of Visa Europe's share capital. The preferred stock conversion rates may be reduced from time to time to offset certain liabilities, if any, which may be incurred by us, Visa Europe or its affiliates as a result of certain existing and potential litigation relating to the setting of multilateral interchange fee rates in the Visa Europe territory. As part of the acquisition, we also entered into the U.K. loss sharing agreement with Visa Europe and certain of Visa Europe’s members located in the United Kingdom to compensate us for certain losses which may be incurred by us or Visa Europe as a result of certain existing and potential litigation relating to the setting and implementation of domestic multilateral interchange fee rates in the United Kingdom. See Note 2—Visa Europe, Note 3—U.S. Retrospective Responsibility Plan and Potential Visa Europe Liabilities and Note 13—Legal Matters to our unaudited consolidated financial statements. The closing of our acquisition of Visa Europe is subject to regulatory approvals and other customary conditions, and is currently expected to occur in our fiscal third quarter of 2016.
Debt issuance. In December 2015, we issued fixed-rate senior notes in an aggregate principal amount of $16.0 billion, with maturities ranging between 2 and 30 years. Interest on these notes, at a rate ranging between 1.20% and 4.30%, is payable semi-annually on June 14 and December 14, commencing June 14, 2016. The net aggregate proceeds of $15.9 billion, after deducting discounts and debt issuance costs, will be used to fund a portion of the purchase price for the anticipated acquisition of Visa Europe, and the remainder will be used for general corporate purposes including share repurchases. See Note 4—Fair Value Measurements and Investments and Note 5—Debt to our unaudited consolidated financial statements.
Financial highlights. During the three months ended December 31, 2015, we recorded net income of $1.9 billion or diluted class A earnings per share of $0.80, an increase of 24% and 26%, respectively, over the prior year comparable period. Our non-GAAP adjusted net income and diluted earnings per share for the three months ended December 31, 2015 and 2014 are as follows:
 
Three Months Ended
December 31,
 
 
(in millions, except percentages and per share data)
2015
 
2014
 
%
Change(1)
Net income, as adjusted
$
1,686

 
$
1,569

 
7
%
Diluted earnings per share, as adjusted(2)
$
0.69

 
$
0.63

 
10
%
(1) 
Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.

29


(2) 
The per share amount for the prior period presented has been retroactively adjusted to reflect the four-for-one stock split effected in the fiscal second quarter of 2015.
During the first quarter of fiscal 2016, we recorded a decrease of $255 million in the fair value of the Put, resulting in the recognition of non-cash, non-operating income that we do not believe is indicative of our operating performance. As such, we believe the presentation of adjusted financial results provides a clearer understanding of our operating performance for the current period presented. This amount is not subject to income tax and therefore has no impact on our reported income tax provision. See Note 4—Fair Value Measurements and Investments to our unaudited consolidated financial statements. There was no comparable adjustment recorded for the three months ended December 31, 2014. Adjusted net income, effective income tax rate and diluted earnings per share are non-GAAP financial measures and should not be relied upon as substitutes for measures calculated in accordance with U.S. GAAP. The following table reconciles our as-reported net income, effective income tax rate and diluted earnings per share, which are calculated in accordance with U.S. GAAP, to our respective non-GAAP adjusted financial measures for the three months ended December 31, 2015:
 
Three Months Ended
December 31, 2015
(in millions, except percentages and per share data)
Net Income
 
Effective Income Tax Rate
(1)
 
Diluted Earnings Per Share
(1)
As reported
$
1,941

 
26
%
 
$
0.80

Revaluation of Visa Europe put option
(255
)
 
3
%
 
(0.10
)
As adjusted
$
1,686

 
29
%
 
$
0.69

Diluted weighted-average shares outstanding, as reported
 
 
 
 
2,430

(1) 
Figures in the table may not recalculate exactly due to rounding. Effective income tax rate and diluted earnings per share figures are calculated based on unrounded numbers.
We recorded total operating revenues of $3.6 billion for the three months ended December 31, 2015, an increase of 5% over the prior year comparable period driven by continued growth in processed transactions and nominal payments volume. The general strengthening of the U.S. dollar during the quarter resulted in a negative three percentage point impact to our total operating revenue growth.
Total operating expenses for the three months ended December 31, 2015 were $1.2 billion, a 2% increase over the prior year comparable period.
Reduction in as-converted class A common stock. In October 2015, our board of directors authorized a new $5.0 billion share repurchase program, in addition to the existing October 2014 program. During the three months ended December 31, 2015, we repurchased 26 million shares of our class A common stock in the open market using $2.0 billion of cash on hand. As of December 31, 2015, we had remaining authorized funds of $5.8 billion for share repurchase. See Note 9—Stockholders' Equity to our unaudited consolidated financial statements.
Nominal payments volume and transaction counts. Payments volume is the primary driver for our service revenues, and the number of processed transactions is the primary driver for our data processing revenues. Nominal payments volume over the prior year posted double-digit growth in the United States, driven mainly by consumer debit and credit. Nominal international payments volume growth was negatively impacted by the overall strengthening of the U.S. dollar. On a constant dollar basis, which excludes the impact of exchange rate movements, our international payments volume growth rate for the three months ended September 30, 2015(1) was 15%. Processed transactions sustained healthy growth reflecting the ongoing worldwide shift to electronic currency.

30


The following tables present nominal payments volume.(2)     
 
United States
 
International
 
Visa Inc.
 
3 Months Ended September 30,(1)
 
3 Months Ended September 30,(1)
 
3 Months Ended September 30,(1)
 
2015
 
2014
 
%
Change
 
2015
 
2014
 
%
Change
 
2015
 
2014
 
%
Change
 
(in billions, except percentages)
Nominal payments volume
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer credit
$
263

 
$
238

 
10
%
 
$
424

 
$
423

 
 %
 
$
687

 
$
662

 
4
 %
Consumer debit(3)
319

 
291

 
9
%
 
111

 
122

 
(9
)%
 
430

 
413

 
4
 %
Commercial(4)
111

 
102

 
9
%
 
37

 
39

 
(6
)%
 
148

 
142

 
5
 %
Total nominal payments volume
$
693

 
$
632

 
10
%
 
$
572

 
$
584

 
(2
)%
 
$
1,265

 
$
1,216

 
4
 %
Cash volume
129

 
124

 
4
%
 
456

 
543

 
(16
)%
 
585

 
667

 
(12
)%
Total nominal volume(5)
$
822

 
$
756

 
9
%
 
$
1,027

 
$
1,127

 
(9
)%
 
$
1,850

 
$
1,883

 
(2
)%
The following table presents nominal and constant payments volume growth.(2) 
 
International
 
Visa Inc.
 
3 Months
Ended September 30,
2015 vs. 2014
(1)
 
3 Months
Ended September 30,
2015 vs. 2014
(1)
 
Nominal
 
Constant(6)
 
Nominal
 
Constant(6)
Payments volume growth
 
 
 
 
 
 
 
Consumer credit
 %
 
16
%
 
4
 %
 
14
%
Consumer debit(3)
(9
)%
 
12
%
 
4
 %
 
10
%
Commercial(4)
(6
)%
 
14
%
 
5
 %
 
10
%
Total payments volume growth
(2
)%
 
15
%
 
4
 %
 
12
%
Cash volume growth
(16
)%
 
5
%
 
(12
)%
 
5
%
Total volume growth
(9
)%
 
10
%
 
(2
)%
 
10
%
(1) 
Service revenues in a given quarter are assessed based on nominal payments volume in the prior quarter. Therefore, service revenues reported for the three months ended December 31, 2015 and 2014, were based on nominal payments volume reported by our financial institution clients for the three months ended September 30, 2015 and 2014, respectively.
(2) 
Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.
(3) 
Includes consumer prepaid volume.
(4) 
Includes large, middle and small business credit and debit, as well as commercial prepaid volume.
(5) 
Total nominal volume is the sum of total nominal payments volume and cash volume. Total nominal payments volume is the total monetary value of transactions for goods and services that are purchased on cards carrying the Visa, Visa Electron and Interlink brands. Cash volume generally consists of cash access transactions, balance access transactions, balance transfers and convenience checks. Total nominal volume is provided by our financial institution clients, subject to review by Visa. On occasion, previously presented volume information may be updated. Prior period updates are not material.
(6) 
Growth on a constant-dollar basis excludes the impact of foreign currency fluctuations against the U.S. dollar.
The following table provides the number of transactions processed by our VisaNet system, including transactions involving Visa, Visa Electron, Interlink and PLUS cards processed on Visa's networks.(1) 
 
Three Months Ended December 31,
2015
 
2014
 
% Change
(in millions, except percentages)
Visa processed transactions
18,986

 
17,599

 
8
%
(1) 
Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.

31


Results of Operations
Operating Revenues
The following table sets forth our operating revenues earned in the United States, internationally 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.
 
Three Months Ended December 31,
 
2015 vs. 2014
 
2015
 
2014
 
$
Change
 
%
Change(1)
 
(in millions, except percentages)
United States
$
1,941

 
$
1,784

 
$
157

 
9
%
International
1,559

 
1,544

 
15

 
1
%
Visa Europe
65

 
54

 
11

 
20
%
Total operating revenues
$
3,565

 
$
3,382

 
$
183

 
5
%
(1) 
Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.
The increase in operating revenues primarily reflects continued growth in processed transactions and nominal payments volume. These benefits were partially offset by increases in client incentives.
Our operating revenues, primarily service revenues, international transaction revenues, and client incentives, 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. The effect of exchange rate movements in the three months ended December 31, 2015, as partially mitigated by our hedging program, resulted in an overall decline of about three percentage points in total operating revenue growth.
The following table sets forth the components of our total operating revenues.
 
Three Months Ended December 31,
 
2015 vs. 2014
 
2015
 
2014
 
$
Change
 
%
Change(1)
 
(in millions, except percentages)
Service revenues
$
1,645

 
$
1,538

 
$
107

 
7
 %
Data processing revenues
1,479

 
1,383

 
96

 
7
 %
International transaction revenues
1,031

 
970

 
61

 
6
 %
Other revenues
198

 
204

 
(6
)
 
(3
)%
Client incentives
(788
)
 
(713
)
 
(75
)
 
10
 %
Total operating revenues
$
3,565

 
$
3,382

 
$
183

 
5
 %
(1) 
Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.
Service revenues increased during the three month comparable period primarily due to 4% growth in nominal payments volume. Service revenues also benefited from select pricing modifications which became effective in the third quarter of fiscal 2015.
Data processing revenues increased mainly due to overall growth in processed transactions of 8% during the three month comparable period.

32


International transaction revenues increased primarily due to select pricing modifications that became effective in the third quarter of fiscal 2015, partially offset by a 4% decline in nominal cross-border payments volume growth driven by continued strengthening of the U.S. dollar.
Client incentives increased during the three month comparable period mainly due to overall growth in U.S. payments volume, and incentives recognized on long-term customer contracts that were initiated or renewed after the first quarter of fiscal 2015. The amount of client incentives we record in future periods will vary based on changes in performance expectations, actual client performance, amendments to existing contracts or the execution of new contracts.
Operating Expenses
The following table sets forth components of our total operating expenses.
 
Three Months Ended
December 31,
 
2015 vs. 2014
 
2015
 
2014
 
$
Change
 
%
Change(1)
 
(in millions, except percentages)
Personnel
$
499

 
$
509

 
$
(10
)
 
(2
)%
Marketing
194

 
205

 
(11
)
 
(5
)%
Network and processing
128

 
114

 
14

 
12
 %
Professional fees
72

 
70

 
2

 
2
 %
Depreciation and amortization
120

 
120

 

 
(1
)%
General and administrative
156

 
126

 
30

 
24
 %
Total operating expenses
$
1,169

 
$
1,144

 
$
25

 
2
 %
(1)
Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.
Marketing expenses decreased due to lower levels of advertising and promotional campaigns during the first quarter of fiscal 2016.
Network and processing expenses increased primarily due to fees associated with the processing of Russian domestic transactions that were transitioned to the Russian National Payment Card system during the third quarter of fiscal 2015.
General and administrative expenses increased mainly due to foreign exchange losses incurred as a result of the strengthening U.S. dollar, combined with an increase in product enhancements and travel activities in support of our business growth.
Non-operating Income
Other non-operating income in fiscal 2016 primarily reflects a non-cash adjustment to the fair value of the Put of $255 million, which is not subject to tax. The change in value primarily reflects our expectation at December 31, 2015 that we will complete the transaction in accordance with the Transaction Agreement and the Put will not revert to its original, unamended form or be unilaterally exercised by Visa Europe in the future. See Note 2—Visa Europe and Note 4—Fair Value Measurements and Investments to our consolidated financial statements.
Effective Income Tax Rate
The effective income tax rates were 26% and 31% for the three months ended December 31, 2015 and 2014, respectively. The effective tax rate for the three months ended December 31, 2015 differs from the effective tax rate in the same period in the prior fiscal year primarily due to:
the non-taxable revaluation of the Visa Europe put option recorded in the quarter ended December 31, 2015;
foreign tax credit benefits related to prior fiscal years recognized during the quarter ended December 31, 2015; and
the absence of the reversal of previously established state tax reserves in the quarter ended December 31, 2014.

33


Excluding the non-cash, non-taxable $255 million gain recognized as non-operating income upon the revaluation of the Visa Europe put option, the adjusted non-GAAP effective income tax rate was 29% for the three months ended December 31, 2015. We believe the adjusted effective income tax rate provides a clearer understanding of our operating performance for the current period.
During the three months ended December 31, 2015, our gross unrecognized tax benefits increased by $20 million, which would favorably impact our effective tax rate if recognized. The increase in gross unrecognized tax benefits is primarily related to various tax positions across several jurisdictions.
Our tax filings are subject to examination by the U.S. federal, state and foreign taxing authorities. The timing and outcome of the final resolutions of the various ongoing income tax examinations are highly uncertain. It is not reasonably possible to estimate the increase or decrease in unrecognized tax benefits within the next twelve months.
Liquidity and Capital Resources
Cash Flow Data
The following table summarizes our cash flow activity for the periods presented:
 
Three Months Ended
December 31,
 
2015
 
2014
 
(in millions)
Total cash provided by (used in):
 
 
 
Operating activities
$
1,979

 
$
1,761

Investing activities
(6,194
)
 
(636
)
Financing activities
13,534

 
(1,012
)
Effect of exchange rate changes on cash and cash equivalents

 
1

Increase in cash and cash equivalents
$
9,319

 
$
114

Operating activities. Cash provided by operating activities for the three months ended December 31, 2015 was higher than prior year comparable period, reflecting continued growth in our underlying business.
Investing activities. Cash used in investing activities was higher compared to the prior year comparable period as we invested a portion of the proceeds received from our debt issuance in available-for-sale securities. See Note 4—Fair Value Measurements and Investments and Note 5—Debt to our unaudited consolidated financial statements.
Financing activities. Financing activities for the three months ended December 31, 2015 reflect net aggregate proceeds of $15.9 billion received from our debt issuance completed on December 14, 2015, and $2.0 billion used to repurchase class A common stock in the open market. See Note 5—Debt and Note 9—Stockholders' Equity.
Sources of Liquidity
Our primary sources of liquidity are cash on hand, cash flow from operations, our investment portfolio and access to various equity and borrowing arrangements. Funds from operations are maintained in cash and cash equivalents and short-term or long-term available-for-sale investment securities based upon our funding requirements, access to liquidity from these holdings, and the returns that these holdings provide. We believe that cash flow generated from operations, in conjunction with access to our other sources of liquidity, will be more than sufficient to meet our ongoing operational needs.
Cash and cash equivalents and short-term and long-term available-for-sale investment securities held by our foreign subsidiaries totaled $7.4 billion at December 31, 2015. If it were necessary to repatriate these funds for use in the United States, we would be required to pay U.S. income taxes on most of this amount. The amount of income taxes that would have resulted had these funds been repatriated is not practicably determinable. It is our intent to indefinitely reinvest the majority of these funds outside of the United States. As such, we have not accrued any U.S. income tax provision in our financial results related to the majority of these funds.

34


Long-term debt and change in capital structure. In conjunction with the anticipated Visa Europe acquisition, we have evolved our long-term capital structure. In December 2015, we issued fixed-rate senior notes in an aggregate principal amount of $16.0 billion, with maturities ranging between 2 and 30 years. Our first principal payment of $1.8 billion is due on December 14, 2017. Interest on the Notes, at a rate ranging between 1.20% and 4.30%, is payable semi-annually on June 14 and December 14 of each year, commencing June 14, 2016. The Notes may be redeemed as a whole or in part, at our option at any time prior to maturity, at a specified redemption price. In the event that the Visa Europe acquisition is not completed on or prior to February 2, 2017 (which date may be extended), we will be required to redeem all Notes except for the 2035 Notes and the 2045 Notes, at a specified redemption price. The net aggregate proceeds of $15.9 billion, after deducting underwriting discounts and debt issuance costs of $123 million, will be used to fund a portion of the purchase price for the anticipated acquisition of Visa Europe, and the remainder will be used for general corporate purposes including share repurchases. We are not subject to any financial covenants and did not experience any changes to our investment credit ratings as a result of this debt issuance. See Note 5—Debt to our unaudited consolidated financial statements.
Credit Facility. On January 27, 2016, we entered into an unsecured $4.0 billion revolving credit facility. The credit facility, which expires on January 27, 2021, replaced our previous $3.0 billion credit facility, which expired on January 27, 2016. The new credit facility contains covenants and events of default customary for facilities of this type. See Note 5—Debt to our unaudited consolidated financial statements.
Uses of Liquidity
There has been no significant change to our primary uses of liquidity since September 30, 2015, except as discussed below. Based on our current cash flow budgets and forecasts of our short-term and long-term liquidity needs, we believe that our projected sources of liquidity will be sufficient to meet our projected liquidity needs for more than the next 12 months. We will continue to assess our liquidity position and potential sources of supplemental liquidity in view of our operating performance, current economic and capital market conditions and other relevant circumstances.
Visa Europe acquisition. On November 2, 2015, we entered into a transaction agreement to acquire Visa Europe for a total purchase price of up to €21.2 billion. The purchase price consists of: (a) at the closing of the transaction, up-front cash consideration of €11.5 billion and preferred stock convertible upon certain conditions into class A common stock or class A equivalent preferred stock, valued at approximately €5.0 billion, and (b) following the end of sixteen fiscal quarters post-closing, contingent cash consideration of up to €4.0 billion (plus up to an additional €0.7 billion in interest), determined based on the achievement of specified net revenue levels during such post-closing period. Closing is subject to regulatory approvals and other customary conditions, and is currently expected to occur in the fiscal third quarter of 2016. See Note 2—Visa Europe to our unaudited consolidated financial statements.
We also entered into the Put Option Amendment with Visa Europe to align certain terms of the Put with the terms of the Visa Europe Transaction Agreement. Under the terms and conditions of the Transaction Agreement, the Visa Europe board of directors is required to exercise the Amended Put Option on the closing date of the transaction to effect our purchase of all of Visa Europe’s share capital. If the Transaction Agreement is terminated for any reason prior to the completion of the transaction, the Put Option Amendment will also terminate and the Put will revert to its original, unamended form. We expect to complete the transaction in accordance with the Transaction Agreement, and therefore do not expect the Put to revert to its original, unamended form.
Reduction in as-converted class A common stock. In October 2015, our board of directors authorized a new $5.0 billion share repurchase program, in addition to the existing October 2014 program. During the three months ended December 31, 2015, we repurchased 26 million shares of our class A common stock using $2.0 billion of cash on hand. As of December 31, 2015, we had remaining authorized funds of $5.8 billion for share repurchase. See Note 9—Stockholders' Equity to our unaudited consolidated financial statements.
Dividends. During the three months ended December 31, 2015, we declared and paid $340 million in dividends. See Note 9—Stockholders' Equity to our unaudited consolidated financial statements. We expect our board of directors to declare a quarterly cash dividend at the beginning of February 2016.
Fair Value Measurements—Financial Instruments
As of December 31, 2015, our financial instruments measured at fair value on a recurring basis included $24.8 billion of assets and $10 million of liabilities. Of these instruments, fair value of $7 million was based on significant

35


unobservable inputs. See Note 4—Fair Value Measurements and Investments to our unaudited consolidated financial statements.
ITEM 3.
Quantitative and Qualitative Disclosures about Market Risk
There have been no significant changes to our market risks during the three months ended December 31, 2015, compared to September 30, 2015.