eBay Inc.
EBAY INC (Form: 10-Q, Received: 10/20/2016 17:03:32)


 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
[x]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

OR

[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to _______
   
Commission file number 001-37713
 
EBAYNOTM.JPG
 
 
eBay Inc.
 
(Exact name of registrant as specified in its charter)
 
 
 

Delaware
77-0430924
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification Number)
 
 
2065 Hamilton Avenue
San Jose, California
95125
(Address of principal executive offices)
(Zip Code)
(408) 376-7400
(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  [x]    No  [ ]

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  [x]    No  [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
[x]
 
Accelerated filer
[ ]
Non-accelerated filer
[ ]
(Do not check if a smaller reporting company)
Smaller reporting company
[ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  [ ]    No  [x]

As of October 18, 2016 , there were 1,117,926,440 shares of the registrant’s common stock, $0.001 par value, outstanding, which is the only class of common or voting stock of the registrant issued.

 



PART I: FINANCIAL INFORMATION
Item 1:
Financial Statements
eBay Inc.
CONDENSED CONSOLIDATED BALANCE SHEET
 
September 30,
2016
 
December 31,
2015
 
(In millions, except par value)
 
(Unaudited)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,753

 
$
1,832

Short-term investments
6,292

 
4,299

Accounts receivable, net
626

 
619

Other current assets
1,112

 
1,154

Total current assets
9,783

 
7,904

Long-term investments
3,921

 
3,391

Property and equipment, net
1,526

 
1,554

Goodwill
4,727

 
4,451

Intangible assets, net
117

 
90

Other assets
428

 
365

Total assets
$
20,502

 
$
17,755

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt
$
1,449

 
$

Accounts payable
278

 
349

Accrued expenses and other current liabilities
1,813

 
1,736

Deferred revenue
116

 
106

Income taxes payable
107

 
72

Total current liabilities
3,763

 
2,263

Deferred and other tax liabilities, net
2,268

 
2,092

Long-term debt
7,582

 
6,749

Other liabilities
70

 
75

Total liabilities
13,683

 
11,179

Commitments and contingencies (Note 11)

 


Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; 3,580 shares authorized; 1,117 and 1,184 shares outstanding
2

 
2

Additional paid-in capital
14,782

 
14,538

Treasury stock at cost, 523 and 443 shares
(18,205
)
 
(16,203
)
Retained earnings
9,036

 
7,713

Accumulated other comprehensive income
1,204

 
526

Total stockholders’ equity
6,819

 
6,576

Total liabilities and stockholders’ equity
$
20,502

 
$
17,755


The accompanying notes are an integral part of these condensed consolidated financial statements.

2


eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(In millions, except per share amounts)
 
(Unaudited)
Net revenues
$
2,217

 
$
2,099

 
$
6,584

 
$
6,270

Cost of net revenues
498

 
433

 
1,468

 
1,278

Gross profit
1,719

 
1,666

 
5,116

 
4,992

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
600

 
565

 
1,760

 
1,672

Product development
288

 
241

 
822

 
694

General and administrative
224

 
207

 
651

 
862

Provision for transaction losses
56

 
65

 
172

 
199

Amortization of acquired intangible assets
9

 
10

 
24

 
30

Total operating expenses
1,177

 
1,088

 
3,429

 
3,457

Income from operations
542

 
578

 
1,687

 
1,535

Interest and other, net
(9
)
 
87

 
(40
)
 
221

Income from continuing operations before income taxes
533

 
665

 
1,647

 
1,756

Provision for income taxes
(115
)
 
(120
)
 
(310
)
 
(332
)
Income from continuing operations
$
418

 
$
545

 
$
1,337

 
$
1,424

Loss from discontinued operations, net of income taxes
(5
)
 
(6
)
 
(7
)
 
(176
)
Net income
$
413

 
$
539

 
$
1,330

 
$
1,248

 
 
 
 
 
 
 
 
Income (loss) per share - basic:
 
 
 
 
 
 
 
Continuing operations
$
0.37

 
$
0.45

 
$
1.17

 
$
1.17

Discontinued operations

 

 
(0.01
)
 
(0.14
)
Net income per share - basic
$
0.37

 
$
0.45

 
$
1.16

 
$
1.03

 
 
 
 
 
 
 
 
Income (loss) per share - diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.36

 
$
0.45

 
$
1.16

 
$
1.16

Discontinued operations

 

 
(0.01
)
 
(0.14
)
Net income per share - diluted
$
0.36

 
$
0.45

 
$
1.15

 
$
1.02

 
 
 
 
 
 
 
 
Weighted-average shares:
 
 
 
 
 
 
 
Basic
1,126

 
1,210

 
1,143

 
1,214

Diluted
1,139

 
1,223

 
1,153

 
1,226


The accompanying notes are an integral part of these condensed consolidated financial statements.


3


eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(In millions)
 
(Unaudited)
Net income
$
413

 
$
539

 
$
1,330

 
$
1,248

Other comprehensive income (loss), net of reclassification adjustments:
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
150

 
(182
)
 
217

 
(426
)
Unrealized gains (losses) on investments, net
353

 
(442
)
 
657

 
(320
)
Tax benefit (expense) on unrealized gains (losses) on investments, net
(128
)
 
155

 
(229
)
 
111

Unrealized gains (losses) on hedging activities, net

 
(19
)
 
33

 
(82
)
Tax benefit (expense) on unrealized gains (losses) on hedging activities, net

 
1

 

 
1

Other comprehensive income (loss), net of tax
375

 
(487
)
 
678

 
(716
)
Comprehensive income
$
788

 
$
52

 
$
2,008

 
$
532


The accompanying notes are an integral part of these condensed consolidated financial statements.


4


eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
 
Nine Months Ended
September 30,
 
2016
 
2015
 
(In millions)
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
1,330

 
$
1,248

Loss from discontinued operations, net of income taxes
7

 
176

Adjustments:

 
 
Provision for transaction losses
172

 
199

Depreciation and amortization
506

 
516

Stock-based compensation
306

 
301

Gain on sale of investments
25

 
(212
)
Changes in assets and liabilities, and other, net of acquisition effects
(139
)
 
(477
)
Net cash provided by continuing operating activities
2,207

 
1,751

Net cash provided by (used in) discontinued operating activities
(1
)
 
1,242

Net cash provided by operating activities
2,206

 
2,993

Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(490
)
 
(539
)
Purchases of investments
(7,782
)
 
(4,452
)
Maturities and sales of investments
5,929

 
5,579

Acquisitions, net of cash acquired
(201
)
 
(24
)
Other
(24
)
 
(15
)
Net cash provided by (used in) continuing investing activities
(2,568
)
 
549

Net cash used in discontinued investing activities

 
(3,837
)
Net cash used in investing activities
(2,568
)
 
(3,288
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of common stock
67

 
173

Repurchases of common stock
(2,002
)
 
(1,512
)
Excess tax benefits from stock-based compensation
9

 
72

Tax withholdings related to net share settlements of restricted stock units and awards
(96
)
 
(226
)
Proceeds from issuance of long-term debt, net
2,216

 

Repayment of debt
(17
)
 
(250
)
Other
5

 
10

Net cash provided by (used in) continuing financing activities
182

 
(1,733
)
Net cash used in discontinued financing activities

 
(1,599
)
Net cash provided by (used in) financing activities
182

 
(3,332
)
Effect of exchange rate changes on cash and cash equivalents
101

 
(286
)
Net increase (decrease) in cash and cash equivalents
(79
)
 
(3,913
)
Cash and cash equivalents at beginning of period
1,832

 
6,328

Cash and cash equivalents at end of period
$
1,753

 
$
2,415

Less: Cash and cash equivalents of held for sale

 
28

Cash and cash equivalents of continuing operations at end of period
$
1,753

 
$
2,387

Supplemental cash flow disclosures:
 
 
 
Cash paid for interest
$
199

 
$
161

Cash paid for income taxes
$
117

 
$
240


The accompanying notes are an integral part of these condensed consolidated financial statements.

5


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 — The Company and Summary of Significant Accounting Policies

The Company

eBay Inc. is a global commerce leader, including our Marketplace, StubHub and Classifieds platforms. Our Marketplace platforms include our online marketplace located at www.ebay.com, its localized counterparts and the eBay mobile apps. Our StubHub platforms include our online ticket platform located at www.stubhub.com, the StubHub mobile apps and Ticketbis. Our Classifieds platforms include a collection of brands such as Mobile.de, Kijiji, Gumtree, Marktplaats, eBay Classifieds and others. 

When we refer to “we,” “our,” “us” or “eBay” in this document, we mean the current Delaware corporation (eBay Inc.) and its California predecessor, as well as all of our consolidated subsidiaries, unless otherwise expressly stated or the context otherwise requires.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate our estimates, including those related to provisions for transaction losses, legal contingencies, income taxes, revenue recognition, stock-based compensation, goodwill and the recoverability of intangible assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results could differ from those estimates.

Principles of Consolidation and Basis of Presentation

The accompanying condensed financial statements are consolidated and include the financial statements of eBay Inc., our wholly and majority-owned subsidiaries and variable interest entities (“VIE”) where we are the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation. Minority interests are recorded as a noncontrolling interest. A qualitative approach is applied to assess the consolidation requirement for VIEs. Investments in entities where we hold at least a 20% ownership interest and have the ability to exercise significant influence, but not control, over the investee are accounted for using the equity method of accounting. For such investments, our share of the investees’ results of operations is included in interest and other, net and our investment balance is included in long-term investments. Investments in entities where we hold less than a 20% ownership interest are generally accounted for using the cost method of accounting, and our share of the investees’ results of operations is included in our condensed consolidated statement of income to the extent dividends are received.

These condensed consolidated financial statements and accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2015 . We have evaluated all subsequent events through the date these condensed consolidated financial statements were issued. In the opinion of management, these condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for fair statement of the condensed consolidated financial position, results of operations and cash flows for these interim periods.


6


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Recent Accounting Pronouncements

In 2014, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance related to revenue recognition. This new standard will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition guidance provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. In 2015, the FASB issued guidance to defer the effective date to fiscal years beginning after December 15, 2017 with early adoption for fiscal years beginning December 15, 2016. In 2016, the FASB issued several amendments to the standard, including principal versus agent considerations when another party is involved in providing goods or services to a customer and the application of identifying performance obligations. We are evaluating the impact of adopting the new accounting guidance on our consolidated financial statements and do not intend to early adopt.

In 2015, the FASB issued new guidance related to presentation of debt issuance costs. The new standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. We adopted this standard retrospectively in the first quarter of 2016. The balance sheet as of December 31, 2015 was retrospectively adjusted, which resulted in reductions to other assets of $30 million and long-term debt of $30 million .

In 2016, the FASB issued new guidance related to accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the FASB clarified guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We are evaluating the impact of adopting this new accounting guidance on our consolidated financial statements.

In 2016, the FASB issued new guidance related to accounting for leases. The new guidance requires the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous guidance. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We are evaluating the impact of adopting this new accounting guidance on our consolidated financial statements.

In 2016, the FASB issued new guidance to revise aspects of stock-based compensation guidance which include income tax consequences, classification of awards as equity or liabilities, and classification on the statement of cash flows. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. Notwithstanding the effects of stock market volatility, we do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

In 2016, the FASB issued new guidance that requires credit losses on financial assets measured at amortized cost basis to be presented at the net amount expected to be collected, not based on incurred losses. Further, credit losses on available-for-sale debt securities should be recorded through an allowance for credit losses limited to the amount by which fair value is below amortized cost. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 is permitted. We are evaluating the impact of adopting this new accounting guidance on our consolidated financial statements.

In 2016, the FASB issued new guidance which clarifies the classification of certain cash receipts and cash payments in the statement of cash flows, including debt prepayment or extinguishment costs, settlement of contingent consideration arising from a business combination, insurance settlement proceeds, and distributions from certain equity method investees. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted. We are evaluating the impact of adopting this new accounting guidance on our consolidated financial statements.


7


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Note 2 — Net Income (loss) Per Share

Basic net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding during the period. The dilutive effect of outstanding options and equity incentive awards is reflected in diluted net income (loss) per share by application of the treasury stock method. The calculation of diluted net income (loss) per share excludes all anti-dilutive common shares. The following table sets forth the computation of basic and diluted net income (loss) per share for the periods indicated:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(In millions, except per share amounts)
Numerator:
 
 
 
 
 
 
 
Income from continuing operations
$
418

 
$
545

 
$
1,337

 
$
1,424

Loss from discontinued operations, net of income taxes
(5
)
 
(6
)
 
(7
)
 
(176
)
Net income
$
413

 
$
539

 
$
1,330

 
$
1,248

Denominator:
 
 
 
 
 
 
 
Weighted average shares of common stock - basic
1,126

 
1,210

 
1,143

 
1,214

Dilutive effect of equity incentive awards
13

 
13

 
10

 
12

Weighted average shares of common stock - diluted
1,139

 
1,223

 
1,153

 
1,226

Income (loss) per share - basic:
 
 
 
 
 
 
 
Continuing operations
$
0.37

 
$
0.45

 
$
1.17

 
$
1.17

Discontinued operations

 

 
(0.01
)
 
(0.14
)
Net income per share - basic
$
0.37

 
$
0.45

 
$
1.16

 
$
1.03

Income (loss) per share - diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.36

 
$
0.45

 
$
1.16

 
$
1.16

Discontinued operations

 

 
(0.01
)
 
(0.14
)
Net income per share - diluted
$
0.36

 
$
0.45

 
$
1.15

 
$
1.02

Common stock equivalents excluded from income per diluted share because their effect would have been anti-dilutive
1

 
4

 
6

 
2


Note 3 — Business Combinations

During the nine months ended September 30, 2016, we completed  five acquisitions for an aggregate purchase consideration of approximately  $206 million , consisting of cash. We believe these acquisitions will help us build a better user experience, improve discoverability and grow our international presence. The condensed consolidated financial statements include the operating results of acquired businesses from the date of each acquisition.

The aggregate purchase consideration of $206 million was allocated as follows: purchased intangible assets of  $70 million , recognized goodwill of $174 million , and net liabilities of $40 million . These allocations have been prepared on a preliminary basis and changes to these allocations may occur as additional information becomes available. We generally do not expect goodwill to be deductible for income tax purposes.

Pro forma results of operations for these acquisitions have not been presented because the effect of the acquisitions were not material to our financial results.


8


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Note 4 — Discontinued Operations

On June 26, 2015, our Board of Directors (the “Board”) approved the separation of PayPal through the distribution of  100%  of the outstanding common stock of PayPal Holdings, Inc. ("PayPal") to our stockholders (the "Distribution"). To consummate the Distribution, our Board declared a pro rata dividend of PayPal Holdings, Inc. common stock to eBay’s stockholders of record as of the close of business on July 8, 2015 (the “Record Date”). Each eBay stockholder received one ( 1 ) share of PayPal Holdings, Inc. common stock for every share of eBay common stock held at the close of business on the Record Date. The Distribution occurred on July 17, 2015. Immediately following the Distribution, PayPal became an independent, publicly traded company and is listed on The NASDAQ Stock Market under the ticker “PYPL.” eBay continues to trade on The NASDAQ Stock Market under the ticker “EBAY.” We have classified the results of PayPal as discontinued operations in our consolidated statement of income for all periods presented. In connection with the Distribution, we reviewed our capital allocation strategy to ensure that each of PayPal and eBay would be well capitalized at Distribution. Pursuant to the terms of the separation and distribution agreement entered into between us and PayPal on June 26, 2015, upon Distribution, assets related to the PayPal business were transferred to, and liabilities related to the PayPal business were retained or assumed by, PayPal. As part of this strategy, we contributed approximately $3.8 billion of cash to PayPal in 2015.

During the second quarter of 2015, our Board approved a plan to sell the businesses underlying our former Enterprise segment (“Enterprise”). Based on the expected sales proceeds, we recorded a goodwill impairment of $786 million in the second quarter of 2015. On July 16, 2015, we signed a definitive agreement to sell Enterprise for $925 million and on November 2, 2015, the sale closed. We recorded a loss of $35 million upon closing included within income from discontinued operations, net of income taxes. We have classified the results of Enterprise as discontinued operations in our condensed consolidated statement of income for all periods presented.

The financial results of PayPal and Enterprise are presented as loss from discontinued operations, net of income taxes on our condensed consolidated statement of income. The following table presents the combined financial results of PayPal and Enterprise:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(In millions)
Net revenues
$

 
$
676

 
$

 
$
5,598

Cost of net revenues

 
362

 

 
2,524

Gross profit

 
314

 

 
3,074

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing

 
71

 

 
628

Product development

 
71

 

 
619

General and administrative
13

 
102

 
15

 
859

Provision for transaction and loan losses

 
34

 

 
427

Amortization of acquired intangible assets

 
3

 

 
100

Goodwill impairment

 

 

 
786

Total operating expenses
13

 
281

 
15

 
3,419

Loss from operations of discontinued operations
(13
)
 
33

 
(15
)
 
(345
)
Interest and other, net

 
(2
)
 

 
2

Loss from discontinued operations before income taxes
(13
)
 
31

 
(15
)
 
(343
)
Income tax benefit/(expense)
8

 
(37
)
 
8

 
167

Loss from discontinued operations, net of income taxes
$
(5
)
 
$
(6
)
 
$
(7
)
 
$
(176
)
 

9


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Note 5 — Goodwill and Intangible Assets

Goodwill

The following table presents goodwill balances and adjustments to those balances during the nine months ended September 30, 2016 :
 
December 31,
2015
 
Goodwill
Acquired
 
Adjustments
 
September 30,
2016
 
(In millions)
Goodwill
$
4,451

 
$
174

 
$
102

 
$
4,727


The adjustments to goodwill during the nine months ended September 30, 2016 were due primarily to foreign currency translation.

Intangible Assets

The components of identifiable intangible assets are as follows: 
 
September 30, 2016
 
December 31, 2015
 
Gross Carrying Amount   
 
Accumulated Amortization  
 
Net Carrying Amount
 
Weighted Average Useful Life (Years)
 
Gross Carrying Amount
 
Accumulated Amortization  
 
Net Carrying Amount
 
Weighted Average Useful Life (Years)
 
(In millions, except years)
Intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer lists and user base
$
462

 
$
(414
)
 
$
48

 
5
 
$
419

 
$
(399
)
 
$
20

 
5
Marketing related
614

 
(595
)
 
19

 
5
 
594

 
(570
)
 
24

 
5
Developed technologies
265

 
(230
)
 
35

 
3
 
238

 
(215
)
 
23

 
4
All other
152

 
(137
)
 
15

 
4
 
157

 
(134
)
 
23

 
4
 
$
1,493

 
$
(1,376
)
 
$
117

 
 
 
$
1,408

 
$
(1,318
)
 
$
90

 
 

Amortization expense for intangible assets was $15 million and $18 million for the three months ended September 30, 2016 and 2015 , respectively. Amortization expense for intangible assets was $38 million and $50 million for the nine months ended September 30, 2016 and 2015 , respectively.

Expected future intangible asset amortization as of September 30, 2016 is as follows (in millions):
Fiscal years:
 
 
Remaining 2016
 
$
18

2017
 
57

2018
 
27

2019
 
10

2020
 
5

Thereafter
 

 
 
$
117



10


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Note 6 — Segments

We have one operating and reportable segment. Our chief operating decision maker reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance.

The following table sets forth the breakdown of net revenues by type for the periods presented:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(In millions)
Net Revenues by Type:
 
 
 
 
 
 
 
Net transaction revenues:
 
 
 
 
 
 
 
Marketplace
$
1,484

 
$
1,459

 
$
4,505

 
$
4,519

StubHub
261

 
200

 
663

 
493

Total net transaction revenues
1,745

 
1,659

 
5,168

 
5,012

Marketing services and other revenues:
 
 
 
 
 
 
 
Marketplace
273

 
266

 
824

 
752

Classifieds
197

 
178

 
590

 
520

StubHub, Corporate and other
2

 
(4
)
 
2

 
(14
)
Total marketing services and other revenues
472

 
440

 
1,416

 
1,258

Total net revenues
$
2,217

 
$
2,099

 
$
6,584

 
$
6,270


Note 7 — Investments

As of September 30, 2016 and December 31, 2015 , the estimated fair value of our short-term and long-term investments classified as available for sale, were as follows:
 
September 30, 2016
 
Gross
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In millions)
Short-term investments:
 
  
 
  
 
 
 
Restricted cash
$
24

  
$

  
$

 
$
24

Corporate debt securities (1)
4,763

  
1

  
(15
)
 
4,749

Government and agency securities
16

  

  

 
16

Equity instruments
9

 
1,494

 

 
1,503

 
$
4,812

  
$
1,495

  
$
(15
)
 
$
6,292

Long-term investments:
 
  
 
  
 
 
 
Corporate debt securities (1)
3,738

  
25

  
(4
)
 
3,759

Government and agency securities
51

  
1

  

 
52

 
$
3,789

  
$
26

  
$
(4
)
 
$
3,811

 
 
(1)
As of September 30, 2016 investment securities with a fair value and a net unrealized foreign exchange loss of $1.2 billion and $15 million , respectively, were held by a foreign subsidiary in which the U.S. dollar is not the functional currency.


11


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


 
December 31, 2015
 
Gross
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In millions)
Short-term investments:
 
  
 
  
 
 
 
Restricted cash
$
28

  
$

  
$

 
$
28

Corporate debt securities
3,302

  
1

  
(16
)
 
3,287

Government and agency securities
55

  

  

 
55

Equity instruments
9

 
920

 

 
929

 
$
3,394

 
$
921

 
$
(16
)
 
$
4,299

Long-term investments:
 
  
 
  
 
 
 
Corporate debt securities
3,327

  
7

  
(67
)
 
3,267

 
$
3,327

  
$
7

  
$
(67
)
 
$
3,267


As of September 30, 2016 , investment securities in a continuous loss position for greater than 12 months had an estimated fair value and unrealized loss of $255 million and $2 million , respectively. At December 31, 2015 , investment securities in a continuous loss position for greater than 12 months had an estimated fair value and unrealized loss of $769 million and $40 million , respectively. Refer to “Note 15 - Accumulated Other Comprehensive Income” for amounts reclassified to earnings from unrealized gains and losses.

The estimated fair values of our short-term and long-term investments classified as available for sale by date of contractual maturity as of September 30, 2016 are as follows:  
 
September 30, 2016
 
(In millions)
One year or less (including restricted cash of $24)
$
4,790

One year through two years
1,492

Two years through three years
1,949

Three years through four years
115

Four years through five years
223

Five years through six years
30

Six years through seven years
1

 
$
8,600

Equity and cost method investments

We have made multiple equity and cost method investments which are reported in long-term investments on our condensed consolidated balance sheet. As of September 30, 2016 and December 31, 2015 , our equity and cost method investments totaled $110 million and $124 million , respectively. During the second quarter of 2016, we sold a portion of our equity interest in Jasper Infotech Private Limited (Snapdeal). The resulting gain is recorded in interest and other, net on our condensed consolidated statement of income.
Subsequent Event

Subsequent to September 30, 2016, we sold most of our investment in MercadoLibre, Inc. for $1.2 billion .


12


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Note 8 — Fair Value Measurement of Assets and Liabilities

The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015 :
 
Balance as of
September 30, 2016
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
(In millions)
Assets:
 
 
 
 
 
Cash and cash equivalents
$
1,753

 
$
1,753

 
$

Short-term investments:
 
 
 
 
 
Restricted cash
24

 
24

 

Corporate debt securities
4,749

 

 
4,749

Government and agency securities
16

 

 
16

Equity instruments
1,503

 
1,503

 

Total short-term investments
6,292

 
1,527

 
4,765

Derivatives
197

 

 
197

Long-term investments:
 
 
 
 
 
Corporate debt securities
3,759

 

 
3,759

Government and agency securities
52

 

 
52

Total long-term investments
3,811

 

 
3,811

Total financial assets
$
12,053

 
$
3,280

 
$
8,773

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Derivatives
$
43

 
$

 
$
43


 
Balance as of
December 31, 2015
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)  
 
Significant Other
Observable Inputs
(Level 2)
 
(In millions)
Assets:
 
 
 
 
 
Cash and cash equivalents
$
1,832

 
$
1,664

 
$
168

Short-term investments:
 
 
 
 
 
Restricted cash
28

 
28

 

Corporate debt securities
3,287

 

 
3,287

Government and agency securities
55

 

 
55

Equity instruments
929

 
929

 

Total short-term investments
4,299

 
957

 
3,342

Derivatives
97

 

 
97

Long-term investments:
 
 
 
 
 
Corporate debt securities
3,267

 

 
3,267

Total long-term investments
3,267

 

 
3,267

Total financial assets
$
9,495

 
$
2,621

 
$
6,874

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Derivatives
$
25

 
$

 
$
25

 

13


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Our financial assets and liabilities are valued using market prices on both active markets (level 1) and less active markets (level 2). Level 1 instrument valuations are obtained from real-time quotes for transactions in active exchange markets involving identical assets. Level 2 instrument valuations are obtained from readily available pricing sources for comparable instruments, identical instruments in less active markets, or models using market observable inputs. The majority of our derivative instruments are valued using pricing models that take into account the contract terms as well as multiple inputs where applicable, such as equity prices, interest rate yield curves, option volatility and currency rates. We did not have any transfers of financial instruments between valuation levels during the nine months ended September 30, 2016 .

Cash and cash equivalents are short-term, highly liquid investments with original or remaining maturities of three months or less when purchased and are comprised primarily of bank deposits, certificates of deposit and commercial paper.

In addition, we had cost and equity method investments of approximately $110 million and $124 million included in long-term investments on our condensed consolidated balance sheet at September 30, 2016 and December 31, 2015 , respectively.

Our derivative instruments vary in duration depending on contract type. Our foreign exchange derivative contracts are primarily short-term in nature, generally one month to one year in duration. Certain foreign currency contracts designated as cash flow hedges may have a duration of up to 18 months . The duration of our interest rate derivative contracts match the duration of the fixed rate notes due 2019, 2021 and 2024.

As of September 30, 2016 and December 31, 2015 , we held no direct investments in auction rate securities, collateralized debt obligations, structured investment vehicles or mortgage-backed securities.

Other financial instruments, including accounts receivable and accounts payable, are carried at cost, which approximates their fair value because of the short-term nature of these instruments.

Note 9 — Derivative Instruments

Summary of Derivative Instruments

Our primary objective in holding derivatives is to reduce the volatility of earnings and cash flows associated with changes in foreign currency exchange rates and interest rates. Our derivatives expose us to credit risk to the extent that the counterparties may be unable to meet the terms of the arrangement. We seek to mitigate such risk by limiting our counterparties to, and by spreading the risk across, major financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored on an ongoing basis. To further limit credit risk, we also enter into collateral security arrangements related to certain interest rate derivative instruments whereby collateral is posted between counterparties if the fair value of the derivative instrument exceeds certain thresholds. Additional collateral would be required in the event of a significant credit downgrade by either party.

Foreign Exchange Contracts

We transact business in various foreign currencies and have significant international revenues as well as costs denominated in foreign currencies, which subjects us to foreign currency risk. We use foreign currency exchange contracts, primarily short-term in nature, generally one month to one year in duration but with maturities up to 18 months , to reduce the volatility of cash flows primarily related to forecasted revenues, expenses, assets and liabilities denominated in foreign currencies. The objective of the foreign exchange contracts is to better ensure that ultimately the U.S. dollar-equivalent cash flows are not adversely affected by changes in the applicable U.S. dollar/foreign currency exchange rate. For derivative instruments that are designated as cash flow hedges, the effective portion of the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into earnings in the same period the forecasted transaction affects earnings. The ineffective portion of the unrealized gains and losses on these contracts, if any, is recorded immediately in earnings. We evaluate the effectiveness of our foreign exchange contracts on a quarterly basis. We do not use any foreign exchange contracts for trading purposes.


14


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


For our derivative instruments designated as cash flow hedges, the amounts recognized in earnings related to the ineffective portion were not material in each of the periods presented, and we did not exclude any component of the changes in fair value of the derivative instruments from the assessment of hedge effectiveness. As of September 30, 2016 , we have estimated that approximately $64 million of net derivative gains related to our cash flow hedges included in accumulated other comprehensive income will be reclassified into earnings within the next 12 months.

Interest Rate Contracts

In connection with the July 2014 issuance of our fixed rate notes due 2019, 2021 and 2024, we entered into certain interest rate swap agreements that have the economic effect of modifying the fixed interest obligations associated with $2.4 billion of these notes so that the interest payable on these senior notes effectively became variable based on London InterBank Offered Rate (LIBOR) plus a spread. We have designated these swap agreements as qualifying hedging instruments and are accounting for them as fair value hedges. These transactions are characterized as fair value hedges for financial accounting purposes because they protect us against changes in the fair value of certain of our fixed rate borrowings due to benchmark interest rate movements. Changes in the fair values of these interest rate swap agreements are recognized in other assets or other liabilities with a corresponding increase or decrease in long-term debt. Each quarter we pay interest based on LIBOR plus a spread to the counterparty and on a semi-annual basis receive interest from the counterparty per the fixed rate of these senior notes. The net amount is recognized as interest expense in interest and other, net. The ineffective portion of the unrealized gains and losses on these contracts, if any, is recorded immediately in earnings. We evaluate the effectiveness of our contracts on a quarterly basis. We do not use any interest rate swap agreements for trading purposes.

For our derivative instruments designated as fair value hedges, the amounts recognized in earnings related to the ineffective portion were not material in each of the periods presented, and we did not exclude any component of the changes in fair value of the derivative instruments from the assessment of hedge effectiveness.

Fair Value of Derivative Contracts

The fair values of our outstanding derivative instruments as of September 30, 2016 and December 31, 2015 were as follows:
 
Balance Sheet Location
 
September 30,
2016
 
December 31,
2015
 
 
 
(In millions)
Derivative Assets:
 
 
 
 
 
Foreign exchange contracts designated as cash flow hedges
Other Current Assets
 
$
80

 
$
42

Foreign exchange contracts not designated as hedging instruments
Other Current Assets
 
18

 
14

Interest rate contracts designated as fair value hedges
Other Assets
 
99

 
41

Total derivative assets
 
 
$
197

 
$
97

 
 
 
 
 
 
Derivative Liabilities:
 
 
 
 
 
Foreign exchange contracts designated as cash flow hedges
Other Current Liabilities
 
$
7

 
$
1

Foreign exchange contracts not designated as hedging instruments
Other Current Liabilities
 
36

 
24

Total derivative liabilities
 
 
$
43

 
$
25

 
 
 
 
 
 
Total fair value of derivative instruments
 
 
$
154

 
$
72



15


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Under the master netting agreements with the respective counterparties to our derivative contracts, subject to applicable requirements, we are allowed to net settle transactions of the same type with a single net amount payable by one party to the other. However, we have elected to present the derivative assets and derivative liabilities on a gross basis on our condensed consolidated balance sheet. As of September 30, 2016 , the potential effect of rights of set-off associated with the foreign exchange contracts discussed above would be an offset to both assets and liabilities by $36 million , resulting in net derivative assets and net derivative liabilities of $62 million and $7 million , respectively. We are not required to pledge, nor are we entitled to receive, collateral related to our foreign exchange derivative transactions. As of September 30, 2016 , we had neither pledged nor received collateral related to our interest rate derivative transactions.

Effect of Derivative Contracts on Accumulated Other Comprehensive Income

The following table summarizes the activity of derivative contracts that qualify for hedge accounting as of September 30, 2016 and December 31, 2015 , and the impact of these derivative contracts on accumulated other comprehensive income for the nine months ended September 30, 2016
 
December 31, 2015
 
Amount of Gain (Loss)
Recognized in Other
Comprehensive 
Income
(Effective Portion)  
 
Amount of Gain (Loss)
Reclassified From
Accumulated Other
Comprehensive Income
to Earnings
(Effective Portion)
 
September 30, 2016
 
(In millions)
Foreign exchange contracts designated as cash flow hedges
$
36

 
$
96

 
$
63

 
$
69


The following table summarizes the activity of derivative contracts that qualify for hedge accounting as of September 30, 2015 and December 31, 2014 , and the impact of these derivative contracts on accumulated other comprehensive income for the nine months ended September 30, 2015 :
 
December 31, 2014
 
Amount of Gain (Loss)
Recognized in Other
Comprehensive 
Income
(Effective Portion)  
 
Amount of Gain (Loss)
Reclassified From
Accumulated Other
Comprehensive Income
to Earnings
(Effective Portion)
 
September 30, 2015
 
(In millions)
Foreign exchange contracts designated as cash flow hedges
$
41

 
$
29

 
$
51

 
$
19


Effect of Derivative Contracts on Condensed Consolidated Statement of Income

The following table provides the location in our financial statements of the recognized gains or losses related to our foreign exchange derivative instruments: 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016

2015
 
2016
 
2015
 
(In millions)
Foreign exchange contracts designated as cash flow hedges recognized in cost of net revenues and operating expenses
$
2

 
$
19

 
$
5

 
$
51

Foreign exchange contracts designated as cash flow hedges recognized in interest and other, net
25

 

 
58

 

Foreign exchange contracts not designated as hedging instruments recognized in interest and other, net
6

 
13

 
9

 
(2
)
Total gain (loss) recognized from foreign exchange derivative contracts in the condensed consolidated statement of income
$
33

 
$
32

 
$
72

 
$
49



16


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


The following table provides the location in our financial statements of the recognized gains or losses related to our interest rate derivative instruments: 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2016
 
2015
 
2016
 
2015
 
(In millions)
Gain (loss) from interest rate contracts designated as fair value hedges recognized in interest and other, net
$
(26
)
 
$
56

 
$
58

 
$
55

Gain (loss) from hedged items attributable to hedged risk recognized in interest and other, net
26

 
(56
)
 
(58
)
 
(55
)
Total gain (loss) recognized from interest rate derivative contracts in the condensed consolidated statement of income
$

 
$

 
$

 
$


Notional Amounts of Derivative Contracts

Derivative transactions are measured in terms of the notional amount, but this amount is not recorded on the balance sheet and is not, when viewed in isolation, a meaningful measure of the risk profile of the instruments. The notional amount is generally not exchanged, but is used only as the basis on which the value of foreign exchange payments under these contracts are determined. The following table provides the notional amounts of our outstanding derivatives:
 
September 30,
 
2016
 
2015
 
(In millions)
Foreign exchange contracts designated as cash flow hedges
$
1,553

 
$
705

Foreign exchange contracts not designated as hedging instruments
3,015

 
2,890

Interest rate contracts designated as fair value hedges
2,400

 
2,400

Total
$
6,968

 
$
5,995



17


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Note 10 — Debt
The following table summarizes the carrying value of our outstanding debt:
 
 
Coupon
 
As of
 
Effective
 
As of
 
Effective
 
 
 Rate
 
September 30, 2016
 
 Interest Rate
 
December 31, 2015
 
 Interest Rate
 
 
(In millions, except percentages)
Long-Term Debt
 
 
 
 
 
 
 
 
 
 
Floating Rate Notes:
 
 
 
 
 
 
 
 
 
 
Senior notes due 2017
 
LIBOR plus 0.20%

 
$
450

 
1.076
%
 
$
450

 
0.586
%
Senior notes due 2019
 
LIBOR plus 0.48%

 
400

 
1.334
%
 
400

 
0.825
%
 
 
 
 
 
 
 
 
 
 
 
Fixed Rate Notes:
 
 
 
 
 
 
 
 
 
 
Senior notes due 2017
 
1.350
%
 
1,000

 
1.456
%
 
1,000

 
1.456
%
Senior notes due 2018
 
2.500
%
 
750

 
2.775
%
 

 
%
Senior notes due 2019
 
2.200
%
 
1,150

 
2.346
%
 
1,150

 
2.346
%
Senior notes due 2020
 
3.250
%
 
500

 
3.389
%
 
500

 
3.389
%
Senior notes due 2021
 
2.875
%
 
750

 
2.993
%
 
750

 
2.993
%
Senior notes due 2022
 
3.800
%
 
750

 
3.989
%
 

 
%
Senior notes due 2022
 
2.600
%
 
1,000

 
2.678
%
 
1,000

 
2.678
%
Senior notes due 2024
 
3.450
%
 
750

 
3.531
%
 
750

 
3.531
%
Senior notes due 2042
 
4.000
%
 
750

 
4.114
%
 
750

 
4.114
%
Senior notes due 2056
 
6.000
%
 
750

 
6.547
%
 

 
%
Total senior notes
 
 
 
9,000

 
 
 
6,750

 
 
Hedge accounting fair value adjustments
 
 
 
99

 
 
 
41

 
 
Unamortized discount and debt issuance costs
 
 
 
(67
)
 
 
 
(42
)
 
 
Less: Current portion of long-term debt
 
 
 
(1,450
)
 
 
 

 
 
Total long-term debt
 
 
 
7,582

 
 
 
6,749

 
 
 
 
 
 
 
 
 
 
 
 
 
Short-Term Debt
 
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
 


 
1,450

 

 

 
 
Unamortized discount and debt issuance costs
 
 
 
(1
)
 
 
 

 
 
Total short-term debt
 
 
 
1,449

 
 
 

 
 
Total Debt
 
 
 
$
9,031

 
 
 
$
6,749

 
 

Senior Notes

In the first quarter of 2016, we issued senior unsecured notes, or senior notes, in an aggregate principal amount of  $2.25 billion . This consists of  $750 million  aggregate principal amount of  2.500%  fixed rate notes due 2018,  $750 million  aggregate principal amount of  3.800%  fixed rate notes due 2022 and  $750 million  aggregate principal amount of  6.000%  fixed rate notes due 2056.

The floating rate notes are not redeemable prior to maturity. On and after March 1, 2021, we may redeem some or all of the 6.000% fixed rate notes due 2056 at any time and from time to time prior to their maturity at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest. We may redeem some or all of the other fixed rate notes of each series at any time and from time to time prior to their maturity, generally at a make-whole redemption price, plus accrued and unpaid interest. If a change of control triggering event (as defined in the applicable notes) occurs with respect to the 2.500% fixed rate notes due 2018, the 3.800% fixed rate notes due 2022 or the 6.000% fixed rate notes due 2056, we must, subject to certain exceptions, offer to repurchase all of the notes of the applicable series at a price equal to 101% of the principal amount, plus accrued and unpaid interest.


18


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


To help achieve our interest rate risk management objectives, in connection with the previous issuance of certain senior notes, we entered into interest rate swap agreements that effectively converted $2.4 billion of our fixed rate notes to floating rate debt based on LIBOR plus a spread. These swaps were designated as fair value hedges against changes in the fair value of certain fixed rate senior notes resulting from changes in interest rates. The gains and losses related to changes in the fair value of interest rate swaps substantially offset changes in the fair value of the hedged portion of the underlying debt that are attributable to changes in market interest rates.

The effective interest rates for our senior notes include the interest payable, the amortization of debt issuance costs and the amortization of any original issue discount on these senior notes. Interest on these senior notes is payable either quarterly or semiannually. Interest expense associated with these senior notes, including amortization of debt issuance costs was approximately $68 million and $46 million during the three months ended September 30, 2016 and 2015 , respectively and $186 million and $137 million during the nine months ended September 30, 2016 and 2015 , respectively. At September 30, 2016 , the estimated fair value of these senior notes was approximately $9.2 billion .

The indenture pursuant to which the senior notes were issued includes customary covenants that, among other things and subject to exceptions, limit our ability to incur, assume or guarantee debt secured by liens on specified assets or enter into sale and lease-back transactions with respect to specified properties, and also includes customary events of default.

Commercial Paper

We have an up to $1.5 billion commercial paper program pursuant to which we may issue commercial paper notes with maturities of up to 397 days from the date of issue in an aggregate principal amount at maturity of up to $1.5 billion outstanding at any time. As of September 30, 2016 , there were no commercial paper notes outstanding.

Credit Agreement

As of September 30, 2016 , no borrowings were outstanding under our $2 billion credit agreement. However, as described above, we have an up to $1.5 billion commercial paper program and therefore maintain $1.5 billion of available borrowing capacity under our credit agreement in order to repay commercial paper borrowings in the event we are unable to repay those borrowings from other sources when they become due. As a result, $500 million of borrowing capacity was available for other purposes permitted by the credit agreement as of September 30, 2016 . The credit agreement includes customary representations, warranties, affirmative and negative covenants, including financial covenants, events of default and indemnification provisions in favor of the banks. The negative covenants include restrictions regarding the incurrence of liens and subsidiary indebtedness, in each case, subject to certain exceptions. The financial covenants require us to meet a quarterly financial test with respect to a minimum consolidated interest coverage ratio and a maximum consolidated leverage ratio. The events of default include the occurrence of a change of control (as defined in the credit agreement) with respect to us.

We were in compliance with all covenants in our outstanding debt instruments during the nine months ended September 30, 2016 .

Note 11 — Commitments and Contingencies

Litigation and Other Legal Matters
 
Overview
We are involved in legal and regulatory proceedings on an ongoing basis. Many of these proceedings are in early stages and may seek an indeterminate amount of damages. If we believe that a loss arising from such matters is probable and can be reasonably estimated, we accrue the estimated liability in our financial statements. If only a range of estimated losses can be determined, we accrue an amount within the range that, in our judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, we accrue the low end of the range. For those proceedings in which an unfavorable outcome is reasonably possible but not probable, we have disclosed an estimate of the reasonably possible loss or range of losses or we have concluded that an estimate of the reasonably possible loss or range arising directly from the proceeding (i.e., monetary damages or amounts paid in judgment or settlement) are not material. If we cannot estimate the probable or reasonably possible loss or range of losses arising from a proceeding, we have disclosed that fact. In assessing the materiality of a proceeding, we

19


eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


evaluate, among other factors, the amount of monetary damages claimed, as well as the potential impact of non-monetary remedies sought by plaintiffs (e.g., injunctive relief) that may require us to change our business practices in a manner that could have a material adverse impact on our business. With respect to the matters disclosed in this Note 11, we are unable to estimate the possible loss or range of losses that could potentially result from the application of such non-monetary remedies.

Amounts accrued for legal and regulatory proceedings for which we believe a loss is probable were not material for the nine months ended September 30, 2016 . Except as otherwise noted for the proceedings described in this Note 11, we have concluded, based on currently available information, that reasonably possible losses arising directly from the proceedings (i.e., monetary damages or amounts paid in judgment or settlement) in excess of our recorded accruals are also not material. However, legal and regulatory proceedings are inherently unpredictable and subject to significant uncertainties. If one or more matters were resolved against us in a reporting period for amounts in excess of management’s expectations, the impact on our operating results or financial condition for that reporting period could be material.


Regulatory Proceedings

In May 2014, we publicly announced that criminals were able to penetrate our network and steal certain data, including user names, encrypted user passwords and other non-financial user data. Upon making this announcement, we required all buyers and sellers on our platform to reset their passwords in order to login to their account. In addition to making this public announcement, we proactively approached a number of regulatory and governmental bodies, including those with the most direct supervisory authority over our data privacy and data security programs, to specifically inform them of the incident and our actions to protect our customers in response. Certain of those regulatory agencies have requested us to provide further, more detailed information regarding the incident, and we believe that we have fully cooperated in all of those requests. To date, we have not been informed by any regulatory authority of an intention to bring any enforcement action arising from this incident; however, in the future we may be subject to fines or other regulatory action. In addition, in July 2014, a putative class action lawsuit was filed against us for alleged violations and harm resulting from the incident. The lawsuit was dismissed with leave to amend.

General Matters

Other third parties have from time to time claimed, and others may claim in the future, that we have infringed their intellectual property rights. We are subject to patent disputes, and expect that we will increasingly be subject to additional patent infringement claims involving various aspects of our business as our products and services continue to expand in scope and complexity. Such claims may be brought directly or indirectly against our companies and/or against our customers (who may be entitled to contractual indemnification under their contracts with us), and we are subject to increased exposure to such claims as a result of our acquisitions and divestitures and in cases where we are entering new lines of business. We have in the past been forced to litigate such claims. We may also become more vulnerable to third-party claims as laws such as the Digital Millennium Copyright Act, the Lanham Act and the Communications Decency Act are interpreted by the courts, and as we expand the scope of our business (both in terms of the range of products and services that we offer and our geographical operations) and become subject to laws in jurisdictions where the underlying laws with respect to the potential liability of online intermediaries like ourselves are either unclear or less favorable. We believe that additional lawsuits alleging that we have violated patent, copyright or trademark laws will be filed against us. Intellectual property claims, whether meritorious or not, are time consuming and costly to defend and resolve, could require expensive changes in our methods of doing business or could require us to enter into costly royalty or licensing agreements on unfavorable terms.

From time to time, we are involved in other disputes or regulatory inquiries that arise in the ordinary course of business, including suits by our users (individually or as class actions) alleging, among other things, improper disclosure of our prices, rules or policies, that our practices, prices, rules, policies or customer/user agreements violate applicable law or that we have acted unfairly and/or not acted in conformity with such prices, rules, policies or agreements. Further, the number and significance of these disputes and inquiries are increasing as we have grown larger, our businesses have expanded in scope (both in terms of the range of products and services that we offer and our geographical operations) and our products and services have increased in complexity. Any claims or regulatory actions against us, whether meritorious or not, could be time consuming, result in costly litigation, damage awards (including statutory damages for certain causes of action in certain jurisdictions), injunctive relief or increased costs of doing business

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eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


through adverse judgment or settlement, require us to change our business practices in expensive ways, require significant amounts of management time, result in the diversion of significant operational resources or otherwise harm our business.

Indemnification Provisions

We entered into a separation and distribution agreement and various other agreements with PayPal to govern the separation and relationship of the two companies going forward. These agreements provide for specific indemnity and liability obligations and could lead to disputes between us and PayPal, which may be significant. In addition, the indemnity rights we have against PayPal under the agreements may not be sufficient to protect us and our indemnity obligations to PayPal may be significant.

In the ordinary course of business, we have included limited indemnification provisions in certain of our agreements with parties with which we have commercial relations, including our standard marketing, promotions and application-programming-interface license agreements. Under these contracts, we generally indemnify, hold harmless and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with claims by a third party with respect to our domain names, trademarks, logos and other branding elements to the extent that such marks are applicable to our performance under the subject agreement. In certain cases, we have agreed to provide indemnification for intellectual property infringement. It is not possible to determine the maximum potential loss under these indemnification provisions due to our limited history of prior indemnification claims and the unique facts and circumstances involved in each particular provision. To date, losses recorded in our consolidated statement of income in connection with our indemnification provisions have not been significant, either individually or collectively. 

Off-Balance Sheet Arrangements

As of September 30, 2016 , we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures or capital resources.

We have a cash pooling arrangement with a financial institution for cash management purposes. This arrangement allows for cash withdrawals from the financial institution based upon our aggregate operating cash balances held within the same financial institution (“Aggregate Cash Deposits”). This arrangement also allows us to withdraw amounts exceeding the Aggregate Cash Deposits up to an agreed-upon limit. The net balance of the withdrawals and the Aggregate Cash Deposits are used by the financial institution as a basis for calculating our net interest expense or income under the arrangement. As of September 30, 2016 , we had a total of $1.2 billion in cash withdrawals offsetting our $1.2 billion in Aggregate Cash Deposits held within the financial institution under the cash pooling arrangement.



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eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Note 12 — Stock Repurchase Programs

In January 2015, our Board authorized a stock repurchase program that provided for the repurchase of up to  $2 billion  of our common stock. In June 2015, our Board authorized an additional  $1 billion  stock repurchase program and in July 2016, our Board authorized an additional  $2.5 billion stock repurchase program. These stock repurchase programs have no expiration from the date of authorization.

Our stock repurchase programs are intended to programmatically offset the impact of dilution from our equity compensation programs and, subject to market conditions and other factors, to make opportunistic repurchases of our common stock to reduce our outstanding share count. Any share repurchases under our stock repurchase programs may be made through open market transactions, block trades, privately negotiated transactions (including accelerated share repurchase transactions) or other means at times and in such amounts as management deems appropriate and will be funded from our working capital or other financing alternatives. Our stock repurchase programs may be limited or terminated at any time without prior notice. The timing and actual number of shares repurchased will depend on a variety of factors, including corporate and regulatory requirements, price and other market conditions and management’s determination as to the appropriate use of our cash.  

The stock repurchase activity under our stock repurchase programs during the nine months ended September 30, 2016 is summarized as follows:
 
Shares Repurchased (1)
 
Average Price per Share (2)
 
Value of Shares Repurchased
 
Remaining Amount Authorized
 
(In millions, except per share amounts)
Balance as of January 1, 2016
 
 
 
 
 
 
$
1,836

Authorization of additional plan in July 2016
 
 
 
 
 
 
2,500

Repurchase of shares of common stock
80

 
$
25.12

 
2,000

 
(2,000
)
Balance as of September 30, 2016
 
 
 
 
 
 
$
2,336

 
(1)
These repurchased shares of common stock were recorded as treasury stock and were accounted for under the cost method. No repurchased shares of common stock have been retired.
(2)
Excludes broker commissions.


Note 13 — Stock-Based Plans

Stock Option Activity

The following table summarizes stock option activity for the nine months ended September 30, 2016 :  
 
Options
 
(In millions)
Outstanding as of January 1, 2016
7

Granted and assumed

Exercised
(1
)
Forfeited/expired/canceled
(1
)
Outstanding as of September 30, 2016
5



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eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Restricted Stock Unit Activity

The following table summarizes restricted stock unit (“RSU”) activity for the nine months ended September 30, 2016 :  
 
Units  
 
(In millions)
Outstanding as of January 1, 2016
36

Awarded and assumed
27

Vested
(13
)
Forfeited
(5
)
Outstanding as of September 30, 2016
45


The weighted average grant date fair value for RSUs awarded during the nine months ended September 30, 2016 was $24.21 per share.

Stock-Based Compensation Expense

The impact on our results of operations of recording stock-based compensation expense for the three and nine months ended September 30, 2016 and 2015 was as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In millions)
Cost of net revenues
$
9

 
$
10

 
$
26

 
$
28

Sales and marketing
24

 
28

 
71

 
75

Product development
40

 
29

 
115

 
83

General and administrative
32

 
26

 
94

 
115

Total stock-based compensation expense
$
105

 
$
93

 
$
306

 
$
301

Capitalized in product development
$
3

 
$
3

 
$
9

 
$
9


Stock Option Valuation Assumptions

We calculated the fair value of each stock option award on the date of grant using the Black-Scholes option pricing model. Our computation of expected volatility is based on a combination of historical and market-based implied volatility from traded options on our common stock. Our computation of expected life is based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior. The interest rate for periods within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of grant.

No stock options were granted during the three months ended September 30, 2016 and an immaterial amount of stock options were granted during the nine months ended September 30, 2016 . The weighted average assumptions used for stock option grants during the three and nine months ended September 30, 2015 were as follows:  
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2015
 
2015
Risk-free interest rate
1.47
%
 
1.39
%
Expected life (in years)
4.4

 
4.1

Dividend yield
%
 
%
Expected volatility
26
%
 
27
%


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eBay Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)


Note 14 — Income Taxes

We are subject to both direct and indirect taxation in the U.S. and various states and foreign jurisdictions. We are under examination by certain tax authorities for the 2003 to 2014 tax years. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these or other examinations. The material jurisdictions where we are subject to potential examination by tax authorities for certain tax years after 2002 include, among others, the U.S. (Federal and California), Germany, Korea, Israel, Switzerland, United Kingdom and Canada.
 
Although the timing of the resolution and/or closure of audits is highly uncertain, it is reasonably possible that the balance of gross unrecognized tax benefits could significantly change in the next 12 months. However, given the number of years remaining subject to examination and the number of matters being examined, we are unable to estimate the full range of possible adjustments to the balance of gross unrecognized tax benefits.

On July 27, 2015, in Altera Corp. v. Commissioner , the U.S. Tax Court issued an opinion invalidating the regulations relating to the treatment of stock-based compensation expense in an intercompany cost-sharing arrangement. A final decision was issued by the Tax Court in December 2015. The IRS is appealing the decision and filed its arguments opposing the Tax Court decision in June 2016. Due to the uncertainty surrounding the status of the current regulations, questions related to the scope of potential benefits or obligations, and the risk of the Tax Court’s decision being overturned upon appeal, we have not recorded any benefit or expense as of September 30, 2016 . We will continue to monitor ongoing developments and potential impacts to our consolidated financial statements.

Note 15 — Accumulated Other Comprehensive Income

The following tables summarize the changes in accumulated balances of other comprehensive income for the three and nine months ended September 30, 2016 :
 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Unrealized
Gains on
Investments
 
Foreign
Currency
Translation
 
Estimated Tax (Expense) Benefit
 
Total
 
(In millions)
Balance as of June 30, 2016
$
69

 
$
1,149

 
$
22

 
$
(411
)
 
$
829

Other comprehensive income (loss) before reclassifications
27

 
350

 
150

 
(128
)
 
399

Less: Amount of gain (loss) reclassified from accumulated other comprehensive income
27

 
(3
)
 

 

 
24

Net current period other comprehensive income

 
353

 
150

 
(128
)
 
375

Balance as of September 30, 2016
$
69

 
$
1,502

 
$
172

 
$
(539
)
 
$
1,204


 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Unrealized
Gains on
Investments
 
Foreign
Currency
Translation
 
Estimated Tax (Expense) Benefit
 
Total
 
(In millions)
Balance as of December 31, 2015
$
36

 
$
845

 
$
(45
)
 
$
(310
)
 
$
526

Other comprehensive income (loss) before reclassifications
96

 
62