Document
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 December 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 January 26, 2018 there were 1,802,624,578 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 12,400,261 shares of class C common stock, par value $0.0001 per share, of Visa Inc. outstanding.


Table of Contents

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

Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1.
Financial Statements
VISA INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
December 31,
2017
 
September 30,
2017
 
(in millions, except par value data)
Assets
 
 
 
Cash and cash equivalents
$
8,138

 
$
9,874

Restricted cash—U.S. litigation escrow (Note 2)
883

 
1,031

Investment securities (Note 3):
 
 
 
Trading
106

 
82

Available-for-sale
3,307

 
3,482

Settlement receivable
1,618

 
1,422

Accounts receivable
1,281

 
1,132

Customer collateral (Note 5)
1,155

 
1,106

Current portion of client incentives
295

 
344

Prepaid expenses and other current assets
504

 
550

Total current assets
17,287

 
19,023

Investment securities, available-for-sale (Note 3)
2,674

 
1,926

Client incentives
557

 
591

Property, equipment and technology, net
2,238

 
2,253

Other assets
1,127

 
1,226

Intangible assets, net 
28,109

 
27,848

Goodwill 
15,162

 
15,110

Total assets
$
67,154

 
$
67,977

Liabilities
 
 
 
Accounts payable
$
108

 
$
179

Settlement payable
2,302

 
2,003

Customer collateral (Note 5)
1,155

 
1,106

Accrued compensation and benefits
389

 
757

Client incentives
2,355

 
2,089

Accrued liabilities
1,224

 
1,129

Current maturities of long-term debt (Note 4)

 
1,749

Accrued litigation (Note 11)
830

 
982

Total current liabilities
8,363

 
9,994

Long-term debt (Note 4)
16,621

 
16,618

Deferred tax liabilities
5,107

 
5,980

Deferred purchase consideration
1,330

 
1,304

Other liabilities
2,332

 
1,321

Total liabilities
33,753

 
35,217

Equity
 
 
 
Preferred stock, $0.0001 par value, 25 shares authorized and 5 shares issued and outstanding as follows:
 
 
 
Series A convertible participating preferred stock, none issued (Note 7)

 

Series B convertible participating preferred stock, 2 shares issued and outstanding at December 31, 2017 and September 30, 2017 (the “UK&I preferred stock”) (Note 7)
2,295

 
2,326

Series C convertible participating preferred stock, 3 shares issued and outstanding at December 31, 2017 and September 30, 2017 (the “Europe preferred stock”) (Note 7)
3,181

 
3,200

Class A common stock, $0.0001 par value, 2,001,622 shares authorized, 1,805 and 1,818 shares issued and outstanding at December 31, 2017 and September 30, 2017, respectively (Note 7)

 

Class B common stock, $0.0001 par value, 622 shares authorized, 245 shares issued and outstanding at December 31, 2017 and September 30, 2017 (Note 7)

 

Class C common stock, $0.0001 par value, 1,097 shares authorized, 12 and 13 shares issued and outstanding at December 31, 2017 and September 30, 2017, respectively (Note 7)

 

Right to recover for covered losses (Note 2)
(5
)
 
(52
)
Additional paid-in capital
16,761

 
16,900

Accumulated income
9,966

 
9,508

Accumulated other comprehensive income (loss), net:
 
 
 
Investment securities, available-for-sale
61

 
73

Defined benefit pension and other postretirement plans
(76
)
 
(76
)
Derivative instruments classified as cash flow hedges
(33
)
 
(36
)
Foreign currency translation adjustments
1,251

 
917

Total accumulated other comprehensive income, net
1,203

 
878

Total equity
33,401

 
32,760

Total liabilities and equity
$
67,154

 
$
67,977


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

3

Table of Contents

VISA INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
 
 
Three Months Ended
December 31,
 
2017
 
2016
 
(in millions, except per share data)
Operating Revenues
 
 
 
Service revenues
$
2,146

 
$
1,918

Data processing revenues
2,147

 
1,892

International transaction revenues
1,666

 
1,489

Other revenues
229

 
203

Client incentives
(1,326
)
 
(1,041
)
Net operating revenues
4,862

 
4,461

 
 
 
 
Operating Expenses 
 
 
 
Personnel
679

 
571

Marketing
223

 
218

Network and processing
160

 
145

Professional fees
92

 
80

Depreciation and amortization
145

 
146

General and administrative
236

 
186

Litigation provision (Note 11)

 
15

Total operating expenses
1,535

 
1,361

Operating income
3,327

 
3,100

 
 
 
 
Non-operating Income (Expense)
 
 
 
Interest expense
(154
)
 
(140
)
Other
66

 
19

Total non-operating expense
(88
)
 
(121
)
Income before income taxes
3,239

 
2,979

Income tax provision (Note 10)
717

 
909

Net income
$
2,522

 
$
2,070

 
 
 
 
Basic earnings per share (Note 8)
 
 
 
Class A common stock
$
1.07

 
$
0.86

Class B common stock
$
1.77

 
$
1.41

Class C common stock
$
4.30

 
$
3.43

 
 
 
 
Basic weighted-average shares outstanding (Note 8)
 
 
 
Class A common stock
1,811

 
1,860

Class B common stock
245

 
245

Class C common stock
13

 
17

 
 
 
 
Diluted earnings per share (Note 8)
 
 
 
Class A common stock
$
1.07

 
$
0.86

Class B common stock
$
1.77

 
$
1.41

Class C common stock
$
4.29

 
$
3.42

 
 
 
 
Diluted weighted-average shares outstanding (Note 8)
 
 
 
Class A common stock
2,353

 
2,421

Class B common stock
245

 
245

Class C common stock
13

 
17



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

4

Table of Contents

VISA INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 
 
Three Months Ended
December 31,
 
2017
 
2016
 
(in millions)
Net income
$
2,522

 
$
2,070

Other comprehensive income (loss), net of tax:
 
 
 
Investment securities, available-for-sale:
 
 
 
Net unrealized gain (loss)
9

 
(3
)
Income tax effect
(3
)
 
(1
)
Reclassification adjustment for net gain realized in net income
(28
)
 

Income tax effect
10

 

Defined benefit pension and other postretirement plans:
 
 
 
Amortization of actuarial loss and prior service credit realized in net income

 
6

Income tax effect

 
(2
)
Derivative instruments classified as cash flow hedges:
 
 
 
Net unrealized (loss) gain
(1
)
 
74

Income tax effect
(5
)
 
(7
)
Reclassification adjustment for net loss realized in net income
11

 
12

Income tax effect
(2
)
 
(2
)
Foreign currency translation adjustments
334

 
(988
)
Other comprehensive income (loss), net of tax
325

 
(911
)
Comprehensive income
$
2,847

 
$
1,159




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

5

Table of Contents

VISA INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
 
Three Months Ended
December 31,
 
2017
 
2016
 
(in millions)
Operating Activities
 
 
 
Net income
$
2,522


$
2,070

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Client incentives
1,326


1,041

Share-based compensation (Note 9)
68


45

Depreciation and amortization of property, equipment, technology and intangible assets
145


146

Deferred income taxes
(919
)

77

Right to recover for covered losses recorded in equity (Note 2)
(3
)

(94
)
Other
(23
)

13

Change in operating assets and liabilities:




Settlement receivable
(180
)

56

Accounts receivable
(146
)

(89
)
Client incentives
(986
)

(1,129
)
Other assets
92


66

Accounts payable
(51
)

(102
)
Settlement payable
275


79

Accrued and other liabilities
794


316

Accrued litigation (Note 11)
(152
)

13

Net cash provided by operating activities
2,762


2,508

Investing Activities
 
 
 
Purchases of property, equipment, technology and intangible assets
(141
)

(171
)
Investment securities, available-for-sale:




Purchases
(1,636
)

(1,032
)
Proceeds from maturities and sales
1,076


788

Purchases of / contributions to other investments
(6
)

(2
)
Net cash used in investing activities
(707
)

(417
)
Financing Activities
 
 
 
Repurchase of class A common stock (Note 7)
(1,778
)
 
(1,893
)
Repayments of long-term debt (Note 4)
(1,750
)
 

Dividends paid (Note 7)
(458
)
 
(399
)
Proceeds from issuance of commercial paper

 
566

Payments from litigation escrow account—U.S. retrospective responsibility plan (Note 2 and Note 11)
150

 

Cash proceeds from issuance of common stock under employee equity plans
53

 
56

Restricted stock and performance-based shares settled in cash for taxes
(88
)
 
(60
)
Net cash used in financing activities
(3,871
)
 
(1,730
)
Effect of exchange rate changes on cash and cash equivalents
80

 
(156
)
(Decrease) increase in cash and cash equivalents
(1,736
)
 
205

Cash and cash equivalents at beginning of period
9,874

 
5,619

Cash and cash equivalents at end of period
$
8,138

 
$
5,824

Supplemental Disclosure
 
 
 
Income taxes paid, net of refunds
$
183

 
$
96

Interest payments on debt (Note 4)
$
241

 
$
244

Accruals related to purchases of property, equipment, technology and intangible assets
$
26

 
$
69

 

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

6

Table of Contents

VISA INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2017
(UNAUDITED)
Note 1—Summary of Significant Accounting Policies
Organization. Visa Inc. ("Visa" or the "Company") is a global payments technology company that enables fast, secure and reliable electronic payments across more than 200 countries and territories. 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, Visa Technology & Operations LLC and CyberSource Corporation, operate one of the world’s largest retail electronic payments networks — VisaNet — which facilitates authorization, clearing and settlement of payment transactions and enables the Company to provide its 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, 2017 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. The impact of the new standard to future financial results is unknowable as it is not possible to estimate the impact to the recognition of new customer contracts which may be executed in future periods. The Company has completed an assessment of its existing customer contracts through December 31, 2017. Application of the new standard to consolidated financial statements for the first quarter of fiscal 2018 would not have resulted in a material impact. The Company will continue to assess the impact of the new standard as new customer contracts are executed going forward.
In March 2016, the FASB issued ASU 2016-05, which clarifies that a change in the counterparty to a derivative instrument that has been designated as the hedging instrument under Topic 815, Derivatives and Hedging, does not, in and of itself, require dedesignation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The Company adopted the standard effective October 1, 2017. The adoption did not have a material impact on the consolidated financial statements.

7

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


In March 2016, the FASB issued ASU 2016-06, which clarifies the requirements for assessing whether contingent call/put options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment is required to assess the embedded call/put options solely in accordance with a four-step decision sequence. The Company adopted the standard effective October 1, 2017. The adoption did not have a material impact on the consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07, which eliminates the requirement that an entity retroactively adopt the equity method of accounting if an investment qualifies for use of the equity method as a result of an increase in the level of ownership or degree of influence. The equity method investor is required to add the cost of acquiring the additional interest in the investee to the current basis of the investor's previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. The Company adopted the standard effective October 1, 2017. The adoption did not have a material impact on the consolidated financial statements.
Note 2—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, certain litigation referred to as 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 $0.9 billion at December 31, 2017 and $1.0 billion at September 30, 2017. The Company paid $150 million from the litigation escrow account during the three months ended December 31, 2017. See Note 11—Legal Matters.
The accrual related to the U.S. covered litigation could be either higher or lower than the litigation escrow account balance. The Company did not record an additional accrual for the U.S. covered litigation during the three months ended December 31, 2017. See Note 11—Legal Matters.
Europe Retrospective Responsibility Plan
The Company, Visa Europe or their affiliates are parties to certain existing and potential litigation relating to the setting of multilateral interchange fee rates in the Visa Europe territory (the "VE territory covered litigation"). Under the terms of the Europe retrospective responsibility plan, the Company is entitled to recover certain losses resulting from VE territory covered litigation (the "VE territory covered losses") through a periodic adjustment to the class A common stock conversion rates applicable to the UK&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 three months ended December 31, 2017, the Company recovered $50 million of VE territory covered losses through adjustments to the class A common stock conversion rates applicable to the UK&I and Europe preferred stock, from 13.077 and 13.948, respectively, at September 30, 2017 to 12.966 and 13.893, respectively, at December 31, 2017.

8

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


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 three months ended December 31, 2017. VE territory covered losses incurred reflect settlements with merchants and additional legal costs. See Note 11—Legal Matters.
 
Preferred Stock
 
Right to Recover for Covered Losses
 
UK&I
 
Europe
 
 
(in millions)
Balance as of September 30, 2017
$
2,326

 
$
3,200

 
$
(52
)
VE territory covered losses incurred

 

 
(3
)
Recovery through conversion rate adjustment
(31
)
 
(19
)
 
50

Balance as of December 31, 2017
$
2,295

 
$
3,181

 
$
(5
)
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 December 31, 2017 and September 30, 2017.(1)
 
December 31, 2017
 
September 30, 2017
 
As-Converted Value of Preferred Stock(2)
 
Book Value of Preferred Stock
 
As-Converted Value of Preferred Stock(3)
 
Book Value of Preferred Stock
 
(in millions)
UK&I preferred stock
$
3,667

 
$
2,295

 
$
3,414

 
$
2,326

Europe preferred stock
5,001

 
3,181

 
4,634

 
3,200

Total
8,668

 
5,476

 
8,048

 
5,526

Less: right to recover for covered losses
(5
)
 
(5
)
 
(52
)
 
(52
)
Total recovery for covered losses available
$
8,663

 
$
5,471

 
$
7,996

 
$
5,474

(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 UK&I and Europe preferred stock outstanding, respectively, as of December 31, 2017; (b)12.966 and 13.893, the class A common stock conversion rate applicable to the UK&I and Europe preferred stock as of December 31, 2017, respectively; and (c) $114.02, Visa's class A common stock closing stock price as of December 31, 2017.
(3) 
The as-converted value of preferred stock is calculated as the product of: (a) 2 million and 3 million shares of the UK&I and Europe preferred stock outstanding, respectively, as of September 30, 2017; (b)13.077 and 13.948, the class A common stock conversion rate applicable to the UK&I and Europe preferred stock as of September 30, 2017, respectively; and (c) $105.24, Visa's class A common stock closing stock price as of September 30, 2017.


9

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


Note 3—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
 
December 31,
2017
 
September 30,
2017
 
December 31,
2017
 
September 30,
2017
 
(in millions)
Assets
 
 
 
 
 
 
 
Cash equivalents and restricted cash:
 
 
 
 
 
 
 
Money market funds
$
5,918

 
$
5,935

 
 
 
 
U.S. government-sponsored debt securities
 
 
 
 
$
567

 
$
2,870

Investment securities, trading:
 
 
 
 
 
 
 
Equity securities
106

 
82

 
 
 
 
Investment securities, available-for-sale:
 
 
 
 
 
 
 
U.S. government-sponsored debt securities
 
 
 
 
3,530

 
3,663

U.S. Treasury securities
2,337

 
1,621

 
 
 
 
Equity securities
114

 
124

 
 
 
 
Prepaid and other current assets:
 
 
 
 
 
 
 
Foreign exchange derivative instruments
 
 
 
 
26

 
18

Total
$
8,475

 
$
7,762

 
$
4,123

 
$
6,551

Liabilities
 
 
 
 
 
 
 
Accrued liabilities:
 
 
 
 
 
 
 
Foreign exchange derivative instruments
 
 
 
 
$
65

 
$
98

Total
$

 
$

 
$
65

 
$
98

There were no transfers between Level 1 and Level 2 assets during the three months ended December 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, 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, 2017.
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 three months ended December 31, 2017 or 2016. These investments totaled $99 million and $94 million at December 31, 2017 and September 30, 2017, respectively, and are classified in other assets on the consolidated balance sheets.

10

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


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 December 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 December 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:
 
December 31, 2017
 
September 30, 2017
 
Carrying Amount
 
Estimated Fair Value
 
Carrying Amount
 
Estimated Fair Value
 
(in millions)
1.20% Senior Notes due December 2017
$

 
$

 
$
1,749

 
$
1,751

2.20% Senior Notes due December 2020
2,991

 
2,998

 
2,990

 
3,031

2.15% Senior Notes due September 2022
993

 
986

 
993

 
997

2.80% Senior Notes due December 2022
2,240

 
2,283

 
2,240

 
2,301

3.15% Senior Notes due December 2025
3,969

 
4,089

 
3,967

 
4,098

2.75% Senior Notes due September 2027
740

 
740

 
740

 
737

4.15% Senior Notes due December 2035
1,486

 
1,665

 
1,485

 
1,637

4.30% Senior Notes due December 2045
3,462

 
3,983

 
3,463

 
3,873

3.65% Senior Notes due September 2047
740

 
770

 
740

 
746

Total
$
16,621

 
$
17,514

 
$
18,367

 
$
19,171

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 December 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 December 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.
Investments
Available-for-sale investment securities. The Company had $110 million in gross unrealized gains and $12 million in gross unrealized losses at December 31, 2017. There were $120 million gross unrealized gains and $4 million gross unrealized losses at September 30, 2017. A majority of the Company's available-for-sale investment securities with stated maturities are due within one to two years.

11

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


Note 4—Debt
The Company had outstanding debt as follows:
 
December 31, 2017
 
September 30, 2017
 
 
 
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

 
$
(1
)
 
$
1,749

 
1.37
%
Total current maturities of long-term debt

 

 

 
1,750

 
(1
)
 
1,749

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.20% Senior Notes due December 2020
3,000

 
(9
)
 
2,991

 
3,000

 
(10
)
 
2,990

 
2.30
%
2.15% Senior Notes due September 2022
1,000

 
(7
)
 
993

 
1,000

 
(7
)
 
993

 
2.30
%
2.80% Senior Notes due December 2022
2,250

 
(10
)
 
2,240

 
2,250

 
(10
)
 
2,240

 
2.89
%
3.15% Senior Notes due December 2025
4,000

 
(31
)
 
3,969

 
4,000

 
(33
)
 
3,967

 
3.26
%
2.75% Senior Notes due September 2027
750

 
(10
)
 
740

 
750

 
(10
)
 
740

 
2.91
%
4.15% Senior Notes due December 2035
1,500

 
(14
)
 
1,486

 
1,500

 
(15
)
 
1,485

 
4.23
%
4.30% Senior Notes due December 2045
3,500

 
(38
)
 
3,462

 
3,500

 
(37
)
 
3,463

 
4.37
%
3.65% Senior Notes due September 2047
750

 
(10
)
 
740

 
750

 
(10
)
 
740

 
3.73
%
Total long-term debt
16,750

 
(129
)
 
16,621

 
16,750

 
(132
)
 
16,618

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total debt
$
16,750

 
$
(129
)
 
$
16,621

 
$
18,500

 
$
(133
)
 
$
18,367

 
 
Senior Notes
On October 11, 2017, the Company redeemed all of the $1.75 billion principal amount outstanding of the 2017 Notes. The redemption was funded with net proceeds from new fixed-rate senior notes issued by the Company in September 2017. As a result of this redemption, we recorded a $1 million loss on extinguishment of debt during the three months ended December 31, 2017.
The Company recognized interest expense for the senior notes of $138 million and $125 million for the three months ended December 31, 2017 and 2016, respectively, as non-operating expense.
Note 5—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 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 $71.3 billion during the three months ended December 31, 2017, compared to $67.7 billion during the three months ended September 30, 2017. Of these amounts, $4.5 billion and $2.8 billion were covered by collateral at December 31, 2017 and September 30, 2017, respectively. The total available collateral balances presented in the table below 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.

12

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


The Company maintained collateral as follows:

December 31,
2017
 
September 30,
2017
 
(in millions)
Cash equivalents(1)
$
1,569

 
$
1,490

Pledged securities at market value
169

 
167

Letters of credit
1,319

 
1,316

Guarantees
617

 
941

Total
$
3,674

 
$
3,914

(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 fair value of the settlement risk guarantee is estimated based on a proprietary probability-weighted model and was approximately $3 million at December 31, 2017 and September 30, 2017. These amounts are reflected in accrued liabilities on the Company's consolidated balance sheets.
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 all eligible 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. The components of net periodic benefit cost presented below include the U.S. pension and other postretirement benefit plans and the non-U.S. pension plans, comprising only the Visa Europe plans. Disclosures relating to other non-U.S. pension benefit plans are not included as they are immaterial, individually and in aggregate.
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Plans
 
Non-U.S. Plans
 
Pension Benefits
 
Other Postretirement Benefits
 
Pension Benefits
 
Three Months Ended
December 31,
 
Three Months Ended
December 31,
 
Three Months Ended
December 31,
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
(in millions)
Service cost
$

 
$

 
$

 
$

 
$
1

 
$
2

Interest cost
8

 
9

 

 

 
3

 
3

Expected return on plan assets
(17
)
 
(18
)
 

 

 
(5
)
 
(4
)
Amortization of:


 
 
 


 


 


 
 
Prior service credit

 

 

 
(1
)
 

 

Actuarial loss

 
4

 

 

 

 

Settlement loss

 
2

 

 

 

 

Total net periodic benefit cost
$
(9
)
 
$
(3
)
 
$

 
$
(1
)
 
$
(1
)
 
$
1


13

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


Note 7—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 December 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)
UK&I preferred stock
2

 
12.9660

 
32

Europe preferred stock
3

 
13.8930

 
44

Class A common stock(2)
1,805

 

 
1,805

Class B common stock
245

 
1.6483

(3) 
405

Class C common stock
12

 
4.0000

 
49

Total
 
 
 
 
2,335

(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 December 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.
Reduction in as-converted shares. During the three months ended December 31, 2017, total as-converted class A common stock was reduced by 17 million shares at an average price of $110.27 per share. Of the 17 million shares, 16 million were repurchased in the open market using $1.8 billion of operating cash on hand. Additionally, the Company recovered $50 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 UK&I and Europe preferred stock conversion rates and consequently the as-converted class A common stock share count. See Note 2—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
December 31, 2017
Shares repurchased in the open market(2)
16

Average repurchase price per share(3)
$
110.24

Total cost
$
1,778

(1)  
Shares repurchased in the open market reflect repurchases settled during the three months ended December 31, 2017. These amounts include repurchases traded but not yet settled on or before September 30, 2017 and exclude repurchases traded but not yet settled on or before December 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 December 31, 2017, the Company's April 2017 share repurchase program had remaining authorized funds of $2.1 billion for share repurchase. All share repurchase programs authorized prior to April 2017 have been completed. In January 2018, the Company's board of directors authorized an additional $7.5 billion share repurchase program.
Under the terms of the Europe retrospective responsibility plan, the Company is entitled to recover VE territory covered losses through periodic adjustments to the class A common stock conversion rates applicable to the UK&I and Europe preferred stock. See Note 2—U.S. and Europe Retrospective Responsibility Plans.

14

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


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

 

Effective price per share(2)
$
111.32

 
$
111.32

Recovery through conversion rate adjustment
$
31

 
$
19

(1) 
The reduction in equivalent number of shares of class A common stock was less than one million shares for both series of preferred stock.
(2) 
Effective price per share is 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 January 2018, the Company’s board of directors declared a quarterly cash dividend of $0.21 per share of class A common stock (determined in the case of class B and C common stock and UK&I and Europe preferred stock on an as-converted basis). The cash dividend will be paid on March 6, 2018, to all holders of record of the Company's common and preferred stock as of February 16, 2018. The Company declared and paid $458 million in dividends to holders of the Company's common stock during the three months ended December 31, 2017.
Note 8—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 7—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 UK&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 December 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
$
1,945

 
1,811

 
$
1.07

 
 
$
2,522

 
2,353

(3) 
$
1.07

Class B common stock
435

 
245

 
$
1.77

 
 
$
434

 
245

 
$
1.77

Class C common stock
54

 
13

 
$
4.30

 
 
$
54

 
13

 
$
4.29

Participating securities(4)
88

 
Not presented

 
Not presented

 
 
$
87

 
Not presented

 
Not presented

Net income
$
2,522

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

15

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


The following table presents earnings per share for the three months ended December 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
$
1,594

 
1,860

 
$
0.86

 
 
$
2,070

 
2,421

(3) 
$
0.86

Class B common stock
347

 
245

 
$
1.41

 
 
$
346

 
245

 
$
1.41

Class C common stock
57

 
17

 
$
3.43

 
 
$
57

 
17

 
$
3.42

Participating securities(4)
72

 
Not presented

 
Not presented

 
 
$
72

 
Not presented

 
Not presented

Net income
$
2,070

 
 
 
 
 
 
 
 
 
 
 
(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 months ended December 31, 2017 and 2016. The weighted-average number of shares of as-converted class C common stock used in the income allocation was 51 million and 67 million for the three months ended December 31, 2017 and 2016, respectively. The weighted-average number of shares of preferred stock, included within participating securities, was 32 million and 35 million of as-converted UK&I preferred stock for the three months ended December 31, 2017 and 2016, respectively, and 44 million of as-converted Europe preferred stock for the three months ended December 31, 2017 and 2016.
(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, 2017 and 2016, because their effect would be dilutive. The computation excludes 2 million and 3 million of common stock equivalents for the three months ended December 31, 2017 and 2016, respectively, 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 UK&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.
Note 9—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, 2017:
 
Granted
 
Weighted-Average
Grant Date Fair
Value
 
Weighted-Average
Exercise Price
Non-qualified stock options
1,622,760

 
$
17.88

 
$
109.82

Restricted stock units ("RSUs")
2,626,011

 
$
109.82

 
 
Performance-based shares(1)
641,498

 
$
120.11

 
 
(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 $68 million for the three months ended December 31, 2017, net of estimated forfeitures, which are adjusted as appropriate.

16

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


Note 10—Income Taxes
The effective income tax rates were 22% and 31% for the three months ended December 31, 2017 and 2016, respectively. The effective tax rate for the three months ended December 31, 2017 differs from the effective tax rate in the same prior-year period primarily due to U.S. tax reform legislation, commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act”), enacted on December 22, 2017. The Tax Act transitions the U.S. tax system to a new territorial system and lowers the statutory federal corporate income tax rate from 35% to 21%.
The reduction of the statutory federal corporate tax rate to 21% became effective on January 1, 2018. In fiscal 2018, the Company’s statutory federal corporate rate is a blended rate of 24.5%, which will be reduced to 21% in fiscal 2019 and thereafter.
As a result of the reduction in the federal corporate tax rate, the Company remeasured its net deferred tax liabilities as of the enactment date of the Tax Act. The deferred tax remeasurement resulted in a one-time, non-cash tax benefit estimated to be approximately $1.1 billion, recorded in the three months ended December 31, 2017.
In transitioning to the new territorial tax system, the Tax Act requires the Company to include certain untaxed foreign earnings of non-U.S. subsidiaries in its fiscal 2018 taxable income. Such foreign earnings are subject to a one-time tax at 15.5% on the amount held in cash or cash equivalents, and at 8% on the remaining non-cash amount. The 15.5% and 8% tax, collectively referred to as the “transition tax”, was estimated to be $1.1 billion, and was recorded in the three months ended December 31, 2017. The Company intends to elect to pay the transition tax over a period of eight years as permitted by the Tax Act.
The above-mentioned accounting impacts of the deferred tax remeasurement and transition tax are provisional, based on currently available information and technical guidance on the interpretations of the new law. The Company continues to obtain and analyze additional information and guidance as they become available to complete the accounting for the tax impacts of the Tax Act. Additional information currently unavailable that is needed to complete the analysis includes, but is not limited to, foreign tax returns and foreign tax documentation for the computation of foreign tax credits, the final determination of the untaxed foreign earnings subject to the transition tax, and the final determination of the net deferred tax liabilities subject to remeasurement. The provisional accounting impacts may change in future reporting periods until the accounting analysis is finalized, which will occur no later than the first quarter of fiscal 2019, as permitted by Staff Accounting Bulletin 118.
The Tax Act also introduces several tax provisions, including:
Tax on global intangible low-tax income, which, in general, is determined annually based on the Company’s aggregate foreign subsidiaries’ income in excess of certain qualified business asset investment return. This provision is effective for the Company on October 1, 2018. The Company needs additional information to complete its analysis on whether to adopt an accounting policy to account for the tax effects of global intangible low-tax income in the period that it is subject to such tax, or to provide deferred taxes for book and tax basis differences that, upon reversal, may be subject to such tax. Hence, the Company has not recorded any tax on global intangible low-tax income in the three months ended December 31, 2017. The Company will make an accounting policy election no later than the first quarter of fiscal 2019.
Base erosion and anti-abuse tax, which, in general, functions like a minimum tax that partially disallows deductions for certain related party transactions. This new minimum tax is determined on a year-by-year basis, and this provision is effective for the Company on October 1, 2018. Hence, no base erosion anti-abuse tax was recorded in the three months ended December 31, 2017.
Deduction for foreign-derived intangible income, which, in general, allows a deduction of certain intangible income derived from serving foreign markets. This provision is effective for the Company on October 1, 2018. Hence, the Company has not recorded the impact of this provision in the three months ended December 31, 2017.

17

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


Other new tax provisions, which disallow certain deductions related to entertainment expenses, fringe benefits provided to employees, executive compensation, and fines or penalties or similar payments to governments. The Company has recorded provisional amounts for the tax effects of these new provisions in the three months ended December 31, 2017, based on information currently available. The provisional amounts may change in future reporting periods when additional information is obtained and analyzed, which will occur no later than the first quarter of fiscal 2019.
During the three months ended December 31, 2017, the Company's gross unrecognized tax benefits increased by $44 million. The Company's net unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate increased by $38 million. The increase in unrecognized tax benefits is primarily related to various tax positions across several jurisdictions. During the three months ended December 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.
Note 11—Legal Matters
The Company is party to various legal and regulatory proceedings. Some of these proceedings involve complex claims that are subject to substantial uncertainties and unascertainable damages. Accordingly, except as disclosed, the Company has not established reserves or ranges of possible loss related to these proceedings, as at this time in the proceedings, the matters do not relate to a probable loss and/or 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:
 
Three Months Ended
 
December 31, 2017
 
December 31, 2016
 
(in millions)
Balance at beginning of period
$
982

 
$
981

Provision for uncovered legal matters

 
15

Accrual of VE territory covered litigation

 
86

Payments on legal matters
(152
)
 
(88
)
Balance at end of period
$
830

 
$
994

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 2—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 a 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.

18

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


The following table summarizes the activity related to U.S. covered litigation:
 
Three Months Ended
 
December 31, 2017
 
December 31, 2016
 
(in millions)
Balance at beginning of period
$
978

 
$
978

Payments on U.S. covered litigation
(150
)
 

Balance at end of period
$
828

 
$
978

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 periodic adjustments to the conversion rates applicable to the UK&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 2—U.S. and Europe Retrospective Responsibility Plans.
The following table summarizes the activity related to VE territory covered litigation:
 
Three Months Ended
 
December 31, 2017
 
December 31, 2016
 
(in millions)
Balance at beginning of period
$
1

 
$
2

Accrual for VE territory covered litigation

 
86

Payments on VE territory covered litigation
(1
)
 
(88
)
Balance at end of period
$

 
$

U.S. Covered Litigation
Interchange Multidistrict Litigation (MDL) – Individual Merchant Actions
A number of individual merchant actions previously filed have been settled, and remain settled. In addition, following the automatic termination of the settlement agreement with Wal-Mart Stores Inc., Visa and Wal-Mart Stores Inc. entered into a new, unconditional settlement agreement on October 31, 2017. Consequently, as of the filing date, Visa has reached settlement agreements with individual merchants representing approximately 51% of the Visa-branded payment card sales volume of merchants who opted out of the 2012 Settlement Agreement.
VE Territory Covered Litigation
UK Merchant Litigation
Since July 2013, in excess of 300 Merchants (the capitalized term "Merchant," when used in this section, means a merchant together with subsidiary/affiliate companies that are party to the same claim) have commenced proceedings against Visa Europe, Visa Inc. and Visa International relating to interchange rates in Europe. They seek damages for alleged anti-competitive conduct in relation to one or more of the following types of interchange fees for credit and debit card transactions: UK domestic, Irish domestic, other European domestic, intra-European Economic Area and/or other inter-regional. As of the filing date, Visa Europe, Visa Inc. and Visa International have settled the claims asserted by over 75 Merchants, leaving more than 200 Merchants with outstanding claims.

19

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


In November 2016, a trial commenced relating to claims filed by a number of Merchants. All of these Merchants except one settled before the trial concluded in March 2017. On November 30, 2017, the court found entirely in Visa’s favor and entered judgment dismissing the remaining claim. An appeal has been lodged, and the Court of Appeal listed the matter for hearing in April 2018. A further judgment on exemption issues is expected to be released in early 2018, which will not change the overall finding on liability set out in the November 30, 2017 judgment.
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. While the amount of interchange being challenged could be substantial, these claims have not yet been filed and their full scope is not yet known. The Company has learned that several additional European entities have indicated that they may also bring similar claims and the Company anticipates additional claims in the future.
Other Litigation
Canadian Competition Proceedings
Merchant Litigation. The court in Quebec held a class certification hearing in November 2017 and reserved decision.
Black Card
On December 28, 2017, Black Card LLC ("Black Card") filed a lawsuit against Visa Inc., Visa U.S.A. Inc., and certain Visa member financial institutions in the U.S. District Court for the Western District of Wisconsin. The complaint alleges that defendants conspired to impede Black Card's business in violation of Section 1 of the Sherman Act and fraudulently concealed their conduct. Black Card seeks treble damages, post-judgment interest, and attorneys' fees.
This action follows a lawsuit filed by Black Card in the U.S. District Court for the District of Wyoming in February 2015 relating to a contractual dispute. The District Court in Wyoming granted Visa's motions for summary judgment and the matter was dismissed. Black Card appealed this decision to the U.S. Court of Appeals for the Tenth Circuit on May 10, 2017.

20

Table of Contents

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,” "us," “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 that relate to, among other things, our future operations, prospects, developments, strategies and growth of our business; integration of Visa Europe, including the migration of European activity to VisaNet and anticipated benefits for our European clients; anticipated expansion of our products in certain countries; industry developments; expectations regarding litigation matters, investigations and proceedings; timing and amount of stock repurchases; sufficiency of sources of liquidity and funding; effectiveness of our risk management programs; and expectations regarding the impact of recent accounting pronouncements on our consolidated financial statements. Forward-looking statements generally are identified by words such as "believes," "estimates," "expects," "intends," "may," "projects," “could," "should," "will," "continue" and other similar expressions. All statements other than statements of historical fact could be forward-looking statements, which speak only as of the date they are made, are not guarantees of future performance and are subject to certain risks, uncertainties and other factors, many of which are beyond our control and are difficult to predict. We describe risks and uncertainties that could cause actual results to differ materially from those expressed in, or implied by, any of these forward-looking statements in our SEC filings, including our Annual Report on Form 10-K, for the year ended September 30, 2017 and our subsequent reports on Forms 10-Q and 8-K. Except as required by law, we do not intend to update or revise any forward-looking statements as a result of new information, future events or otherwise.

21

Table of Contents

Overview
Visa is a global payments technology company that enables fast, secure and reliable electronic payments across more than 200 countries and territories. We facilitate global commerce through the transfer of value and information among a global network of consumers, merchants, financial institutions, businesses, strategic partners and government entities. Our advanced transaction processing network, VisaNet, enables authorization, clearing and settlement of payment transactions and allows us to provide our financial institution and merchant clients a wide range of products, platforms and value-added services.
Overall economic conditions. Our business is affected by overall economic conditions and consumer spending. Our business performance during the three months ended December 31, 2017 reflects continued uneven economic growth around the world.
U.S. Tax Reform Legislation. On December 22, 2017, the U.S. government enacted comprehensive tax reform legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act transitions the U.S. tax system to a new territorial system and lowers the statutory federal corporate income tax rate. As a result of the reduction in the federal corporate income tax rate, we remeasured our net deferred tax liabilities as of the enactment date and the remeasurement resulted in a one-time, non-cash tax benefit estimated to be approximately $1.1 billion, recorded in the three months ended December 31, 2017. In transitioning to the new territorial system, the Tax Act requires us to include certain untaxed foreign earnings of non-U.S. subsidiaries in our fiscal 2018 taxable income. This tax, referred to as the "transition tax", was estimated to be $1.1 billion and recorded in the three months ended December 31, 2017. See Note 10—Income Taxes to our unaudited consolidated financial statements.
Financial highlights. Our financial results for the three months ended December 31, 2017 reflect the impact of certain significant items that we believe are not indicative of our operating performance in these or future periods, as they were either non-recurring or had no cash impact. There were no comparable adjustments recorded for the three months ended December 31, 2016. Our as-reported U.S. GAAP and adjusted non-GAAP net income and diluted earnings per share for these periods are as follows:
 
Three Months Ended December 31,
 
 
(in millions, except percentages and per share data)
2017
 
2016
 
%
Change(1)
Net income, as reported
$
2,522

 
$
2,070

 
22
%
Diluted earnings per share, as reported
$
1.07

 
$
0.86

 
25
%
Net income, as adjusted(2)
$
2,536

 
$
2,070

 
23
%
Diluted earnings per share, as adjusted(2)
$
1.08

 
$
0.86

 
26
%
(1) 
Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.
(2) 
For a full reconciliation of our adjusted financial results, see tables in Adjusted financial results below.
We recorded net operating revenues of $4.9 billion for the three months ended December 31, 2017, an increase of 9% over the prior-year comparable period, reflecting continued growth in nominal payments volume, processed transactions and nominal cross-border volume. The effect of exchange rate movements in the three months ended December 31, 2017, as partially mitigated by our hedging program, resulted in an approximately one percentage point positive impact to our net operating revenue growth.
Total operating expenses for the three months ended December 31, 2017 were $1.5 billion, an increase of 13%, over the prior-year comparable period. The increase in the period was primarily due to increases in personnel expenses, general and administrative expenses, network and processing expenses and professional fees as we continue to invest to support growth.

22

Table of Contents

Adjusted financial results. Our financial results for the three months ended December 31, 2017 reflect the impact of certain significant items that we do not believe are indicative of our ongoing operating performance in this period or future periods, as they were either non-recurring or had no cash impact. As such, we believe the presentation of adjusted financial results excluding the following items provides a clearer understanding of our operating performance for the periods presented. There were no comparable adjustments recorded for the three months ended December 31, 2016.
Remeasurement of deferred tax balances. During the three months ended December 31, 2017, in connection with the Tax Act's reduction of the corporate income tax rate, we remeasured our net deferred tax liabilities as of the enactment date, resulting in the recognition of a non-recurring, non-cash income tax benefit estimated to be approximately $1.1 billion.
Transition tax on foreign earnings. During the three months ended December 31, 2017, in connection with the Tax Act's requirement that we include certain untaxed foreign earnings of non-U.S. subsidiaries in our fiscal 2018 taxable income, we recorded a one-time transition tax estimated to be approximately $1.1 billion.
See Note 10—Income Taxes to our unaudited consolidated financial statements.
Adjusted financial results 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 financial measures calculated in accordance with U.S. GAAP, to our respective non-GAAP adjusted financial measures for the three months ended December 31, 2017. There were no comparable adjustments recorded for the three months ended December 31, 2016.
 
Three Months Ended
December 31, 2017
(in millions, except per share data)
Income Tax Provision
 
Net Income
 
Diluted Earnings Per Share(1)
As reported
$
717

 
$
2,522

 
$
1.07

Remeasurement of deferred tax balances
1,133

 
(1,133
)
 
(0.48
)
Transition tax on foreign earnings
(1,147
)
 
1,147

 
0.49

As adjusted
$
703

 
$
2,536

 
$
1.08

(1) 
Figures in the table may not recalculate exactly due to rounding. Diluted earnings per share and its respective total are calculated based on unrounded numbers.
Common stock repurchases. During the three months ended December 31, 2017, we repurchased 16 million shares of our class A common stock in the open market using $1.8 billion of cash on hand. As of December 31, 2017, we had remaining authorized funds of $2.1 billion for share repurchase. In January 2018, our board of directors authorized an additional $7.5 billion share repurchase program. See Note 7—Stockholders' Equity to our unaudited consolidated financial statements.

23

Table of Contents

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 high single-digit growth in the United States, driven mainly by consumer credit. Growth on a constant-dollar basis, which excludes the impact of exchange rate movements on our international payments volume, was not significantly different from growth on a nominal-dollar basis for the three months ended September 30, 2017(1). Growth in processed transactions reflects the ongoing worldwide shift to electronic payments.
The following table presents nominal payments and cash volume.(2) 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
United States
 
International(3)
 
Visa Inc.(3)
 
Three Months Ended September 30,(1)
 
Three Months Ended September 30,(1)
 
Three Months Ended September 30,(1)
 
2017
 
2016
 
%
Change
 
2017
 
2016
 
%
Change
 
2017
 
2016
 
%
Change
 
(in billions, except percentages)
Nominal payments volume
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer credit
$
348

 
$
315

 
10
%
 
$
589

 
$
551

 
7
%
 
$
937

 
$
866

 
8
%
Consumer debit(4)
354

 
328

 
8
%
 
419

 
359

 
17
%
 
773

 
686

 
13
%
Commercial(5)
134

 
125

 
8
%
 
86

 
75

 
15
%
 
220

 
200

 
10
%
Total nominal payments volume
$
836

 
$
768

 
9
%
 
$
1,094

 
$
985

 
11
%
 
$
1,930

 
$
1,752

 
10
%
Cash volume
142

 
135

 
5
%
 
605

 
595

 
2
%
 
747

 
731

 
2
%
Total nominal volume(6)
$
978

 
$
903

 
8
%
 
$
1,700

 
$
1,580

 
8
%
 
$
2,677

 
$
2,483

 
8
%
The following table presents nominal and constant payments and cash volume growth.(2) 
 
International(3)
 
Visa Inc.(3)
 
Three Months
Ended September 30,
2017 vs. 2016
(1)
 
Three Months
Ended September 30,
2017 vs. 2016
(1)
 
Nominal
 
Constant(7)
 
Nominal
 
Constant(7)
Payments volume growth
 
 
 
 
 
 
 
Consumer credit growth
7
%
 
7
%
 
8
%
 
8
%
Consumer debit growth(5)
17
%
 
14
%
 
13
%
 
11
%
Commercial growth(6)
15
%
 
15
%
 
10
%
 
10
%
Total payments volume growth
11
%
 
10
%
 
10
%
 
10
%
Cash volume growth
2
%
 
0
%
 
2
%
 
1
%
Total volume growth
8
%
 
7
%
 
8
%
 
7
%

(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, 2017 and 2016 were based on nominal payments volume reported by our financial institution clients for the three months ended September 30, 2017 and 2016, respectively.
(2) 
Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.
(3) 
As a result of European Union Interchange Fee regulation changes, effective with the quarter ended December 31, 2016, Europe co-badged payments volume is no longer included in reported volume. For comparative purposes, international volume for the three months ended September 30, 2016 was adjusted to exclude co-badged payments volume. The associated growth rates for the three months ended September 30, 2017 were calculated using these adjusted amounts.
(4) 
Includes consumer prepaid volume and Interlink volume.
(5) 
Includes large, middle and small business credit and debit, as well as commercial prepaid volume.
(6) 
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, Interlink and V PAY 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.
(7) 
Growth on a constant-dollar basis excludes the impact of foreign currency fluctuations against the U.S. dollar.

24

Table of Contents

The following table provides the number of transactions involving Visa, Visa Electron, Interlink, V PAY and PLUS cards processed on Visa's networks during the periods presented.(1) 
 
Three Months Ended December 31,
2017
 
2016
 
%
Change
(in millions, except percentages)
Visa processed transactions
30,508

 
27,329

 
12
%
(1) 
Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.
Results of Operations
Operating Revenues
The following table sets forth our operating revenues earned in the U.S. and internationally.
 
Three Months Ended
December 31,
 
2017 vs. 2016
 
2017
 
2016
 
$
Change
 
%
Change(1)
 
(in millions, except percentages)
U.S.
$
2,265

 
$
2,121

 
$
144

 
7
%
International
2,597

 
2,340

 
257

 
11
%
Net operating revenues
$
4,862

 
$
4,461

 
$
401

 
9
%
(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 reflects the continued growth in nominal payments volume, processed transactions and nominal cross-border volume.
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, 2017, as partially mitigated by our hedging program, resulted in an approximately one percentage point positive impact to our net operating revenue growth.
The following table sets forth the components of our net operating revenues.
 
Three Months Ended
December 31,
 
2017 vs. 2016
 
2017
 
2016
 
$
Change
 
%
Change(1)
 
(in millions, except percentages)
Service revenues
$
2,146

 
$
1,918

 
$
228

 
12
%
Data processing revenues
2,147

 
1,892

 
255

 
13
%
International transaction revenues
1,666

 
1,489

 
177

 
12
%
Other revenues
229

 
203

 
26

 
13
%
Client incentives
(1,326
)
 
(1,041
)
 
(285
)
 
27
%
Net operating revenues
$
4,862

 
$
4,461

 
$
401

 
9
%
(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 10% growth in nominal payments volume.
Data processing revenues increased mainly due to overall growth in processed transactions of 12% during the three-month comparable period.

25

Table of Contents

International transaction revenues increased primarily due to nominal cross-border volume growth of 14% during the three-month comparable period. International transaction revenue growth was partially offset by lower volatility in a broad range of currencies.
Client incentives increased during the three-month comparable period mainly due to incentives recognized on long-term customer contracts that were initiated or renewed after the first quarter of fiscal 2017 and overall growth in global payments volume. 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,
 
2017 vs. 2016
 
2017
 
2016
 
$
Change
 
%
Change(1)
 
(in millions, except percentages)
Personnel
$
679

 
$
571

 
$
108

 
19
 %
Marketing
223

 
218

 
5

 
3
 %
Network and processing
160

 
145

 
15

 
10
 %
Professional fees
92

 
80

 
12

 
14
 %
Depreciation and amortization
145

 
146

 
(1
)
 
(1
)%
General and administrative
236

 
186

 
50

 
27
 %
Litigation provision

 
15

 
(15
)
 
(100
)%
Total operating expenses
$
1,535

 
$
1,361

 
$
174

 
13
 %

(1) 
Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.
Personnel expenses increased primarily due to an increase in headcount, reflecting our strategy to invest for future growth.
Network and processing expenses increased mainly due to continued technology and processing network investments to support growth.
Professional fees increased primarily due to consulting fees related to technology and other corporate projects.
General and administrative expenses increased mainly due to increases in product enhancements and travel activities in support of our business growth, as well as higher indirect taxes.
Non-operating Income (Expense)
The following table sets forth components of our non-operating income (expense).
 
Three Months Ended
December 31,
 
2017 vs. 2016
 
2017
 
2016
 
$
Change
 
%
Change(1)
 
(in millions, except percentages)
Interest expense
$
(154
)
 
$
(140
)
 
$
(14
)
 
10
 %
Other
66

 
19

 
47

 
NM

Total non-operating expense
$
(88
)
 
$
(121
)
 
$
33

 
(27
)%
NM — not meaningful
(1) 
Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.
Interest expense increased in the three months ended December 31, 2017 primarily due to the issuance of $2.5 billion fixed-rate senior notes in September 2017. See Note 4—Debt to our unaudited consolidated financial statements.

26

Table of Contents

Other non-operating income increased in the three months ended December 31, 2017 due to a gain on the sale of an investment and higher interest income on our cash and investments.
Effective Income Tax Rate
The effective income tax rates were 22% and 31% for the three months ended December 31, 2017 and 2016, respectively. The effective tax rate for the three months ended December 31, 2017 differs from the effective tax rate in the same prior-year period primarily due to the Tax Act. The Tax Act transitions the U.S. tax system to a new territorial system and lowers the statutory federal corporate income tax rate from 35% to 21%.
The reduction of the statutory federal corporate tax rate to 21% became effective on January 1, 2018. In fiscal 2018, our statutory federal corporate rate is a blended rate of 24.5%, which will be reduced to 21% in fiscal 2019 and thereafter.
As a result of the reduction in the federal corporate tax rate, we remeasured our net deferred tax liabilities as of the enactment date of the Tax Act. The deferred tax remeasurement resulted in a one-time, non-cash tax benefit estimated to be approximately $1.1 billion, recorded in the three months ended December 31, 2017.
In transitioning to the new territorial tax system, the Tax Act requires that we include certain untaxed foreign earnings of non-U.S. subsidiaries in our fiscal 2018 taxable income. Such foreign earnings are subject to a one-time tax at 15.5% on the amount held in cash or cash equivalents, and at 8% on the remaining non-cash amount. The 15.5% and 8% tax, collectively referred to as the “transition tax”, was estimated to be $1.1 billion, and was recorded in the three months ended December 31, 2017. We intend to elect to pay the transition tax over a period of eight years as permitted by the Tax Act.
The above-mentioned accounting impacts of the deferred tax remeasurement and transition tax are provisional, based on currently available information and technical guidance on the interpretations of the new law. We continue to obtain and analyze additional information and guidance as they become available to complete the accounting for the tax impacts of the Tax Act. The provisional accounting impacts may change in future reporting periods until the accounting analysis is finalized, which will occur no later than the first quarter of fiscal 2019.
During the three months ended December 31, 2017, our gross unrecognized tax benefits increased by $44 million. Our net unrecognized tax benefits that, if recognized, would favorably impact the effective tax rate increased by $38 million. The increase in unrecognized tax benefits is primarily related to various tax positions across several jurisdictions. See Note 10—Income Taxes to our unaudited consolidated financial statements.
Adjusted effective income tax rate. Our financial results for the three months ended December 31, 2017 reflect the impact of certain significant items that we believe are not indicative of our operating performance in this period or future periods, as they were either non-recurring or had no cash impact. As such, we have presented our adjusted effective income tax rate for this period in the table below, which we believe provides a clearer understanding of our operating performance for the reported period. There were no comparable adjustments recorded for the three months ended December 31, 2016. See Overview—Adjusted financial results within this Management's Discussion and Analysis of Financial Condition and Results of Operations for descriptions of the adjustments in the tables below.
 
Three Months Ended December 31, 2017
(in millions, except percentages)
Income Before Income Taxes
 
Income Tax Provision
 
Effective Income Tax Rate(1)
As reported
$
3,239

 
$
717

 
22.1
%
Remeasurement of deferred tax balances

 
1,133

 
 
Transition tax on foreign earnings

 
(1,147
)
 
 
As adjusted
$
3,239

 
$
703

 
21.7
%
(1) 
Figures in the table may not recalculate exactly due to rounding. Effective income tax rate is calculated based on unrounded numbers.

27

Table of Contents

Liquidity and Capital Resources
Cash Flow Data
The following table summarizes our cash flow activity for the periods presented:
 
Three Months Ended
December 31,
 
2017
 
2016
 
(in millions)
Total cash provided by (used in):
 
 
 
Operating activities
$
2,762

 
$
2,508

Investing activities
(707
)
 
(417
)
Financing activities
(3,871
)
 
(1,730
)
Effect of exchange rate changes on cash and cash equivalents
80

 
(156
)
(Decrease) increase in cash and cash equivalents
$
(1,736
)
 
$
205

Operating activities. Cash provided by operating activities for the three months ended December 31, 2017 was higher than the prior-year comparable period, reflecting continued growth in our underlying business.
Investing activities. Cash used in investing activities for the three months ended December 31, 2017 was higher than the prior-year comparable period as purchases of available-for-sale investment securities reflected additional investment of net proceeds received from new fixed-rate senior notes issued in September 2017.
Financing activities. Cash used in financing activities for the three months ended December 31, 2017 was higher than the prior-year comparable period primarily due to the repayment of the 2017 Notes and an increase in dividends paid in the current year, while the prior year included proceeds from issuance of commercial paper. This increase was partially offset by payments from our litigation escrow account and a decrease in the repurchases of our class A common stock. See Note 2—U.S. and Europe Retrospective Responsibility Plans, Note 4—Debt and Note 7—Stockholders' Equity to our unaudited consolidated financial statements.
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, primarily attributable to undistributed earnings, totaled $6.3 billion at December 31, 2017. This excludes $1.8 billion of cash and cash equivalents and available-for-sale investment securities we returned during the three months ended December 31, 2017 from our foreign subsidiaries to the United States. This transaction did not constitute a return of undistributed earnings. Pursuant to the Tax Act, we are required to pay U.S. tax on most of the undistributed and untaxed foreign earnings of non-U.S. subsidiaries accumulated as of December 31, 2017. If it were necessary to repatriate the undistributed earnings of our foreign subsidiaries for use in the United States in the future, the repatriated earnings would not be subject to further U.S. tax.
Uses of Liquidity
There has been no significant change to our primary uses of liquidity since September 30, 2017, 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.

28

Table of Contents

Senior Notes. In October 2017, we redeemed all of the $1.75 billion principal amount outstanding of the 2017 Notes. The redemption was funded with the net proceeds from the new fixed-rate senior notes issued in September 2017. Interest payments of $241 million were made in fiscal 2018. See Note 4—Debt to our unaudited consolidated financial statements.
Common stock repurchases. During the three months ended December 31, 2017, we repurchased 16 million shares of our class A common stock using $1.8 billion of cash on hand. As of December 31, 2017, we had remaining authorized funds of $2.1 billion for share repurchase. All share repurchase programs authorized prior to April 2017 have been completed. In January 2018, our board of directors authorized an additional $7.5 billion share repurchase program. See Note 7—Stockholders' Equity to our unaudited consolidated financial statements.
Dividends. During the three months ended December 31, 2017, we declared and paid $458 million in dividends to holders of our common stock. In January 2018, our board of directors declared a cash dividend in the amount of $0.21 per share of class A common stock (determined in the case of class B and C common stock and UK&I and Europe preferred stock on an as-converted basis), which will be paid on March 6, 2018, to all holders of record of our common and preferred stock as of February 16, 2018. See Note 7—Stockholders' Equity to our unaudited consolidated financial statements. We expect to continue paying quarterly dividends in cash, subject to approval by the board of directors. All three series of preferred stock and class B and C common stock will share ratably on an as-converted basis in such future dividends.
Fair Value Measurements—Financial Instruments
As of December 31, 2017, our financial instruments measured at fair value on a recurring basis included $12.6 billion of assets and $65 million of liabilities. See Note 3—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, 2017, compared to September 30, 2017.
ITEM 4.
Controls and Procedures
Disclosure controls and procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) of Visa Inc. at the end of the period covered by this report and, based on such evaluation, have concluded that the disclosure controls and procedures of Visa Inc. were effective at the reasonable assurance level as of such date.
Changes in internal control over financial reporting. There has been no change in the internal control over financial reporting of Visa Inc. that occurred during the fiscal period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

29

Table of Contents

PART II. OTHER INFORMATION
 
ITEM 1.
Legal Proceedings.
Refer to Note 11—Legal Matters to the unaudited consolidated financial statements included in this Form 10-Q for a description of the Company’s current material legal proceedings. 
ITEM 1A.
Risk Factors.