10-Q 1 ebay10-qq32014.htm QUARTERLY REPORT eBay 10-Q Q3 2014


 
 
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, 2014

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 000-24821
 
 
 
 
 
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 10, 2014, there were 1,242,367,268 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,
2014
 
December 31,
2013
 
(In millions, except par value amounts)
 
(Unaudited)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
4,790

 
$
4,494

Short-term investments
5,601

 
4,531

Accounts receivable, net
755

 
899

Loans and interest receivable, net
3,162

 
2,789

Funds receivable and customer accounts
9,962

 
9,260

Other current assets
1,384

 
1,310

Total current assets
25,654

 
23,283

Long-term investments
5,875

 
4,971

Property and equipment, net
2,825

 
2,760

Goodwill
9,220

 
9,267

Intangible assets, net
642

 
941

Other assets
260

 
266

Total assets
$
44,476

 
$
41,488

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 

 
 

Short-term debt
$
250

 
$
6

Accounts payable
339

 
309

Funds payable and amounts due to customers
9,962

 
9,260

Accrued expenses and other current liabilities
5,617

 
2,799

Deferred revenue
185

 
158

Income taxes payable
138

 
107

Total current liabilities
16,491

 
12,639

Deferred and other tax liabilities, net
709

 
841

Long-term debt
7,346

 
4,117

Other liabilities
120

 
244

Total liabilities
24,666

 
17,841

Commitments and contingencies (Note 8)

 


Stockholders' equity:
 
 
 
Common stock, $0.001 par value; 3,580 shares authorized; 1,242 and 1,294 shares outstanding
2

 
2

Additional paid-in capital
13,580

 
13,031

Treasury stock at cost, 362 and 296 shares
(12,872
)
 
(9,396
)
Retained earnings
17,877

 
18,854

Accumulated other comprehensive income
1,223

 
1,156

Total stockholders' equity
19,810

 
23,647

Total liabilities and stockholders' equity
$
44,476

 
$
41,488


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,
 
2014
 
2013
 
2014
 
2013
 
(In millions, except per share amounts)
 
(Unaudited)
Net revenues
$
4,353

 
$
3,892

 
$
12,981

 
$
11,517

Cost of net revenues
1,389

 
1,224

 
4,132

 
3,587

Gross profit
2,964

 
2,668

 
8,849

 
7,930

Operating expenses:
 
 
 
 
 

 
 

Sales and marketing
923

 
755

 
2,642

 
2,223

Product development
511

 
433

 
1,491

 
1,318

General and administrative
442

 
415

 
1,368

 
1,242

Provision for transaction and loan losses
249

 
185

 
685

 
553

Amortization of acquired intangible assets
58

 
81

 
210

 
245

Total operating expenses
2,183

 
1,869

 
6,396

 
5,581

Income from operations
781

 
799

 
2,453

 
2,349

Interest and other, net
20

 
74

 
24

 
89

Income before income taxes
801

 
873

 
2,477

 
2,438

Provision for income taxes
(128
)
 
(184
)
 
(3,454
)
 
(432
)
Net income (loss)
$
673

 
$
689

 
$
(977
)
 
$
2,006

Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.54

 
$
0.53

 
$
(0.78
)
 
$
1.55

Diluted
$
0.54

 
$
0.53

 
$
(0.78
)
 
$
1.53

Weighted average shares:
 
 
 
 
 
 
 
Basic
1,242

 
1,295

 
1,258

 
1,296

Diluted
1,251

 
1,310

 
1,258

 
1,314


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,
 
2014
 
2013
 
2014
 
2013
 
(In millions)
 
(Unaudited)
Net income (loss)
$
673

 
$
689

 
$
(977
)
 
$
2,006

Other comprehensive income (loss), net of reclassification adjustments:
 
 
 
 
 

 
 

Foreign currency translation gain (loss)
(214
)
 
353

 
(123
)
 
88

Unrealized gains (losses) on investments, net
67

 
243

 
(14
)
 
459

Tax (expense) benefit on unrealized gains (losses) on investments, net
(33
)
 
(86
)
 
(1
)
 
(175
)
Unrealized gains (losses) on hedging activities, net
174

 
(135
)
 
211

 
(24
)
Tax (expense) benefit on unrealized gains (losses) on hedging activities, net
(2
)
 
4

 
(6
)
 
1

Other comprehensive income (loss), net tax
(8
)
 
379

 
67

 
349

Comprehensive income (loss)
$
665

 
$
1,068

 
$
(910
)
 
$
2,355


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,
 
2014
 
2013
 
(In millions)
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
(977
)

$
2,006

Adjustments:
 

 
Provision for transaction and loan losses
685


553

Depreciation and amortization
1,120


1,033

Stock-based compensation
488


412

Gain on sale of equity investments

 
(75
)
Deferred income taxes
2,996


258

Changes in assets and liabilities, net of acquisition effects
(276
)

(905
)
Net cash provided by operating activities
4,036


3,282

Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(902
)
 
(969
)
Changes in principal loans receivable, net
(493
)
 
(395
)
Purchases of investments
(6,879
)
 
(5,726
)
Maturities and sales of investments
4,594

 
2,710

Acquisitions, net of cash acquired
(59
)
 
(85
)
Repayment of note receivable and sale of related equity investments

 
485

Other
(6
)
 
(14
)
Net cash used in investing activities
(3,745
)
 
(3,994
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of common stock
178


301

Repurchases of common stock
(3,476
)

(1,088
)
Excess tax benefits from stock-based compensation
90


180

Tax withholdings related to net share settlements of restricted stock awards and units
(224
)

(247
)
Proceeds from issuance of debt
3,482

 

Funds receivable and customer accounts, net
(702
)

(979
)
Funds payable and amounts due to customers, net
702


979

Other
(7
)
 

Net cash provided by (used in) financing activities
43

 
(854
)
Effect of exchange rate changes on cash and cash equivalents
(38
)
 
29

Net increase (decrease) in cash and cash equivalents
296

 
(1,537
)
Cash and cash equivalents at beginning of period
4,494

 
6,817

Cash and cash equivalents at end of period
$
4,790

 
$
5,280

Supplemental cash flow disclosures:
 

 
 

Cash paid for interest
$
84

 
$
85

Cash paid for income taxes
$
229

 
$
348


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

We are a global technology company that enables commerce through three reportable segments: Marketplaces, Payments and Enterprise. Our Marketplaces segment includes our eBay.com platform and its localized counterparts and our other online platforms, such as our online classifieds sites and StubHub. Our Payments segment is comprised of PayPal and PayPal Credit (formerly Bill Me Later). Our Enterprise segment includes our Magento business and provides commerce technologies, omnichannel operations and marketing solutions for merchants of all sizes that operate in general merchandise categories.

On September 30, 2014, we announced that our Board of Directors, following a strategic review of our growth strategies and structure, has approved a plan to separate our eBay (consisting of Marketplaces and Enterprise) and PayPal businesses into independent publicly traded companies. We expect to complete the transaction as a tax-free spin-off in the second half of 2015, subject to market, regulatory, and certain other conditions. We also announced that Dan Schulman has been appointed as President of PayPal and CEO-designee of the standalone PayPal company following separation, and that Devin Wenig, currently president of eBay Marketplaces, will become CEO of the new eBay company following separation.

We are required to comply with various regulations worldwide in order to operate our businesses, particularly our Payments business. We also partner with banks and other financial institutions to offer our Payments services globally. Changes in laws or regulations, non-compliance with laws or regulations or loss of key bank or financial institution partners could have a significant adverse impact on our ability to operate our Payments business; therefore, we monitor these areas closely to mitigate potential adverse impacts.

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 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 and loan 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

6


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


ended December 31, 2013. 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 presentation of the condensed consolidated financial statements for interim periods.

Recent Accounting Pronouncements

In 2013, the Financial Accounting Standards Board ("FASB") issued new accounting guidance clarifying the accounting for the release of a cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business within a foreign entity. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. The adoption of this guidance did not have a material impact on financial statements.

In 2013, the FASB issued new accounting guidance clarifying the accounting for obligations resulting from joint and several liability arrangements for which the total amount under the arrangement is fixed at the reporting date. The new standard was effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2013. The adoption of this guidance did not have a material impact on our financial statements.

In 2013, the FASB issued new accounting guidance requiring the presentation of certain unrecognized tax benefits as reductions to deferred tax assets rather than as liabilities in the consolidated balance sheets when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The new standard required adoption on a prospective basis in the first quarter of 2014. The adoption of this guidance did not have a material impact on our financial statements.

In April 2014, the FASB issued new guidance related to reporting discontinued operations. This new standard raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The new standard is effective for fiscal years beginning on or after December 15, 2014 and will impact the treatment of our tax-free spin-off of PayPal expected to occur in the second half of 2015. Early adoption is permitted but only for disposals that have not been reported in financial statements previously issued. We are evaluating the impact of adopting this new accounting guidance on our financial statements.

In May 2014, the 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 will be effective for eBay Inc. beginning January 1, 2017 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. We are evaluating the impact of adopting this new accounting guidance on our financial statements.

In June 2014, the FASB issued new guidance related to development-stage entities. The new standard removes all incremental financial reporting requirements from GAAP for development-stage entities. The accounting standards update also removes an exception provided to development stage entities in consolidations for determining whether an entity is a variable interest entity. The new standard is effective for fiscal years beginning after December 15, 2014. The revised consolidation standards are effective one year later, for fiscal years beginning after December 15, 2015. Early adoption is permitted. We are evaluating the impact, if any, of adopting this new accounting guidance on our financial statements.

In August 2014, the FASB issued new guidance related to the disclosures around going concern. The new standard provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosures. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on our 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

7


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


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,
 
2014
 
2013
 
2014
 
2013
 
(In millions, except per share amounts)
Numerator:
 
 
 
 
 
 
 
Net income (loss)
$
673

 
$
689

 
$
(977
)
 
$
2,006

Denominator:
 
 
 
 
 
 
 
Weighted average shares of common stock - basic
1,242

 
1,295

 
1,258

 
1,296

Dilutive effect of equity incentive awards
9

 
15

 

 
18

Weighted average shares of common stock - diluted
1,251

 
1,310

 
1,258

 
1,314

Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.54

 
$
0.53

 
$
(0.78
)
 
$
1.55

Diluted
$
0.54

 
$
0.53

 
$
(0.78
)
 
$
1.53

Common stock equivalents excluded from income per diluted share because their effect would have been anti-dilutive
8

 
2

 
54

 
2



Note 3 — Goodwill and Intangible Assets

Goodwill

The following table presents goodwill balances and adjustments to those balances for each of our reportable segments and corporate investments during the nine months ended September 30, 2014:
 
 
December 31,
2013
 
Goodwill
Acquired
 
Adjustments
 
September 30,
2014
 
(In millions)
Reportable segments:(1)
 
 
 
 
 
 
 
Marketplaces
$
4,861

 
$
30

 
$
(94
)
 
$
4,797

Payments
3,120

 

 
17

 
3,137

Enterprise
1,286

 

 

 
1,286

 
$
9,267

 
$
30

 
$
(77
)
 
$
9,220


(1)
The above table presents recasted annual segment activity to reflect the move of our Magento platform into our Enterprise segment. Prior to this change, Magento was reported in corporate and other.

The adjustments to goodwill during the nine months ended September 30, 2014 were due primarily to foreign currency translation, a post-closing adjustment related to our acquisition of Braintree which closed December 19, 2013 and a change in our reportable segments. Refer to "Note 4 - Segments" for further discussion on the change in our reportable segments.


8


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


Intangible Assets

The components of identifiable intangible assets are as follows: 
 
September 30, 2014
 
December 31, 2013
 
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
$
1,655

 
$
(1,339
)
 
$
316

 
5
 
$
1,653

 
$
(1,213
)
 
$
440

 
5
Marketing related
872

 
(735
)
 
137

 
5
 
780

 
(677
)
 
103

 
5
Developed technologies
583

 
(463
)
 
120

 
4
 
554

 
(401
)
 
153

 
4
Braintree related(1)
N/A

 
N/A

 
N/A

 
N/A
 
155

 

 
155

 
All other
274

 
(205
)
 
69

 
4
 
273

 
(183
)
 
90

 
4
 
$
3,384

 
$
(2,742
)
 
$
642

 
 
 
$
3,415

 
$
(2,474
)
 
$
941

 
 
 

(1)
During the nine months ended September 30, 2014, we allocated the Braintree intangible assets between customer lists, marketing related and developed technologies intangible assets.

Amortization expense for intangible assets was $85 million and $107 million for the three months ended September 30, 2014 and 2013, respectively. Amortization expense for intangible assets was $297 million and $323 million for the nine months ended September 30, 2014 and 2013, respectively.

Expected future intangible asset amortization as of September 30, 2014 is as follows (in millions):
Fiscal years:
 
 
Remaining 2014
 
$
80

2015
 
309

2016
 
182

2017
 
44

2018
 
22

Thereafter
 
5

 
 
$
642

Note 4 — Segments

We have three reportable segments: Marketplaces, Payments and Enterprise. We allocate resources to and assess the performance of each reportable segment using information about its revenue and operating income (loss). We do not evaluate operating segments using discrete asset information. We do not allocate gains and losses from equity investments, interest and other income, or taxes to our reportable segments.

During the first quarter of 2014, we changed our reportable segments based upon changes in our organizational structure which reflect the integration of our Magento platform into our Enterprise segment. Prior to this change, Magento was reported in corporate and other. Also during the first quarter of 2014, we revised our internal management reporting of certain Marketplaces transactions to align more closely with our related operating metrics. Related to this change, we reclassified our Marketplaces vehicles and real estate revenues from net transaction revenues to marketing services and other revenues. Prior period amounts have been revised to conform to the current period segment reporting structure.

The corporate and other category includes income, expenses and charges such as:

results of operations of various initiatives which support all of our reportable segments;
corporate management costs, such as human resources, finance and legal, not allocated to our segments;

9


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


amortization of intangible assets;
restructuring charges; and
stock-based compensation expense.

The following tables summarize the financial performance of our reportable segments and provide a reconciliation to our consolidated operating results for the periods reflected below:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014

2013
 
2014
 
2013
 
(In millions)
Net Revenue
 
 
 
 
 
 
 
Marketplaces
 
 
 
 
 
 
 
Net transaction revenues
$
1,707

 
$
1,609

 
$
5,156

 
$
4,741

Marketing services and other revenues
449

 
418

 
1,329

 
1,244

 
2,156

 
2,027

 
6,485

 
5,985

Payments
 
 
 
 
 
 
 
Net transaction revenues
1,783

 
1,493

 
5,224

 
4,403

Marketing services and other revenues
167

 
127

 
517

 
389

 
1,950

 
1,620

 
5,741

 
4,792

Enterprise
 
 
 
 
 
 
 
Net transaction revenues
199

 
185

 
614

 
565

Marketing services and other revenues
60

 
67

 
181

 
195

 
259

 
252

 
795

 
760

 
 
 
 
 
 
 
 
Elimination of inter-segment net revenue (1)
(12
)
 
(7
)
 
(40
)
 
(20
)
Total consolidated net revenue
$
4,353

 
$
3,892

 
$
12,981

 
$
11,517

 
 
 
 
 
 
 
 
Operating income (loss)
 
 
 
 
 
 
 
Marketplaces
$
775

 
$
789

 
$
2,419

 
$
2,406

Payments
407

 
368

 
1,360

 
1,116

Enterprise

 
8

 
16

 
9

Corporate and other
(401
)
 
(366
)
 
(1,342
)
 
(1,182
)
Total operating income (loss)
$
781

 
$
799

 
$
2,453

 
$
2,349


(1) Represents revenue generated between our reportable segments.



10


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


Note 5 — 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, 2014 and December 31, 2013:

 Description
 
Balance as of
September 30, 2014
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
 
(In millions)
Assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
4,790

 
$
3,472

 
$
1,318

Short-term investments:
 
 
 
 
 
 
Restricted cash
 
38

 
38

 

Corporate debt securities
 
4,525

 

 
4,525

Government and agency securities
 
4

 

 
4

Time deposits
 
150

 

 
150

Equity instruments
 
884

 
884

 

Total short-term investments
 
5,601

 
922

 
4,679

Funds receivable and customer accounts
 
3,858

 

 
3,858

Derivatives
 
169

 

 
169

Long-term investments:
 
 
 
 
 
 
Corporate debt securities
 
5,394

 

 
5,394

Government and agency securities
 
238

 

 
238

Total long-term investments
 
5,632

 

 
5,632

Total financial assets
 
$
20,050

 
$
4,394

 
$
15,656

 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Derivatives
 
$
73

 
$

 
$
73




11


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


Description
 
Balance as of
December 31, 2013
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1) 
 
Significant Other
Observable Inputs
(Level 2)
 
 
(In millions)
Assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
4,494

 
$
4,159

 
$
335

Short-term investments:
 
 
 
 
 
 
Restricted cash
 
17

 
17

 

Corporate debt securities
 
3,529

 

 
3,529

Government and agency securities
 
43

 

 
43

Time deposits
 
49

 

 
49

Equity instruments
 
893

 
893

 

Total short-term investments
 
4,531

 
910

 
3,621

Funds receivable and customer accounts
 
3,563

 

 
3,563

Derivatives
 
44

 

 
44

Long-term investments:
 
 
 
 
 
 
Corporate debt securities
 
4,445

 

 
4,445

Government and agency securities
 
251

 

 
251

Total long-term investments
 
4,696

 

 
4,696

Total financial assets
 
$
17,328

 
$
5,069

 
$
12,259

 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Derivatives
 
$
151

 
$

 
$
151

 
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, 2014.

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, money market funds and commercial paper. We had total funds receivable and customer accounts of $10.0 billion as of September 30, 2014, of which $3.9 billion was invested in short-term investments. We elect to account for certain customer accounts, including foreign-currency denominated available-for-sale investments, under the fair value option. Election of the fair value option allows us to significantly reduce the accounting asymmetry that would otherwise arise when recognizing foreign exchange gains and losses relating to available for sale investments and the corresponding customer liabilities.

In addition, we had cost and equity method investments of approximately $243 million and $269 million included in long-term investments on our condensed consolidated balance sheet at September 30, 2014 and our consolidated balance sheet at December 31, 2013, respectively. Additionally, as of September 30, 2014, we held no time deposits classified as held to maturity, compared to $6 million as of December 31, 2013, which were recorded at amortized cost.

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, 2014 and December 31, 2013, we held no direct investments in auction rate securities, collateralized debt obligations, structured investment vehicles or mortgage-backed securities.

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



Other financial instruments, including accounts receivable, loans and interest receivable, accounts payable, funds receivable, certain customer accounts, funds payable and amounts due to customers, are carried at cost, which approximates their fair value because of the short-term nature of these instruments.

Note 6 — 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, generally with maturities of 12 months or less, 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 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.

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, 2014, we estimate that approximately $84 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 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.


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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, 2014 and December 31, 2013 were as follows:
 
 
Balance Sheet Location
 
September 30,
2014
 
December 31,
2013
 
 
 
(In millions)
Derivative Assets:
 
 
 
 
 
Foreign exchange contracts designated as cash flow hedges
Other Current Assets
 
$
123

 
$
15

Foreign exchange contracts not designated as hedging instruments
Other Current Assets
 
46

 
29

Total derivative assets
 
 
$
169

 
$
44

 
 
 
 
 
 
Derivative Liabilities:
 
 
 
 
 
Foreign exchange contracts designated as cash flow hedges
Other Current Liabilities
 
$
18

 
$
121

Foreign exchange contracts not designated as hedging instruments
Other Current Liabilities
 
$
45

 
$
30

Interest rate contracts designated as fair value hedges
Other Liabilities
 
$
10

 
N/A

Total derivative liabilities
 
 
$
73

 
$
151

 
 
 
 
 
 
Total fair value of derivative instruments
 
 
$
96

 
$
(107
)

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, 2014, 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 $60 million, resulting in net derivative assets and derivative liabilities of $108 million and $2 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, 2014, 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, 2014 and December 31, 2013, and the impact of these derivative contracts on accumulated other comprehensive income for the nine months ended September 30, 2014:
 
 
December 31, 2013
 
Amount of gain (loss)
recognized in other
comprehensive income
(effective portion) 
 
Amount of gain (loss)
reclassified from
accumulated other
comprehensive income
to net revenue and operating expense
(effective portion)
 
September 30, 2014
 
(In millions)
Foreign exchange contracts designated as cash flow hedges
$
(106
)
 
$
147

 
$
(64
)
 
$
105



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


The following table summarizes the activity of derivative contracts that qualify for hedge accounting as of September 30, 2013 and December 31, 2012, and the impact of these derivative contracts on accumulated other comprehensive income for the nine months ended September 30, 2013:

 
December 31, 2012
 
Amount of gain (loss)
recognized in other
comprehensive income
(effective portion) 
 
Amount of gain (loss)
reclassified from
accumulated other
comprehensive income
to net revenue and operating expense
(effective portion)
 
September 30, 2013
 
(In millions)
Foreign exchange contracts designated as cash flow hedges
$
(55
)
 
$
(23
)
 
$
1

 
$
(79
)


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,
 
2014

2013
 
2014
 
2013
 
(In millions)
Foreign exchange contracts designated as cash flow hedges recognized in net revenues
$
(16
)
 
$
6

 
$
(56
)
 
$
9

Foreign exchange contracts designated as cash flow hedges recognized in operating expenses

 
(2
)
 
(8
)
 
(8
)
Foreign exchange contracts not designated as hedging instruments recognized in interest and other, net
13

 
(4
)
 
(9
)
 
13

Total gain (loss) recognized from foreign exchange derivative contracts in the condensed consolidated statement of income
$
(3
)
 
$

 
$
(73
)
 
$
14


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,
 
2014
 
2013
 
2014
 
2013
 
(In millions)
Gain (loss) from interest rate contracts designated as fair value hedges recognized in interest and other, net
$
(10
)
 
$

 
$
(10
)
 
$

Gain (loss) from hedged items attributable to hedged risk recognized in interest and other, net
10

 

 
10

 

Total gain (loss) recognized from in the condensed consolidated statement of income
$

 
$

 
$

 
$



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


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 derivative 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 is determined. The following table provides the notional amounts of our outstanding derivatives:

 
September 30,
 
2014
 
2013
 
(In millions)
Foreign exchange contracts designated as cash flow hedges
$
2,560

 
$
2,901

Foreign exchange contracts not designated as hedging instruments
2,895

 
3,380

Interest rate contracts designated as fair value hedges
$
2,400

 
N/A

Total
$
7,855

 
$
6,281



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


Note 7 — Debt
The following table summarizes the carrying value of our outstanding debt:
 
 
Coupon
 
Carrying Value as of
 
Effective
 
Carrying Value as of
 
Effective
 
 
 Rate
 
September 30, 2014
 
 Interest Rate
 
December 31, 2013
 
 Interest Rate
 
 
(In millions, except percentages)
Long-Term Debt
 
 
 
 
 
 
 
 
 
 
Floating Rate Notes:
 
 
 
 
 
 
 
 
 
 
Senior notes due 2017
 
LIBOR plus 0.20%

 
$
450

 
0.560
%
 

 
%
Senior notes due 2019
 
LIBOR plus 0.48%

 
$
400

 
0.812
%
 

 
%
 
 
 
 
 
 
 
 
 
 
 
Fixed Rate Notes:
 
 
 
 
 
 
 
 
 
 
Senior notes due 2015
 
0.700
%
 
$

 
 
 
$
250

 
0.82
%
Senior notes due 2015
 
1.625
%
 
$
600

 
1.805
%
 
$
599

 
1.805
%
Senior notes due 2017
 
1.350
%
 
1,000

 
1.456
%
 
1,000

 
1.456
%
Senior notes due 2019
 
2.200
%
 
1,148

 
2.346
%
 

 
%
Senior notes due 2020
 
3.250
%
 
498

 
3.389
%
 
498

 
3.389
%
Senior notes due 2021
 
2.875
%
 
748

 
2.993
%
 

 
%
Senior notes due 2022
 
2.600
%
 
999

 
2.678
%
 
999

 
2.678
%
Senior notes due 2024
 
3.450
%
 
749

 
3.531
%
 

 
%
Senior notes due 2042
 
4.000
%
 
743

 
4.114
%
 
743

 
4.114
%
Total senior notes
 
 
 
7,335

 
 
 
4,089

 
 
Hedge accounting fair value adjustments
 
 
 
(10
)
 
 
 
N/A

 
 
Other indebtedness
 
 
 
21

 
 
 
28

 
 
Total long-term debt
 
 
 
$
7,346

 
 
 
$
4,117

 
 
 
 
 
 
 
 
 
 
 
 
 
Short-Term Debt
 
 
 
 
 
 
 
 
 
 
Senior notes due 2015
 
0.700
%
 
250

 
0.820
%
 

 


Other indebtedness
 
 
 

 
 
 
6

 
 
Total short-term debt
 
 
 
250

 
 
 
6

 
 
Total Debt
 
 
 
$
7,596

 
 
 
$
4,123

 
 
Senior Notes
In July 2014, we issued senior unsecured notes, or senior notes, in an aggregate principal amount of $3.5 billion. This consists of $450 million aggregate principal amount of floating rate notes due 2017, $400 million aggregate principal amount of floating rate notes due 2019, $1.15 billion aggregate principal amount of 2.2% fixed rate notes due 2019, $750 million aggregate principal amount of 2.875% fixed rate notes due 2021 and $750 million aggregate principal amount of 3.45% fixed rate notes due 2024. The floating rate notes due 2017 bear interest at a floating rate equal to the 3-month LIBOR plus 0.20%. The floating rate notes due 2019 bear interest at a floating rate equal to the 3-month LIBOR plus 0.48%. Interest on the floating rate notes due 2017 is paid quarterly on January 28, April 28, July 28 and October 28 of each year. Interest on the floating rate notes due 2019 is paid quarterly on February 1, May 1, August 1 and November 1 of each year. Interest on the fixed rate notes due 2019, 2021 and 2024 is payable semi-annually on February 1 and August 1. The floating rate notes are not redeemable prior to maturity. We may redeem some or all of the 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.

To help achieve our interest rate risk management objectives, in connection with the July 2014 issuance of senior notes, we entered into interest rate swap agreements that effectively converted $2.4 billion of our fixed rate debt to floating rate debt based on LIBOR. These swaps were designated as fair value hedges against changes in the fair value of certain fixed rate senior

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


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 our senior notes, including amortization of debt issuance costs, during the three months ended September 30, 2014 and 2013 was approximately $32 million and $26 million, respectively. Interest expense associated with our senior notes, including amortization of debt issuance costs, during the nine months ended September 30, 2014 and 2013 was approximately $83 million and $79 million, respectively. At September 30, 2014, the estimated fair value of our senior notes included in long-term debt was approximately $7.2 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.
Other Indebtedness
Our other indebtedness is comprised of overdraft facilities. We have formal overdraft facilities in India bearing interest on drawn balances at a rate of approximately 10% per annum. Drawn balances are expected to be repaid in more than one year.
Commercial Paper
We have an up to $2 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 $2 billion outstanding at any time. As of September 30, 2014, there were no commercial paper notes outstanding.
Credit Agreement
As of September 30, 2014, no borrowings or letters of credit were outstanding under our $3 billion credit agreement. However, as described above, we have an up to $2 billion commercial paper program and therefore maintain $2 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, at September 30, 2014, $1 billion of borrowing capacity was available for other purposes permitted by the credit agreement. The credit agreement includes customary representations, warranties, affirmative and negative covenants, including a financial covenant, events of default and indemnification provisions in favor of the banks. The negative covenants include restrictions regarding the incurrence of liens, subject to certain exceptions. The financial covenant requires us to meet a quarterly financial test with respect to a minimum consolidated interest coverage ratio. We were in compliance with all covenants in our outstanding debt instruments for the three-month period ended September 30, 2014.

Note 8 — Commitments and Contingencies

Commitments

 As of September 30, 2014, approximately $19.3 billion of unused credit was available to PayPal Credit accountholders. While this amount represents the total unused credit available, we have not experienced, and do not anticipate, that all of our PayPal Credit accountholders will access their entire available credit at any given point in time. In addition, the individual lines of credit that make up this unused credit are subject to periodic review and termination by the chartered financial institutions that are the issuers of PayPal Credit products based on, among other things, account usage and customer creditworthiness. When a consumer makes a purchase using a PayPal Credit product, the chartered financial institution extends credit to the consumer, funds the extension of credit at the point of sale and advances funds to the merchant. We subsequently purchase the consumer receivables related to the consumer loans and as a result of that purchase, bear the risk of loss in the event of loan defaults. However, we subsequently sell a participation interest in the entire pool of consumer loans to the chartered financial institution that extended the consumer loans. Although the chartered financial institution continues to own each customer account, we own and bear the risk of loss on the related consumer receivables, less the participation interest held by the chartered financial institution, and PayPal Credit is responsible for all servicing functions related to the customer account balances. As of September 30, 2014, the total outstanding balance of this pool of consumer receivables was $3.3 billion, of which the chartered financial institution owned a participation interest of $133 million, or 4.1% of the total outstanding balance of the consumer receivables as of that date.


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


In addition, in June 2014, we agreed, subject to certain conditions, that PayPal, one of its affiliates or a third party partner will purchase a portfolio of consumer loan receivables relating to the customer accounts arising out of our current credit program agreement with Synchrony (formerly GE Capital Retail Bank) for a price based on the book value of the consumer loan receivables portfolio at the time of the purchase (expected to be October 2016), subject to certain adjustments and exclusions. As of December 31, 2013, Synchrony had a net receivables portfolio under the credit program agreement of approximately $1.3 billion.

Litigation and Other Legal Matters
 
Overview
We are involved in legal proceedings on an ongoing basis. 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. Amounts accrued for legal proceedings for which we believe a loss is probable were not material for the nine months ended September 30, 2014. Except as otherwise noted, we have concluded that reasonably possible losses arising directly from the proceedings (i.e., monetary damages or amounts paid in judgment or settlement) in excess of our accruals are also not material. 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 legal proceeding, we have disclosed that fact.
 In assessing the materiality of a legal 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 8, we are unable to estimate the possible loss or range of losses that could potentially result from the application of such non-monetary remedies.
Specific Matters

eBay's Korean subsidiary, IAC (which has merged into Gmarket and is now named eBay Korea), has notified its approximately 20 million users of a January 2008 data breach involving personally identifiable information including name, address, resident registration number and some transaction and refund data (but not including credit card information or real time banking information). Approximately 149,000 users sued IAC over this breach in several lawsuits in Korean courts and more may do so in the future (including after final determination of liability). Trial for a group of representative suits began in August 2009 in the Seoul Central District Court, and trial for additional suits began later in the Seoul Central District Court. There is some precedent in Korea for a court to grant “consolation money” for data breaches without a specific finding of harm from the breach. Such precedents have involved payments of up to approximately $200 per user. In January 2010, the Seoul Central District Court ruled that IAC had met its obligations with respect to defending the website from intrusion and, accordingly, had no liability for the breach. This January 2010 ruling was appealed by approximately 34,000 plaintiffs to the Seoul High Court. In September 2012, the Seoul High Court announced its decision upholding the Seoul Central District Court's January 2010 decision for three cases involving 55 plaintiffs (who did not appeal to the Korea Supreme Court). During 2013, the Seoul High Court upheld the Seoul Central District Court's January 2010 ruling in another 18 cases involving 33,795 plaintiffs. The Seoul High Court's decision in 10 of these 18 cases has been appealed by 33,215 plaintiffs to the Korea Supreme Court, and there was no appeal in the eight other cases. Currently, the Korea Supreme Court is reviewing a total of 11 cases with 33,218 plaintiffs, including one case appealed from the Daegu High Court. In January 2013, the Seoul Western District Court ruled in favor of IAC with respect to two cases filed by 2,291 plaintiffs by following the Seoul Central District Court's January 2010 ruling, and 2,284 plaintiffs proceeded to appeal the January 2013 decision of the Seoul Western District Court to the Seoul High Court. We expect decisions in these cases in late 2014 or early 2015.

PayPal routinely reports to the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) on payments it has rejected or blocked pursuant to OFAC sanctions regulations and on any possible violations of those regulations. PayPal has also cooperated with OFAC in recent years regarding PayPal’s review process over transaction monitoring and has self-reported a large number of small dollar amount transactions that could possibly be in violation of OFAC sanctions. In September 2014, OFAC indicated its willingness to engage in settlement discussions with PayPal regarding the alleged

19


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


violations. Any such settlement could result in a material loss, which is not reasonably estimable at this time due to the number of factors that OFAC may consider. 

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 Marketplaces, Payments and Enterprise businesses as our services continue to expand in scope and complexity. Such claims may be brought directly 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 recent acquisitions, particularly in cases where we are entering into new lines of business in connection with such acquisitions. 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 businesses (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 prices, rules, policies or customer/user agreements violate applicable law or that we have not acted in conformity with such prices, rules, policies or agreements. The number and significance of these disputes and inquiries are increasing as our company has 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

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 many of its major ecommerce agreements, our Enterprise business has agreed to indemnify Enterprise clients against certain claims by third parties regarding our products and services; these agreements may include indemnities related to various intellectual property rights, and we have provided similar indemnities in a limited number of agreements for our other businesses. In certain cases, we have agreed to provide indemnification for intellectual property infringement. In our PayPal business, we have provided an indemnity to our payment processors in the event of certain third-party claims or card association fines against the processor arising out of conduct by PayPal or PayPal customers. PayPal has also provided a limited indemnity to merchants using its retail point of sale payment services and to manufacturers of its point of sale devices (e.g., the PayPal Here devices and the Beacon device). In addition, PayPal Credit has provided indemnification provisions in its agreements with the chartered financial institutions that issue its credit products. 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 statement of income in connection with our indemnification provisions have not been significant, either individually or collectively. 


20


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


Off-Balance Sheet Arrangements

As of September 30, 2014, 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 various cash pooling arrangements with financial institutions for cash management purposes. These arrangements allow for cash withdrawals from these financial institutions based upon our aggregate operating cash balances held within the same financial institutions (“Aggregate Cash Deposits”). These arrangements also allow 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 these financial institutions as a basis for calculating our net interest expense or income under these arrangements. As of September 30, 2014, we had a total of $7.0 billion in cash withdrawals offsetting our $7.0 billion in Aggregate Cash Deposits held within these financial institutions under these cash pooling arrangements.
 

Note 9 — Stock Repurchase Programs

In June 2012, our Board of Directors authorized a stock repurchase program that provided for the repurchase of up to $2 billion of our common stock, with no expiration from the date of authorization. In January 2014, our Board of Directors authorized an additional stock repurchase program that provides for the repurchase of up to an additional $5 billion of our common stock, with no expiration from the date of authorization. The stock repurchase programs are intended to offset the impact of dilution from our equity compensation programs and, subject to market conditions and other factors, are also used 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, 2014 is summarized as follows:

 
Shares Repurchased
 
Average Price per Share
 
Value of Shares Repurchased
 
Remaining Amount Authorized
 
(In millions, except per share amounts)
Balance as of January 1, 2014
25

 
$
54.30

 
$
1,360

 
$
640

Authorization of additional plan in January 2014
 
 
 
 
 
 
5,000

Repurchase of shares of common stock
66

 
52.89

 
3,475

 
(3,475
)
Balance as of September 30, 2014
91

 
$
53.28

 
$
4,835

 
$
2,165


As of September 30, 2014, we had repurchased the full amount of common stock authorized under our June 2012 stock repurchase program and a total of approximately $2.2 billion remained available for future repurchases of our common stock under our January 2014 stock repurchase program. 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.



21


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


Note 10 — Stock-Based Plans

Stock Option Activity

The following table summarizes stock option activity for the nine months ended September 30, 2014:  
 
Options
 
(In millions)
Outstanding as of January 1, 2014
14

Granted and assumed
2

Exercised
(4
)
Forfeited/expired/canceled
(1
)
Outstanding as of September 30, 2014
11


The weighted average exercise price of stock options granted during the period was $55.60 per share and the related weighted average grant date fair value was $13.75 per share.

Restricted Stock Unit Activity

The following table summarizes restricted stock unit ("RSU") activity for the nine months ended September 30, 2014:  
 
Units 
 
(In millions)
Outstanding as of January 1, 2014
34

Awarded and assumed
17

Vested
(12
)
Forfeited
(4
)
Outstanding as of September 30, 2014
35


The weighted average grant date fair value for RSUs awarded during the period was $55.31 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, 2014 and 2013 was as follows:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(In millions)
Cost of net revenues
$
19

 
$
9

 
$
56

 
$
45

Sales and marketing
46

 
38

 
133

 
112

Product development
57

 
42

 
167

 
120

General and administrative
51

 
51

 
132

 
135

Total stock-based compensation expense
$
173

 
$
140

 
$
488

 
$
412

Capitalized in product development
$
5

 
$
4

 
$
13

 
$
11



22


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


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. The following weighted average assumptions were used for the three and nine months ended September 30, 2014 and 2013:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Risk-free interest rate
1.27
%
 
0.77
%
 
1.19
%
 
0.62
%
Expected life (in years)
3.9

 
3.9

 
4.1

 
4.1

Dividend yield
%
 
%
 
%
 
%
Expected volatility
27
%
 
32
%
 
29
%
 
34
%

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.


Note 11 — Income Taxes

The following table reflects changes in unrecognized tax benefits for the nine months ended September 30, 2014:
 
 
(In millions)
Gross amounts of unrecognized tax benefits as of January 1, 2014
$
334

Increases related to prior period tax positions
21

Decreases related to prior period tax positions
(9
)
Increases related to current period tax positions
41

Settlements
(10
)
Gross amounts of unrecognized tax benefits as of September 30, 2014
$
377


As of September 30, 2014, our liabilities for unrecognized tax benefits were included in accrued expenses and other current liabilities, deferred and other tax liabilities, net and as a reduction of the amount of deferred tax asset for tax credit carryforwards.
 
We recognize interest and/or penalties related to uncertain tax positions in income tax expense. The amount of interest and penalties accrued as of September 30, 2014 and December 31, 2013 was approximately $77 million for both periods.
 
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 2012 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), France, Germany, Korea, Israel, Switzerland, Singapore, the 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.


23


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


As of December 31, 2013, we had approximately $14.0 billion of indefinitely reinvested foreign earnings for which we had not provided U.S. income or applicable foreign withholding taxes. During the first quarter of 2014, we altered our capital allocation strategy. As a result, we provided for U.S. income and applicable foreign withholding taxes on $9.0 billion of undistributed foreign earnings of those subsidiaries for 2013 and prior years, and recorded a deferred tax liability of approximately $3.0 billion, which is included in accrued expenses and other current liabilities on our condensed consolidated balance sheet at September 30, 2014. As of September 30, 2014, we have not repatriated any of these earnings and as such no related taxes have become payable.

The remaining approximately $5.0 billion of undistributed foreign earnings for 2013 and prior years have been reinvested in our foreign operations, as we have determined that these earnings are necessary to support our planned ongoing investments in our foreign operations, and as a result, these earnings remain indefinitely reinvested in those operations. In making this determination, we considered projected cash needs for, among other things, investment in our existing businesses, potential acquisitions and capital transactions, including repurchases of our common stock and debt repayments. Additionally, we estimated the amount of cash available or needed in the jurisdictions where these investments are expected, as well as our ability to generate cash in those jurisdictions and our access to capital markets. This analysis enabled us to conclude whether or not we will indefinitely reinvest foreign earnings in our international operations. The remaining approximately $5.0 billion of undistributed foreign earnings for 2013 and prior years that is indefinitely reinvested in our foreign operations relates to a large number of our non-U.S. subsidiaries located in numerous jurisdictions for which it is impracticable to determine the impact of U.S. income or applicable foreign taxes that would be payable if such earnings were repatriated to the U.S.

In addition to the accrual of deferred taxes related to undistributed foreign earnings of certain of our non-U.S. subsidiaries for 2013 and prior years discussed above, during the three and nine months ended September 30, 2014, we recorded U.S. income and applicable foreign withholding taxes of $56 million and $155 million, respectively, based on our estimated 2014 earnings of our non-U.S. subsidiaries not considered indefinitely reinvested in our foreign operations.

Note 12 — Loans and Interest Receivable, Net
Loans and interest receivable primarily represent purchased consumer receivables arising from loans made by our partner chartered financial institutions to individual consumers in the U.S. to purchase goods and services through our PayPal Credit merchant network. Although a chartered financial institution continues to own each respective customer account, we own the related consumer receivable and PayPal Credit is responsible for all servicing functions related to the customer accounts. Effective August 2013, ownership of most of the existing customer accounts was transitioned from WebBank to a new chartered financial institution, Comenity Capital Bank. As part of the arrangement, we sell Comenity Capital Bank a participation interest in the entire pool of consumer receivables outstanding under the customer accounts. During the three months ended September 30, 2014 and 2013, we purchased approximately $1.3 billion and $1 billion, respectively, in consumer receivables. During the nine months ended September 30, 2014 and 2013, we purchased approximately $3.6 billion and $2.8 billion, respectively, in consumer receivables. As of September 30, 2014, the total outstanding balance of this pool of consumer receivables was $3.3 billion, of which Comenity Capital Bank owned a participation interest of $133 million, or 4.1% of the total outstanding balance of the consumer receivables at that date. Comenity Capital Bank has no recourse against us related to its participation interest for failure of debtors to pay when due. The participation interest held by the Comenity Capital Bank has the same priority to the interests held by us and is subject to the same credit, prepayment, and interest rate risk associated with this pool of consumer receivables.
Loans and interest receivable are reported at their outstanding principal balances, net of participation interest sold and pro-rata allowances, including unamortized deferred origination costs and estimated collectible interest and fees. We use a consumer's FICO score, among other measures, in evaluating the credit quality of our consumer receivables. A FICO score is a type of credit score that lenders use to assess an applicant's credit risk and whether to extend credit. Individual FICO scores generally are obtained each quarter the consumer has an outstanding consumer receivable owned by PayPal Credit. The weighted average consumer FICO score related to the pool of consumer receivables and interest receivable balance outstanding as of September 30, 2014 was 686, compared to 688 as of December 31, 2013. As of September 30, 2014 and December 31, 2013, approximately 54.0% and 54.7%, respectively, of the pool of consumer receivables and interest receivable balance was due from consumers with FICO scores greater than 680, which is generally considered "prime" by the consumer credit industry. As of September 30, 2014 and December 31, 2013, approximately 10% and 9.1%, respectively, of the pool of consumer receivables and interest receivable balance was due from customers with FICO scores below 599. As of September 30, 2014 and December 31, 2013, approximately 89% and 90%, respectively, of the portfolio of consumer receivables and interest receivable was current.


24


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


During 2013, we began a pilot program, working with a chartered financial institution, for the chartered financial institution to offer working capital loans to selected merchant sellers in the U.S. We subsequently purchase the related merchant receivable from the chartered financial institution. Under the program, participating merchants can borrow a certain percentage of their annual payment volume processed by PayPal and are charged a fixed fee for the loan. This program is still in the pilot phase. As of September 30, 2014, the total outstanding balance of this pool of merchant receivables was approximately $86 million.
The following table summarizes the activity in the allowance for loans and interest receivable, net of participating interest sold, for the periods indicated:
 
Nine Months Ended September 30,
 
2014
 
2013
 
(In millions)
Balance as of January 1
$
146

 
$
101

Charge-offs
(210
)
 
(161
)
Recoveries
20

 
9

Provision
222

 
181

Balance as of September 30
$
178

 
$
130



Note 13 — Accumulated Other Comprehensive Income
The following table summarizes the changes in accumulated balances of other comprehensive income for the three months ended September 30, 2014:
 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Unrealized
Gains on
Investments
 
Foreign
Currency
Translation
 
Estimated tax (expense) benefit
 
Total
 
(In millions)
Beginning balance
$
(69
)
 
$
840

 
$
748

 
$
(288
)
 
$
1,231

Other comprehensive income before reclassifications
158

 
88

 
(214
)
 
(35
)
 
(3
)
Amount of gain (loss) reclassified from accumulated other comprehensive income
(16
)
 
21

 

 

 
5

Net current period other comprehensive income
174

 
67

 
(214
)
 
(35
)
 
(8
)
Ending balance
$
105

 
$
907

 
$
534

 
$
(323
)
 
$
1,223



25


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


The following table summarizes the changes in accumulated balances of other comprehensive income for the nine months ended September 30, 2014:
 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Unrealized
Gains on
Investments
 
Foreign
Currency
Translation
 
Estimated tax (expense) benefit
 
Total
 
(In millions)
Beginning balance
$
(106
)
 
$
921

 
$
657

 
$
(316
)
 
$
1,156

Other comprehensive income before reclassifications
147

 
21

 
(123
)
 
(7
)
 
38

Amount of gain (loss) reclassified from accumulated other comprehensive income
(64
)
 
35

 

 

 
(29
)
Net current period other comprehensive income
211

 
(14
)
 
(123
)
 
(7
)
 
67

Ending balance
$
105

 
$
907

 
$
534

 
$
(323
)
 
$
1,223


The following table summarizes the changes in accumulated balances of other comprehensive income for the three months ended September 30, 2013:
 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Unrealized
Gains on
Investments
 
Foreign
Currency
Translation
 
Estimated tax (expense) benefit
 
Total
 
(In millions)
Beginning balance
$
56

 
$
903

 
$
184

 
$
(317
)
 
$
826

Other comprehensive income before reclassifications
(131
)
 
243

 
353

 
(82
)
 
383

Amount of gain (loss) reclassified from accumulated other comprehensive income
4

 

 

 

 
4

Net current period other comprehensive income
(135
)
 
243

 
353

 
(82
)
 
379

Ending balance
$
(79
)
 
$
1,146

 
$
537

 
$
(399
)
 
$
1,205


The following table summarizes the changes in accumulated balances of other comprehensive income for the nine months ended September 30, 2013:
 
Unrealized Gains (Losses) on Cash Flow Hedges
 
Unrealized
Gains on
Investments
 
Foreign
Currency
Translation
 
Estimated tax (expense) benefit
 
Total
 
(In millions)
Beginning balance
$
(55
)
 
$
687

 
$
449

 
$
(225
)
 
$
856

Other comprehensive income before reclassifications
(23
)
 
463

 
88

 
(174
)
 
354

Amount of gain (loss) reclassified from accumulated other comprehensive income
1

 
4

 

 

 
5

Net current period other comprehensive income
(24
)
 
459

 
88

 
(174
)
 
349

Ending balance
$
(79
)
 
$
1,146

 
$
537

 
$
(399
)
 
$
1,205


26


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



The following table provides details about reclassifications out of accumulated other comprehensive income for the three months ended September 30, 2014 and 2013:
Details about Accumulated Other Comprehensive
Income Components
 
Amount of Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Income
 
Affected Line Item in the Statement of Income
 
 
Three Months Ended
September 30, 2014
 
Three Months Ended
September 30, 2013
 
 
 
 
(In millions)
 
 
Gains (losses) on cash flow hedges - foreign exchange contracts
 
$
(16
)
 
$
6

 
Net Revenues
 
 

 
(1
)
 
Cost of net revenues
 
 

 

 
Sales and marketing
 
 

 
(1
)
 
Product development
 
 

 

 
General and administrative
 
 
(16
)
 
4

 
Total, before income taxes
 
 

 

 
Provision for income taxes
 
 
(16
)
 
4

 
Total, net of income taxes
 
 
 
 
 
 
 
Unrealized gains on investments
 
21

 

 
Interest and other, net
 
 
21

 

 
Total, before income taxes
 
 

 

 
Provision for income taxes
 
 
21

 

 
Total, net of income taxes
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
5

 
$
4

 
Total, net of income taxes


27


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


The following table provides details about reclassifications out of accumulated other comprehensive income for the nine months ended September 30, 2014 and 2013:
Details about Accumulated Other Comprehensive
Income Components
 
Amount of Gain (Loss)
Reclassified from
Accumulated Other
Comprehensive
Income
 
Affected Line Item in the Statement of Income
 
 
Nine Months Ended
September 30, 2014
 
Nine Months Ended
September 30, 2013
 
 
 
 
(In millions)
 
 
Gains (losses) on cash flow hedges - foreign exchange contracts
 
$
(56
)
 
$
9

 
Net Revenues
 
 
(2
)
 
(2
)
 
Cost of net revenues
 
 

 
(1
)
 
Sales and marketing
 
 
(4
)
 
(4
)
 
Product development
 
 
(2
)
 
(1
)