eBay Inc.
EBAY INC (Form: 10-Q, Received: 10/20/2017 06:06:14)


 
 
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, 2017

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
 
EBAYNOTMA03.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)
 
 
2025 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, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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
[ ]
 
 
 
Emerging growth company
[ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  [ ]

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 16, 2017 , there were 1,044,571,141 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,
2017
 
December 31,
2016
 
(In millions, except par value)
 
(Unaudited)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,760

 
$
1,816

Short-term investments
4,270

 
5,333

Accounts receivable, net
626

 
592

Other current assets
1,202

 
1,134

Total current assets
7,858

 
8,875

Long-term investments
6,302

 
3,969

Property and equipment, net
1,546

 
1,516

Goodwill
4,669

 
4,501

Intangible assets, net
78

 
102

Deferred tax assets
5,214

 
4,608

Other assets
276

 
276

Total assets
$
25,943

 
$
23,847

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt
$
749

 
$
1,451

Accounts payable
260

 
283

Accrued expenses and other current liabilities
1,964

 
1,893

Deferred revenue
117

 
110

Income taxes payable
100

 
110

Total current liabilities
3,190

 
3,847

Deferred and other tax liabilities, net
2,157

 
1,888

Long-term debt
9,249

 
7,509

Other liabilities
64

 
64

Total liabilities
14,660

 
13,308

Commitments and contingencies (Note 10)

 


Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; 3,580 shares authorized; 1,049 and 1,087 shares outstanding
2

 
2

Additional paid-in capital
15,169

 
14,907

Treasury stock at cost, 607 and 557 shares
(20,970
)
 
(19,205
)
Retained earnings
16,544

 
14,959

Accumulated other comprehensive income/(loss)
538

 
(124
)
Total stockholders’ equity
11,283

 
10,539

Total liabilities and stockholders’ equity
$
25,943

 
$
23,847


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,
 
2017
 
2016
 
2017
 
2016
 
(In millions, except per share amounts)
 
(Unaudited)
Net revenues
$
2,409

 
$
2,217

 
$
6,954

 
$
6,584

Cost of net revenues
556

 
498

 
1,632

 
1,468

Gross profit
1,853

 
1,719

 
5,322

 
5,116

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
627

 
600

 
1,826

 
1,760

Product development
316

 
288

 
907

 
822

General and administrative
254

 
224

 
766

 
651

Provision for transaction losses
68

 
56

 
193

 
172

Amortization of acquired intangible assets
10

 
9

 
28

 
24

Total operating expenses
1,275

 
1,177

 
3,720

 
3,429

Income from operations
578

 
542

 
1,602

 
1,687

Interest and other, net
119

 
(9
)
 
113

 
(40
)
Income before income taxes
697

 
533

 
1,715

 
1,647

Income tax benefit (provision)
(174
)
 
(115
)
 
(130
)
 
(310
)
Income from continuing operations
$
523

 
$
418

 
$
1,585

 
$
1,337

Loss from discontinued operations, net of income taxes

 
(5
)
 

 
(7
)
Net income
$
523

 
$
413

 
$
1,585

 
$
1,330

 
 
 
 
 
 
 
 
Income (loss) per share - basic:
 
 
 
 
 
 
 
Continuing operations
$
0.49

 
$
0.37

 
$
1.48

 
$
1.17

Discontinued operations

 

 

 
(0.01
)
Net income per share - basic
$
0.49

 
$
0.37

 
$
1.48

 
$
1.16

 
 
 
 
 
 
 
 
Income (loss) per share - diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.48

 
$
0.36

 
$
1.45

 
$
1.16

Discontinued operations

 

 

 
(0.01
)
Net income per share - diluted
$
0.48

 
$
0.36

 
$
1.45

 
$
1.15

 
 
 
 
 
 
 
 
Weighted-average shares:
 
 
 
 
 
 
 
Basic
1,062

 
1,126

 
1,074

 
1,143

Diluted
1,078

 
1,139

 
1,091

 
1,153


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,
 
2017
 
2016
 
2017
 
2016
 
(In millions)
 
(Unaudited)
Net income
$
523

 
$
413

 
$
1,585

 
$
1,330

Other comprehensive income, net of reclassification adjustments:
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
115

 
150

 
791

 
217

Unrealized gains (losses) on investments, net
7

 
353

 
(42
)
 
657

Tax benefit (expense) on unrealized gains (losses) on investments, net
(2
)
 
(128
)
 
16

 
(229
)
Unrealized gains (losses) on hedging activities, net
(24
)
 

 
(122
)
 
33

Tax benefit (expense) on unrealized gains (losses) on hedging activities, net
5

 

 
19

 

Other comprehensive income, net of tax
101

 
375

 
662

 
678

Comprehensive income
$
624

 
$
788

 
$
2,247

 
$
2,008


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,
 
2017
 
2016
 
(In millions)
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
1,585

 
$
1,330

Loss from discontinued operations, net of income taxes

 
7

Adjustments:

 
 
Provision for transaction losses
193

 
172

Depreciation and amortization
504

 
506

Stock-based compensation
356

 
306

Gain on sale of business
(167
)
 

Deferred income taxes
(38
)
 
(123
)
Changes in assets and liabilities, and other, net of acquisition effects
(275
)
 
9

Net cash provided by continuing operating activities
2,158

 
2,207

Net cash used in discontinued operating activities

 
(1
)
Net cash provided by operating activities
2,158

 
2,206

Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(474
)
 
(490
)
Purchases of investments
(11,276
)
 
(7,782
)
Equity investment in Flipkart
(514
)
 

Maturities and sales of investments
10,778

 
5,929

Other
(24
)
 
(225
)
Net cash used in continuing investing activities
(1,510
)
 
(2,568
)
Net cash used in discontinued investing activities

 

Net cash used in investing activities
(1,510
)
 
(2,568
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of common stock
74

 
67

Repurchases of common stock
(1,824
)
 
(2,002
)
Excess tax benefits from stock-based compensation

 
9

Tax withholdings related to net share settlements of restricted stock units and awards
(170
)
 
(96
)
Proceeds from issuance of long-term debt, net
2,484

 
2,216

Repayment of debt
(1,450
)
 
(17
)
Other
(2
)
 
5

Net cash provided by (used in) continuing financing activities
(888
)
 
182

Net cash provided by (used in) discontinued financing activities

 

Net cash provided by (used in) financing activities
(888
)
 
182

Effect of exchange rate changes on cash and cash equivalents
184

 
101

Net decrease in cash and cash equivalents
(56
)
 
(79
)
Cash and cash equivalents at beginning of period
1,816

 
1,832

Cash and cash equivalents at end of period
1,760

 
1,753

Supplemental cash flow disclosures:
 
 
 
Cash paid for:
 
 
 
Interest
$
241

 
$
199

Income taxes
$
193

 
$
117

Noncash investing activities:
 
 
 
Sale of business in exchange for ownership interest in Flipkart
$
211

 
$


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, which includes 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, its localized counterparts and the StubHub mobile apps. Our Classifieds platforms include a collection of brands such as Mobile.de, Kijiji, Gumtree, Marktplaats, eBay Kleinanzeigen and others.

When we refer to “we,” “our,” “us” or “eBay” in this Quarterly Report on Form 10-Q, 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, 2016 . 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.

Recently Adopted Accounting Pronouncements

In 2016, the FASB issued new guidance to revise certain aspects of stock-based compensation guidance which includes income tax consequences, classification of awards as equity or liabilities, and classification on the statement of cash flows. We adopted the new standard in the first quarter of 2017. Adoption of this standard did not have a material impact on our consolidated financial statements.

6


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


Recent Accounting Pronouncements Not Yet Adopted

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. 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.

While we continue to assess all potential impacts of the standard, we currently identified one performance obligation related to the core service offered to sellers in our Marketplace platform and believe additional services mainly to promote or feature listings at the option of sellers are not distinct within the context of the contract. Accordingly, certain fees paid by sellers for these services will be recognized when the single performance obligation is satisfied resulting, in some cases, in a change in the timing of recognition from current guidance. We are in the process of quantifying the impact resulting from the change in timing of recognition for both the Marketplace and StubHub platforms. We do not anticipate that the principal versus agent considerations under ASU 2016-08 Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) will materially change how we present revenue. Further, we believe certain incentives such as coupons and rewards provided to certain users from which we do not earn revenue within the context of the identified contract of approximately $330 million for fiscal year 2016 could be recognized as sales and marketing expense, historically recorded as a reduction of revenue under current guidance. We are in process of quantifying the amount for fiscal year 2017.

We currently anticipate adopting the standard using the full retrospective transition method and restate each prior reporting period presented. The Company will adopt the new revenue standard in its first quarter of 2018.

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 anticipate that the adoption of the new standard will increase the volatility of our other income (expense), net, as a result of the remeasurement of our equity and cost method investments.

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 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.


7


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

In 2016, the FASB issued new guidance that 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. Additionally, the FASB issued new guidance to include restricted cash with cash and cash equivalents when reconciling the beginning-of-the-period and end-of-the-period total amounts shown on the statement of cash flows. The new standards are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. While we continue to assess the potential impact of this standard, 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 the recognition of the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. This removes the exception to postpone recognition until the asset has been sold to an outside party. This standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods, with early adoption permitted. It is required to be applied on a modified retrospective basis through a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. We currently anticipate that the adoption of this new guidance will not have a material impact on our consolidated financial statements.

In 2017, the FASB issued new guidance that narrows the application of when an integrated set of assets and activities is considered a business and provides a framework to assist entities in evaluating whether both an input and a substantive process are present to be considered a business. It is expected that the new guidance will reduce the number of transactions that would need to be further evaluated and accounted for as a business. This standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods, with early adoption permitted. We anticipate that the adoption of the new guidance will impact management’s consideration of strategic investments, but do not expect a material impact on our consolidated financial statements at adoption.

In 2017, the FASB issued new guidance to simplify the subsequent measurement of goodwill by removing the requirement to perform a hypothetical purchase price allocation to compute the implied fair value of goodwill to measure impairment. Instead, any goodwill impairment will equal the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. Further, the guidance eliminates the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. This standard is effective for annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2019, with early adoption permitted for impairment tests performed after January 1, 2017. While we continue to assess the potential impact of this standard, we do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

In 2017, the FASB issued new guidance to clarify the scope and application of the sale or transfer of nonfinancial assets to noncustomers, including partial sales and also defines what constitutes an “in substance nonfinancial asset” which can include financial assets. The new guidance eliminates several accounting differences between transactions involving assets and transactions involving businesses. Further, the guidance aligns the accounting for derecognition of a nonfinancial asset with that of a business. This standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements.

In 2017, the FASB issued new guidance that will shorten the amortization period for certain callable debt securities held at a premium to the earliest call date to more closely align with expectations incorporated in market pricing. The new guidance will not impact debt securities held at a discount. Adoption of this standard will be made on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. This standard is effective for annual reporting periods beginning after December 15, 2018, including interim reporting periods within those annual reporting periods, with early adoption permitted. While we continue to assess the potential impact of this standard, we do not expect the adoption of this standard to have a material impact on our consolidated financial statements.


8


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

In 2017, the FASB issued new guidance to amend the scope of modification accounting for share-based payment arrangements. The amendments in the update provide guidance on types of changes to the terms or conditions of share-based payment awards would be required to apply modification accounting under ASC 718, Compensation-Stock Compensation. The amendments are effective for annual reporting periods beginning after December 15, 2017 with early adoption permitted. We are evaluating the impact of adopting this new accounting guidance on our consolidated financial statements.

In 2017, the FASB issued new guidance to simplify the application of the hedge accounting guidance in current GAAP and improve the financial reporting of hedging relationships by allowing entities to better align its risk management activities and financial reporting for hedging relationships through changes to both designation and measurement for qualifying hedging relationships and the presentation of hedge results. Further, the new guidance allows more flexibility in the requirements to qualify and maintain hedge accounting. The new standard is effective for fiscal years beginning after December 15, 2018, and interim periods. We are evaluating the impact of adopting this new accounting guidance on our consolidated financial statements.

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 three and nine months ended September 30, 2017 and 2016 (in millions, except per share amounts):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
Income from continuing operations
$
523

 
$
418

 
$
1,585

 
$
1,337

Loss from discontinued operations, net of income taxes

 
(5
)
 

 
(7
)
Net income
$
523

 
$
413

 
$
1,585

 
$
1,330

Denominator:
 
 
 
 
 
 
 
Weighted average shares of common stock - basic
1,062

 
1,126

 
1,074

 
1,143

Dilutive effect of equity incentive awards
16

 
13

 
17

 
10

Weighted average shares of common stock - diluted
1,078

 
1,139

 
1,091

 
1,153

 
 
 
 
 
 
 
 
Income (loss) per share - basic:
 
 
 
 
 
 
 
Continuing operations
$
0.49

 
$
0.37

 
$
1.48

 
$
1.17

Discontinued operations

 

 

 
(0.01
)
Net income per share - basic
$
0.49

 
$
0.37

 
$
1.48

 
$
1.16

Income (loss) per share - diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.48

 
$
0.36

 
$
1.45

 
$
1.16

Discontinued operations

 

 

 
(0.01
)
Net income per share - diluted
$
0.48

 
$
0.36

 
$
1.45

 
$
1.15

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

 
1

 
2

 
6



9


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

Note 3 — Discontinued Operations

PayPal and Enterprise

In 2015, we separated from PayPal through the distribution of 100% of the outstanding common stock of PayPal Holdings, Inc. ("PayPal") to our stockholders (the "Distribution"). Subsequent to the Distribution, we classified the results of PayPal as discontinued operations in our consolidated statement of income for all periods presented. In 2015, we also sold the businesses underlying our former Enterprise segment (“Enterprise”). Subsequent to the sale of Enterprise, we 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 (in millions):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Net revenues
$

 
$

 
$

 
$

Cost of net revenues

 

 

 

Gross profit

 

 

 

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing

 

 

 

Product development

 

 

 

General and administrative

 
13

 

 
15

Provision for transaction and loan losses

 

 

 

Amortization of acquired intangible assets

 

 

 

Goodwill impairment

 

 

 

Total operating expenses

 
13

 

 
15

Loss from operations of discontinued operations

 
(13
)
 

 
(15
)
Interest and other, net

 

 

 

Loss from discontinued operations before income taxes

 
(13
)
 

 
(15
)
Income tax benefit

 
8

 

 
8

Loss from discontinued operations, net of income taxes
$

 
$
(5
)
 
$

 
$
(7
)
 
Note 4 — Goodwill and Intangible Assets

Goodwill

The following table presents goodwill activities during the nine months ended September 30, 2017 (in millions):
 
December 31,
2016
 
Goodwill
Acquired
 
Adjustments
 
September 30,
2017
Goodwill
$
4,501

 
$
1

 
$
167

 
$
4,669


The adjustments to goodwill during the nine months ended September 30, 2017 were primarily due to foreign currency translation.


10


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

Intangible Assets

The components of identifiable intangible assets as of September 30, 2017 and December 31, 2016 are as follows (in millions, except years): 
 
September 30, 2017
 
December 31, 2016
 
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)
Intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Customer lists and user base
$
447

 
$
(415
)
 
$
32

 
5
 
$
434

 
$
(393
)
 
$
41

 
5
Marketing related
586

 
(562
)
 
24

 
5
 
568

 
(555
)
 
13

 
5
Developed technologies
266

 
(249
)
 
17

 
3
 
263

 
(229
)
 
34

 
3
All other
154

 
(149
)
 
5

 
4
 
154

 
(140
)
 
14

 
4
Total
$
1,453

 
$
(1,375
)
 
$
78

 
 
 
$
1,419

 
$
(1,317
)
 
$
102

 
 

Amortization expense for intangible assets was $16 million and $15 million for the three months ended September 30, 2017 and 2016 , respectively. Amortization expense for intangible assets was $48 million and $38 million for the nine months ended September 30, 2017 and 2016 , respectively.

Expected future intangible asset amortization as of September 30, 2017 is as follows (in millions):
Fiscal year:
 
 
Remaining 2017
 
$
16

2018
 
40

2019
 
15

2020
 
7

Thereafter
 

Total
 
$
78


Note 5 — 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 three and nine months ended September 30, 2017 and 2016 (in millions):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Net transaction revenues:
 
 
 
 
 
 
 
Marketplace
$
1,606

 
$
1,484

 
$
4,721

 
$
4,505

StubHub
273

 
261

 
704

 
663

Total net transaction revenues
1,879

 
1,745

 
5,425

 
5,168

Marketing services and other revenues:
 
 
 
 
 
 
 
Marketplace
293

 
273

 
859

 
824

Classifieds
235

 
197

 
653

 
590

StubHub, Corporate and other
2

 
2

 
17

 
2

Total marketing services and other revenues
530

 
472

 
1,529

 
1,416

Total net revenues
$
2,409

 
$
2,217

 
$
6,954

 
$
6,584



11


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

Note 6 — Investments

The following tables summarize the unrealized gains and losses and estimated fair value of our investments classified as available-for-sale as of September 30, 2017 and December 31, 2016 (in millions):
 
September 30, 2017
 
Gross
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
Short-term investments:
 
  
 
  
 
 
 
Restricted cash
$
22

  
$

  
$

 
$
22

Corporate debt securities
4,201

  
3

  
(8
)
 
4,196

Government and agency securities
52

  

  

 
52

 
$
4,275

  
$
3

  
$
(8
)
 
$
4,270

Long-term investments:
 
  
 
  
 
 
 
Corporate debt securities
5,403

  
20

  
(6
)
 
5,417

 
$
5,403

  
$
20

  
$
(6
)
 
$
5,417

 

 
December 31, 2016
 
Gross
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
Short-term investments:
 
  
 
  
 
 
 
Restricted cash
$
19

  
$

  
$

 
$
19

Corporate debt securities
5,203

  
44

  
(1
)
 
5,246

Government and agency securities
63

  
5

  

 
68

 
$
5,285

 
$
49

 
$
(1
)
 
$
5,333

Long-term investments:
 
  
 
  
 
 
 
Corporate debt securities
3,848

  
15

  
(12
)
 
3,851

 
$
3,848

  
$
15

  
$
(12
)
 
$
3,851


Investment securities in a continuous loss position for greater than 12 months had an estimated fair value of $129 million and an immaterial amount of unrealized losses as of September 30, 2017 and an estimated fair value of $123 million and an immaterial amount of unrealized losses as of December 31, 2016 . Refer to “Note 14 - 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, 2017 are as follows (in millions):  
 
September 30, 2017
One year or less (including restricted cash of $22)
$
4,270

One year through two years
2,431

Two years through three years
1,774

Three years through four years
519

Four years through five years
574

Five years through six years
119

 
$
9,687


12


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

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. During the third quarter of 2017, we received a 5.44% ownership interest in Flipkart in exchange for our eBay India business and a $500 million cash investment, resulting in a cost method investment of $725 million . The gain on disposal of our eBay India business of $167 million was recorded in interest and other, net on our consolidated statement of income. During the second quarter of 2016, we sold a portion of our equity interest in Jasper Infotech Private Limited (Snapdeal). The resulting gain was recorded in interest and other, net on our consolidated statement of income. As of September 30, 2017 and December 31, 2016 , our equity and cost method investments totaled $885 million and $118 million , respectively.

Note 7 — Fair Value Measurement of Assets and Liabilities

The following tables presents financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2017 and December 31, 2016 (in millions):
 
September 30, 2017
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
Assets:
 
 
 
 
 
Cash and cash equivalents
$
1,760

 
$
1,731

 
$
29

Short-term investments:
 
 
 
 
 
Restricted cash
22

 
22

 

Corporate debt securities
4,196

 

 
4,196

Government and agency securities
52

 

 
52

Total short-term investments
4,270

 
22

 
4,248

Derivatives
79

 

 
79

Long-term investments:
 
 
 
 
 
Corporate debt securities
5,417

 

 
5,417

Total long-term investments
5,417

 

 
5,417

Total financial assets
$
11,526

 
$
1,753

 
$
9,773

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Derivatives
$
63

 
$

 
$
63



13


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

 
December 31, 2016
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
Assets:
 
 
 
 
 
Cash and cash equivalents
$
1,816

 
$
1,816

 
$

Short-term investments:
 
 
 
 
 
Restricted cash
19

 
19

 

Corporate debt securities
5,246

 

 
5,246

Government and agency securities
68

 

 
68

Total short-term investments
5,333

 
19

 
5,314

Derivatives
154

 

 
154

Long-term investments:
 
 
 
 
 
Corporate debt securities
3,851

 

 
3,851

Total long-term investments
3,851

 

 
3,851

Total financial assets
$
11,154

 
$
1,835

 
$
9,319

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Derivatives
$
48

 
$

 
$
48

 
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, 2017 .

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 8 — 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 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.

14


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


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 (”AOCI”) 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. Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Unrealized gains and losses in AOCI associated with such derivative instruments are immediately reclassified into earnings. As of September 30, 2017 , we have estimated that approximately $61 million of net derivative losses related to our cash flow hedges included in AOCI will be reclassified into earnings within the next 12 months.

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.

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.

15


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


Fair Value of Derivative Contracts

The fair values of our outstanding derivative instruments as of September 30, 2017 and December 31, 2016 were as follows (in millions):
 
Balance Sheet Location
 
September 30,
2017
 
December 31,
2016
Derivative Assets:
 
 
 
 
 
Foreign exchange contracts designated as cash flow hedges
Other Current Assets
 
$
18

 
$
67

Foreign exchange contracts not designated as hedging instruments
Other Current Assets
 
42

 
64

Interest rate contracts designated as fair value hedges
Other Assets
 
19

 
23

Total derivative assets
 
 
$
79

 
$
154

 
 
 
 
 
 
Derivative Liabilities:
 
 
 
 
 
Foreign exchange contracts designated as cash flow hedges
Other Current Liabilities
 
$
32

 
$
3

Foreign exchange contracts not designated as hedging instruments
Other Current Liabilities
 
31

 
45

Total derivative liabilities
 
 
$
63

 
$
48

 
 
 
 
 
 
Total fair value of derivative instruments
 
 
$
16

 
$
106


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, 2017 , the potential effect of rights of set-off associated with the foreign exchange contracts would be an offset to both assets and liabilities by $41 million , resulting in net derivative assets of $19 million and net derivative liabilities of $22 million . We are not required to pledge, nor are we entitled to receive, collateral related to our foreign exchange derivative transactions. As of September 30, 2017 , 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 tables present the activity of derivative contracts that qualify for hedge accounting as of September 30, 2017 and December 31, 2016 , and the impact of these derivative contracts on AOCI for the nine months ended September 30, 2017 and 2016 (in millions): 
 
December 31, 2016
 
Amount of Gain (Loss)
Recognized in Other
Comprehensive 
Income
(Effective Portion)  
 
Amount of Gain (Loss)
Reclassified From
AOCI to Earnings
(Effective Portion)
 
September 30, 2017
Foreign exchange contracts designated as cash flow hedges
$
54

 
$
(94
)
 
$
28

 
$
(68
)

 
December 31, 2015
 
Amount of Gain (Loss)
Recognized in Other
Comprehensive 
Income
(Effective Portion)  
 
Amount of Gain (Loss)
Reclassified From
AOCI to Earnings
(Effective Portion)
 
September 30, 2016
Foreign exchange contracts designated as cash flow hedges
$
36

 
$
96

 
$
63

 
$
69



16


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

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 (in millions): 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017

2016
 
2017
 
2016
Foreign exchange contracts designated as cash flow hedges recognized in net revenues
$
(7
)
 
$

 
$
(7
)
 
$

Foreign exchange contracts designated as cash flow hedges recognized in cost of net revenues and operating expenses

 
2

 
11

 
5

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

 
25

 
24

 
58

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

 
(14
)
 
9

Total gain (loss) recognized from foreign exchange derivative contracts in the condensed consolidated statement of income
$
(13
)
 
$
33

 
$
14

 
$
72


The following table provides the location in our financial statements of the recognized gains or losses related to our interest rate derivative instruments (in millions): 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Gain (loss) from interest rate contracts designated as fair value hedges recognized in interest and other, net
$
(5
)
 
$
(26
)
 
$
(4
)
 
$
58

Gain (loss) from hedged items attributable to hedged risk recognized in interest and other, net
5

 
26

 
4

 
(58
)
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 as of September 30, 2017 and December 31, 2016 (in millions):
 
September 30,
2017
 
December 31,
2016
Foreign exchange contracts designated as cash flow hedges
$
1,999

 
$
1,200

Foreign exchange contracts not designated as hedging instruments
3,601

 
2,993

Interest rate contracts designated as fair value hedges
2,400

 
2,400

Total
$
8,000

 
$
6,593



17


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

Note 9 — Debt

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

 

 
$
450

 
1.223
%
Senior notes due 2019
 
LIBOR plus 0.48%
 
400

 
1.886
%
 
400

 
1.460
%
Senior notes due 2023
 
LIBOR plus 0.87%
 
400

 
2.285
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed Rate Notes:
 
 
 
 
 
 
 
 
 
 
Senior notes due 2017
 
1.350%
 

 

 
1,000

 
1.456
%
Senior notes due 2018
 
2.500%
 
750

 
2.775
%
 
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 2020
 
2.150%
 
500

 
2.344
%
 
 
 
 
Senior notes due 2021
 
2.875%
 
750

 
2.993
%
 
750

 
2.993
%
Senior notes due 2022
 
3.800%
 
750

 
3.989
%
 
750

 
3.989
%
Senior notes due 2022
 
2.600%
 
1,000

 
2.678
%
 
1,000

 
2.678
%
Senior notes due 2023
 
2.750%
 
750

 
2.866
%
 
 
 
 
Senior notes due 2024
 
3.450%
 
750

 
3.531
%
 
750

 
3.531
%
Senior notes due 2027
 
3.600%
 
850

 
3.689
%
 
 
 
 
Senior notes due 2042
 
4.000%
 
750

 
4.114
%
 
750

 
4.114
%
Senior notes due 2056
 
6.000%
 
750

 
6.547
%
 
750

 
6.547
%
Total senior notes
 
 
 
10,050

 
 
 
9,000

 
 
Hedge accounting fair value adjustments
 
 
 
19

 
 
 
23

 
 
Unamortized discount and debt issuance costs
 
 
 
(70
)
 
 
 
(64
)
 
 
Less: Current portion of long-term debt
 
 
 
(750
)
 
 
 
(1,450
)
 
 
Total long-term debt
 
 
 
9,249

 
 
 
7,509

 
 
 
 
 
 
 
 
 
 
 
 
 
Short-Term Debt
 
 
 
 
 
 
 
 
 
 
Current portion of long-term debt
 
 
 
750

 
 
 
1,450

 
 
Unamortized discount and debt issuance costs
 
 
 
(1
)
 
 
 
(1
)
 
 
Other indebtedness
 
 
 

 
 
 
2

 
 
Total short-term debt
 
 
 
749

 
 
 
1,451

 
 
Total Debt
 
 
 
$
9,998

 
 
 
$
8,960

 
 

Senior Notes

During the third quarter of 2017 $1.0 billion of 1.350% fixed rate notes due 2017 and $450 million of floating rate notes due 2017 matured and were repaid. During the second quarter of 2017, we issued senior unsecured notes, or senior notes, in an aggregate principal amount of  $2.5 billion . The issuance consisted of $400 million  of floating rate notes due 2023,  $500 million  of  2.150%  fixed rate notes due 2020, $750 million  of  2.750%  fixed rate notes due 2023 and  $850 million  of  3.600%  fixed rate notes due 2027.

All of 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.

18


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


If a change of control triggering event occurs with respect to the 2.500% fixed rate notes due 2018, the 2.150% fixed rate notes due 2020, the 3.800% fixed rate notes due 2022, the floating rate notes due 2023, the 2.750% fixed rate notes due 2023, the 3.600% fixed rate notes due 2027 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.

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.

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 $83 million and $68 million during the three months ended September 30, 2017 and 2016 , respectively, and $225 million and $186 million during the nine months ended September 30, 2017 and 2016 , respectively.

As of September 30, 2017 and December 31, 2016 , the estimated fair value of these senior notes was approximately $10.1 billion and $8.9 billion , respectively.

Commercial Paper

We have a commercial paper program pursuant to which we may issue commercial paper notes in an aggregate principal amount at maturity of up to $1.5 billion outstanding at any time with maturities of up to 397 days from the date of issue. As of September 30, 2017 , there were no commercial paper notes outstanding.

Credit Agreement

As of September 30, 2017 , 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 as of September 30, 2017 for other purposes permitted by the credit agreement. 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, 2017 .


19


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

Note 10 — Commitments and Contingencies

Off-Balance Sheet Arrangements

As of September 30, 2017 , 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, 2017 , we had a total of $1.3 billion in cash withdrawals offsetting our $1.3 billion in Aggregate Cash Deposits held within the financial institution under the cash pooling arrangement.

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 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 10, 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, 2017 . Except as otherwise noted for the proceedings described in this Note 10, 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.

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

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

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 the political and regulatory landscape changes; and 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 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 addition, we have entered into indemnification agreements with each of our directors, executive officers and certain other officers. These agreements require us to indemnify such individuals, to the fullest extent permitted by Delaware law, for certain liabilities to which they may become subject as a result of their affiliation with us.

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. 

Note 11 — Stockholders’ Equity

Stock Repurchase Program

Our stock repurchase program is 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 program 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 program 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.  


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

In July 2016, our Board authorized a  $2.5 billion stock repurchase program and in July 2017 our Board authorized an additional $3.0 billion stock repurchase program. These stock repurchase programs have no expiration from the date of authorization. The stock repurchase activity under our stock repurchase programs during the nine months ended September 30, 2017 is summarized as follows (in millions, except per share amounts):
 
Shares Repurchased (1)
 
Average Price per Share (2)
 
Value of Shares Repurchased
 
Remaining Amount Authorized
Balance as of January 1, 2017
 
 
 
 
 
 
$
1,336

Authorization of additional plan in July 2017
 
 
 
 
 
 
3,000

Repurchase of shares of common stock
50

 
$
34.93

 
$
1,764

 
(1,764
)
Balance as of September 30, 2017
 
 
 
 
 
 
$
2,572

 
(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 12 — Employee Benefit Plans

Restricted Stock Unit Activity

The following table presents restricted stock unit (“RSU”) activity (including performance-based RSUs that have been earned) under our equity incentive plans as of and for the nine months ended September 30, 2017 (in millions except per share amounts):  
 
Units  
Outstanding as of January 1, 2017
44

Awarded and assumed
21

Vested
(14
)
Forfeited
(6
)
Outstanding as of September 30, 2017
45


The weighted average grant date fair value for RSUs awarded during the nine months ended September 30, 2017 was $33.76 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, 2017 and 2016 was as follows (in millions):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
Cost of net revenues
$
14

 
$
9

 
$
40

 
$
26

Sales and marketing
19

 
24

 
68

 
71

Product development
45

 
40

 
131

 
115

General and administrative
40

 
32

 
117

 
94

Total stock-based compensation expense
$
118

 
$
105

 
$
356

 
$
306

Capitalized in product development
$
4

 
$
3

 
$
10

 
$
9



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

Note 13 — 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 2013 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 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.

During the fourth quarter of 2016, we began the process of realigning our legal structure, subsequent to the distribution of PayPal Holdings, Inc., to better reflect how we manage and operate our platforms. We consider many factors in effecting this realignment, including foreign exchange exposures, long-term cash flows and cash needs of our platforms, capital allocation considerations and the associated tax effects. As a result, we achieved a substantial step-up in the tax basis of the intangible assets in our foreign eBay platforms in 2016. The step-up in tax basis of our foreign eBay platforms resulted from our election to terminate an existing tax ruling and finalize a new agreement with the foreign tax authority. In the fourth quarter of 2016, we recognized a tax benefit of $4.6 billion , which represented the income tax effect of this step-up in tax basis. During the first half of 2017, we recognized a noncash income tax charge of $376 million caused by the foreign exchange remeasurement of the associated deferred tax asset. In the first quarter of 2017, we achieved a step-up in the tax basis of the intangible assets in our foreign Classifieds platforms as a result of voluntary domiciling our Classifieds intangible assets into a new jurisdiction and recognized a tax benefit of $695 million .
  
As a result of the realignment, we no longer benefit from tax rulings previously concluded in several different jurisdictions. Without the benefit of the rulings, the noncash tax impacts of the realignment in our foreign eBay and Classifieds platforms have increased our income tax rate in certain foreign jurisdictions, most significantly Switzerland. The higher rate results from eBay being subject to a higher enacted tax rate for the foreseeable future. Accordingly, our effective tax was 25% and 8% rate for the three and nine months ended September 30, 2017 as compared to 22% and 19% respectively for the same periods in 2016.

While we experienced a higher tax rate, the realignment allows us to achieve certain cash tax benefits due to the step-up in tax basis achieved in certain foreign jurisdictions. We expect these cash tax benefits to remain consistent, subject to the performance of our foreign platforms , for a period in excess of 10 years. The realignment is expected to extend into 2018 and primarily impact our international entities.

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, 2017 . We will continue to monitor ongoing developments and potential impacts to our consolidated financial statements.


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

Note 14 — Accumulated Other Comprehensive Income

The following tables summarize the changes in AOCI for the three and nine months ended September 30, 2017 and 2016 (in millions):

 
Unrealized Gains (Losses) on Derivative Instruments
 
Unrealized
Gains on
Investments
 
Foreign
Currency
Translation
 
Estimated Tax (Expense) Benefit
 
Total
Balance as of June 30, 2017
$
(44
)
 
$
2

 
$
446

 
$
33

 
$
437

Other comprehensive income (loss) before reclassifications
(31
)
 
3

 
115

 
3

 
90

Less: Amount of gain (loss) reclassified from AOCI
(7
)
 
(4
)
 

 

 
(11
)
Net current period other comprehensive income
(24
)
 
7

 
115

 
3

 
101

Balance as of September 30, 2017
$
(68
)
 
$
9

 
$
561

 
$
36

 
$
538


 
Unrealized Gains (Losses) on Derivative Instruments
 
Unrealized
Gains on
Investments
 
Foreign
Currency
Translation
 
Estimated Tax (Expense) Benefit
 
Total
Balance as of December 31, 2016
$
54

 
$
51

 
$
(230
)
 
$
1

 
$
(124
)
Other comprehensive income (loss) before reclassifications
(94
)
 
(29
)
 
791

 
35

 
703

Less: Amount of gain (loss) reclassified from AOCI
28

 
13

 

 

 
41

Net current period other comprehensive income
(122
)
 
(42
)
 
791

 
35

 
662

Balance as of September 30, 2017
$
(68
)
 
$
9

 
$
561

 
$
36

 
$
538


 
Unrealized Gains (Losses) on Derivative Instruments
 
Unrealized
Gains on
Investments
 
Foreign
Currency
Translation
 
Estimated Tax (Expense) Benefit
 
Total
Balance as of June 30, 2016
$
69

 
$
1,149

 
$
22

 
$
(411
)
 
$
829

Other comprehensive income (loss) before reclassifications
27

 
350