VISA, INC. This management's discussion and analysis provides a review of the results of operations, financial condition and liquidity and capital resources ofVisa Inc. and its subsidiaries ("Visa ," "we," "us," "our" and 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 the consolidated financial statements and related notes included in Item 8-Financial Statements and Supplementary Data of this report. This section of this Form 10-K generally discusses fiscal 2020 compared to fiscal 2019. Discussions of fiscal 2019 compared to 2018 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2019 Form 10-K, filed with theUnited States Securities and Exchange Commission onNovember 14, 2019 . OverviewVisa is a global payments technology company that enables innovative, secure and reliable electronic payments across more than 200 countries and territories. We facilitate digital payments across a global network of consumers, merchants, financial institutions, businesses, strategic partners and government entities through innovative technologies. 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. Financial overview. Our as-reportedU.S. GAAP and non-GAAP net income and diluted earnings per share are as follows: For the Years Ended September 30, % Change(1) 2020 2019 vs. vs. 2020 2019 2018 2019 2018 (in millions, except percentages and per share data) Net income, as reported$ 10,866 $ 12,080 $ 10,301 (10) % 17 %
Diluted earnings per share, as reported
$ 4.42 (8) % 20 % Non-GAAP net income(2)$ 11,193 $ 12,274 $ 10,656 (9) % 15 %
Non-GAAP diluted earnings per share(2)
$ 4.58 (7) % 18 % (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 non-GAAP financial results, see tables in Non-GAAP financial results below. Coronavirus. COVID-19 continues to have an impact globally. While we have been actively monitoring the worldwide spread of COVID-19, the extent to which COVID-19 will ultimately impact our business remains difficult to predict. Our priority remains the safety of our employees, clients and the communities in which we live and operate. We are taking a measured approach in bringing our employees back in the office and will continue to have most of our employees work remotely for the rest of 2020. We continue to remain in close and regular contact with our employees, clients, partners and governments globally to help them navigate these challenging times. Revenues in the latter half of fiscal 2020 were impacted by declines in volumes and transactions as a result of COVID-19, although we are exiting the year with improved results and most countries had stable to positive year-over-year domestic spending growth in the fiscal fourth quarter. Cross-border volume however, remained depressed, led by travel spending, as the majority of borders remain closed. While we have taken measures to modify our business practices and reduce operating expenses, including scaling back hiring plans, restricting travel, lowering marketing spend and the use of external resources, the impact that COVID-19 will have on our business remains difficult to predict due to numerous uncertainties, including the transmissibility, severity and duration of the outbreak, the effectiveness of social distancing measures or actions that are voluntarily adopted by the public or required by governments or public health authorities, the development and availability of effective treatments or vaccines, and the impact to our employees and our operations, the business of our clients, supplier and business partners, and other factors identified in Part I, Item 1A "Risk Factors" in this Form 10-K. We will continue to evaluate the nature and extent of the impact to our business. 37 -------------------------------------------------------------------------------- Table of Content s Highlights for fiscal 2020. Net revenues for fiscal 2020 were$21.8 billion , a decrease of 5% over the prior year, primarily due to the year-over-year changes payments volume, cross-border volume and processed transactions, which were impacted by the spread of COVID-19 globally starting in the latter part ofMarch 2020 . Exchange rate movements in fiscal 2020, partially mitigated by our hedging program, negatively impacted our net revenues growth by approximately half a percentage point. Total operating expenses for fiscal 2020 were$7.8 billion on a GAAP basis, and decreased 3% over the prior year, driven by lower litigation provision and our overall cost reduction strategy, offset by higher personnel and depreciation and amortization from our ongoing investments in support of our strategy for future growth. Total operating expenses for fiscal 2020 were$7.7 billion on a non-GAAP basis, and increased 1% over the prior year primarily driven by higher personnel, offset by our overall cost reduction strategy. Non-GAAP financial results. We use non-GAAP financial measures of our performance which exclude certain items which we believe are not representative of our continuing operations, as they may be non-recurring or have no cash impact, and may distort our longer-term operating trends. We consider non-GAAP measures useful to investors because they provide greater transparency into management's view and assessment of our ongoing operating performance. Starting in fiscal 2020, we revised our non-GAAP methodology to also exclude the impact of gains and losses on our equity investments, amortization of acquired intangible assets and acquisition-related costs for acquisitions that closed in fiscal 2019 and subsequent periods. Prior year amounts have been restated to conform to our current presentation. •Gains and losses on equity investments. Gains and losses on equity investments include periodic non-cash fair value adjustments and gains and losses upon sale of an investment. These long-term investments are strategic in nature and are primarily private company investments. Gains and losses and the related tax impacts associated with these investments are tied to the performance of the companies that we invest in and therefore do not correlate to the underlying performance of our business. •Amortization of acquired intangible assets. Amortization of acquired intangible assets consists of amortization of intangible assets such as developed technology, customer relationships and brands acquired in connection with business combinations executed beginning in fiscal 2019. Amortization charges for our acquired intangible assets are non-cash and are significantly affected by the timing, frequency and size of our acquisitions, rather than our core operations. As such, we have excluded this amount and the related tax impact to facilitate an evaluation of our current operating performance and comparison to our past operating performance. •Acquisition-related costs. Acquisition-related costs consist primarily of one-time transaction and integration costs associated with our business combinations. These costs include professional fees, technology integration fees, restructuring activities and other direct costs related to the purchase and integration of acquired entities. It also includes retention equity and deferred equity compensation when they are agreed upon as part of the purchase price of the transaction but are required to be recognized as expense post-combination. We have excluded these amounts and the related tax impacts as the expenses are recognized for a limited duration and do not reflect the underlying performance of our business. •Litigation provision. During fiscal 2019 and 2018, we recorded a litigation provision of$370 million and$600 million , respectively, and related tax benefits of$83 million and$137 million , respectively, associated with the interchange multidistrict litigation. The tax impact is determined by applying applicable federal and state tax rates to the litigation provision. Under theU.S. retrospective responsibility plan, we recover the monetary liabilities related to theU.S. covered litigation through a reduction to the conversion rate of our class B common stock to shares of class A common stock. See Note 5-U.S. and Europe Retrospective Responsibility Plans and Note 20-Legal Matters to our consolidated financial statements included in Item 8-Financial Statements and Supplementary Data of this report. •Charitable contributions. During fiscal 2018, we donated investment securities to theVisa Foundation and recognized a non-cash general and administrative expense of$195 million , before tax, and recorded$193 million of realized gain on the donation of these investments as non-operating income. Net of the related cash tax benefit of$51 million , determined by applying applicable tax rates, non-GAAP net income decreased by$49 million . •Remeasurement of deferred tax balances. During fiscal 2020, in connection with theUK enacted legislation that repealed the previous tax rate reduction from 19% to 17% that was effective onApril 1, 2020 , we 38 -------------------------------------------------------------------------------- Table of Content s remeasured our net deferred tax liabilities as of the enactment date, resulting in the recognition of a non-recurring, non-cash income tax expense of$329 million . During fiscal 2018, in connection with the Tax Cuts and Jobs Act (the "Tax Act") 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 of$1.1 billion . See Note 19-Income Taxes to our consolidated financial statements included in Item 8-Financial Statements and Supplementary Data of this report. •Transition tax on foreign earnings. During fiscal 2018, in connection with the Tax Act 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 estimate of approximately$1.1 billion . See Note 19-Income Taxes to our consolidated financial statements included in Item 8-Financial Statements and Supplementary Data of this report. •Resolution of a tax item. During fiscal 2020, we resolved a long-outstanding tax matter, dating back more than 12 years, relating to certain tax filing positions taken prior to our initial public offering. The resolution of this matter resulted in the recognition of a one-time charge to income tax expense of$28 million , which we believe is not representative of our continuing operations and ongoing effective tax rate. Non-GAAP operating expenses, non-operating income (expense), income tax provision, effective income tax rate, net income and diluted earnings per share should not be relied upon as substitutes for measures calculated in accordance withU.S. GAAP. The following tables reconcile our as-reported financial measures, calculated in accordance withU.S. GAAP, to the respective non-GAAP financial measures: For the Year Ended September 30, 2020 Diluted Operating Non-operating Income Tax Effective Income Earnings Per Expenses Income (Expense) Provision Tax Rate(1) Net Income Share(1)
(in millions, except percentages and per share data) As reported
$ 7,765 $ (291)$ 2,924 21.2 %$ 10,866 $ 4.89 (Gains) Losses on equity investments, net - (101) (23) (78) (0.04) Amortization of acquired intangible assets (46) - 11 35 0.02 Acquisition-related costs (17) - 4 13 0.01 Remeasurement of deferred tax balances - - (329) 329 0.15 Resolution of a tax item - - (28) 28 0.01 Non-GAAP$ 7,702 $ (392)$ 2,559 18.6 %$ 11,193 $ 5.04 For the Year Ended September 30, 2019 Diluted Operating Non-operating Income Tax Effective Income Earnings Per Expenses Income (Expense) Provision Tax Rate(1) Net Income Share(1)
(in millions, except percentages and per share data) As reported
$ 7,976 $ (117)$ 2,804 18.8 %$ 12,080 $ 5.32 (Gains) Losses on equity investments, net - (131) (30) (101) (0.04) Amortization of acquired intangible assets (6) - 1 5 - Acquisition-related costs (4) - 1 3 - Litigation provision (370) - 83 287 0.13 Non-GAAP$ 7,596 $ (248)$ 2,859 18.9 %$ 12,274 $ 5.40 39
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For the Year Ended
September 30, 2018
Diluted
Operating Non-operating Income Tax Effective Income Earnings Per
Expenses Income (Expense) Provision Tax Rate(1) Net Income Share(1)
(in millions, except percentages and per share data)
As reported $ 7,655 $ (148) $ 2,505 19.6 % $ 10,301 $ 4.42
(Gains) Losses on equity
investments, net - (98) (25) (73) (0.03)
Charitable contribution (195) (193) 51 (49) (0.02)
Litigation provision (600) - 137 463 0.20
Remeasurement of deferred tax
balances - - 1,133 (1,133) (0.49)
Transition tax on foreign
earnings - - (1,147) 1,147 0.49
Non-GAAP $ 6,860 $ (439) $ 2,654 20.3 % $ 10,656 $ 4.58
(1)Figures in the table may not recalculate exactly due to rounding. Effective
income tax rate, diluted earnings per share and their respective totals are
calculated based on unrounded numbers.
Release of preferred stock. In September 2020 , we released $7.3 billion of the
as-converted value from our series B and C preferred stock (alternatively
referred to as UK&I and Europe preferred stock, respectively) and issued 374,819
shares of series A preferred stock in connection with the first mandatory
release assessment, as required by the litigation management deed entered into
at the time of the Visa Europe acquisition. See Note 5-U.S. and Europe
Retrospective Responsibility Plans and Note 15-Stockholders' Equity to our
consolidated financial statements included in Item 8-Financial Statements and
Supplementary Data of this report.
Common stock repurchases. In January 2020 , our board of directors authorized a
$9.5 billion share repurchase program (the "January 2020 Program"). During
fiscal 2020, we repurchased 44 million shares of our class A common stock in the
open market for $8.1 billion . As of September 30, 2020 , our January 2020 Program
had remaining authorized funds of $5.5 billion for share repurchase. See Note
15-Stockholders' Equity to our consolidated financial statements included in
Item 8-Financial Statements and Supplementary Data of this report.
Senior notes. In fiscal 2020, we issued fixed-rate senior notes in public
offerings in an aggregate principal amount of $7.3 billion with maturities
ranging between 7 and 30 years. See Note 10-Debt to our consolidated financial
statements included in Item 8-Financial Statements and Supplementary Data of
this report.
Acquisition. On January 13, 2020 , we entered into a definitive agreement to
acquire Plaid Inc. for $5.3 billion . We will pay approximately $4.9 billion of
cash and $0.4 billion of retention equity and deferred equity consideration.
This acquisition is subject to customary closing conditions, including
regulatory reviews and approvals.
On November 5, 2020 , the U.S. Department of Justice filed a complaint in the
U.S. District Court for the Northern District of California seeking a permanent
injunction to prevent Visa from acquiring Plaid , alleging that the proposed
acquisition would substantially lessen competition in violation of Section 7 of
the Clayton Act and would constitute monopolization under Section 2 of the
Sherman Act. Visa intends to vigorously defend the lawsuit. See Note
2-Acquisitions and Note 20-Legal Matters to our consolidated financial
statements included in Item 8-Financial Statements and Supplementary Data of
this report.
Payments volume and processed transactions. 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 growth in the U.S. for the 12 months ended June 30, 2020
and 2019 was 4% and 10%, respectively. The decrease in nominal international
payments volume of 1% for the 12 months ended June 30, 2020 (1) was negatively
impacted by the overall strengthening of the U.S. dollar. On a constant-dollar
basis, which excludes the impact of exchange rate movements, our international
payments volume growth for the 12 months ended June 30, 2020 and 2019 was 2% and
9%, respectively. Growth in processed transactions reflects the ongoing
worldwide shift to electronic payments, partially offset by the impact of
COVID-19.
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Table of Content s
The following tables present nominal payments and cash volume:
U.S. International Visa Inc.
12 months 12 months 12 months
ended June 30,(1) ended June 30,(1) ended June 30,(1)
% % %
2020 2019 Change(2) 2020 2019 Change(2) 2020 2019 Change(2)
(in billions, except percentages)Nominal payments volume Consumer credit$ 1,518 $ 1,540 (1) %$ 2,361 $ 2,484 (5) %$ 3,879 $ 4,025 (4) % Consumer debit(3) 1,851 1,699 9 % 1,974 1,877 5 % 3,824 3,576 7 % Commercial(4) 641 634 1 % 369 381 (3) % 1,010 1,015 - % Total nominal payments volume(2)$ 4,009 $ 3,873 4 %$ 4,704 $ 4,742 (1) %$ 8,713 $ 8,615 1 % Cash volume 573 573 - % 2,046 2,261 (9) % 2,620 2,834 (8) % Total nominal volume(2),(5)$ 4,583 $ 4,447 3 %$ 6,750 $ 7,003 (4) %$ 11,333 $ 11,450 (1) % U.S. International Visa Inc. 12 months 12 months 12 months ended June 30,(1) ended June 30,(1) ended June 30,(1) % % % 2019 2018 Change(2) 2019 2018 Change(2) 2019 2018 Change(2) (in billions, except percentages)
Nominal payments volume Consumer credit$ 1,540 $ 1,441 7 %$ 2,484 $ 2,455 1 %$ 4,025 $ 3,897 3 % Consumer debit(3) 1,699 1,521 12 % 1,877 1,792 5 % 3,576 3,313 8 % Commercial(4) 634 564 12 % 381 364 5 % 1,015 927 9 % Total nominal payments volume(2)$ 3,873 $ 3,526 10 %$ 4,742 $ 4,611 3 %$ 8,615 $ 8,137 6 % Cash volume 573 563 2 % 2,261 2,437 (7) % 2,834 3,000 (6) % Total nominal volume(2),(5)$ 4,447 $ 4,089 9 %$ 7,003 $ 7,048 (1) %$ 11,450 $ 11,137 3 % The following table presents the change in nominal and constant payments and cash volume: International Visa Inc. 12 months ended 12 months ended 12 months ended 12 months endedJune 30 ,June 30 ,June 30 ,June 30, 2020 vs 2019(1) 2019 vs 2018(1) 2020 vs 2019(1) 2019 vs 2018(1) Nominal Constant(6) Nominal Constant(6) Nominal Constant(6) Nominal Constant(6) Payments volume growth Consumer credit growth (5) % (2) % 1 % 8 % (4) % (2) % 3 % 7 % Consumer debit growth(3) 5 % 9 % 5 % 11 % 7 % 9 % 8 % 11 % Commercial growth(4) (3) % - % 5 % 13 % - % 1 % 9 % 12 % Total payments volume growth(2) (1) % 2 % 3 % 9 % 1 % 3 % 6 % 10 % Cash volume growth (9) % (6) % (7) % - % (8) % (5) % (6) % - % Total volume growth(2) (4) % (1) % (1) % 6 % (1) % 1 % 3 % 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 12 months endedSeptember 30, 2020 , 2019 and 2018, were based on nominal payments volume reported by our financial institution clients for the 12 months endedJune 30, 2020 , 2019 and 2018, respectively. (2)Figures in the tables may not recalculate exactly due to rounding. Percentage changes and totals are calculated based on unrounded numbers. (3)Includes consumer prepaid volume and interlink volume. (4)Includes large, medium and small business credit and debit, as well as commercial prepaid volume. (5)Total nominal volume is the sum of total nominal payments volume and cash volume. Total nominal payments volume is the total monetary value of transactions for goods and services that are purchased on cards carrying theVisa , 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 byVisa . On occasion, previously presented volume information may be updated. Prior period updates are not material. (6)Growth on a constant-dollar basis excludes the impact of foreign currency fluctuations against theU.S. dollar. 41 -------------------------------------------------------------------------------- Table of Content s The following table provides the number of transactions involving cards and other form factors carrying theVisa , Visa Electron, Interlink,VPAY and PLUS cards processed onVisa's networks: For the Years Ended September 30, % Change(1) 2020 2019 vs. vs. 2020 2019 2018 2019 2018 (in millions, except percentages) Visa processed transactions 140,839 138,329 124,320 2 % 11 % (1)Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers. On occasion, previously presented information may be updated. Prior period updates are not material. Financial Information Presentation Net Revenues Our net revenues are primarily generated from payments volume onVisa products for purchased goods and services, as well as the number of transactions processed on our network. We do not earn revenues from, or bear credit risk with respect to, interest or fees paid by account holders onVisa products. Our issuing clients have the responsibility for issuing cards and other payment products and determining the interest rates and fees paid by account holders. We generally do not earn revenues from the fees that merchants are charged for acceptance by acquirers, including the merchant discount rate. Our acquiring clients are generally responsible for soliciting merchants as well as establishing and earning these fees. The following sets forth the components of our net revenues: Service revenues consist mainly of revenues earned for services provided in support of client usage ofVisa payment services. Current quarter service revenues are primarily assessed using a calculation of current quarter's pricing applied to the prior quarter's payments volume. Service revenues also include assessments designed to support ongoing acceptance and volume growth initiatives, which are recognized in the same period the related volumes are transacted. Data processing revenues are earned for authorization, clearing, settlement, value added services, network access and other maintenance and support services that facilitate transaction and information processing among our clients globally. Data processing revenues are recognized in the same period the related transactions occur or services are performed. International transaction revenues are earned for cross-border transaction processing and currency conversion activities. Cross-border transactions arise when the country of origin of the issuer, or financial institution originating the transaction, is different from that of the beneficiary. International transaction revenues are recognized in the same period the cross-border transactions occur or services are performed. Other revenues consist mainly of value added services, license fees for use of the Visa brand or technology, fees for account holder services, certification, licensing and product enhancements, such as extended account holder protection and concierge services. Other revenues are recognized in the same period the related transactions occur or services are performed. Client incentives consist of incentives provided in contracts with financial institution clients, merchants and strategic partners for various programs designed to grow payments volume, increaseVisa product acceptance, win merchant routing transactions over our network and drive innovation. These incentives are primarily accounted for as reductions to revenues. Operating Expenses Personnel expenses include salaries, employee benefits, incentive compensation, share-based compensation, severance charges and contractor expense. Marketing expenses include expenses associated with advertising and marketing campaigns, sponsorships and other related promotions of the Visa brand. 42 -------------------------------------------------------------------------------- Table of Content s Network and processing expenses mainly represent expenses for the operation of our processing network, including maintenance, equipment rental and fees for other data processing services. Professional fees mainly consist of fees for consulting, legal and other professional services. Depreciation and amortization expenses include depreciation expense for property and equipment, as well as amortization of purchased and internally developed software. Also included in this amount is amortization of finite-lived intangible assets primarily obtained through acquisitions. General and administrative expenses consist mainly of product enhancements, facilities costs, travel activities, indirect taxes, foreign exchange gains and losses and other corporate expenses incurred in support of our business. Litigation provision represents litigation expenses and is based on management's understanding of our litigation profile, the specifics of the cases, advice of counsel to the extent appropriate and management's best estimate of incurred loss. Non-operating Income (Expense) Non-operating income (expense) primarily includes interest expense, gains and losses earned on investments, income from derivative instruments not associated with our core business, as well as the non-service components of net periodic pension income and expenses. Results of Operations Net Revenues The following table sets forth our net revenues earned in theU.S. and internationally: For the Years Ended September 30, $ Change % Change(1) 2020 2019 2020 2019 vs. vs. vs. vs. 2020 2019 2018 2019 2018 2019 2018 (in millions, except percentages) U.S.$ 10,125 $ 10,279 $ 9,332 $ (154) $ 947 (1) % 10 %
International 11,721 12,698 11,277 (977) 1,421
(8) % 13 %
Net revenues
(5) % 11 %
(1)Figures in the table may not recalculate exactly due to rounding. Percentage
changes are calculated based on unrounded numbers.
Net revenues decreased in fiscal 2020 primarily due to the year-over-year
changes in payments volume, cross-border volume and processed transactions,
which were impacted by COVID-19 starting in the latter part of March 2020 .
Our net revenues 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. Exchange rate movements in fiscal
2020, as partially mitigated by our hedging program, negatively impacted our net
revenues growth by approximately half a percentage point.
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The following table sets forth the components of our net revenues:
For the Years Ended
September 30, $ Change % Change(1)
2020 2019 2020 2019
vs. vs. vs. vs.
2020 2019 2018 2019 2018 2019 2018
(in millions, except percentages)
Service revenues $ 9,804 $ 9,700 $ 8,918 $ 104 $ 782 1 % 9 %
Data processing revenues 10,975 10,333 9,027 642 1,306 6 % 14 %
International transaction revenues 6,299 7,804 7,211 (1,505) 593 (19) % 8 %
Other revenues 1,432 1,313 944 119 369 9 % 39 %
Client incentives (6,664) (6,173) (5,491) (491) (682) 8 % 12 %
Net revenues $ 21,846 $ 22,977 $ 20,609 $ (1,131) $ 2,368 (5) % 11 %
(1)Figures in the table may not recalculate exactly due to rounding. Percentage
changes are calculated based on unrounded numbers.
•Service revenues increased primarily due to 1% growth in nominal payments
volume.
•Data processing revenues increased due to 2% growth in processed transactions,
growth in value added services and select pricing modifications.
•International transaction revenues decreased due to a 23% decline in nominal
cross-border volumes, excluding transactions within Europe , as COVID-19 spread
globally starting in the latter part of March 2020 . International transaction
revenues were also impacted by select pricing modifications.
•Other revenues increased primarily due to the increase in consulting and
marketing services related fees, other value added services and
acquisition-related revenues.
•Client incentives increased mainly due to incentives recognized on long-term
client contracts that were initiated or renewed during fiscal 2020 partially
offset by the recent decline 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 the components of our total operating expenses:
For the Years Ended
September 30, $ Change % Change(1)
2020 2019 2020 2019
vs. vs. vs. vs.
2020 2019 2018 2019 2018 2019 2018
(in millions, except percentages)
Personnel $ 3,785 $ 3,444 $ 3,170 $ 341 $ 274 10 % 9 %
Marketing 971 1,105 988 (134) 117 (12) % 12 %
Network and processing 727 721 686 6 35 1 % 5 %
Professional fees 408 454 446 (46) 8 (10) % 2 %Depreciation and amortization 767 656 613 111 43
17 % 7 %
General and administrative 1,096 1,196 1,145 (100) 51
(8) % 4 %
Litigation provision 11 400 607 (389) (207) (97) % (34) %
Total operating expenses(2)
(3) % 4 %
(1)Figures in the table may not recalculate exactly due to rounding. Percentage
changes are calculated based on unrounded numbers.
(2)Operating expenses for fiscal 2019 and 2018 include significant items that we
do not believe are indicative of our operating performance as they are related
to the interchange multidistrict litigation provision or charitable donations.
See Overview within this Item 7-Management's Discussion and Analysis of
Financial Condition and Results of Operations.
•Personnel expenses increased due to continued headcount growth in support of
our investment strategy for future growth.
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•Marketing expenses decreased reflecting our overall cost reduction strategy,
the absence of FIFA women's world cup and the delay of the Tokyo Olympics to
fiscal 2021, partially offset by an increase in client marketing spend.
•Professional fees decreased reflecting our overall cost reduction strategy.
•Depreciation and amortization expenses increased primarily due to additional
depreciation and amortization from our on-going investments, including
acquisitions.
•General and administrative expenses decreased primarily due to travel
restrictions and our overall cost reduction strategy.
•Litigation provision decreased primarily due to lower accruals for uncovered
litigation in fiscal 2020 and a $370 million accrual in fiscal 2019 related to
the interchange multidistrict litigation. See Note 5-U.S. and Europe
Retrospective Responsibility Plans and Note 20-Legal Matters to our consolidated
financial statements included in Item 8-Financial Statements and Supplementary
Data of this report.
Non-operating Income (Expense)
The following table sets forth the components of our non-operating income
(expense):
For the Years Ended
September 30, $ Change % Change(1)
2020 2019 2020 2019
vs. vs. vs. vs.
2020 2019 2018 2019 2018 2019 2018
(in millions, except percentages)
Interest expense, net $ (516) $ (533) $ (612) $ 17 $ 79 (3) % (13) %
Investment income and other 225 416 464 (191) (48) (46) %
(10) %
Total non-operating income (expense)
148 % (20) %
(1)Figures in the table may not recalculate exactly due to rounding. Percentage changes are calculated based on unrounded numbers.
•Interest expense, net decreased primarily as a result of derivative instruments
that lowered the cost of borrowing on a portion of our outstanding debt, offset
by additional interest expense related to the issuance of debt in fiscal 2020.
See Note 10-Debt and Note 13-Derivative Financial Instruments to our
consolidated financial statements included in Item 8-Financial Statements and
Supplementary Data of this report.
•Investment income and other decreased primarily due to lower gains on our
equity investments and lower interest income on our cash and investments. See
Note 6-Fair Value Measurements and Investments to our consolidated financial
statements included in Item 8-Financial Statements and Supplementary Data of
this report.
Effective Income Tax Rate
The following table sets forth our effective income tax rate:
For the Years Ended
September 30, Change
2020 2019
vs. vs.
2020 2019 2018 2019 2018
Effective income tax rate 21 % 19 % 20 % 2 % (1) %
The effective tax rate in fiscal 2020 differs from the effective tax rate in
fiscal 2019 mainly due to a $329 million non-recurring, non-cash tax expense
relating to the remeasurement of UK deferred tax liabilities, as a result of the
enactment of UK legislation on July 22, 2020 that repealed the previous tax rate
reduction from 19% to 17% that was effective on April 1, 2020 . The remeasurement
of UK deferred tax liabilities was primarily related to deferred taxes on
intangibles recorded upon the acquisition of Visa Europe in fiscal 2016.
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Liquidity and Capital Resources
Management of Our Liquidity
We regularly evaluate cash requirements for current operations, commitments,
development activities and capital expenditures, and we may elect to raise
additional funds for these purposes in the future through the issuance of either
debt or equity. Our treasury policies provide management with the guidelines and
authority to manage liquidity risk in a manner consistent with our corporate
objectives.
The objectives of our treasury policies are to:
•provide adequate liquidity to cover operating expenditures and liquidity
contingency scenarios;
•ensure timely completion of payments settlement activities;
•ensure payments on required litigation settlements;
•make planned capital investments in our business;
•pay dividends and repurchase our shares at the discretion of our board of
directors; and
•invest excess cash in securities that enable us to first meet our working
capital and liquidity needs, and earn additional income.
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.
Cash Flow Data
The following table summarizes our cash flow activity for the fiscal years
presented:
For the Years Ended
September 30,
2020 2019 2018
(in millions)
Total cash provided by (used in):
Operating activities $ 10,440 $ 12,784 $ 12,941
Investing activities 1,427 (591) (3,084)
Financing activities (3,968) (12,061) (10,790) Effect of exchange rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents
440 (277) (101)
Increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents
$ 8,339
Operating activities. Cash provided by operating activities in fiscal 2020 was
lower than the prior fiscal year primarily due to lower net income, higher
client incentive payments and timing of settlement.
Investing activities. Cash provided by investing activities in fiscal 2020 was
higher than the prior fiscal year primarily due to higher proceeds from sales
and maturities of investment securities, combined with fewer investment security
purchases, lower purchase consideration paid for acquisitions, net of cash and
restricted cash acquired, due to fewer acquisitions and lower purchases of other
investments.
Financing activities. Cash used in financing activities in fiscal 2020 was lower
than the prior fiscal year primarily due to proceeds received from the issuance
of senior notes, the absence of the deferred purchase consideration payment made
in the prior year and lower share repurchases, partially offset by higher
dividends paid. See Note 10-Debt and Note 15-Stockholders' Equity, to our
consolidated financial statements included in Item 8-Financial Statements and
Supplementary Data of this report.
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Sources of Liquidity
Our primary sources of liquidity are cash on hand, cash flow from our
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 return
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.
Available-for-sale debt securities. Our investment portfolio is designed to
invest cash in securities which enables us to meet our working capital and
liquidity needs. Our investment portfolio consists of debt securities issued by
the U.S. Treasury or U.S. government-sponsored agencies. The majority of these
investments, $3.6 billion , are classified as current and are available to meet
short-term liquidity needs. The remaining non-current investments have stated
maturities of more than one year from the balance sheet date; however, they are
also generally available to meet short-term liquidity needs.
Factors that may impact the liquidity of our investment portfolio include, but
are not limited to, changes to credit ratings of the securities, uncertainty
related to regulatory developments, actions by central banks and other monetary
authorities and the ongoing strength and quality of credit markets. We will
continue to review our portfolio in light of evolving market and economic
conditions. However, if current market conditions deteriorate, the liquidity of
our investment portfolio may be impacted and we could determine that some of our
investments are impaired, which could adversely impact our financial results. We
have policies that limit the amount of credit exposure to any one financial
institution or type of investment.
Commercial paper program. We maintain a commercial paper program to support our
working capital requirements and for other general corporate purposes. Under the
program, we are authorized to issue up to $3.0 billion in outstanding notes,
with maturities up to 397 days from the date of issuance. We had no outstanding
obligations under the program at September 30, 2020 . See Note 10-Debt to our
consolidated financial statements included in Item 8-Financial Statements and
Supplementary Data of this report.
Credit facility. We have an unsecured $5.0 billion revolving credit facility
(the "Credit Facility") which expires on July 25, 2024 . There were no borrowings
under the Credit Facility as of September 30, 2020 . See Note 10-Debt to our
consolidated financial statements included in Item 8-Financial Statements and
Supplementary Data of this report.
Senior notes. In fiscal 2020, we issued fixed-rate senior notes in public
offerings in an aggregate principal amount of $7.3 billion with maturities
between 7 and 30 years. See Note 10-Debt to our consolidated financial
statements included in Item 8-Financial Statements and Supplementary Data of
this report.
U.S. Litigation escrow account. Pursuant to the terms of the U.S. retrospective
responsibility plan, which was created to insulate Visa and our class A common
shareholders from financial liability for certain litigation cases, we maintain
a U.S. litigation escrow account from which monetary liabilities from
settlements of, or judgments in, the U.S. covered litigation will be payable.
When we fund the U.S. litigation escrow account, the shares of class B common
stock held by our stockholders are subject to dilution through an adjustment to
the conversion rate of the shares of class B common stock to shares of class A
common stock. The balance in this account at September 30, 2020 , was $0.9
billion and is reflected as restricted cash equivalents in our consolidated
balance sheets. As these funds are restricted for the sole purpose of making
payments related to the U.S. covered litigation matters, as described below
under Uses of Liquidity, we do not rely on them for other operational needs. See
Note 5-U.S. and Europe Retrospective Responsibility Plans and Note 20-Legal
Matters to our consolidated financial statements included in Item 8-Financial
Statements and Supplementary Data of this report.
Credit Ratings
At September 30, 2020 , our credit ratings by Standard and Poor's and Moody's
were as follows:
Standard and Poor's Moody's
Debt type Rating Outlook Rating Outlook
Short-term unsecured debt A-1+ Stable P-1 Stable
Long-term unsecured debt AA- Stable Aa3 Stable
47-------------------------------------------------------------------------------- Table of Content s Various factors affect our credit ratings, including changes in our operating performance, the economic environment, conditions in the electronic payment industry, our financial position and changes in our business strategy. We do not currently foresee any reasonable circumstances under which our credit ratings would be significantly downgraded. If a downgrade were to occur, it could adversely impact, among other things, our future borrowing costs and access to capital markets. Uses of Liquidity Payments settlement. Payments settlement due to and from our financial institution clients can represent a substantial daily liquidity requirement. MostU.S. dollar settlements are settled within the same day and do not result in a receivable or payable balance, while settlements in currencies other than theU.S. dollar generally remain outstanding for one to two business days, which is consistent with industry practice for such transactions. In general, during fiscal 2020, we were not required to fund settlement-related working capital. Our average daily net settlement position was a net payable of$452 million . We hold approximately$7.7 billion of available liquidity globally as ofSeptember 30, 2020 , in the form of cash, cash equivalents and available-for-sale investment securities, to fund daily settlement in the event one or more of our financial institution clients are unable to settle.U.S. covered litigation. We are parties to legal and regulatory proceedings with respect to a variety of matters, including certain litigation that we refer to as theU.S. covered litigation. As noted above, monetary liabilities from settlements of, or judgments in, theU.S. covered litigation are payable from theU.S. litigation escrow account. InSeptember 2018 ,Visa and other defendants entered into an Amended Settlement Agreement with plaintiffs in the interchange multidistrict litigation purporting to represent a class of plaintiffs seeking monetary damages, which superseded and amended the 2012 Settlement Agreement. InDecember 2019 , the district court granted final approval of the Amended Settlement Agreement relating to claims by the Damages Class, which was subsequently appealed. Settlement discussions with plaintiffs purporting to act on behalf of the putative Injunctive Relief Class are ongoing. During fiscal 2020, we have reached settlements with a number of merchants representing approximately 40% of theVisa -branded payment card sales volume of merchants who opted out of the Amended Settlement Agreement with the Damages Class plaintiffs. AtSeptember 30, 2020 , theU.S. litigation escrow account had an available balance of$0.9 billion for settlement with opt-out merchants. Other litigation. Judgments in and settlements of litigation, other than theU.S. covered litigation, including VE territory covered litigation or other fines imposed in investigations and proceedings, could give rise to future liquidity needs. Common stock repurchases. During fiscal 2020, we repurchased 44 million shares of our class A common stock in the open market for$8.1 billion . As ofSeptember 30, 2020 , ourJanuary 2020 Program had remaining authorized funds of$5.5 billion . See Note 15-Stockholders' Equity to our consolidated financial statements included in Item 8-Financial Statements and Supplementary Data of this report. Dividends. During fiscal 2020, we declared and paid$2.7 billion in dividends at a quarterly rate of$0.30 per share. OnOctober 23, 2020 , our board of directors declared a quarterly cash dividend of$0.32 per share of class A common stock (determined in the case of class B and C common stock and series A, UK&I andEurope preferred stock on an as-converted basis). We expect to pay approximately$703 million in connection with this dividend onDecember 1, 2020 . See Note 15-Stockholders' Equity to our consolidated financial statements included in Item 8-Financial Statements and Supplementary Data of this report. We expect to continue paying quarterly dividends in cash, subject to approval by the board of directors. All preferred and class B and C common stock will share ratably on an as-converted basis in such future dividends. Pension and other postretirement benefits. We sponsor various qualified and non-qualified defined benefit pension and other postretirement benefit plans that provide for retirement and medical benefits for substantially all employees residing in theU.S. As a result of the acquisition of Visa Europe, we assumed the obligations related to Visa Europe's defined benefit plan, primarily consisting of theUK pension plans. Our policy with respect to ourU.S. qualified pension plan is to contribute annually in September of each year, an amount not less than the minimum required under the Employee Retirement Income Security Act. OurU.S. non-qualified pension and other postretirement benefit plans are funded on a current basis. In relation to the Visa EuropeUK pension plans, our funding policy is to contribute in accordance with the appropriate funding requirements agreed with the trustees of ourUK pension plans. Additional amounts may be agreed with theUK pension plan trustees. In fiscal 2020, we made contributions to ourU.S. pension and other postretirement benefit plans of$3 million and to our Visa Europe'sUK pension plans of$22 million . In fiscal 2021, given current projections and assumptions, we anticipate funding 48 -------------------------------------------------------------------------------- Table of Content s ourU.S. pension and other postretirement benefit plans and Visa Europe'sUK defined benefit pension plans by approximately$2 million and$10 million , respectively. The actual contribution amount will vary depending upon the funded status of the pension plan, movements in the discount rate, performance of the plan assets and related tax consequences. See Note 11-Pension and Other Postretirement Benefits to our consolidated financial statements included in Item 8-Financial Statements and Supplementary Data of this report. Capital expenditures. Our capital expenditures decreased slightly during fiscal 2020. We expect to continue investing in technology assets and payments system infrastructure to support our digital solutions and core business initiatives. Senior notes. A principal payment of$3.0 billion is due onDecember 14, 2020 on our fixed-rate senior notes issued inDecember 2015 , for which we have sufficient liquidity. See Note 10-Debt to our consolidated financial statements included in Item 8-Financial Statements and Supplementary Data of this report. Acquisitions. In fiscal 2020, we entered into a definitive agreement to acquire Plaid Inc. for$5.3 billion . We will pay approximately$4.9 billion of cash and$0.4 billion of retention equity and deferred equity consideration. OnNovember 5, 2020 , theU.S. Department of Justice filed a complaint in theU.S. District Court for the Northern District of California seeking a permanent injunction to preventVisa from acquiringPlaid . See Note 2-Acquisitions and Note 20-Legal Matters to our consolidated financial statements included in Item 8-Financial Statements and Supplementary Data of this report. Off-Balance Sheet Arrangements Our off-balance sheet arrangements are primarily comprised of guarantees and indemnifications.Visa has no off-balance sheet arrangements, other than purchase order commitments, as discussed and reflected in our contractual obligations table below. Indemnifications We indemnify our financial institution clients for settlement losses suffered due to the failure of any other client to fund its settlement obligations in accordance with our operating rules. The amount of the indemnification is limited to the amount of unsettledVisa payment transactions at any point in time. We maintain and regularly review global settlement risk policies and procedures to manage settlement risk, which may require clients to post collateral if certain credit standards are not met. See Note 1-Summary of Significant Accounting Policies and Note 12-Settlement Guarantee Management to our consolidated financial statements included in Item 8-Financial Statements and Supplementary Data of this report. In the ordinary course of business, we enter into contractual arrangements with financial institutions and other clients and partners under which we may agree to indemnify the client for certain types of losses incurred relating to the services we provide or otherwise relating to our performance under the applicable agreement. 49 -------------------------------------------------------------------------------- Table of Content s Contractual Obligations Our contractual commitments will have an impact on our future liquidity. The contractual obligations identified in the table below include both on- and off-balance sheet transactions that represent a material, expected or contractually committed future obligation as ofSeptember 30, 2020 . We believe that we will be able to fund these obligations through cash generated from our operations and available credit facilities. Payments Due by Period Less than 1-3 3-5 More than 1 Year Years Years 5 Years Total (in millions) Debt(1)$ 3,643 $ 4,411 $ 1,046 $ 23,754 $ 32,854 Purchase obligations(2) 1,541 746 413 712 3,412 Leases(3) 108 216 209 554 1,087 Transition tax(4) 86 162 369 264 881 Dividends(5) 703 - - - 703 Total(6),(7),(8)$ 6,081 $ 5,535 $ 2,037 $ 25,284 $ 38,937 (1)Amounts presented include payments for both interest and principal. Also see Note 10-Debt to our consolidated financial statements included in Item 8-Financial Statements and Supplementary Data of this report. (2)Represents agreements to purchase goods and services that specify significant terms, including: fixed or minimum quantities to be purchased, minimum or variable price provisions, and the approximate timing of the transaction. For obligations where the individual years of spend are not specified in the contract, we have estimated the timing of when these amounts will be spent. (3)Includes operating leases for premises and equipment, which range in original lease terms from less than one year to twenty-six years. (4)Amounts presented relate to the estimated transition tax, net of foreign tax credit carryovers, on certain foreign earnings of non-U.S. subsidiaries. See Note 19-Income Taxes to our consolidated financial statements included in Item 8-Financial Statements and Supplementary Data of this report. (5)Includes expected dividend amount of$703 million as dividends were declared onOctober 23, 2020 and will be paid onDecember 1, 2020 to all holders of record ofVisa's common and preferred stock as ofNovember 13, 2020 . (6)We have liabilities for uncertain tax positions of$2.0 billion as ofSeptember 30, 2020 . AtSeptember 30, 2020 , we had also accrued$233 million of interest and$31 million of penalties associated with our uncertain tax positions. We cannot determine the range of cash payments that will be made and the timing of the cash settlements, if any, associated with our uncertain tax positions. Therefore, no amounts related to these obligations have been included in the table. (7)We evaluate the need to make contributions to our pension plan after considering the funded status of the pension plan, movements in the discount rate, performance of the plan assets and related tax consequences. Expected contributions to our pension plan have not been included in the table as such amounts are dependent upon the considerations discussed above, and may result in a wide range of amounts. See Note 11-Pension and Other Postretirement Benefits to our consolidated financial statements included in Item 8-Financial Statements and Supplementary Data of this report and the Liquidity and Capital Resources section of this Management's Discussion and Analysis of Financial Condition and Results of Operations. (8)Future cash payments for long-term contracts with financial institution clients and other business partners are not included in the table as the amounts are unknowable due to the inherent unpredictability of payment and transaction volume. These agreements, which range in terms from less than one to fifteen years, can provide card issuance and/or conversion support, volume/growth targets or marketing and program support based on specific performance requirements. As ofSeptember 30, 2020 , we have$4.4 billion of client incentives liability recorded on the consolidated balance sheet related to these arrangements. Critical Accounting Estimates Our consolidated financial statements are prepared in accordance with accounting principles generally accepted inthe United States of America which require us to make judgments, assumptions and estimates that affect the amounts reported. See Note 1-Summary of Significant Accounting Policies to our consolidated financial statements included in Item 8-Financial Statements and Supplementary Data of this report. We have established policies and control procedures which seek to ensure that estimates and assumptions are appropriately governed and applied consistently from period to period. However, actual results could differ from our assumptions and estimates, and such differences could be material. We believe that the following accounting estimates are the most critical to fully understand and evaluate our reported financial results, as they require our most subjective or complex management judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain and unpredictable. 50 -------------------------------------------------------------------------------- Table of Content s Revenue Recognition-Client Incentives Critical estimates. We enter into long-term incentive agreements with financial institution clients, merchants and other business partners for various programs designed to increase revenue by growing payments volume, increasingVisa product acceptance, winning merchant routing transactions over to our network and driving innovation. These incentives are primarily accounted for as reductions to net revenues; however, if a separate identifiable benefit at fair value can be established, they are accounted for as operating expenses. Incentives are recognized systematically and rationally based on management's estimate of each client's performance. These estimates are regularly reviewed and adjusted as appropriate based on changes in performance expectations, actual client performance, amendments to existing contracts or the execution of new contracts. Assumptions and judgment. Estimation of client incentives relies on forecasts of payments and transaction volume, card issuance and card conversion. Performance is estimated using client-reported information, transactional information accumulated from our systems, historical information, market and economic conditions and discussions with our clients, merchants and business partners. Impact if actual results differ from assumptions. If actual performance is not consistent with our estimates, client incentives may be materially different than initially recorded. Increases in incentive payments are generally driven by increased payments and transaction volume, which drive our net revenues. As a result, in the event incentive payments exceed estimates, such payments are not expected to have a material effect on our financial condition, results of operations or cash flows. The cumulative impact of a revision in estimates is recorded in the period such revisions become probable and estimable. For the year endedSeptember 30, 2020 , client incentives represented 23% of gross revenues. Legal and Regulatory Matters Critical estimates. We are currently involved in various legal proceedings, the outcomes of which are not within our complete control or may not be known for prolonged periods of time. Management is required to assess the probability of loss and estimate the amount of such loss, if any, in preparing our consolidated financial statements. Assumptions and judgment. We evaluate the likelihood of a potential loss from legal or regulatory proceedings to which we are a party. We record a liability for such claims when a loss is deemed probable and the amount can be reasonably estimated. Significant judgment may be required in the determination of both probability and whether a potential loss is reasonably estimable. Our judgments are subjective based on management's understanding of the litigation profile, the specifics of each case, our history with similar proceedings, advice of in-house and outside legal counsel to the extent appropriate and management's best estimate of incurred loss. As additional information becomes available, we reassess the potential loss related to pending claims and may revise our estimates. We have entered into loss sharing agreements that reduce our potential liability under certain litigation. However, ourU.S. retrospective responsibility plan only addresses monetary liabilities from settlements of, or final judgments in, theU.S. covered litigation. The plan's mechanisms include the use of theU.S. litigation escrow account. The accrual related to theU.S. covered litigation could be either higher or lower than theU.S. litigation escrow account balance. OurEurope retrospective responsibility plan only covers Visa Europe territory covered litigation (and resultant liabilities and losses) relating to the covered period, subject to certain limitations, and does not cover any fines or penalties incurred in theEuropean Commission proceedings or any other matter. See Note 5-U.S. and Europe Retrospective Responsibility Plans and Note 20-Legal Matters to our consolidated financial statements included in Item 8-Financial Statements and Supplementary Data. Impact if actual results differ from assumptions. Due to the inherent uncertainties of the legal and regulatory processes in the multiple jurisdictions in which we operate, our judgments may be materially different than the actual outcomes, which could have material adverse effects on our business, financial conditions and results of operations. See Note 20-Legal Matters to our consolidated financial statements included in Item 8-Financial Statements and Supplementary Data. Income Taxes Critical estimates. In calculating our effective income tax rate, we make judgments regarding certain tax positions, including the timing and amount of deductions and allocations of income among various tax jurisdictions. 51 -------------------------------------------------------------------------------- Table of Content s Assumptions and judgment. We have various tax filing positions with regard to the timing and amount of deductions and credits, the establishment of liabilities for uncertain tax positions and the allocation of income among various tax jurisdictions. We are also required to inventory, evaluate and measure all uncertain tax positions taken or to be taken on tax returns and to record liabilities for the amount of such positions that may not be sustained, or may only be partially sustained, upon examination by the relevant taxing authorities. Impact if actual results differ from assumptions. Although we believe that our estimates and judgments are reasonable, actual results may differ from these estimates. Some or all of these judgments are subject to review by the taxing authorities. If one or more of the taxing authorities were to successfully challenge our right to realize some or all of the tax benefit we have recorded, and we were unable to realize this benefit, it could have a material adverse effect on our financial results and cash flows. ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk Market risk is the potential economic loss arising from adverse changes in market factors. Our exposure to financial market risks results primarily from fluctuations in foreign currency exchange rates, interest rates and equity prices. Aggregate risk exposures are monitored on an ongoing basis. Foreign Currency Exchange Rate Risk We are exposed to risks from foreign currency exchange rate fluctuations that are primarily related to changes in the functional currency value of revenues generated from foreign currency-denominated transactions and changes in the functional currency value of payments in foreign currencies. We manage these risks by entering into foreign currency forward contracts that hedge exposures of the variability in the functional currency equivalent of anticipated non-functional currency denominated cash flows. Our foreign currency exchange rate risk management program reduces, but does not entirely eliminate, the impact of foreign currency exchange rate movements. AtSeptember 30, 2020 and 2019, the aggregate notional amounts of our foreign currency forward contracts outstanding in our exchange rate risk management program, including contracts not designated for cash flow hedge accounting, were$3.9 billion and$3.1 billion , respectively. The aggregate notional amount outstanding atSeptember 30, 2020 is fully consistent with our strategy and treasury policy aimed at reducing foreign exchange risk below a predetermined and approved threshold. However, actual results could materially differ from our forecast. The effect of a hypothetical 10% strengthening or weakening in the value of the functional currencies atSeptember 30, 2020 is estimated to create an additional fair value gain of approximately$210 million or loss of approximately$260 million , respectively, on our outstanding foreign currency forward contracts. The gain or loss from this hypothetical strengthening or weakening would be largely offset by a corresponding gain or loss on our cash flows from foreign currency-denominated revenues and payments. See Note 1-Summary of Significant Accounting Policies and Note 13-Derivative Financial Instruments to our consolidated financial statements included in Item 8-Financial Statements and Supplementary Data of this report. We are further exposed to foreign currency exchange rate risk related to translation as the functional currency of Visa Europe is the euro. Translation from the euro to theU.S. dollar is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using an average exchange rate for the period. Resulting translation adjustments are reported as a component of accumulated other comprehensive income (loss) on the consolidated balance sheets. A hypothetical 10% change in the euro against theU.S. dollar compared to the exchange rate atSeptember 30, 2020 , would result in a foreign currency translation adjustment of$2.2 billion . See Note 1-Summary of Significant Accounting Policies to our consolidated financial statements included in Item 8-Financial Statements and Supplementary Data of this report. We are also subject to foreign currency exchange risk in daily settlement activities. This risk arises from the timing of rate setting for settlement with clients relative to the timing of market trades for balancing currency positions. Risk in settlement activities is limited through daily operating procedures, including the utilization ofVisa settlement systems and our interaction with foreign exchange trading counterparties. 52 -------------------------------------------------------------------------------- Table of Content s Interest Rate Risk Our investment portfolio assets are held in both fixed-rate and adjustable-rate securities. Investments in fixed-rate instruments carry a degree of interest rate risk. The fair value of fixed-rate securities may be adversely impacted due to a rise in interest rates. Additionally, a falling-rate environment creates reinvestment risk because as securities mature, the proceeds are reinvested at a lower rate, generating less interest income. Historically, we have been able to hold investments until maturity. Neither our statements of operations or cash flows have been, nor are they expected to be, materially impacted by a sudden change in market interest rates. The fair value of our fixed-rate investment securities atSeptember 30, 2020 and 2019 were$4.0 billion and$1.8 billion , respectively. The fair value of our adjustable-rate debt securities were$2.0 billion and$4.6 billion atSeptember 30, 2020 and 2019, respectively. A hypothetical 100 basis point increase in interest rates would create an estimated decrease in fair value of approximately$3.5 million on our investment securities atSeptember 30, 2020 . A hypothetical 100 basis point decrease in interest rates would create an estimated increase in fair value of approximately$7.2 million on our investment securities atSeptember 30, 2020 . In fiscal 2019, we entered into interest rate and cross-currency swap agreements on a portion of our outstanding senior notes that allow us to manage our interest rate exposure through a combination of fixed and floating rates and reduce our overall cost of borrowing. Together these swap agreements effectively convert a portion of ourU.S. dollar denominated fixed-rate payments into euro denominated floating-rate payments. By entering into interest rate swaps, we have assumed risks associated with market interest rate fluctuations. A hypothetical 100 basis point increase in interest rates would have resulted in an increase of approximately$30 million in annual interest expense. See Note 13-Derivative Financial Instruments to our consolidated financial statements included in Item 8-Financial Statements and Supplementary Data of this report. Equity Investment Risk As ofSeptember 30, 2020 and 2019, the carrying value of our non-marketable equity securities was$1.0 billion and$0.7 billion , respectively. These investments are subject to a wide variety of market-related risks that could substantially reduce or increase the fair value of our holdings. A decline in financial condition or operating results of these investments could result in a loss of all or a substantial part of our carrying value in these companies. We regularly review our non-marketable equity securities for possible impairment, which generally involves an analysis of the facts and changes in circumstances influencing the investment, expectations of the entity's cash flows and capital needs, and the viability of its business model. Pension Plan Risk AtSeptember 30, 2020 and 2019, ourU.S. defined benefit pension plan assets were$1.1 billion and projected benefit obligations were$0.9 billion at each year end. A material adverse decline in the value of pension plan assets and/or in the discount rate for benefit obligations would result in a decrease in the funded status of the pension plan, an increase in pension cost and an increase in required funding. A hypothetical 10% decrease in the value of pension plan assets and a 1% decrease in the discount rate as ofSeptember 30, 2020 would result in an aggregate decrease of approximately$221 million in the funded status and an increase of approximately$44 million in pension cost. AtSeptember 30, 2020 and 2019, our non-U.S. defined benefit pension plan assets were$0.5 billion at each year end and projected benefit obligations were$0.6 billion and$0.5 billion , respectively. A material adverse decline in the value of pension plan assets and/or in the discount rate for benefit obligations would result in a decrease in the funded status of the pension plan, an increase in pension cost and an increase in required funding. A hypothetical 10% decrease in the value of pension plan assets and a 1% decrease in the discount rate as ofSeptember 30, 2020 would result in an aggregate decrease of approximately$194 million in the funded status and an increase of approximately$17 million in pension cost. We will continue to monitor the performance of pension plan assets and market conditions as we evaluate the amount of our contribution to the pension plans for fiscal 2021, if any, which would be made inSeptember 2021 . 53
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