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EX-10.1 - EXHIBIT 10.1 - VISA INC.vex10133117.htm
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EX-31.1 - EXHIBIT 31.1 - VISA INC.vex31133117.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2017

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
      
Commission file number 001-33977
logo.gif
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, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  þ
Accelerated filer   o
Smaller reporting company   o
Non-accelerated filer o (Do not check if a smaller reporting company.)
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 April 14, 2017 there were 1,846,250,328 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 13,684,312 shares of class C common stock, par value $0.0001 per share, of Visa Inc. outstanding.



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)
 
March 31,
2017
 
September 30,
2016
 
(in millions, except par value data)
Assets
 
 
 
Cash and cash equivalents
$
6,427

 
$
5,619

Restricted cash—U.S. litigation escrow (Note 3)
1,029

 
1,027

Investment securities (Note 4):
 
 
 
Trading
78

 
71

Available-for-sale
1,417

 
3,248

Settlement receivable (Note 7)
3,350

 
1,467

Accounts receivable
1,081

 
1,041

Customer collateral (Note 7)
1,043

 
1,001

Current portion of client incentives
292

 
284

Prepaid expenses and other current assets
788

 
555

Total current assets
15,505

 
14,313

Investment securities, available-for-sale (Note 4)
2,882

 
3,931

Client incentives
486

 
448

Property, equipment and technology, net
2,133

 
2,150

Other assets
980

 
893

Intangible assets, net (Note 2 and Note 5)
26,416

 
27,234

Goodwill (Note 2 and Note 5)
14,825

 
15,066

Total assets
$
63,227

 
$
64,035

Liabilities
 
 
 
Accounts payable
$
120

 
$
203

Settlement payable (Note 7)
2,879

 
2,084

Customer collateral (Note 7)
1,043

 
1,001

Accrued compensation and benefits
500

 
673

Client incentives
1,753

 
1,976

Accrued liabilities
1,167

 
1,128

Current maturities of long-term debt (Note 6)
1,748

 

Accrued litigation (Note 13)
996

 
981

Total current liabilities
10,206

 
8,046

Long-term debt (Note 6)
14,140

 
15,882

Deferred tax liabilities
5,731

 
4,808

Deferred purchase consideration
1,180

 
1,225

Other liabilities
1,187

 
1,162

Total liabilities 
32,444

 
31,123

 

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

3


VISA INC.
CONSOLIDATED BALANCE SHEETS—(Continued)
(UNAUDITED)
 
March 31,
2017
 
September 30,
2016
 
(in millions, except par value data)
Equity
 
 
 
Preferred stock, $0.0001 par value, 25 shares authorized and 5 issued and outstanding as follows:
 
 
 
Series A convertible participating preferred stock, none issued (Note 2 and Note 9)
$

 
$

Series B convertible participating preferred stock, 2 shares issued and outstanding at March 31, 2017 and September 30, 2016 (Note 2 and Note 9)
2,397

 
2,516

Series C convertible participating preferred stock, 3 shares issued and outstanding at March 31, 2017 and September 30, 2016 (Note 2 and Note 9)
3,200

 
3,201

Class A common stock, $0.0001 par value, 2,001,622 shares authorized, 1,847 and 1,871 shares issued and outstanding at March 31, 2017 and September 30, 2016, respectively (Note 9)

 

Class B common stock, $0.0001 par value, 622 shares authorized, 245 shares issued and outstanding at March 31, 2017 and September 30, 2016 (Note 9)

 

Class C common stock, $0.0001 par value, 1,097 shares authorized, 14 and 17 shares issued and outstanding at March 31, 2017 and September 30, 2016, respectively (Note 9)

 

Treasury stock (Note 9)

 
(170
)
Right to recover for covered losses (Note 3)
(77
)
 
(34
)
Additional paid-in capital
17,103

 
17,395

Accumulated income
9,140

 
10,462

Accumulated other comprehensive loss, net:
 
 
 
Investment securities, available-for-sale
45

 
36

Defined benefit pension and other postretirement plans
(216
)
 
(225
)
Derivative instruments classified as cash flow hedges
(6
)
 
(50
)
Foreign currency translation adjustments
(803
)
 
(219
)
Total accumulated other comprehensive loss, net
(980
)
 
(458
)
Total equity
30,783

 
32,912

Total liabilities and equity
$
63,227

 
$
64,035



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
March 31,
 
Six Months Ended
March 31,
 
2017
 
2016
 
2017
 
2016
 
(in millions, except per share data)
Operating Revenues
 
 
 
 
 
 
 
Service revenues
$
1,993

 
$
1,699

 
$
3,911

 
$
3,344

Data processing revenues
1,843

 
1,473

 
3,735

 
2,952

International transaction revenues
1,469

 
1,045

 
2,958

 
2,076

Other revenues
203

 
198

 
406

 
396

Client incentives
(1,031
)
 
(789
)
 
(2,072
)
 
(1,577
)
Net operating revenues
4,477

 
3,626

 
8,938

 
7,191

Operating Expenses 
 
 
 
 
 
 
 
Personnel
704

 
528

 
1,275

 
1,027

Marketing
193

 
186

 
411

 
380

Network and processing
150

 
126

 
295

 
254

Professional fees
83

 
66

 
163

 
138

Depreciation and amortization
131

 
121

 
277

 
241

General and administrative
406

 
164

 
592

 
320

Litigation provision (Note 13)
2

 
1

 
17

 
1

Total operating expenses
1,669

 
1,192

 
3,030

 
2,361

Operating income
2,808

 
2,434

 
5,908

 
4,830

Non-operating (Expense) Income 
 
 
 
 
 
 
 
Interest expense
(135
)
 
(132
)
 
(275
)
 
(161
)
Other
29

 
139

 
48

 
411

Non-operating (expense) income
(106
)
 
7

 
(227
)
 
250

Income before income taxes
2,702

 
2,441

 
5,681

 
5,080

Income tax provision (Note 12)
2,272

 
734

 
3,181

 
1,432

Net income
$
430

 
$
1,707

 
$
2,500

 
$
3,648





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
March 31,
 
Six Months Ended
March 31,
 
2017
 
2016
 
2017
 
2016
 
(in millions, except per share data)
Basic earnings per share (Note 10)
 
 
 
 
 
 
 
Class A common stock
$
0.18

 
$
0.71

 
$
1.04

 
$
1.51

Class B common stock
$
0.30

 
$
1.17

 
$
1.71

 
$
2.49

Class C common stock
$
0.72

 
$
2.85

 
$
4.15

 
$
6.05

Basic weighted-average shares outstanding (Note 10)

 
 
 
 
 
 
Class A common stock
1,854

 
1,909

 
1,857

 
1,923

Class B common stock
245

 
245

 
245

 
245

Class C common stock
15

 
19

 
16

 
19

Diluted earnings per share (Note 10)

 
 
 
 
 
 
Class A common stock
$
0.18

 
$
0.71

 
$
1.04

 
$
1.51

Class B common stock
$
0.29

 
$
1.17

 
$
1.71

 
$
2.49

Class C common stock
$
0.72

 
$
2.84

 
$
4.14

 
$
6.04

Diluted weighted-average shares outstanding (Note 10)

 
 
 
 
 
 
Class A common stock
2,406

 
2,401

 
2,413

 
2,416

Class B common stock
245

 
245

 
245

 
245

Class C common stock
15

 
19

 
16

 
19




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
March 31,
 
Six Months Ended
March 31,
 
2017
 
2016
 
2017
 
2016
 
(in millions)
Net income
$
430

 
$
1,707

 
$
2,500

 
$
3,648

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Investment securities, available-for-sale:
 
 
 
 
 
 
 
Net unrealized gain
19

 
26

 
16

 
60

Income tax effect
(7
)
 
(7
)
 
(8
)
 
(23
)
Reclassification adjustment for net loss (gain) realized in net income
1

 
(3
)
 
1

 
(3
)
Income tax effect

 
1

 

 
1

Defined benefit pension and other postretirement plans:
 
 
 
 
 
 
 
Net unrealized actuarial (loss) gain and prior service credit
(5
)
 
5

 
(5
)
 
61

Income tax effect
2

 
(2
)
 
2

 
(23
)
Amortization of actuarial loss and prior service credit realized in net income
15

 
2

 
21

 
(5
)
Income tax effect
(7
)
 

 
(9
)
 
2

Derivative instruments classified as cash flow hedges:
 
 
 
 
 
 
 
Net unrealized (loss) gain
(49
)
 
(54
)
 
25

 
(38
)
Income tax effect
11

 
11

 
4

 
6

Reclassification adjustment for net loss (gain) realized in net income
8

 
(37
)
 
20

 
(85
)
Income tax effect
(3
)
 
11

 
(5
)
 
25

Foreign currency translation adjustments
404

 

 
(584
)
 

Other comprehensive income (loss), net of tax
389

 
(47
)
 
(522
)
 
(22
)
Comprehensive income
$
819

 
$
1,660

 
$
1,978

 
$
3,626




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

7


VISA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Six Months Ended
March 31,
 
2017
 
2016
 
(in millions)
Operating Activities
 
 
 
Net income
$
2,500


$
3,648

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Client incentives
2,072


1,577

Fair value adjustment for the Visa Europe put option


(255
)
Share-based compensation (Note 11)
116


97

Excess tax benefit for share-based compensation


(43
)
Depreciation and amortization of property, equipment, technology and intangible assets
277


241

Deferred income taxes
1,700


(29
)
Right to recover for covered losses recorded in equity
(163
)


Charitable contribution of Visa Inc. shares (Note 9 and Note 12)
192



Other
23


17

Change in operating assets and liabilities:




Settlement receivable
(1,946
)

(6
)
Accounts receivable
(40
)

(97
)
Client incentives
(2,306
)

(1,912
)
Other assets
(301
)

(397
)
Accounts payable
(83
)

(34
)
Settlement payable
883


(57
)
Accrued and other liabilities
(35
)

81

Accrued litigation (Note 13)
15


(12
)
Net cash provided by operating activities
2,904


2,819

Investing Activities
 
 
 
Purchases of property, equipment, technology and intangible assets
(317
)

(250
)
Investment securities, available-for-sale:




Purchases
(1,083
)

(17,437
)
Proceeds from maturities and sales
3,972


15,860

Acquisition of business, net of cash received
(302
)

(14
)
Purchases of / contributions to other investments
(2
)

(9
)
Proceeds / distributions from other investments


4

Net cash provided by (used in) investing activities
2,268


(1,846
)
 




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

8


VISA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
(UNAUDITED)
 
 
Six Months Ended
March 31,
 
2017
 
2016
 
(in millions)
Financing Activities
 
 
 
Repurchase of class A common stock (Note 9)
$
(3,469
)

$
(3,765
)
Dividends paid (Note 9)
(795
)

(676
)
Proceeds from issuance of senior notes (Note 6)


15,971

Debt issuance costs (Note 6)


(96
)
Payments from litigation escrow account—U.S. retrospective responsibility plan (Note 3 and Note 13)


11

Cash proceeds from issuance of common stock under employee equity plans
87


49

Restricted stock and performance-based shares settled in cash for taxes
(66
)

(85
)
Excess tax benefit for share-based compensation


43

Net cash (used in) provided by financing activities
(4,243
)

11,452

Effect of exchange rate changes on cash and cash equivalents
(121
)


Increase in cash and cash equivalents
808


12,425

Cash and cash equivalents at beginning of year
5,619


3,518

Cash and cash equivalents at end of period
$
6,427


$
15,943

Supplemental Disclosure
 
 
 
Income taxes paid, net of refunds
$
1,611


$
1,501

Interest payments on debt (Note 6)
$
244


$

Net unrealized gain on currency forward contracts
$


$
116

Accruals related to purchases of property, equipment, technology and intangible assets
$
37


$
38









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

9


VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2017
(UNAUDITED)
Note 1—Summary of Significant Accounting Policies
Organization. Visa Inc. ("Visa" or the "Company") is a global payments technology company that connects consumers, merchants, financial institutions, businesses, strategic partners 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 Europe Limited ("Visa Europe"), Visa Canada Corporation, Inovant LLC and CyberSource Corporation ("CyberSource"), operate one of the world’s largest retail electronic payments networks — VisaNet — which facilitates authorization, clearing and settlement of payment transactions and enables us to provide our financial institution and merchant clients a wide range of products, platforms and value-added services. 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 products. In most cases, account holder and merchant relationships belong to, and are managed by, Visa's financial institution clients.
Consolidation and basis of presentation. The accompanying unaudited consolidated financial statements include the accounts of Visa and its consolidated entities and are presented in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The Company consolidates its majority-owned and controlled entities, including variable interest entities ("VIEs") for which the Company is the primary beneficiary. The Company’s investments in VIEs have not been material to its 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, 2016 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 May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of goods or services to customers. The ASU will replace existing revenue recognition guidance in U.S. GAAP when it becomes effective. Subsequently, the FASB also issued a series of amendments to the new revenue standard. The Company will adopt the standard effective October 1, 2018, and expects to adopt the standard using the modified retrospective transition method. The Company expects that the new standard will primarily impact recognition timing for certain fixed incentives and price discounts provided to clients, and the classification of certain client incentives between contra revenues and operating expenses. The Company is still in the process of quantifying the full effect that ASU 2014-09 and all of its related subsequent updates will have on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, which simplifies several aspects of the accounting for share-based payments, including the accounting for excess tax benefits and deficiencies, forfeitures, and statutory tax withholding requirements, as well as classification on the statement of cash flows related to excess tax benefits and employee taxes paid when an employer withholds shares for tax-withholding purposes. The Company elected to early adopt this guidance effective October 1, 2016. The adoption had the following impact on the consolidated financial statements:

10

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


The Company recorded excess tax benefits of $46 million in our provision for income taxes rather than as an increase to additional paid-in capital for the six months ended March 31, 2017 on a prospective basis. Therefore, the prior period presented has not been adjusted.
The Company excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of diluted earnings per share, which did not have a material impact on our diluted earnings per share for the six months ended March 31, 2017.
The Company elected to apply the presentation requirement for cash flows related to excess tax benefits prospectively, and thus, the prior period presented has not been adjusted. This adoption resulted in an increase to both net cash provided by operating activities and net cash used in financing of $46 million for the six months ended March 31, 2017.
In October 2016, the FASB issued ASU 2016-16, which requires that entities recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. The standard will be effective for Visa on October 1, 2018. However, the Company is considering early adoption of the standard on October 1, 2017. The adoption is not expected to have a material impact on the consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, which requires that a statement of cash flows includes the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. The Company will adopt the standard effective October 1, 2018. The adoption will impact the presentation of transactions related to the U.S. litigation escrow account on the consolidated statements of cash flows.
In January 2017, the FASB issued ASU 2017-04, which simplifies the test for goodwill impairment by eliminating a previously required step. The Company will adopt the standard effective October 1, 2020. The adoption is not expected to have a material impact on the consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, which requires that the service cost component of net periodic pension and postretirement benefit cost be presented in the same line item as other employee compensation costs, while the other components be presented separately as non-operating income (expense). Currently, all net periodic pension and postretirement benefit costs are presented in Personnel on the Company's consolidated statement of operations. 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
On June 21, 2016, the Company acquired 100% of the share capital of Visa Europe, a payments technology business. The acquisition positions Visa to create additional value through increased scale, efficiencies realized by the integration of both businesses, and benefits related to Visa Europe's transition from an association to a for-profit enterprise. At the closing of the transaction (the "Closing"), the Company:
paid up-front cash consideration of €12.2 billion ($13.9 billion);
issued preferred stock of the Company convertible upon certain conditions into approximately 79 million shares of class A common stock of the Company, as described below, equivalent to a value of €5.3 billion ($6.1 billion) at the closing stock price of $77.33 on June 21, 2016; and
agreed to pay an additional €1.0 billion, plus 4% compound annual interest, on the third anniversary of the Closing.
Preferred stock. In connection with the transaction, three new series of preferred stock of the Company were created:
series A convertible participating preferred stock, par value $0.0001 per share, which is generally 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 Company issued 2,480,466 shares of U.K.&I preferred stock to Visa Europe’s member financial institutions in the United Kingdom and Ireland entitled to receive preferred stock at the Closing, and 3,156,823 shares of Europe preferred stock to Visa Europe’s other member financial institutions entitled to receive preferred stock at the Closing.

11

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


Under certain conditions described below, the U.K.&I and Europe preferred stock is 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, 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, where, generally, the relevant claims (and resultant liabilities and losses) relate to the period before the Closing. See Note 3—U.S. and Europe Retrospective Responsibility Plans.
Updated purchase price allocation.
Upon the Closing, total purchase consideration of $18.8 billion was allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on a preliminary valuation. During the second quarter of fiscal year 2017, based on additional information that became available, which impacted certain of the assumptions used, the Company updated the purchase price allocation.
The following table summarizes the updated purchase price allocation:
 
Preliminary Purchase Price Allocation
 
Measurement Period Adjustments
 
Updated
Purchase Price Allocation
 
(in millions)
Current assets(1)
$
4,457

 
$

 
$
4,457

Non-current assets(2)
258

 
(46
)
 
212

Current liabilities(3)
(2,731
)
 
(39
)
 
(2,770
)
Non-current liabilities(2)
(2,605
)
 
618

 
(1,987
)
Tangible assets and liabilities
$
(621
)
 
$
533

 
$
(88
)
Intangible assets — customer relationships and reacquired rights(2)
16,137

 
(232
)
 
15,905

Goodwill(4)
3,268

 
(301
)
 
2,967

Fair value of net assets acquired
$
18,784

 
$

 
$
18,784

(1) 
Current assets are largely comprised of cash and cash equivalents and settlement receivable.
(2) 
Intangible assets consist of customer relationships and reacquired rights, which have been valued as a single composite intangible asset as they are inextricably linked. These intangibles are considered indefinite-lived assets as the associated customer relationships have historically not experienced significant attrition, and the reacquired rights are based on the Framework Agreement, which has a perpetual term. Non-current assets and liabilities include deferred tax assets and liabilities that result in net deferred tax liabilities of $1.7 billion based on the updated valuation. In February 2017, the Company completed a legal entity reorganization, resulting in the elimination of most of these deferred tax assets and liabilities. See Note 12—Income Taxes.
(3) 
Current liabilities assumed mainly include settlement payable, client incentives liabilities and accrued liabilities.
(4) 
The excess of purchase consideration over net assets acquired was recorded as goodwill, which represents the value that is expected from increased scale and synergies as a result of the integration of both businesses.

12

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


Actual and pro forma impact of acquisition.
The following table presents unaudited supplemental pro forma information for the three and six months ended March 31, 2016, as if the acquisition and related issuance of senior notes had occurred on October 1, 2014. The pro forma financial information is not necessarily indicative of the Company's consolidated results of operations that would have been realized had the acquisition been completed on October 1, 2014, nor does it purport to project the future results of operations of the combined company or reflect any reorganizations, or cost or other operating synergies that may occur subsequent to the Closing. The actual results of operations of the combined company may differ significantly from the pro forma results presented here due to many factors.
 
Consolidated Actual Results
 
Unaudited Pro Forma Consolidated Results
 
Consolidated Actual Results
 
Unaudited Pro Forma Consolidated Results
 
Three Months Ended March 31,
 
Six Months Ended March 31,
 
2017
 
2016
 
2017
 
2016
 
(in millions, except per share data)
Net operating revenues
$
4,477

 
$
3,935

 
$
8,938

 
$
7,899

Net income
$
430

 
$
1,679

 
$
2,500

 
$
3,456

Diluted earnings per share
$
0.18

 
$
0.68

 
$
1.04

 
$
1.39

The unaudited pro forma financial information for the three and six months ended March 31, 2016 reflects the following material pro forma adjustments:
conversion of Visa Europe's historical results of operations from euro to U.S. dollar, and from International Financial Reporting Standards to U.S. GAAP;
elimination of transactions between Visa and Visa Europe upon consolidation, primarily related to annual license and various other fees paid by Visa Europe to Visa in accordance with the Framework Agreement;
an increase in non-operating expense for the six months ended March 31, 2016 for additional interest expense and amortization of debt issuance costs resulting from the issuance of the $16.0 billion senior notes;
exclusion of a $255 million gain related to the revaluation of the Visa Europe put option from the six months ended March 31, 2016(1); and
elimination of acquisition-related costs incurred by Visa Europe.
(1) 
For purposes of preparing this pro forma financial information, the fair value of the Visa Europe put option is presumed to have been reduced to zero prior to October 1, 2014. Therefore, the Company did not include any gains associated with a write-down in the fair value of the Visa Europe put option liability in the unaudited pro forma net income for the six months ended March 31, 2016.
The pro forma results also reflect the applicable tax impact of the pro forma adjustments. The taxes associated with the adjustments reflect the statutory tax rate in effect during the respective periods.
Note 3—U.S. and Europe Retrospective Responsibility Plans
U.S. Retrospective Responsibility Plan
Under the terms of the U.S. retrospective responsibility plan, the Company maintains an escrow account from which settlements of, or judgments in, the U.S. covered litigation are paid. The escrow funds are held in money market investments along with interest income earned, less applicable taxes, and are classified as restricted cash on the consolidated balance sheets. The balance of the escrow account was $1.0 billion at March 31, 2017 and September 30, 2016. The Company did not make any payments to opt-out merchants from the litigation escrow account during the six months ended March 31, 2017. 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 six months ended March 31, 2017. See Note 13—Legal Matters.

13

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


Europe Retrospective Responsibility Plan
Under the terms of the Europe retrospective responsibility plan, the Company is entitled to recover VE territory covered losses through a periodic adjustment to the class A common stock conversion rates applicable to the U.K.&I. and Europe preferred stock. VE territory covered losses are recorded in "right to recover for covered losses" within equity before the corresponding adjustment to the applicable conversion rate is effected. Adjustments to the conversion rate may be executed once in any six-month period unless a single, individual loss greater than €20 million is incurred, in which case, the six-month limitation does not apply. When the adjustment to the conversion rate is made, the amount previously recorded in "right to recover for covered losses" as contra-equity is then recorded against the book value of the preferred stock within stockholders' equity.
During the six months ended March 31, 2017, the Company recovered $120 million of VE territory covered losses through adjustments to the class A common stock conversion rates applicable to the U.K.&I and Europe preferred stock, from 13.952 at September 30, 2016 to 13.388 and 13.948, respectively, at March 31, 2017.
The following table sets forth the activities related to VE territory covered losses in preferred stock and "right to recover for covered losses" within equity during the six months ended March 31, 2017. VE territory covered losses incurred reflect settlements with merchants and additional legal costs. See Note 13—Legal Matters.
 
Preferred Stock
 
Right to Recover for Covered Losses
 
U.K.&I
 
Europe
 
 
(in millions)
Balance as of September 30, 2016
$
2,516

 
$
3,201

 
$
(34
)
VE territory covered losses incurred
$

 
$

 
$
(163
)
Recovery through conversion rate adjustment
(119
)
 
(1
)
 
120

Balance as of March 31, 2017
$
2,397

 
$
3,200

 
$
(77
)
The following table sets forth the as-converted value of the preferred stock available to recover VE territory covered losses compared to the book value of preferred shares recorded in stockholders' equity within the Company's unaudited consolidated balance sheet as of March 31, 2017.(1)
 
March 31, 2017
 
As-Converted Value of Preferred Stock(2)
 
Book Value of Preferred Stock
 
(in millions)
U.K.&I preferred stock
$
2,951

 
$
2,397

Europe preferred stock
3,913

 
3,200

Total
$
6,864

 
$
5,597

Less: Right to recover for covered losses
(77
)
 
(77
)
Total recovery for covered losses available
$
6,787

 
$
5,520

(1) 
Figures in the table may not recalculate exactly due to rounding. As-converted and book values are based on unrounded numbers.
(2) 
The as-converted value of preferred stock is calculated as the product of: (a) 2 million and 3 million shares of the U.K.&I and Europe preferred stock outstanding, respectively, as of March 31, 2017; (b)13.388 and 13.948, the class A common stock conversion rate applicable to the U.K.&I and Europe preferred stock as of March 31, 2017, respectively; and (c) $88.87, Visa's class A common stock closing stock price as of March 31, 2017.


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
 
March 31,
2017
 
September 30,
2016
 
March 31,
2017
 
September 30,
2016
 
(in millions)
Assets
 
 
 
 
 
 
 
Cash equivalents and restricted cash:
 
 
 
 
 
 
 
Money market funds
$
4,594

 
$
4,537

 
 
 
 
U.S. government-sponsored debt securities
 
 
 
 
$
132

 
$
196

Investment securities, trading:
 
 
 
 
 
 
 
Equity securities
78

 
71

 
 
 
 
Investment securities, available-for-sale:
 
 
 
 
 
 
 
U.S. government-sponsored debt securities
 
 
 
 
3,039

 
4,699

U.S. Treasury securities
1,102

 
2,178

 
 
 
 
Equity securities
78

 
53

 
 
 
 
Corporate debt securities
 
 
 
 
80

 
249

Prepaid and other current assets:
 
 
 
 
 
 
 
Foreign exchange derivative instruments
 
 
 
 
52

 
50

Other assets:
 
 
 
 
 
 
 
Foreign exchange derivative instruments
 
 
 
 

 
6

Total
$
5,852

 
$
6,839

 
$
3,303

 
$
5,200

Liabilities
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
Foreign exchange derivative instruments
 
 
 
 
$
83

 
$
116

Other liabilities:
 
 
 
 
 
 
 
Foreign exchange derivative instruments
 
 
 
 

 
20

Total
$

 
$

 
$
83

 
$
136

There were no transfers between Level 1 and Level 2 assets during the six months ended March 31, 2017.
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.
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 six months ended March 31, 2017.

15

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


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 significant impairments during the six months ended March 31, 2017 or 2016. These investments totaled $49 million and $46 million at March 31, 2017 and September 30, 2016, respectively, and are classified in other assets on the consolidated balance sheets.
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. The Company completed its annual impairment review of its indefinite-lived intangible assets and goodwill as of February 1, 2017, and concluded that there was no impairment. No recent events or changes in circumstances indicate that impairment existed at March 31, 2017.
Other Fair Value Disclosures
Long-term debt. Debt instruments are measured at amortized cost on the Company's unaudited consolidated balance sheet at March 31, 2017. The fair value of the debt instruments, as provided by third-party pricing vendors, is based on quoted prices in active markets for similar, not identical, assets. The pricing data obtained from outside sources is reviewed internally for reasonableness, compared against benchmark quotes from independent pricing sources, then confirmed or revised accordingly. If measured at fair value in the financial statements, these instruments would be classified as Level 2 in the fair value hierarchy.
The following table presents the carrying amount and estimated fair value of the Company’s debt in order of maturity:
 
March 31, 2017
 
September 30, 2016
 
Carrying Amount
 
Estimated Fair Value
 
Carrying Amount
 
Estimated Fair Value
 
(in millions)
1.20% Senior Notes due December 2017
$
1,748

 
$
1,748

 
$
1,746

 
$
1,754

2.20% Senior Notes due December 2020
2,989

 
3,009

 
2,988

 
3,077

2.80% Senior Notes due December 2022
2,239

 
2,270

 
2,238

 
2,359

3.15% Senior Notes due December 2025
3,966

 
4,014

 
3,964

 
4,225

4.15% Senior Notes due December 2035
1,485

 
1,569

 
1,485

 
1,698

4.30% Senior Notes due December 2045
3,461

 
3,673

 
3,461

 
4,045

Total
$
15,888

 
$
16,283

 
$
15,882

 
$
17,158

Other financial instruments not measured at fair value. The following financial instruments are not measured at     fair value on the Company's unaudited consolidated balance sheet at March 31, 2017, but disclosure of their fair values is required: time deposits recorded in prepaid expenses and other current assets, settlement receivable and payable, commercial paper, and customer collateral. The estimated fair value of such instruments at March 31, 2017 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.

16

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


Investments
Available-for-sale investment securities. The Company had $78 million in gross unrealized gains and $7 million in gross unrealized losses at March 31, 2017. There were $55 million gross unrealized gains and no gross unrealized losses at September 30, 2016. A majority of the Company's available-for-sale investment securities with stated maturities are due within one to two years.
Note 5—Intangible Assets and Goodwill
Goodwill and intangible assets at March 31, 2017 decreased from September 30, 2016 primarily due to measurement period adjustments as the Company updated the purchase price allocation during the second quarter of fiscal 2017. See Note 2—Visa Europe. Goodwill and intangible assets also decreased due to foreign currency translation, which is recorded as a component of accumulated other comprehensive loss in the consolidated balance sheet.
In February 2017, the Company acquired a business for a total purchase consideration net of cash received of approximately $302 million, paid primarily with cash on hand. Total purchase consideration has been allocated to the tangible and identifiable intangible assets acquired, and to liabilities assumed based on their respective fair values on the acquisition date. Related finite-lived intangible assets recorded totaled $104 million with a weighted-average useful life of eight years. Goodwill of $181 million was recorded to reflect the excess purchase consideration over net assets acquired. The consolidated financial statements include the operating results of the acquired business from the date of acquisition. Pro forma information related to the acquisition has not been presented as the impact is not material to the Company's financial results.
Note 6—Debt
The Company had outstanding debt as follows:
 
March 31, 2017
 
September 30, 2016
 
 
 
Principal Amount
 
Unamortized Discounts and Debt Issuance Costs
 
Carrying Amount
 
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

 
$
(2
)
 
$
1,748

 
$

 
$

 
$

 
1.37
%
Total current maturities of long-term debt
1,750

 
(2
)
 
1,748

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1.20% Senior Notes due December 2017 (the "2017 Notes")

 

 

 
1,750

 
(4
)
 
1,746

 
1.37
%
2.20% Senior Notes due December 2020 (the "2020 Notes")
3,000

 
(11
)
 
2,989

 
3,000

 
(12
)
 
2,988

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

 
(11
)
 
2,239

 
2,250

 
(12
)
 
2,238

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

 
(34
)
 
3,966

 
4,000

 
(36
)
 
3,964

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

 
(15
)
 
1,485

 
1,500

 
(15
)
 
1,485

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

 
(39
)
 
3,461

 
3,500

 
(39
)
 
3,461

 
4.37
%
Total long-term debt
14,250

 
(110
)
 
14,140

 
16,000

 
(118
)
 
15,882

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total debt
$
16,000

 
$
(112
)
 
$
15,888

 
$
16,000

 
$
(118
)
 
$
15,882

 
 

17

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


Senior Notes
Interest expense for the senior notes was $125 million and $250 million for the three and six months ended March 31, 2017, respectively, as compared to $125 million and $149 million for the same periods in 2016. The Company recognized interest expense as non-operating expense and paid $244 million in interest on the senior notes during the six months ended March 31, 2017.
Commercial Paper Program
The Company maintains a commercial paper program to support its working capital requirements and for other general corporate purposes. During the three months ended March 31, 2017, the Company repaid the $567 million of commercial paper that was issued in December 2016. As of March 31, 2017 and September 30, 2016, the Company had no outstanding obligations under the program.
Credit Facility Extension
On January 27, 2017, the Company extended the term of the $4.0 billion credit facility that was entered into on January 27, 2016. The credit facility will now expire on January 27, 2022. No other terms were materially changed. A brief description of the material terms and conditions of the credit facility are described in the Company's Form 10-K, as filed with the SEC on November 15, 2016.
Note 7—Settlement Guarantee Management
The Company indemnifies its 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 clients that do not meet its credit standards to post collateral to offset potential loss from their estimated unsettled transactions. The Company’s estimated maximum settlement exposure was $68.5 billion for the quarter ended March 31, 2017, compared to $67.8 billion for the quarter ended September 30, 2016. Of these amounts, $3.1 billion and $2.9 billion were covered by collateral at March 31, 2017 and September 30, 2016, respectively.
The Company maintained collateral as follows:

March 31,
2017
 
September 30,
2016
 
(in millions)
Cash equivalents(1)
$
1,324

 
$
1,295

Pledged securities at market value
154

 
170

Letters of credit
1,477

 
1,311

Guarantees
1,369

 
1,418

Total
$
4,324

 
$
4,194

(1) 
Cash collateral held by Visa Europe is not included on the Company's consolidated balance sheets as its clients retain beneficial ownership and the cash is only accessible to the Company in the event of default by the client on its settlement obligations.
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 $3 million and $2 million at March 31, 2017 and September 30, 2016, respectively. These amounts are reflected in accrued liabilities on the Company's consolidated balance sheets.

18

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


In the last week of March 2017, the Company experienced delays in the processing and settlement of $1.6 billion of volume in Europe. As a result of this delay, this volume was processed and settled in the first few days of April 2017 instead of in March 2017. The settlement receivable and payable amounts recorded on the consolidated balance sheets at March 31, 2017 are elevated because they include this unsettled activity. The balances in these accounts returned to historical levels in early April 2017 following the settlement of this activity.
Note 8—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 U.S. The Company also sponsors other pension benefit plans that provide benefits for internationally-based employees at certain non-U.S. locations. The components of net periodic benefit cost presented below include the U.S. pension plans and the non-U.S. plans, which represent Visa Europe funded and unfunded pension plans. Disclosures relating to other non-U.S. pension benefit plans are not included as they are immaterial, individually and in aggregate.
In October 2015, the Company amended the U.S. qualified defined benefit pension plan and discontinued employer provided credits after December 31, 2015. Plan participants will continue to earn interest credits on existing balances at December 31, 2015. The Visa Europe pension plans had been closed to new entrants prior to the Visa Europe acquisition.
 
U.S. Plans
 
Non-U.S. Plans
 
Pension Benefits
 
Other Postretirement Benefits
 
Pension Benefits
 
Three Months Ended
March 31,
 
Three Months Ended
March 31,
 
Three Months Ended
March 31,
 
2017
 
2016
 
2017
 
2016
 
2017
 
(in millions)
Service cost
$

 
$

 
$

 
$

 
$
1

Interest cost
9

 
10

 

 

 
2

Expected return on assets
(17
)
 
(18
)
 

 

 
(4
)
Amortization of:
 
 
 
 
 
 
 
 
 
Prior service credit

 

 

 
(1
)
 

Actuarial loss
4

 
2

 

 

 
1

Curtailment gain

 

 

 

 

Settlement loss
11

 

 

 

 

Total net periodic benefit cost
$
7

 
$
(6
)
 
$

 
$
(1
)
 
$


 
U.S. Plans
 
Non-U.S. Plans
 
Pension Benefits
 
Other Postretirement Benefits
 
Pension Benefits
 
Six Months Ended
March 31,
 
Six Months Ended
March 31,
 
Six Months Ended
March 31,
 
2017
 
2016
 
2017
 
2016
 
2017
 
(in millions)
Service cost
$

 
$
13

 
$

 
$

 
$
3

Interest cost
18

 
21

 

 

 
5

Expected return on assets
(35
)
 
(35
)
 

 

 
(8
)
Amortization of:


 
 
 


 


 


Prior service credit

 
(1
)
 
(1
)
 
(2
)
 

Actuarial loss
8

 
4

 

 

 
1

Curtailment gain

 
(8
)
 

 

 

Settlement loss
13

 

 

 

 

Total net periodic benefit cost
$
4

 
$
(6
)
 
$
(1
)
 
$
(2
)
 
$
1


19

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


Note 9—Stockholders' Equity
As-Converted Class A Common Stock. The number of shares of each series and class and the number of shares of class A common stock on an as-converted basis at March 31, 2017, are as follows:
(in millions, except conversion rates)
Shares Outstanding
 
Conversion Rate
Into Class A
Common Stock
 
As-converted Class A Common
Stock(1)
U.K.&I preferred stock
2

 
13.3880

 
33

Europe preferred stock
3

 
13.9480

 
44

Class A common stock (2)
1,847

 

 
1,847

Class B common stock
245

 
1.6483

(3) 
405

Class C common stock
14

 
4.0000

 
55

Total
 
 
 
 
2,384

(1) 
Figures in the table may not recalculate exactly due to rounding. As-converted class A common stock is calculated based on unrounded numbers.
(2) 
Class A common stock shares outstanding exclude repurchases traded but not yet settled on or before March 31, 2017.
(3) 
The class B to class A common stock conversion rate is presented on a rounded basis. Conversion calculations for dividend payments are based on a conversion rate rounded to the tenth decimal.

During the three months ended March 31, 2017, the newly-formed Visa Foundation received all Visa Inc. shares that were previously recorded as treasury stock. See Note 12—Income Taxes.
Reduction in as-converted shares. During the six months ended March 31, 2017, total as-converted class A common stock was reduced by 43 million shares at an average price of $83.64 per share. Of the 43 million shares, 41 million were repurchased in the open market using $3.5 billion of operating cash on hand. Additionally, the Company recovered $120 million of VE territory covered losses in accordance with the Europe retrospective responsibility plan. The recovery has the same economic effect on earnings per share as repurchasing the Company's class A common stock, because it reduces the U.K.&I. and Europe preferred stock conversion rates and consequently the as-converted class A common stock share count. See Note 3—U.S. and Europe Retrospective Responsibility Plans.
The following table presents share repurchases in the open market.(1) 
(in millions, except per share data)
Three Months Ended
March 31, 2017
 
Six Months Ended
March 31, 2017
Shares repurchased in the open market (2)
18

 
41

Average repurchase price per share (3)
$
88.45

 
$
83.59

Total cost
$
1,576

 
$
3,469

(1)  
Shares repurchased in the open market reflect repurchases settled during the three and six months ended March 31, 2017. These amounts include repurchases traded but not yet settled on or before September 30, 2016 for the six months, or December 31, 2016 for the three months, and exclude repurchases traded but not yet settled on or before March 31, 2017.
(2) 
All shares repurchased in the open market have been retired and constitute authorized but unissued shares.
(3) 
Figures in the table may not recalculate exactly due to rounding. Average repurchase price per share is calculated based on unrounded numbers.
As of March 31, 2017, the Company's July 2016 share repurchase program had remaining authorized funds of $2.3 billion for share repurchase. All share repurchase programs authorized prior to July 2016 have been completed. In April 2017, the Company's board of directors authorized an additional $5.0 billion share repurchase program.
Under the terms of the Europe retrospective responsibility plan, the Company is entitled to recover VE territory covered losses through a periodic adjustment to the class A common stock conversion rates applicable to the U.K.&I. and Europe preferred stock. See Note 3—U.S. and Europe Retrospective Responsibility Plans.

20

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


The following table presents as-converted U.K.&I. and Europe preferred stock, after the Company recovered VE territory covered losses through a conversion rate adjustment, for the three and six months ended March 31, 2017.
 
Three and Six Months Ended March 31, 2017
(in millions, except per share and conversion rate data)
U.K.&I. Preferred Stock
 
Europe Preferred Stock
Reduction in equivalent number of shares of class A common stock
1

 

(1) 
Effective price per share (2)
$
85.01

 
$
85.01

 
Recovery through conversion rate adjustment
$
119

 
$
1

 
Conversion rate of preferred stock to class A common stock after adjustment
13.388

 
13.948

 
As-converted preferred stock after recovery
33

 
44

 
(1) 
The reduction in equivalent number of shares of class A common stock was less than one million shares.
(2) 
Effective price per share calculated using the volume-weighted average price of the Company's class A common stock over a pricing period in accordance with the Company's current certificates of designations for its series B and C convertible participating preferred stock.
Dividends. In April 2017, the Company’s board of directors declared a quarterly cash dividend of $0.165 per share of class A common stock (determined in the case of class B and C common stock and U.K.&I and Europe preferred stock on an as-converted basis). The cash dividend will be paid on June 6, 2017, to all holders of record of the Company's common and preferred stock as of May 19, 2017. The Company declared and paid $396 million and $795 million in dividends to holders of the Company's common stock during the three and six months ended March 31, 2017.
Note 10—Earnings Per Share
Basic earnings per share is computed by dividing net income available to each class by the weighted-average number of shares of common stock outstanding and participating securities during the period. Net income is allocated to each class of common stock and participating securities based on its proportional ownership on an as-converted basis. The weighted-average number of shares of each class 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 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 U.K.&I and Europe preferred stock and class B and C common stock based on the conversion rates in effect through the period, and (2) incremental shares of class A common stock calculated by applying the treasury stock method to the assumed exercise of employee stock options, the assumed purchase of stock under the Employee Stock Purchase Plan and the assumed vesting of unearned performance shares.
The following table presents earnings per share for the three months ended March 31, 2017.(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
$
332

 
1,854

 
$
0.18

 
 
$
430

 
2,406

(3) 
$
0.18

Class B common stock
73

 
245

 
$
0.30

 
 
$
72

 
245

 
$
0.29

Class C common stock
10

 
15

 
$
0.72

 
 
$
10

 
15

 
$
0.72

Participating securities(4)
15

 
Not presented

 
Not presented

 
 
$
15

 
Not presented

 
Not presented

Net income
$
430

 
 
 
 
 
 
 
 
 
 
 

21

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


The following table presents earnings per share for the six months ended March 31, 2017.(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
$
1,928

 
1,857

 
$
1.04

 
 
$
2,500

 
2,413

(3) 
$
1.04

Class B common stock
420

 
245

 
$
1.71

 
 
$
419

 
245

 
$
1.71

Class C common stock
65

 
16

 
$
4.15

 
 
$
65

 
16

 
$
4.14

Participating securities(4)
87

 
Not presented

 
Not presented

 
 
$
87

 
Not presented

 
Not presented

Net income
$
2,500

 
 
 
 
 
 
 
 
 
 
 
The following table presents earnings per share for the three months ended March 31, 2016.(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
$
1,360

 
1,909

 
$
0.71

 
 
$
1,707

 
2,401

(3) 
$
0.71

Class B common stock
288

 
245

 
$
1.17

 
 
$
288

 
245

 
$
1.17

Class C common stock
55

 
19

 
$
2.85

 
 
$
55

 
19

 
$
2.84

Participating securities(4)
4

 
Not presented

 
Not presented

 
 
$
4

 
Not presented

 
Not presented

Net income
$
1,707

 
 
 
 
 
 
 
 
 
 
 
The following table presents earnings per share for the six months ended March 31, 2016.(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
$
2,910

 
1,923

 
$
1.51

 
 
$
3,648

 
2,416

(3) 
$
1.51

Class B common stock
612

 
245

 
$
2.49

 
 
$
611

 
245

 
$
2.49

Class C common stock
118

 
19

 
$
6.05

 
 
$
117

 
19

 
$
6.04

Participating securities(4)
8

 
Not presented

 
Not presented

 
 
$
8

 
Not presented

 
Not presented

Net income
$
3,648

 
 
 
 
 
 
 
 
 
 
 
(1) 
Figures in the table may not recalculate exactly due to rounding. Earnings per share is calculated based on unrounded numbers.
(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 and six months ended March 31, 2017 and 2016. The weighted-average number of shares of as-converted class C common stock used in the income allocation was 58 million and 63 million for the three and six months ended March 31, 2017, respectively and 77 million and 78 million for the three and six months ended March 31, 2016, respectively. The weighted-average number of shares of preferred stock, included within participating securities, was 34 million of as-converted U.K.&I preferred stock and 44 million of as-converted Europe preferred stock for the three and six months ended March 31, 2017.
(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 and six months ended March 31, 2017 and 2016, because their effect would be dilutive. The computation excludes 3 million of common stock equivalents for the three and six months ended March 31, 2017 and 1 million of common stock equivalents for the three and six months ended March 31, 2016, because their effect would have been anti-dilutive.
(4) 
Participating securities include preferred stock outstanding and unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, such as the Company's U.K.&I and Europe preferred stock, restricted stock awards, restricted stock units and earned performance-based shares. Participating securities' income is allocated based on the weighted-average number of shares of as-converted stock.

22

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


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 six months ended March 31, 2017:
 
Granted
 
Weighted-Average
Grant Date Fair
Value
 
Weighted-Average
Exercise Price
Non-qualified stock options
1,671,344

 
$
13.90

 
$
80.82

Restricted stock units ("RSUs")
3,122,624

 
$
80.96

 
 
Performance-based shares(1)
634,651

 
$
86.37

 
 
(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. The Company recorded share-based compensation cost of $116 million for the six months ended March 31, 2017, net of estimated forfeitures, which are adjusted as appropriate.
Note 12—Income Taxes
In February 2017, the Company completed a reorganization of Visa Europe and certain other legal entities ("legal entity reorganization" or "reorganization") to align the Company's corporate structure to the geographic jurisdictions in which it conducts business operations. As a result of the reorganization, during the three months ended March 31, 2017, the Company recorded a non-recurring, non-cash income tax provision of $1.5 billion primarily related to the elimination of deferred tax balances originally recognized upon the acquisition of Visa Europe. Associated with this reorganization, the newly-formed Visa Foundation received all Visa Inc. shares held by Visa Europe, which were previously recorded as treasury stock.
The effective income tax rates were 84% and 56% for the three and six months ended March 31, 2017, respectively, and 30% and 28% for the three and six months ended March 31, 2016, respectively. The effective tax rate for the three and six months ended March 31, 2017 differs from the effective tax rate in the same periods in the prior fiscal year primarily due to:
the aforementioned $1.5 billion non-recurring, non-cash income tax provision related to the legal entity reorganization recorded in the quarter ended March 31, 2017;
$71 million tax benefit related to Visa Foundation's receipt of Visa Inc. shares mentioned above;
$20 million and $46 million of excess tax benefits related to share-based payments recorded during the three and six months ended March 31, 2017, respectively, as a result of early adoption of Accounting Standards Update 2016-09. See Note 1—Summary of Significant Accounting Policies;
the restrictions on U.S. foreign tax credits that can be claimed for Visa Europe's foreign taxes prior to the aforesaid legal entity reorganization; and
the absence of the non-taxable $255 million revaluation of the Visa Europe put option recorded in the quarter ended December 31, 2015.
During the three and six months ended March 31, 2017, the Company's gross unrecognized tax benefits increased by $23 million and $56 million, respectively. The Company's unrecognized tax benefits that would favorably impact the effective tax rate, if recognized, increased by $69 million and $97 million for the three and six months ended March 31, 2017, respectively. The increase in unrecognized tax benefits is primarily related to various tax positions across several jurisdictions. During the three and six months ended March 31, 2017 and 2016, 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 highly uncertain. It is not reasonably possible to estimate the increase or decrease in unrecognized tax benefits within the next twelve months.

23

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


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 2017
 
Fiscal 2016
 
(in millions)
Balance at October 1
$
981

 
$
1,024

Provision for uncovered legal matters
17

 
1

Accrual of VE territory covered litigation
142

 

Payments on legal matters
(144
)
 
(12
)
Balance at March 31
$
996

 
$
1,013

Accrual Summary—U.S. Covered Litigation
Visa Inc., Visa U.S.A. and Visa International are parties to certain legal proceedings that are covered by the U.S. retrospective responsibility plan, which the Company refers to as the U.S. covered litigation. See Note 3—U.S. and Europe Retrospective Responsibility Plans. An accrual for the U.S. covered litigation and a charge to the litigation provision are recorded when 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 2017
 
Fiscal 2016
 
(in millions)
Balance at October 1
$
978

 
$
1,023

Payments on U.S. covered litigation

 
(11
)
Balance at March 31
$
978

 
$
1,012

Accrual Summary—VE Territory Covered Litigation
Visa Inc., Visa International and Visa Europe are parties to certain legal proceedings that are covered by the Europe retrospective responsibility plan. Unlike the U.S. retrospective responsibility plan, the Europe retrospective responsibility plan does not have an escrow account that is used to fund settlements or judgments. The Company is entitled to recover VE territory covered losses through a periodic adjustment to the conversion rates applicable to the U.K.&I preferred stock and Europe preferred stock. An accrual for the VE territory covered losses and a reduction to stockholders' equity will be recorded when the loss is deemed to be probable and reasonably estimable. See further discussion below under VE Territory Covered Litigation and Note 3—U.S. and Europe Retrospective Responsibility Plans.

24

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


The following table summarizes the activity related to VE territory covered litigation:
 
Fiscal 2017
 
(in millions)
Balance at October 1
$
2

Accrual for VE territory covered litigation
142

Payments on VE territory covered litigation
(144
)
Balance at March 31
$

U.S. Covered Litigation
Interchange Multidistrict Litigation (MDL)
Putative Class Actions. On November 23, 2016, class plaintiffs that signed the 2012 Settlement Agreement filed a petition for writ of certiorari with the U.S. Supreme Court seeking review of the Second Circuit’s decision that vacated the district court’s certification of the merchant class and reversed the approval of the settlement. The Supreme Court denied the petition on March 27, 2017.
On November 30, 2016, the district court entered an order appointing interim counsel for two putative classes of plaintiffs, a “Damages Class” and an “Injunctive Relief Class.” Following the district court’s order, on February 8, 2017, plaintiffs purporting to act on behalf of the putative Damages Class sought leave to file an amended complaint and plaintiffs purporting to act on behalf of the putative Injunctive Relief Class filed a new class complaint, as described below.
The plaintiffs that signed the 2012 Settlement Agreement, acting on behalf of the putative Damages Class, filed a motion requesting leave to file a Third Consolidated Amended Class Action Complaint. The complaint seeks money damages alleged to range in the tens of billions of dollars (subject to trebling), as well as attorneys' fees and injunctive relief, and names as defendants Visa Inc., Visa U.S.A., Visa International, MasterCard Incorporated and MasterCard International Incorporated, and certain U.S. financial institutions. The plaintiffs assert that the proposed complaint updates, among other things, claims for damages and accounts for industry developments. Defendants opposed the Damages Class plaintiffs’ motion on March 10, 2017.
A new group of purported class plaintiffs, acting on behalf of the putative Injunctive Relief Class, filed a class action complaint seeking declaratory and injunctive relief, as well as attorneys’ fees. That complaint seeks, among other things, an injunction against: the setting of default interchange rates; certain Visa Rules relating to merchants, including the honor-all-cards rule; and various transaction fees, including the fixed acquirer network fee. The complaint names as defendants Visa Inc., Visa U.S.A., Visa International, MasterCard Incorporated and MasterCard International Incorporated, and certain U.S. financial institutions.
Individual Merchant Actions. On February 8, 2017, the same day that the putative Damages Class plaintiffs sought leave to file an amended complaint and the putative Injunctive Relief Class plaintiffs filed a new class action complaint, certain other individual merchants filed motions in existing actions in MDL 1720 requesting leave to amend their complaints. Merchants requesting leave to amend assert, among other things, that their proposed complaints add claims for injunctive relief and update claims for damages. Defendants opposed the various merchants’ motions on March 10, 2017. In addition, on February 8, 2017, certain individual merchants filed a new action in federal court which was subsequently included in MDL 1720.
A number of individual merchant actions previously filed have been settled and remain settled, but the settlement agreement with Wal-Mart Stores Inc. automatically terminated upon the exhaustion of appeals concerning the reversal of approval of the 2012 Settlement Agreement. The termination results in a decrease of the “settled” percentage of Visa-branded payment card sales volume of merchants who opted out of the 2012 Settlement Agreement. Consequently, as of the filing date, Visa has reached settlement agreements with individual merchants representing approximately 34% of the Visa-branded payment card sales volume of merchants who opted out of the 2012 Settlement Agreement.

25

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


Unlike the matters above, all of which were filed in federal court or are pending in MDL 1720, one merchant filed a case on February 17, 2017, in Texas state court. The Texas merchant generally pursues claims on allegations similar to those raised in MDL 1720. Based on currently available information, the Company believes this matter may be covered by the U.S. retrospective responsibility plan.
Consumer Interchange Litigation
On December 9, 2016, the Second Circuit denied plaintiffs’ petition for rehearing. On March 9, 2017, plaintiffs filed a petition for writ of certiorari with the U.S. Supreme Court.
VE Territory Covered Litigation
U.K. Merchant Litigation
Since July 2013, in excess of 150 Merchants (the capitalized term "Merchant," when used in this section, means a merchant together with subsidiary/affiliate companies who have issued claims jointly) have commenced proceedings against Visa Europe, Visa Inc. and Visa International relating to interchange rates in Europe, and seek damages for alleged anti-competitive conduct primarily in relation to U.K. domestic and/or Irish domestic and/or intra-EEA interchange fees for credit and debit cards. As of the date of this report, Visa Europe, Visa Inc. and Visa International have settled the claims asserted by 15 Merchants, leaving more than 130 Merchants with outstanding claims.
The trial in relation to claims filed in 2013 by a number of Merchants began in November 2016. Of the 15 settling Merchants, three Merchants settled before the trial commenced and the remaining 12 settled during trial. The trial concluded in March 2017, and a decision is pending with respect to one remaining Merchant.
In addition, over 30 additional Merchants have threatened to commence similar proceedings. Standstill agreements have been entered into with respect to some of those Merchants' claims.
Other Litigation
"Indirect Purchaser" Actions
On January 12, 2017, the appeals court affirmed the trial court's order denying the objector's motion for attorneys' fees and costs. The objector subsequently agreed not to seek any further appeal.
Canadian Competition Proceedings
On March 8, 2017, Visa entered into an agreement in principle with merchant class plaintiffs to settle, on a national basis, the active class actions filed in Quebec, British Columbia, Ontario, Saskatchewan and Alberta. The settlement remains subject to execution of a final settlement agreement and court approval.
Data Pass Litigation
On December 20, 2016, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal as to certain claims against Gamestop Corporation, Webloyalty.com, Inc. and Visa, vacated the dismissal as to certain claims against Webloyalty and Gamestop, and remanded the case to the district court for further proceedings on the remaining claims.
U.S. ATM Access Fee Litigation
On November 17, 2016, the U.S. Supreme Court ordered that the writs of certiorari be dismissed as improvidently granted. On February 13, 2017, plaintiffs in the National ATM Council action filed a renewed application for a preliminary injunction to prohibit Visa and MasterCard from continuing to enforce non-discrimination ATM access fee rules. The application is pending.
Federal Trade Commission
Notice Regarding EMV Chip Debit Cards. On November 22, 2016, the FTC's Bureau of Competition informed Visa that the Bureau had closed its investigation.

26

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


EMV Chip Liability Shift
On March 10, 2017, the plaintiffs filed a motion for class certification. On March 20, 2017, Visa and MasterCard filed a motion to transfer the action to the U.S. District Court for the Eastern District of New York, or, in the alternative, to stay the action. The motion is pending.
Walmart Acceptance Agreement
On February 27, 2017, the Court granted Walmart’s motion to dismiss Visa’s counterclaim for fraudulent inducement. Walmart’s claims and Visa’s remaining counterclaims remain pending.
Broadway Grill
On February 21, 2017, Visa filed a motion to stay the litigation pending the outcome of the federal class actions in MDL 1720. On March 20, 2017, the U.S. Court of Appeals for the Ninth Circuit granted Visa permission to appeal the district court’s order remanding the case to California state court.
On April 5, 2017, plaintiff Nuts for Candy, a California merchant represented by the same counsel that represents Broadway Grill, filed a complaint in California state court containing allegations similar to those raised by Broadway Grill.
Korea Fair Trade Commission
Following complaints lodged by certain financial institutions in Korea, in November 2016, the Korea Fair Trade Commission (KFTC) initiated an investigation into certain pricing changes applicable to Visa financial institutions in Korea. Visa is cooperating with the KFTC.
Ohio Attorney General Civil Investigative Demand
On January 19, 2017, the State of Ohio Office of the Attorney General issued an investigative demand to Visa seeking documents and information focusing on Visa's rules related to the acceptance of Visa debit cards, as well as cardholder verification methods and the routing of Visa debit transactions. Visa is cooperating with the Attorney General.

27


ITEM 2.