10-Q 1 ebay10-qq22015.htm QUARTERLY REPORT eBay 10-Q Q2 2015


 
 
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 June 30, 2015

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 July 14, 2015, there were 1,218,228,091 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
 
June 30,
2015
 
December 31,
2014
 
(In millions, except par value amounts)
 
(Unaudited)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
4,971

 
$
6,299

Short-term investments
5,583

 
3,769

Accounts receivable, net
662

 
651

Loans and interest receivable, net
3,152

 
3,600

Funds receivable and customer accounts
11,352

 
10,545

Other current assets
1,643

 
1,414

Current assets held for sale
1,186

 
253

Total current assets
28,549

 
26,531

Long-term investments
5,881

 
5,767

Property and equipment, net
2,781

 
2,599

Goodwill
7,902

 
7,807

Intangible assets, net
283

 
305

Other assets
262

 
261

Long-term assets held for sale

 
1,862

Total assets
$
45,658

 
$
45,132

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt
$
865

 
$
850

Accounts payable
368

 
221

Funds payable and amounts due to customers
11,352

 
10,545

Accrued expenses and other current liabilities
3,868

 
5,279

Deferred revenue
125

 
108

Income taxes payable
101

 
154

Current liabilities held for sale
381

 
374

Total current liabilities
17,060

 
17,531

Deferred and other tax liabilities, net
1,913

 
719

Long-term debt
6,757

 
6,777

Other liabilities
123

 
125

Long-term liabilities held for sale

 
74

Total liabilities
25,853

 
25,226

Commitments and contingencies (Note 11)

 


Stockholders' equity:
 
 
 
Common stock, $0.001 par value; 3,580 shares authorized; 1,218 and 1,224 shares outstanding
2

 
2

Additional paid-in capital
14,306

 
13,887

Treasury stock at cost, 402 and 384 shares
(15,054
)
 
(14,054
)
Retained earnings
19,609

 
18,900

Accumulated other comprehensive income
942

 
1,171

Total stockholders' equity
19,805

 
19,906

Total liabilities and stockholders' equity
$
45,658

 
$
45,132

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

2


eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF INCOME
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(In millions, except per share amounts)
 
(Unaudited)
Net revenues
$
4,379

 
$
4,103

 
$
8,549

 
$
8,100

Cost of net revenues
1,348

 
1,181

 
2,585

 
2,330

Gross profit
3,031

 
2,922

 
5,964

 
5,770

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
836

 
885

 
1,600

 
1,661

Product development
485

 
468

 
935

 
915

General and administrative
683

 
448

 
1,322

 
900

Provision for transaction and loan losses
262

 
229

 
519

 
432

Amortization of acquired intangible assets
24

 
38

 
47

 
82

Total operating expenses
2,290

 
2,068

 
4,423

 
3,990

Income from operations
741

 
854

 
1,541

 
1,780

Interest and other, net
126

 
10

 
135

 
5

Income from continuing operations before income taxes
867

 
864

 
1,676

 
1,785

Provision for income taxes
(185
)
 
(144
)
 
(323
)
 
(3,360
)
Income (loss) from continuing operations
$
682

 
$
720

 
$
1,353

 
$
(1,575
)
Loss from discontinued operations, net of income taxes
(599
)
 
(44
)
 
(644
)
 
(75
)
Net income (loss)
$
83

 
$
676

 
$
709

 
$
(1,650
)
 
 
 
 
 
 
 
 
Income (loss) per share - basic:
 
 
 
 
 
 
 
Continuing operations
$
0.56

 
$
0.57

 
$
1.11

 
$
(1.24
)
Discontinued operations
$
(0.49
)
 
$
(0.03
)
 
$
(0.53
)
 
$
(0.06
)
Net income (loss) per share - basic
$
0.07

 
$
0.54

 
$
0.58

 
$
(1.30
)
 
 
 
 
 
 
 
 
Income (loss) per share - diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.56

 
$
0.57

 
$
1.10

 
$
(1.24
)
Discontinued operations
$
(0.49
)
 
$
(0.04
)
 
$
(0.52
)
 
$
(0.06
)
Net income (loss) per share - diluted
$
0.07

 
$
0.53

 
$
0.58

 
$
(1.30
)
 
 
 
 
 
 
 
 
Weighted average shares:
 
 
 
 
 
 
 
Basic
1,217

 
1,258

 
1,217

 
1,267

Diluted
1,225

 
1,267

 
1,227

 
1,267


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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(In millions)
 
(Unaudited)
Net income (loss)
$
83

 
$
676

 
$
709

 
$
(1,650
)
Other comprehensive income (loss), net of reclassification adjustments:
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
21

 
120

 
(244
)
 
91

Unrealized gains (losses) on investments, net
144

 
16

 
122

 
(81
)
Tax (expense) benefit on unrealized gains (losses) on investments, net
(53
)
 
(10
)
 
(44
)
 
32

Unrealized gains (losses) on hedging activities, net
(152
)
 
22

 
(63
)
 
37

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

 
(1
)
 

 
(4
)
Other comprehensive income (loss), net tax
(38
)
 
147

 
(229
)
 
75

Comprehensive income (loss)
$
45

 
$
823

 
$
480

 
$
(1,575
)

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


4


eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
 
Six Months Ended June 30,
 
2015
 
2014
 
(In millions)
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
709

 
$
(1,650
)
Loss from discontinued operations
644

 
75

Adjustments:

 
 
Provision for transaction and loan losses
519

 
432

Depreciation and amortization
634

 
615

Stock-based compensation
370

 
307

Purchases of loans held for sale
(196
)
 

Proceeds from sale of loans held for sale
200

 

Gain on sale of investments and loans held for sale
(132
)
 

Deferred income taxes
(28
)
 
3,043

Changes in assets and liabilities, net of acquisition effects
(418
)
 
(95
)
Net cash provided by continuing operating activities
2,302

 
2,727

Net cash provided by (used in) discontinued operating activities
5

 
(59
)
Net cash provided by operating activities
2,307

 
2,668

Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(720
)
 
(421
)
Changes in principal loans receivable, net
(319
)
 
(232
)
Proceeds from sale of loans originated for investment
714

 

Purchases of investments
(6,119
)
 
(3,641
)
Maturities and sales of investments
4,369

 
3,264

Acquisitions, net of cash acquired
(273
)
 
(35
)
Other
(2
)
 
(6
)
Net cash used in continuing investing activities
(2,350
)
 
(1,071
)
Net cash used in discontinued investing activities
(70
)
 
(58
)
Net cash used in investing activities
(2,420
)
 
(1,129
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of common stock
146

 
154

Repurchases of common stock
(1,000
)
 
(3,468
)
Excess tax benefits from stock-based compensation
56

 
86

Tax withholdings related to net share settlements of restricted stock awards and units
(180
)
 
(210
)
Funds receivable and customer accounts, net
(807
)
 
(777
)
Funds payable and amounts due to customers, net
807

 
777

Net borrowings under commercial paper program

 
1,200

Other

 
3

Net cash used in continuing financing activities
(978
)
 
(2,235
)
Net cash used in discontinued financing activities

 
(3
)
Net cash used in financing activities
(978
)
 
(2,238
)
Effect of exchange rate changes on cash and cash equivalents
(250
)
 
39



5


Net increase (decrease) in cash and cash equivalents
(1,341
)
 
(660
)
Cash and cash equivalents at beginning of period
6,328

 
4,494

Cash and cash equivalents at end of period
$
4,987

 
$
3,834

Less: Cash and cash equivalents of held for sale
$
16

 
$
37

Cash and cash equivalents of continuing operations at end of period
$
4,971

 
$
3,797

Supplemental cash flow disclosures:
 
 
 
Cash paid for interest
$
88

 
$
49

Cash paid for income taxes
$
199

 
$
142


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

6


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 two reportable segments: Marketplaces and Payments. 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 our PayPal business.

During the second quarter of 2015, our Board of Directors approved a plan to sell the businesses underlying our Enterprise segment. As a result, we have classified the results of our Enterprise segment as discontinued operations in our condensed consolidated statement of income for all periods presented. Additionally, the related assets and liabilities associated with the discontinued operations are classified as held for sale in our condensed consolidated balance sheet. On July 16, 2015, we signed a definitive agreement to sell these businesses and, subject to customary closing conditions, we expect to close this transaction in the second half of 2015. See "Note 4 - Discontinued Operations" for additional information.

On September 30, 2014, we announced that our Board of Directors, following a strategic review of our growth strategies and structure, approved a plan to separate PayPal (consisting of our Payments segment) into an independent publicly traded company. On July 17, 2015, we completed the distribution of 100% of the outstanding common stock of PayPal Holdings, Inc. to our stockholders (the "Distribution"). See "Note 18 - Subsequent Events" for additional information.

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 with the goal of mitigating 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.


7


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


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, 2014. 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 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 now effective for the Company. The standard impacted the presentation of our Enterprise segment during the second quarter of 2015 related to the financial statement presentation of assets held for sale and required additional disclosures as presented in "Note 4 - Discontinued Operations." In a similar manner, the standard will also impact our financial statements that are issued after the Distribution.

In 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 can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. In July 2015, the FASB voted to defer the effective date to January 1, 2018 with early adoption beginning January 1, 2017. We are evaluating the impact of adopting this new accounting guidance on our financial statements.

In 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. As of the first annual period beginning after December 15, 2014, the presentation and disclosure requirements in Topic 915 will no longer be required. The revised consolidation standards are effective one year later, for fiscal years beginning after December 15, 2015. Early adoption is permitted. The adoption of the presentation and disclosure requirements in Topic 915 did not have a material impact on our financial statements. We are evaluating the impact, if any, of adopting the remaining new accounting guidance on our financial statements.

In 2014, the FASB issued new guidance on the disclosures related to 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.

In 2014, the FASB issued new guidance related to pushdown accounting. The new guidance provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. The amendments are effective on November 18, 2014. We adopted this guidance, as required, on November 18, 2014. The adoption of this guidance did not have a material impact on our financial statements.

In 2015, the FASB issued new guidance related to consolidations. The new standard amends the guidelines for determining whether certain legal entities should be consolidated and reduces the number of consolidation models. The new standard is effective for fiscal years, and interim periods within those 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 2015, the FASB issued new guidance related to presentation of debt issuance costs. The new standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability. The new standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on our financial statements.


8


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


In 2015, the FASB issued new guidance related to accounting for fees paid in a cloud computing arrangement. The new standard provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The new standard is effective for fiscal years, and interim periods within those 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 2015, the FASB issued new guidance related to pushdown accounting. The new guidance removes references to the SEC guidance on pushdown accounting from the FASB Accounting Standards Codification. The amendments therefore conform the FASB’s guidance on pushdown accounting with the SEC’s guidance. The adoption of this guidance did not 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 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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(In millions, except per share amounts)
Numerator:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
682

 
$
720

 
$
1,353

 
$
(1,575
)
Loss from discontinued operations, net of income taxes
(599
)
 
(44
)
 
(644
)
 
(75
)
Net income (loss)
$
83

 
$
676

 
$
709

 
$
(1,650
)
Denominator:
 
 
 
 
 
 
 
Weighted average shares of common stock - basic
1,217

 
1,258

 
1,217

 
1,267

Dilutive effect of equity incentive awards
8

 
9

 
10

 

Weighted average shares of common stock - diluted
1,225

 
1,267

 
1,227

 
1,267

Income (loss) per share - basic:
 
 
 
 
 
 
 
Continuing operations
$
0.56

 
$
0.57

 
$
1.11

 
$
(1.24
)
Discontinued operations
$
(0.49
)
 
$
(0.03
)
 
$
(0.53
)
 
$
(0.06
)
Net income (loss) per share - basic
$
0.07

 
$
0.54

 
$
0.58

 
$
(1.30
)
Income (loss) per share - diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.56

 
$
0.57

 
$
1.10

 
$
(1.24
)
Discontinued operations
$
(0.49
)
 
$
(0.04
)
 
$
(0.52
)
 
$
(0.06
)
Net income (loss) per share - diluted
$
0.07

 
$
0.53

 
$
0.58

 
$
(1.30
)
Common stock equivalents excluded from income per diluted share because their effect would have been anti-dilutive
3

 
17

 
3

 
54



9


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



Note 3 — Business Combinations

During the three months ended June 30, 2015, we completed two acquisitions in our Payments segment for aggregate purchase consideration of approximately $281 million, consisting primarily of cash. The acquisition of Paydiant is intended to expand PayPal's capabilities in mobile payments. Using Paydiant’s platform, PayPal's merchant partners can create their own branded wallets to accelerate mobile-in-store payments and drive consumer engagement through mobile payments, loyalty, offers and the prioritization of preferred payment types, such as store branded credit cards and gift cards. The acquisition of CyActive is intended to further enhance PayPal's risk assessment capabilities used to protect merchants and consumers on our Payments Platform. CyActive is a cybersecurity firm that specializes in technology that predicts how malware will develop. The allocation of the aggregate purchase consideration resulted in purchased intangible assets of $57 million and goodwill of $224 million. Acquired intangible assets included marketing-related and technology-based assets. We generally do not expect goodwill to be deductible for income tax purposes. The allocations of the respective purchase prices for these acquisitions have been prepared on a preliminary basis and changes to those allocations may occur as additional information becomes available. The condensed consolidated financial statements include the operating results of the acquired businesses since the respective dates of the acquisitions. Pro forma results of operations have not been presented because the effect of the acquisitions were not material to our financial results.

Note 4 — Discontinued Operations

Enterprise

During the second quarter of 2015, our Board of Directors approved a plan to sell the businesses underlying our Enterprise segment. On July 16, 2015, we signed a definitive agreement to sell these businesses for $925 million and, subject to customary closing conditions, we expect to close this transaction in the second half of 2015. Based on the expected sales proceeds from bids received during the second quarter, we recorded a goodwill impairment of $786 million. We have classified the results of our Enterprise segment as discontinued operations in our condensed consolidated statement of income for all periods presented. Additionally, the related assets and liabilities associated with the discontinued operations are classified as held for sale in our condensed consolidated balance sheet. The assets and liabilities as of June 30, 2015 are classified as current in our condensed consolidated balance sheet as we expect to close the transaction discussed above within one year.


10


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


The financial results of our Enterprise business through June 30, 2015 are presented as loss from discontinued operations, net of income taxes on our condensed consolidated statement of income. The following table presents financial results of the Enterprise business:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Net revenues
$
266

 
$
263

 
$
544

 
$
528

Cost of net revenues
209

 
211

 
422

 
413

Gross profit
57

 
52

 
122

 
115

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
34

 
29

 
64

 
58

Product development
31

 
32

 
66

 
65

General and administrative
64

 
13

 
90

 
26

Provision for transaction and loan losses
1

 
3

 
8

 
4

Amortization of acquired intangible assets
35

 
35

 
70

 
70

Goodwill impairment
786

 

 
786

 

Total operating expenses
951

 
112

 
1,084

 
223

Loss from operations of discontinued operations
(894
)
 
(60
)
 
(962
)
 
(108
)
Interest and other, net
4

 
(1
)
 
3

 
(1
)
Loss from discontinued operations before income taxes
(890
)
 
(61
)
 
(959
)
 
(109
)
Income tax benefit
291

 
17

 
315

 
34

Loss from discontinued operations, net of income taxes
$
(599
)
 
$
(44
)
 
$
(644
)
 
$
(75
)

The following table presents the aggregate carrying amounts of the classes of held for sale assets and liabilities:
 
June 30,
2015
 
December 31,
2014
 
(In millions)
Carrying amounts of assets included as part of discontinued operations:
 
 
 
Cash and cash equivalents
$
16

 
$
29

Short-term investments
1

 
1

Accounts receivable, net
114

 
146

Other current assets
53

 
77

Long-term investments
11

 
10

Property and equipment, net
315

 
303

Goodwill
500

 
1,287

Intangible assets, net
174

 
259

Other assets
2

 
3

Total assets classified as held for sale in the condensed consolidated balance sheet
$
1,186

 
$
2,115

 
 
 
 
Carrying amounts of liabilities included as part of discontinued operations:
 
 
 
Accounts payable
110

 
179

Accrued expenses and other current liabilities
107

 
115

Deferred revenue
81

 
80

Deferred and other tax liabilities, net
82

 
73

Other liabilities
1

 
1

Total liabilities classified as held for sale in the condensed consolidated balance sheet
$
381

 
$
448

 

11


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


The following table presents cash flow of the Enterprise business:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Net cash provided by (used in) discontinued operating activities
$
47

 
$
20

 
$
5

 
$
(59
)
Net cash used in discontinued investing activities
$
(47
)
 
$
(33
)
 
$
(70
)
 
$
(58
)
Net cash used in discontinued financing activities
$

 
$
(1
)
 
$

 
$
(3
)

Note 5 — Goodwill and Intangible Assets

Goodwill

The following table presents goodwill balances and adjustments to those balances for each of our reportable segments during the six months ended June 30, 2015:
 
December 31,
2014
 
Goodwill
Acquired
 
Adjustments
 
June 30,
2015
 
(In millions)
Reportable segments:
 
 
 
 
 
 
 
Marketplaces
$
4,677

 
$

 
$
(135
)
 
$
4,542

Payments
$
3,130

 
$
224

 
$
6

 
$
3,360

 
$
7,807

 
$
224

 
$
(129
)
 
$
7,902


The adjustments to goodwill during the six months ended June 30, 2015 were due primarily to foreign currency translations.


Intangible Assets

The components of identifiable intangible assets are as follows: 

 
June 30, 2015
 
December 31, 2014
 
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
$
954

 
$
(888
)
 
$
66

 
6
 
$
954

 
$
(884
)
 
$
70

 
6
Marketing related
789

 
(711
)
 
78

 
5
 
823

 
(713
)
 
110

 
5
Developed technologies
445

 
(365
)
 
80

 
3
 
404

 
(348
)
 
56

 
3
All other
280

 
(221
)
 
59

 
4
 
278

 
(209
)
 
69

 
4
 
$
2,468

 
$
(2,185
)
 
$
283

 
 
 
$
2,459

 
$
(2,154
)
 
$
305

 
 

Amortization expense for intangible assets was $43 million and $59 million for the three months ended June 30, 2015 and 2014, respectively. Amortization expense for intangible assets was $81 million and $124 million for the six months ended June 30, 2015 and 2014, respectively.

Goodwill and intangible assets to be disposed of as a result of our planned sale of our Enterprise segment were included in Current assets held for sale on our condensed consolidated balance sheet as of June 30, 2015 and accordingly, are not included in the tables above.

12


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



Expected future intangible asset amortization as of June 30, 2015 is as follows (in millions):
Fiscal years:
 
 
Remaining 2015
 
$
77

2016
 
116

2017
 
64

2018
 
23

2019
 
3

Thereafter
 

 
 
$
283


Note 6 — Segments

We have two reportable segments: Marketplaces and Payments. 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 second quarter, we have classified the results of our Enterprise segment as discontinued operations in our condensed consolidated statement of income for all periods presented. Additionally, the related assets and liabilities associated with the discontinued operations are classified as held for sale in our condensed consolidated balance sheet. See "Note 4 - Discontinued Operations" for additional information. 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;
amortization of intangible assets;
separation related expenses;
restructuring charges; and
stock-based compensation expense.


13


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


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 June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Net Revenue
 
 
 
 
 
 
 
Marketplaces
 
 
 
 
 
 
 
Net transaction revenues
$
1,684

 
$
1,722

 
$
3,356

 
$
3,449

Marketing services and other revenues
432

 
452

 
829

 
880

 
2,116

 
2,174

 
4,185

 
4,329

Payments
 
 
 
 
 
 
 
Net transaction revenues
2,006

 
1,741

 
3,946

 
3,441

Marketing services and other revenues
254

 
205

 
422

 
350

 
2,260

 
1,946

 
4,368

 
3,791

 
 
 
 
 
 
 
 
Elimination of inter-segment net revenue and other(1)
3

 
(17
)
 
(4
)
 
(20
)
Total consolidated net revenue
$
4,379

 
$
4,103

 
$
8,549

 
$
8,100

 
 
 
 
 
 
 
 
Operating income (loss)
 
 
 
 
 
 
 
Marketplaces
$
758

 
$
788

 
$
1,569

 
$
1,644

Payments
590

 
478

 
1,123

 
953

Corporate and other
(607
)
 
(412
)
 
(1,151
)
 
(817
)
Total operating income (loss)
$
741

 
$
854

 
$
1,541

 
$
1,780


(1) Represents revenue generated between our reportable segments and other revenue.

Note 7 — Investments

At June 30, 2015 and December 31, 2014, the estimated fair value of our short-term and long-term investments classified as available for sale, were as follows:
 
June 30, 2015
 
Gross
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In millions)
Short-term investments:
 
  
 
  
 
 
 
Restricted cash
$
44

  
$

  
$

 
$
44

Corporate debt securities
3,737

  
1

  
(1
)
 
3,737

Government and agency securities
595

  

  

 
595

Time deposits and other
56

  

  

 
56

Equity instruments
8

 
1,143

 

 
1,151

 
$
4,440

  
$
1,144

  
$
(1
)
 
$
5,583

Long-term investments:
 
  
 
  
 
 
 
Corporate debt securities
5,654

  
20

  
(10
)
 
5,664

Government and agency securities
51

  

  

 
51

 
$
5,705

  
$
20

  
$
(10
)
 
$
5,715

 

14


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


 
December 31, 2014
 
Gross
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In millions)
Short-term investments:
 
  
 
  
 
 
 
Restricted cash
$
29

  
$

  
$

 
$
29

Corporate debt securities
2,519

  
1

  
(1
)
 
2,519

Government and agency securities
3

  

  

 
3

Time deposits and other
181

  

  

 
181

Equity instruments
9

 
1,028

 

 
1,037

 
$
2,741

 
$
1,029

 
$
(1
)
 
$
3,769

Long-term investments:
 
  
 
  
 
 
 
Corporate debt securities
5,319

  
18

  
(18
)
 
5,319

Government and agency securities
232

  
1

  

 
233

 
$
5,551

  
$
19

  
$
(18
)
 
$
5,552


We had no material long-term or short-term investments that have been in a continuous unrealized loss position for more than 12 months as of June 30, 2015 and December 31, 2014. Refer to "Note 16 - 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 at June 30, 2015 are as follows:  
 
June 30,
2015
 
(In millions)
One year or less (including restricted cash of $44)
$
4,432

One year through two years
2,504

Two years through three years
1,852

Three years through four years
1,163

Four years through five years
147

Five years through six years
32

Six years through seven years
3

Seven years through eight years
9

Eight years through nine years

Nine years through ten years
1

Ten years through eleven years

Eleven years through twelve years
4

 
$
10,147

Equity and cost method investments
We have made multiple equity and cost method investments which are reported in long-term investments on our consolidated balance sheet. As of June 30, 2015 and December 31, 2014, our equity and cost method investments totaled $166 million and $215 million, respectively. During the second quarter of 2015, we sold our equity interest in craigslist, Inc and the resulting gain is recorded in Interest and other, net on our condensed consolidated statement of income.


15


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


Note 8 — Fair Value Measurement of Assets and Liabilities

The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2015 and December 31, 2014:
 Description
Balance as of
June 30, 2015
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
(In millions)
Assets:
 
 
 
 
 
Cash and cash equivalents
$
4,971

 
$
3,939

 
$
1,032

Short-term investments:
 
 
 
 
 
Restricted cash
44

 
44

 

Corporate debt securities
3,737

 

 
3,737

Government and agency securities
595

 

 
595

Time deposits
56

 

 
56

Equity instruments
1,151

 
1,151

 

Total short-term investments
5,583

 
1,195

 
4,388

Funds receivable and customer accounts
5,839

 

 
5,839

Derivatives
181

 

 
181

Long-term investments:
 
 
 
 
 
Corporate debt securities
5,664

 

 
5,664

Government and agency securities
51

 

 
51

Total long-term investments
5,715

 

 
5,715

Total financial assets
$
22,289

 
$
5,134

 
$
17,155

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Derivatives
$
61

 
$

 
$
61




16


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


Description
 
Balance as of
December 31, 2014
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1) 
 
Significant Other
Observable Inputs
(Level 2)
 
 
(In millions)
Assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
6,299

 
$
3,888

 
$
2,411

Short-term investments:
 
 
 
 
 
 
Restricted cash
 
29

 
29

 

Corporate debt securities
 
2,519

 

 
2,519

Government and agency securities
 
3

 

 
3

Time deposits
 
181

 

 
181

Equity instruments
 
1,037

 
1,037

 

Total short-term investments
 
3,769

 
1,066

 
2,703

Funds receivable and customer accounts
 
4,161

 

 
4,161

Derivatives
 
219

 

 
219

Long-term investments:
 
 
 
 
 
 
Corporate debt securities
 
5,319

 

 
5,319

Government and agency securities
 
233

 

 
233

Total long-term investments
 
5,552

 

 
5,552

Total financial assets
 
$
20,000

 
$
4,954

 
$
15,046

 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Derivatives
 
$
27

 
$

 
$
27

 
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 six months ended June 30, 2015.

Cash and cash equivalents are short-term, highly liquid investments with original or remaining maturities of three months or less when purchased and are comprised primarily of bank deposits, certificates of deposit and commercial paper. We had total funds receivable and customer accounts of $11.4 billion as of June 30, 2015, of which $5.8 billion was invested in time deposits and U.S. and foreign government and agency securities. 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 $166 million and $215 million included in long-term investments on our condensed consolidated balance sheet at June 30, 2015 and December 31, 2014, respectively.

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

As of June 30, 2015 and December 31, 2014, we held no direct investments in auction rate securities, collateralized debt obligations, structured investment vehicles or mortgage-backed securities.


17


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 9 — Derivative Instruments

Summary of Derivative Instruments

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

Foreign Exchange Contracts

We transact business in various foreign currencies and have significant international revenues as well as costs denominated in foreign currencies, which subjects us to foreign currency risk. We use foreign currency exchange contracts, generally with maturities of 18 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 June 30, 2015, we have estimated that approximately $109 million of net derivative gains related to our cash flow hedges included in accumulated other comprehensive income will be reclassified into earnings within the next 12 months.

Interest Rate Contracts

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

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

18


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



Fair Value of Derivative Contracts

The fair values of our outstanding derivative instruments as of June 30, 2015 and December 31, 2014 were as follows:
 
Balance Sheet Location
 
June 30,
2015
 
December 31,
2014
 
 
 
(In millions)
Derivative Assets:
 
 
 
 
 
Foreign exchange contracts designated as cash flow hedges
Other Current Assets
 
$
125

 
$
170

Foreign exchange contracts not designated as hedging instruments
Other Current Assets
 
35

 
27

Interest rate contracts designated as fair value hedges
Other Assets
 
21

 
22

Total derivative assets
 
 
$
181

 
$
219

 
 
 
 
 
 
Derivative Liabilities:
 
 
 
 
 
Foreign exchange contracts designated as cash flow hedges
Other Current Liabilities
 
$
20

 
$
2

Foreign exchange contracts not designated as hedging instruments
Other Current Liabilities
 
41

 
25

Total derivative liabilities
 
 
$
61

 
$
27

 
 
 
 
 
 
Total fair value of derivative instruments
 
 
$
120

 
$
192


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 June 30, 2015, 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 $51 million, resulting in net derivative assets and derivative liabilities of $109 million and $10 million, respectively. We are not required to pledge, nor are we entitled to receive, collateral related to our foreign exchange derivative transactions. As of June 30, 2015, 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 June 30, 2015 and December 31, 2014, and the impact of these derivative contracts on accumulated other comprehensive income for the six months ended June 30, 2015
 
December 31, 2014
 
Amount of gain (loss)
recognized in other
comprehensive income
(effective portion) 
 
Amount of gain (loss)
reclassified from
accumulated other
comprehensive income
to net revenue and operating expense
(effective portion)
 
June 30, 2015
 
(In millions)
Foreign exchange contracts designated as cash flow hedges
$
168

 
$
81

 
$
144

 
$
105



19


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 June 30, 2014 and December 31, 2013, and the impact of these derivative contracts on accumulated other comprehensive income for the six months ended June 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)
 
June 30, 2014
 
(In millions)
Foreign exchange contracts designated as cash flow hedges
$
(106
)
 
$
(11
)
 
$
(48
)
 
$
(69
)


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
June 30,
 
Six Months Ended
June 30,
 
2015

2014
 
2015
 
2014
 
(In millions)
Foreign exchange contracts designated as cash flow hedges recognized in net revenues
$
62

 
$
(23
)
 
$
112

 
$
(40
)
Foreign exchange contracts designated as cash flow hedges recognized in operating expenses
12

 
(4
)
 
32

 
(8
)
Foreign exchange contracts not designated as hedging instruments recognized in interest and other, net
(41
)
 
(12
)
 
(15
)
 
(22
)
Total gain (loss) recognized from foreign exchange derivative contracts in the condensed consolidated statement of income
$
33

 
$
(39
)
 
$
129

 
$
(70
)

$15 million in net derivative losses recognized in interest and other, net, during the three and six months ended June 30, 2015 pertained to foreign exchange contracts not designated as hedging instruments used to mitigate the effect of translation in future periods.

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
June 30,
 
Six Months Ended
June 30,
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Gain (loss) from interest rate contracts designated as fair value hedges recognized in interest and other, net
$
(38
)
 
N/A
 
$
(1
)
 
N/A
Gain (loss) from hedged items attributable to hedged risk recognized in interest and other, net
38

 
N/A
 
1

 
N/A
Total gain (loss) recognized from interest rate derivative contracts in the condensed consolidated statement of income
$

 
N/A
 
$

 
N/A


20


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:
 
June 30,
 
2015
 
2014
 
(In millions)
Foreign exchange contracts designated as cash flow hedges
$
2,206

 
$
2,600

Foreign exchange contracts not designated as hedging instruments
3,594

 
4,147

Interest rate contracts designated as fair value hedges
2,400

 
N/A

Total
$
8,200

 
$
6,747


Note 10 — Debt
The following table summarizes the carrying value of our outstanding debt:
 
 
Coupon
 
Carrying Value as of
 
Effective
 
Carrying Value as of
 
Effective
 
 
 Rate
 
June 30, 2015
 
 Interest Rate
 
December 31, 2014
 
 Interest Rate
 
 
(In millions, except percentages)
Long-Term Debt
 
 
 
 
 
 
 
 
 
 
Floating Rate Notes:
 
 
 
 
 
 
 
 
 
 
Senior notes due 2017
 
LIBOR plus 0.20%

 
$
450

 
0.566
%
 
$
450

 
0.560
%
Senior notes due 2019
 
LIBOR plus 0.48%

 
400

 
0.815
%
 
400

 
0.811
%
 
 
 
 
 
 
 
 
 
 
 
Fixed Rate Notes:
 
 
 
 
 
 
 
 
 
 
Senior notes due 2017
 
1.350
%
 
1,000

 
1.456
%
 
1,000

 
1.456
%
Senior notes due 2019
 
2.200
%
 
1,148

 
2.346
%
 
1,148

 
2.346
%
Senior notes due 2020
 
3.250
%
 
498

 
3.389
%
 
498

 
3.389
%
Senior notes due 2021
 
2.875
%
 
749

 
2.993
%
 
749

 
2.993
%
Senior notes due 2022
 
2.600
%
 
999

 
2.678
%
 
999

 
2.678
%
Senior notes due 2024
 
3.450
%
 
749

 
3.531
%
 
749

 
3.531
%
Senior notes due 2042
 
4.000
%
 
743

 
4.114
%
 
743

 
4.114
%
Total senior notes
 
 
 
6,736

 
 
 
6,736

 
 
Hedge accounting fair value adjustments
 
 
 
21

 
 
 
22

 
 
Other indebtedness
 
 
 

 
 
 
19

 
 
Total long-term debt
 
 
 
$
6,757

 
 
 
$
6,777

 
 
 
 
 
 
 
 
 
 
 
 
 
Short-Term Debt
 
 
 
 
 
 
 
 
 
 
Senior notes due 2015
 
0.700
%
 
250

 
0.820
%
 
250

 
0.820
%
Senior notes due 2015
 
1.625
%
 
600

 
1.805
%
 
600

 
1.805
%
Other indebtedness
 
 
 
15

 
 
 

 
 
Total short-term debt
 
 
 
865

 
 
 
850

 
 
Total Debt
 
 
 
$
7,622

 
 
 
$
7,627

 
 

21


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


Senior Notes
In July 2014, we issued senior unsecured notes, or senior notes, in an aggregate principal amount of $3.5 billion. These senior notes consist 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 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 our senior notes, including amortization of debt issuance costs, during the three months ended June 30, 2015 and 2014 was approximately $46 million and $26 million, respectively. At June 30, 2015, the estimated fair value of these senior notes was approximately $7.4 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 9% to 10% per annum. Drawn balances are expected to be repaid in less 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 June 30, 2015, there were no commercial paper notes outstanding.
Credit Agreement
As of June 30, 2015, 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 June 30, 2015, $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 June 30, 2015.


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


Note 11 — Commitments and Contingencies

Commitments

 As of June 30, 2015, approximately $22.1 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, and beginning in May 2015, to other third-party investors. 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 other investors, and PayPal is responsible for all servicing functions related to the customer account balances. As of June 30, 2015, the total outstanding principal balance of this pool of consumer loans was $3.1 billion, net of which the chartered financial institution and other investors owned a participation interest of $876 million, or 22% of the total outstanding balance of the consumer loans as of that date.

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, 2014, Synchrony had a net receivables portfolio under the credit program agreement of approximately $1.5 billion.

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 11, we are unable to estimate the possible loss or range of losses that could potentially result from the application of such non-monetary remedies.

On July 17, 2015, we completed the Distribution to eBay stockholders of 100% of the shares of common stock of PayPal Holdings, Inc., pursuant to which PayPal Holdings, Inc. became an independent company. Pursuant to the terms of the separation and distribution agreement entered into between us and PayPal Holdings, Inc. on June 26, 2015, assets related to the PayPal business were transferred to, and liabilities related to the PayPal business were retained or assumed by, PayPal Holdings, Inc.

Amounts accrued for legal and regulatory proceedings for which we believe a loss is probable were not material for the six months ended June 30, 2015. Except as otherwise noted for the proceedings described in this Note 11, we have concluded, based on currently available information, that reasonably possible losses arising directly from the proceedings (i.e., monetary damages or amounts paid in judgment or settlement) in excess of our recorded accruals are also not material. However, legal and regulatory proceedings are inherently unpredictable and subject to significant uncertainties. If one or more matters were

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


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.

Litigation

eBay Inc., eBay Domestic Holdings, Inc., Pierre Omidyar and Joshua Silverman have been sued by craigslist, Inc. in California Superior Court in San Francisco (Case No.:  CGC - 08 - 475276). craigslist filed suit on May 13, 2008 alleging that we engaged in conduct designed to harm craigslist's business while we negotiated to become and while we were a minority shareholder in craigslist. craigslist’s allegations include that we (i) misrepresented, concealed, suppressed and failed to disclose facts in order to induce craigslist to take detrimental action; (ii) interfered with craigslist's business operations; (iii) improperly disseminated and misused confidential and proprietary information from craigslist that we received as a minority investor; (iv) infringed and diluted craigslist's trademark and trade name; and (v) breached duties owed to craigslist. The complaint seeks significant compensatory and punitive damages, rescission and other relief. In addition, in September 2014, craigslist filed an amended complaint alleging trade secret misappropriation and seeking new and additional compensatory and punitive damages. The matter was settled in June 2015 and the lawsuit has been dismissed.

In March 2015, StubHub filed suit against Ticketmaster and the Golden State Warriors, alleging antitrust and various state law violations arising out of the defendants’ restrictive ticketing practices, which include prohibiting the resale of Warriors tickets on StubHub or any other non-Ticketmaster secondary exchange (StubHub, Inc. v. Golden State Warriors, LLC et al, N.D. Cal. No. 3:15-cv-01436). StubHub filed a First Amended Complaint on June 30, 2015. Discovery has not yet started and no trial date has been set.

Regulatory Proceedings

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

General Matters

Other third parties have from time to time claimed, and others may claim in the future, that we have infringed their intellectual property rights. We are subject to patent disputes, and expect that we will increasingly be subject to additional patent infringement claims involving various aspects of our Marketplaces and Enterprise businesses 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 recent acquisitions, particularly in cases where we are entering into new lines of business or acquiring new technologies 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 typically 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

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


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 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 statement of income in connection with our indemnification provisions have not been significant, either individually or collectively. 

Off-Balance Sheet Arrangements

As of June 30, 2015, 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 June 30, 2015, we had a total of $4.4 billion in cash withdrawals offsetting our $4.4 billion in Aggregate Cash Deposits held within these financial institutions under these cash pooling arrangements.

Protection Programs

Through our Payments segment, we provide customers with protection programs on substantially all transactions completed through PayPal's payments network, except for transactions using PayPal's payment gateway businesses. These programs protect customers from loss primarily due to fraud and counterparty performance.

The maximum potential exposure under PayPal's protection programs is estimated to be the portion of total eligible transaction volume for which customer protection claims may be raised under existing PayPal user agreements. Since eligible transactions are typically completed in a period significantly shorter than the period under which disputes may be opened, and based on our historical losses to date, we do not believe that that the maximum potential exposure is representative of our actual potential exposure. We record a liability with respect to losses under PayPal's protection programs when they are probable and the amount can be reasonably estimated.

The following table provides management’s estimate of the maximum potential exposure related to PayPal's protection programs as of June 30, 2015 and December 31, 2014:
 
Maximum potential exposure
 
Allowance for Transaction Losses
 
June 30,
2015
 
December 31, 2014
 
June 30,
2015
 
December 31,
2014
 
(In millions)
Protection Programs
$
73,250

 
$
75,833

 
$
190

 
$
166



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


Note 12 — Stock Repurchase Programs

In January 2014, our board of directors authorized a stock repurchase program that provided for the repurchase of up to an additional $5 billion of our common stock, with no expiration from the date of authorization. In January 2015, our board of directors authorized an additional $2 billion stock repurchase program, 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, 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 six months ended June 30, 2015 is summarized as follows:
 
Shares Repurchased
 
Average Price per Share (1)
 
Value of Shares Repurchased
 
Remaining Amount Authorized
 
(In millions, except per share amounts)
Balance as of January 1, 2015

 

 

 
$
985

Authorization of additional plan in January 2015

 

 

 
2,000

Repurchase of shares of common stock
18

 
$
56.95

 
1,000

 
(1,000
)
Balance as of June 30, 2015

 

 

 
$
1,985

 
(1) Stock repurchase activity excludes broker commissions.

As of June 30, 2015, a total of approximately $2 billion remained available for future repurchases of our common stock under our January 2015 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.

In July 2015, our board of directors authorized an additional $1 billion stock repurchase program, with no expiration from the date of authorization. This new stock repurchase program, together with approximately $2 billion remaining under our January 2015 stock repurchase program, brings the total repurchase authorization as of July 2015 to approximately $3 billion

Note 13 — Stock-Based Plans

Stock Option Activity

The following table summarizes stock option activity for the six months ended June 30, 2015:  
 
Options
 
(In millions)
Outstanding as of January 1, 2015
10

Granted and assumed
2

Exercised
(3
)
Forfeited/expired/canceled

Outstanding as of June 30, 2015
9


The weighted average exercise price of stock options granted during the period was $50.37 per share and the related weighted average grant date fair value was $13.39 per share.


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


Restricted Stock Unit Activity

The following table summarizes restricted stock unit ("RSU") activity for the six months ended June 30, 2015:  
 
Units 
 
(In millions)
Outstanding as of January 1, 2015
36

Awarded and assumed
16

Vested
(10
)
Forfeited
(4
)
Outstanding as of June 30, 2015
38


The weighted average grant date fair value for RSUs awarded during the period was $57.15 per share.

 Stock-Based Compensation Expense

The impact on our results of operations of recording stock-based compensation expense for the three and six months ended June 30, 2015 and 2014 was as follows:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Cost of net revenues
$
20

 
$
16