Visa Inc. — Form 10-Q Summary
Business context and reporting period. Visa operates a global electronic-payments network and provides payment processing for credit, debit, prepaid and commercial payments; it does not issue cards or set cardholder interest rates. This filing covers the fiscal third quarter and first nine months ended June 30, 2012. Amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended June 30, 2012 | Nine months ended June 30, 2012 |
|---|---|---|
| Operating revenue | $2.565 billion, up 10% year over year | $7.690 billion, up 13% |
| Operating income (loss), reported | $(2.607) billion; operating margin (102)% | $617 million; operating margin 8% |
| Net income (loss) attributable to Visa, reported | $(1.839) billion; diluted Class A EPS $(2.74) | $482 million; diluted Class A EPS $0.71 |
| Adjusted net income and diluted EPS | $1.055 billion and $1.56, versus $883 million and $1.26 a year earlier | $3.168 billion and $4.66, versus $2.648 billion and $3.72 |
| Adjusted operating margin | 58%, unchanged from the prior-year quarter | 61%, versus 60% |
Adjusted results exclude the $4.098 billion covered-litigation provision and related tax effects; nine-month adjusted results also exclude a $208 million one-time, non-cash deferred-tax benefit. These are management-presented non-GAAP measures, not substitutes for reported GAAP results.
Revenue growth reflected higher payments volume, processed transactions and cross-border volume, partly offset by increased client incentives. Client incentives rose 37% in the quarter and 22% for the nine months. Quarterly Visa-processed transactions increased 1%; CyberSource billable transactions increased 25%. Nine-month nominal payments volume grew 13% overall, with stronger growth outside the U.S.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $3.640 billion, versus $3.004 billion in 2011. The litigation accrual and related tax effects materially influenced the period’s cash-flow reconciliation.
- Investing cash outflow was $1.943 billion, including net purchases of investment securities; financing cash outflow was $2.262 billion, including litigation-escrow funding, share repurchases and dividends. Cash and cash equivalents decreased $569 million to $1.558 billion.
- At June 30, total assets were $38.741 billion, total liabilities $12.583 billion and equity $26.158 billion. Restricted litigation-escrow cash was $4.282 billion and should be distinguished from cash available for general operations.
- The balance-sheet excerpt does not separately show a debt balance. No debt principal payments were made in the nine months; the filing reports $28 million of interest expense.
- Management said projected liquidity sources were sufficient for needs beyond the next 12 months. It also noted that $3.0 billion of cash, cash equivalents and available-for-sale securities were held by foreign subsidiaries and would incur U.S. tax if repatriated.
Material changes, outlook and risks
- Interchange litigation: Visa recorded a $4.098 billion provision, raising accrued litigation to $4.384 billion. A July 13, 2012 memorandum of understanding contemplated approximately $4.0 billion in class-settlement payments from the escrow account, an eight-month interchange reduction for class merchants, and certain rule changes. The proposed settlement remained subject to approvals, court approval, agreement on procedures and other conditions. Visa also had an agreement in principle for approximately $350 million to resolve individual merchant claims, subject to a written agreement and customary conditions.
- Escrow: The litigation escrow held $4.282 billion at quarter-end; Visa deposited a further $150 million on July 24, 2012. The filing cautions that the recorded litigation accrual and escrow balance may differ.
- Guidance: Management expected full-year fiscal 2012 operating revenue growth in the low double digits, client incentives at 17%–18% of gross revenue, and an adjusted effective tax rate of 33%–34%. It expected the U.S. debit-regulation impact to remain similar to, or slightly greater than, the quarter’s estimated $0.04 reduction in diluted Class A EPS over the next few quarters. Management also anticipated higher fourth-quarter marketing spending, including for the 2012 Summer Olympics.
- Regulatory and operating risks: Debit interchange caps and network-routing rules may pressure pricing, volume and client incentives. Other cited risks include competition, technology disruption, data breaches, economic and currency conditions, litigation and government enforcement. The Justice Department was investigating potential antitrust issues relating to Visa debit and its competitive responses to the Reform Act.
- Tax and Visa Europe exposures: The IRS proposed disallowing a tax benefit associated with the American Express litigation settlement; Visa estimated approximately $396 million of additional federal and state tax, excluding interest and penalties, if the position is sustained, and planned to appeal. Visa Europe’s perpetual put option had a recorded fair value of $145 million, but an exercise could require a purchase payment of several billion dollars or more.
- Capital returns: Visa paid $448 million of dividends and repurchased $536 million of Class A shares during the nine months. A new $1 billion share-repurchase authorization was announced in July 2012. The board declared a $0.22-per-share dividend payable September 4, 2012.
Important facts for investors to verify
- Whether the interchange class and individual-merchant settlements receive all required approvals and become effective, and how final costs compare with the $4.1 billion accrual.
- How the debit-routing rules, pricing changes and incentives affect transaction volumes, revenue growth and margins relative to management’s outlook.
- The outcome of the IRS dispute and any resulting tax, interest or penalty exposure.
- The potential funding and financial impact if Visa Europe exercises its put option.
- Underlying cash generation and liquidity, excluding restricted litigation escrow and considering foreign-held funds.