10-Q 1 ebay10-qq32015.htm QUARTERLY REPORT 10-Q


 
 
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, 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 October 26, 2015, there were 1,200,653,879 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,
2015
 
December 31,
2014
 
(In millions, except par value amounts)
 
(Unaudited)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
2,387

 
$
4,105

Short-term investments
2,914

 
3,730

Accounts receivable, net
595

 
600

Other current assets
1,152

 
1,048

Current assets of discontinued operations

 
16,795

Current assets held for sale
1,232

 
253

Total current assets
8,280

 
26,531

Long-term investments
3,572

 
5,736

Property and equipment, net
1,535

 
1,486

Goodwill
4,442

 
4,671

Intangible assets, net
90

 
133

Other assets
419

 
207

Long-term assets of discontinued operations

 
4,506

Long-term assets held for sale

 
1,862

Total assets
$
18,338

 
$
45,132

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term debt
$
625

 
$
850

Accounts payable
175

 
107

Accrued expenses and other current liabilities
3,106

 
3,830

Deferred revenue
137

 
108

Income taxes payable
57

 
125

Current liabilities of discontinued operations

 
12,137

Current liabilities held for sale
336

 
374

Total current liabilities
4,436

 
17,531

Deferred and other tax liabilities, net
511

 
522

Long-term debt
6,814

 
6,777

Other liabilities
85

 
79

Long-term liabilities of discontinued operations

 
243

Long-term liabilities held for sale

 
74

Total liabilities
11,846

 
25,226

Commitments and contingencies (Note 10)

 


Stockholders' equity:
 
 
 
Common stock, $0.001 par value; 3,580 shares authorized; 1,203 and 1,224 shares outstanding
2

 
2

Additional paid-in capital
14,445

 
13,887

Treasury stock at cost, 423 and 384 shares
(15,653
)
 
(14,054
)
Retained earnings
7,255

 
18,900

Accumulated other comprehensive income
443

 
1,171

Total stockholders' equity
6,492

 
19,906

Total liabilities and stockholders' equity
$
18,338

 
$
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
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(In millions, except per share amounts)
 
(Unaudited)
Net revenues
$
2,099

 
$
2,150

 
$
6,270

 
$
6,467

Cost of net revenues
433

 
413

 
1,278

 
1,221

Gross profit
1,666

 
1,737

 
4,992

 
5,246

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
565

 
624

 
1,672

 
1,815

Product development
241

 
246

 
694

 
747

General and administrative
207

 
203

 
862

 
678

Provision for transaction losses
65

 
58

 
199

 
196

Amortization of acquired intangible assets
10

 
10

 
30

 
65

Total operating expenses
1,088

 
1,141

 
3,457

 
3,501

Income from operations
578

 
596

 
1,535

 
1,745

Interest and other, net
87

 
17

 
221

 
32

Income from continuing operations before income taxes
665

 
613

 
1,756

 
1,777

Provision for income taxes
(120
)
 
(104
)
 
(332
)
 
(3,371
)
Income (loss) from continuing operations
$
545

 
$
509

 
$
1,424

 
$
(1,594
)
Income (loss) from discontinued operations, net of income taxes
(6
)
 
164

 
(176
)
 
617

Net income (loss)
$
539

 
$
673

 
$
1,248

 
$
(977
)
 
 
 
 
 
 
 
 
Income (loss) per share - basic:
 
 
 
 
 
 
 
Continuing operations
$
0.45

 
$
0.41

 
$
1.17

 
$
(1.27
)
Discontinued operations
$

 
$
0.13

 
$
(0.14
)
 
$
0.49

Net income (loss) per share - basic
$
0.45

 
$
0.54

 
$
1.03

 
$
(0.78
)
 
 
 
 
 
 
 
 
Income (loss) per share - diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.45

 
$
0.41

 
$
1.16

 
$
(1.27
)
Discontinued operations
$

 
$
0.13

 
$
(0.14
)
 
$
0.49

Net income (loss) per share - diluted
$
0.45

 
$
0.54

 
$
1.02

 
$
(0.78
)
 
 
 
 
 
 
 
 
Weighted average shares:
 
 
 
 
 
 
 
Basic
1,210

 
1,242

 
1,214

 
1,258

Diluted
1,223

 
1,251

 
1,226

 
1,258


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,
 
2015
 
2014
 
2015
 
2014
 
(In millions)
 
(Unaudited)
Net income (loss)
$
539

 
$
673

 
$
1,248

 
$
(977
)
Other comprehensive income (loss), net of reclassification adjustments:
 
 
 
 
 
 
 
Foreign currency translation gain (loss)
(182
)
 
(214
)
 
(426
)
 
(123
)
Unrealized gains (losses) on investments, net
(442
)
 
67

 
(320
)
 
(14
)
Tax benefit (expense) on unrealized gains (losses) on investments, net
155

 
(33
)
 
111

 
(1
)
Unrealized gains (losses) on hedging activities, net
(19
)
 
174

 
(82
)
 
211

Tax benefit (expense) on unrealized gains (losses) on hedging activities, net
1

 
(2
)
 
1

 
(6
)
Other comprehensive income (loss), net tax
(487
)
 
(8
)
 
(716
)
 
67

Comprehensive income (loss)
$
52

 
$
665

 
$
532

 
$
(910
)

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


4


eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

 
Nine Months Ended September 30,
 
2015
 
(In millions)
 
(Unaudited)
Common stock:
 
Balance, beginning of year
$
2

Common stock issued

Common stock repurchased/forfeited

Balance, end of period
2

Additional paid-in-capital:
 
Balance, beginning of year
13,887

Common stock and stock-based awards issued and assumed
(54
)
Stock-based compensation
523

Stock-based awards tax impact
89

Balance, end of period
14,445

Treasury stock at cost:
 
Balance, beginning of year
(14,054
)
Common stock repurchased
(1,599
)
Balance, end of period
(15,653
)
Retained earnings:
 
Balance, beginning of year
18,900

Net income
1,248

Distribution of PayPal
(12,893
)
Balance, end of period
7,255

Accumulated other comprehensive income:
 
Balance, beginning of year
1,171

Change in unrealized gains on investments
(320
)
Change in unrealized losses on cash flow hedges
(82
)
Foreign currency translation adjustment
(426
)
Tax benefit on above items
112

Distribution of PayPal
(12
)
Balance, end of period
443

Total stockholders' equity
$
6,492

Number of Shares:
 
Common stock:
 
Balance, beginning of year
1,224

Common stock issued
18

Common stock repurchased/forfeited
(39
)
Balance, end of period
1,203


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


5


eBay Inc.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
 
Nine Months Ended September 30,
 
2015
 
2014
 
(In millions)
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income (loss)
$
1,248

 
$
(977
)
(Income) loss from discontinued operations
176

 
(617
)
Adjustments:

 
 
Provision for transaction losses
199

 
196

Depreciation and amortization
516

 
518

Stock-based compensation
301

 
251

Gain on sale of investments
(212
)
 

Deferred income taxes
(115
)
 
2,979

Changes in assets and liabilities, net of acquisition effects
(362
)
 
40

Net cash provided by continuing operating activities
1,751

 
2,390

Net cash provided by discontinued operating activities
1,242

 
1,646

Net cash provided by operating activities
2,993

 
4,036

Cash flows from investing activities:
 

 
 

Purchases of property and equipment
(539
)
 
(422
)
Purchases of investments
(4,452
)
 
(6,808
)
Maturities and sales of investments
5,579

 
4,205

Acquisitions, net of cash acquired
(24
)
 
(55
)
Other
(15
)
 
(5
)
Net cash provided by (used in) continuing investing activities
549

 
(3,085
)
Net cash used in discontinued investing activities
(3,837
)
 
(660
)
Net cash used in investing activities
(3,288
)
 
(3,745
)
Cash flows from financing activities:
 

 
 

Proceeds from issuance of common stock
173

 
178

Repurchases of common stock
(1,512
)
 
(3,476
)
Excess tax benefits from stock-based compensation
72

 
56

Tax withholdings related to net share settlements of restricted stock awards and units
(226
)
 
(224
)
Proceeds from issuance of debt

 
3,482

Repayment of debt
(250
)
 

Other
10

 
8

Net cash provided by (used in) continuing financing activities
(1,733
)
 
24

Net cash provided by (used in) discontinued financing activities
(1,599
)
 
19

Net cash provided by (used) in financing activities
(3,332
)
 
43

Effect of exchange rate changes on cash and cash equivalents
(286
)
 
(38
)
Net increase (decrease) in cash and cash equivalents
(3,913
)
 
296

Cash and cash equivalents at beginning of period
6,328

 
4,494

Cash and cash equivalents at end of period
$
2,415

 
$
4,790

Less: Cash and cash equivalents of held for sale
28

 
29

Less: Cash and cash equivalents of discontinued operations

 
2,254

Cash and cash equivalents of continuing operations at end of period
$
2,387

 
$
2,507

Supplemental cash flow disclosures:
 
 
 
Cash paid for interest
$
161

 
$
84

Cash paid for income taxes
$
240

 
$
229


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

eBay Inc. is a global commerce leader including eBay, Stubhub and eBay Classifieds platforms.

On July 17, 2015, we completed the distribution of 100% of the outstanding common stock of PayPal Holdings, Inc. ("PayPal") to our stockholders ("Distribution"), pursuant to which PayPal became an independent company. Beginning in the third quarter of 2015, PayPal's financial results for periods prior to the Distribution have been reflected in our condensed consolidated statement of income, retrospectively, as discontinued operations. Additionally, the related assets and liabilities associated with the discontinued operations in the prior year are classified as discontinued operations in our condensed consolidated balance sheet. Pursuant to the terms of the separation and distribution agreement entered into between us and PayPal on June 26, 2015, upon Distribution, assets related to the PayPal business were transferred to, and liabilities related to the PayPal business were retained or assumed by, PayPal. See "Note 3 - Discontinued Operations" for additional information.

During the second quarter of 2015, our Board of Directors ("Board") approved a plan to sell the businesses underlying our Enterprise segment ("Enterprise"). As a result, the Enterprise financial results were reflected in our condensed consolidated statement of income, retrospectively, as discontinued operations beginning in the second quarter of 2015. 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 Enterprise and, subject to customary closing conditions, we expect to close this transaction in the fourth quarter of 2015. See "Note 3 - Discontinued Operations" for additional information.

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

Use of estimates

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

Principles of consolidation and basis of presentation

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

These condensed consolidated financial statements and accompanying notes should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 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

7


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


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. The standard impacted the presentation of Enterprise during the second quarter of 2015 and PayPal during the third quarter of 2015 related to the financial statement presentation of assets held for sale and discontinued operations and required additional disclosures as presented in "Note 3 - Discontinued Operations."

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 2015, the FASB issued guidance 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 consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated 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 consolidated financial statements.

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

8


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


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 consolidated 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 consolidated financial statements.

In 2015, the FASB issued new guidance related to business combinations. The new guidance requires that adjustments made to provisional amounts recognized in a business combination be recorded in the period such adjustments are determined, rather than retrospectively adjusting previously reported amounts. 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 consolidated financial statements.

Note 2 — Net Income (loss) Per Share

Basic net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding during the period. The dilutive effect of outstanding options and equity incentive awards is reflected in diluted net income (loss) per share by application of the treasury stock method. The calculation of diluted net income (loss) per share excludes all anti-dilutive common shares. The following table sets forth the computation of basic and diluted net income (loss) per share for the periods indicated:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(In millions, except per share amounts)
Numerator:
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
545

 
$
509

 
$
1,424

 
$
(1,594
)
Income (loss) from discontinued operations, net of income taxes
(6
)
 
164

 
(176
)
 
617

Net income (loss)
$
539

 
$
673

 
$
1,248

 
$
(977
)
Denominator:
 
 
 
 
 
 
 
Weighted average shares of common stock - basic
1,210

 
1,242

 
1,214

 
1,258

Dilutive effect of equity incentive awards
13

 
9

 
12

 

Weighted average shares of common stock - diluted
1,223

 
1,251

 
1,226

 
1,258

Income (loss) per share - basic:
 
 
 
 
 
 
 
Continuing operations
$
0.45

 
$
0.41

 
$
1.17

 
$
(1.27
)
Discontinued operations
$

 
$
0.13

 
$
(0.14
)
 
$
0.49

Net income (loss) per share - basic
$
0.45

 
$
0.54

 
$
1.03

 
$
(0.78
)
Income (loss) per share - diluted:
 
 
 
 
 
 
 
Continuing operations
$
0.45

 
$
0.41

 
$
1.16

 
$
(1.27
)
Discontinued operations
$

 
$
0.13

 
$
(0.14
)
 
$
0.49

Net income (loss) per share - diluted
$
0.45

 
$
0.54

 
$
1.02

 
$
(0.78
)
Common stock equivalents excluded from income per diluted share because their effect would have been anti-dilutive
4

 
8

 
2

 
54



9


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


Note 3 — Discontinued Operations

On June 26, 2015, our Board approved the separation of PayPal through the Distribution. To consummate the Distribution, our Board declared a pro rata dividend of PayPal Holdings, Inc. common stock to eBay’s stockholders of record as of the close of business on July 8, 2015 (the "Record Date"). Each eBay stockholder received one (1) share of PayPal Holdings, Inc. common stock for every share of eBay common stock held at the close of business on the Record Date. The Distribution occurred on July 17, 2015. Immediately following the Distribution, PayPal became an independent, publicly traded company and is listed on The NASDAQ Stock Market under the ticker “PYPL.” eBay will continue to trade on The NASDAQ Stock Market under the ticker “EBAY.”

During the second quarter of 2015, our Board approved a plan to sell Enterprise. Based on the expected sales proceeds, we recorded a goodwill impairment of $786 million in the second quarter of 2015. On July 16, 2015, we signed a definitive agreement to sell Enterprise for $925 million and, subject to customary closing conditions, we expect to close this transaction in the fourth quarter of 2015. We have classified the results of Enterprise 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 September 30, 2015 are classified as current in our condensed consolidated balance sheet as we expect to close the transaction discussed above in the fourth quarter of 2015.

The financial results of PayPal and Enterprise are presented as income (loss) from discontinued operations, net of income taxes in our condensed consolidated statement of income. The following table presents financial results of PayPal and Enterprise:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015 (1)
 
2014
 
2015 (2)
 
2014
 
(In millions)
PayPal income from discontinued operations, net of income taxes
$
29

 
$
216

 
$
503

 
$
744

Enterprise loss from discontinued operations, net of income taxes
(35
)
 
(52
)
 
(679
)
 
(127
)
Income (loss) from discontinued operations, net of income taxes
$
(6
)
 
$
164

 
$
(176
)
 
$
617

 
(1)    Includes PayPal financial results from July 1, 2015 to July 17, 2015
(2)    Includes PayPal financial results from January 1, 2015 to July 17, 2015

10


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


The following table presents cash flow of PayPal and Enterprise:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015 (1)
 
2014
 
2015 (2)
 
2014
 
(In millions)
PayPal net cash provided by discontinued operating activities
$
32

 
$
547

 
$
1,287

 
$
1,680

Enterprise net cash provided by (used in) discontinued operating activities
(50
)
 
26

 
(45
)
 
(34
)
Net cash provided by (used in) discontinued operating activities
$
(18
)
 
$
573

 
$
1,242

 
$
1,646

 
 
 
 
 
 
 
 
PayPal net cash used in discontinued investing activities
$
(1,091
)
 
$
(490
)
 
$
(3,744
)
 
$
(564
)
Enterprise net cash used in discontinued investing activities
(23
)
 
(38
)
 
(93
)
 
(96
)
Net cash used in discontinued investing activities
$
(1,114
)
 
$
(528
)
 
$
(3,837
)
 
$
(660
)
 
 
 
 
 
 
 
 
PayPal net cash provided by (used in) discontinued financing activities (3)
$
(1,615
)
 
$
2

 
$
(1,599
)
 
$
34

Enterprise net cash used in discontinued financing activities

 
(12
)
 

 
(15
)
Net cash provided by (used in) discontinued financing activities
$
(1,615
)
 
$
(10
)
 
$
(1,599
)
 
$
19

(1)    Includes PayPal financial results from July 1, 2015 to July 17, 2015
(2)    Includes PayPal financial results from January 1, 2015 to July 17, 2015
(3)    Includes $1.6 billion of cash and cash equivalents distributed to PayPal on July 17, 2015.

PayPal

The financial results of PayPal through the Distribution are presented as income (loss) from discontinued operations, net of income taxes on our condensed consolidated statement of income. The following table presents financial results of PayPal:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015 (1)
 
2014
 
2015 (2)
 
2014
 
(In millions)
Net revenues
$
415

 
$
1,950

 
$
4,793

 
$
5,733

Cost of net revenues
178

 
772

 
1,918

 
2,294

Gross profit
237

 
1,178

 
2,875

 
3,439

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
41

 
270

 
534

 
740

Product development
45

 
229

 
527

 
643

General and administrative
73

 
221

 
740

 
646

Provision for transaction and loan losses
33

 
189

 
418

 
483

Amortization of acquired intangible assets
3

 
13

 
30

 
40

Total operating expenses
195

 
922

 
2,249

 
2,552

Income from operations of discontinued operations
42

 
256

 
626

 
887

Interest and other, net

 
4

 
1

 
(6
)
Income from discontinued operations before income taxes
42

 
260

 
627

 
881

Income tax expense
(13
)
 
(44
)
 
(124
)
 
(137
)
Income from discontinued operations, net of income taxes
$
29

 
$
216

 
$
503

 
$
744

 
(1)    Includes PayPal financial results from July 1, 2015 to July 17, 2015
(2)    Includes PayPal financial results from January 1, 2015 to July 17, 2015

11


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



The following table presents the aggregate carrying amounts of the classes of assets and liabilities of discontinued operations:
 
December 31,
2014
 
(In millions)
Carrying amounts of assets included as part of discontinued operations:
 
Cash and cash equivalents
$
2,194

Short-term investments
39

Accounts receivable, net
51

Loans and interest receivable, net
3,600

Funds receivable and customer accounts
10,545

Other current assets
366

Long-term investments
31

Property and equipment, net
1,113

Goodwill
3,136

Intangible assets, net
172

Other assets
54

Total assets classified as discontinued operations in the condensed consolidated balance sheet
$
21,301

 
 
Carrying amounts of liabilities included as part of discontinued operations:
 
Accounts payable
115

Funds receivable and customer accounts
10,545

Accrued expenses and other current liabilities
1,448

Income taxes payable
29

Deferred and other tax liabilities, net
197

Other liabilities
46

Total liabilities classified as discontinued operations in the condensed consolidated balance sheet
$
12,380

 




12


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


Enterprise

The financial results of Enterprise through September 30, 2015 are presented as income (loss) from discontinued operations, net of income taxes on our condensed consolidated statement of income. The following table presents financial results of Enterprise:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Net revenues
$
261

 
$
253

 
$
805

 
$
781

Cost of net revenues
184

 
204

 
606

 
617

Gross profit
77

 
49

 
199

 
164

Operating expenses:
 
 
 
 
 
 
 
Sales and marketing
30

 
29

 
94

 
87

Product development
26

 
36

 
92

 
101

General and administrative
29

 
18

 
119

 
44

Provision for transaction and loan losses
1

 
2

 
9

 
6

Amortization of acquired intangible assets

 
35

 
70

 
105

Goodwill impairment

 

 
786

 

Total operating expenses
86

 
120

 
1,170

 
343

Loss from operations of discontinued operations
(9
)
 
(71
)
 
(971
)
 
(179
)
Interest and other, net
(2
)
 
(1
)
 
1

 
(2
)
Loss from discontinued operations before income taxes
(11
)
 
(72
)
 
(970
)
 
(181
)
Income tax benefit (provision)
(24
)
 
20

 
291

 
54

Loss from discontinued operations, net of income taxes
$
(35
)
 
$
(52
)
 
$
(679
)
 
$
(127
)

The following table presents the aggregate carrying amounts of the classes of held for sale assets and liabilities:
 
September 30,
2015
 
December 31,
2014
 
(In millions)
Carrying amounts of assets included as part of held for sale:
 
 
 
Cash and cash equivalents
$
28

 
$
29

Short-term investments
1

 
1

Accounts receivable, net
121

 
146

Other current assets
56

 
77

Long-term investments
11

 
10

Property and equipment, net
338

 
303

Goodwill
500

 
1,287

Intangible assets, net
175

 
259

Other assets
2

 
3

Total assets classified as held for sale in the condensed consolidated balance sheet
$
1,232

 
$
2,115

 
 
 
 
Carrying amounts of liabilities included as part of held for sale:
 
 
 
Accounts payable
50

 
179

Accrued expenses and other current liabilities
126

 
115

Deferred revenue
82

 
80

Deferred and other tax liabilities, net
77

 
73

Other liabilities
1

 
1

Total liabilities classified as held for sale in the condensed consolidated balance sheet
$
336

 
$
448

 

13


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


Note 4 — Goodwill and Intangible Assets

Goodwill

The following table presents goodwill balances and adjustments to those balances during the nine months ended September 30, 2015:
 
December 31,
2014
 
Goodwill
Acquired
 
Adjustments
 
September 30,
2015
 
(In millions)
Goodwill
$
4,671

 
$
23

 
$
(252
)
 
$
4,442


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

Intangible Assets

The components of identifiable intangible assets are as follows: 
 
September 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
$
417

 
$
(395
)
 
$
22

 
5
 
$
434

 
$
(407
)
 
$
27

 
5
Marketing related
587

 
(561
)
 
26

 
5
 
642

 
(596
)
 
46

 
5
Developed technologies
236

 
(211
)
 
25

 
4
 
237

 
(195
)
 
42

 
4
All other
149

 
(132
)
 
17

 
4
 
144

 
(126
)
 
18

 
4
 
$
1,389

 
$
(1,299
)
 
$
90

 
 
 
$
1,457

 
$
(1,324
)
 
$
133

 
 

Amortization expense for intangible assets was $18 million and $19 million for the three months ended September 30, 2015 and 2014, respectively. Amortization expense for intangible assets was $50 million and $92 million for the nine months ended September 30, 2015 and 2014, respectively.

Expected future intangible asset amortization as of September 30, 2015 is as follows (in millions):
Fiscal years:
 
 
Remaining 2015
 
$
16

2016
 
39

2017
 
27

2018
 
7

2019
 
1

 
 
$
90


Note 5 — Segments

We have one reportable segment. Our chief operating decision maker reviews financial information presented on a consolidated basis for purposes of allocating resources and evaluating financial performance. During the second quarter of 2015, we classified the results of Enterprise, formerly our Enterprise segment, as discontinued operations in our condensed consolidated statement of income for all periods presented. During the third quarter of 2015, we have classified the results of PayPal, formerly our Payments segment, as discontinued operations in our condensed consolidated statement of income for all periods presented. See "Note 3 - Discontinued Operations" for additional information.

14


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



The following table sets forth the breakdown of net revenues by type for the periods presented:
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Net Revenues by Type:
 
 
 
 
 
 
 
Net transaction revenues
$
1,659

 
$
1,703

 
$
5,012

 
$
5,144

Marketing services and other revenues
440

 
447

 
1,258

 
1,323

Total net revenue
$
2,099

 
$
2,150

 
$
6,270

 
$
6,467


Note 6 — Investments

At September 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:
 
September 30, 2015
 
Gross
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In millions)
Short-term investments:
 
  
 
  
 
 
 
Restricted cash
$
30

  
$

  
$

 
$
30

Corporate debt securities
2,039

  
1

  
(1
)
 
2,039

Government and agency securities
55

  

  

 
55

Time deposits and other
50

  

  

 
50

Equity instruments
9

 
731

 

 
740

 
$
2,183

  
$
732

  
$
(1
)
 
$
2,914

Long-term investments:
 
  
 
  
 
 
 
Corporate debt securities
3,468

  
15

  
(34
)
 
3,449

 
$
3,468

  
$
15

  
$
(34
)
 
$
3,449

 
 
December 31, 2014
 
Gross
Amortized
Cost
  
Gross
Unrealized
Gains
  
Gross
Unrealized
Losses
 
Estimated
Fair Value
 
(In millions)
Short-term investments:
 
  
 
  
 
 
 
Restricted cash
$
19

  
$

  
$

 
$
19

Corporate debt securities
2,519

  
1

  
(1
)
 
2,519

Government and agency securities
3

  

  

 
3

Time deposits and other
152

  

  

 
152

Equity instruments
9

 
1,028

 

 
1,037

 
$
2,702

 
$
1,029

 
$
(1
)
 
$
3,730

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


15


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



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 September 30, 2015 and December 31, 2014. Refer to "Note 14 - Accumulated Other Comprehensive Income" for amounts reclassified to earnings from unrealized gains and losses.

The estimated fair values of our short-term and long-term investments classified as available for sale by date of contractual maturity at September 30, 2015 are as follows:  
 
September 30,
2015
 
(In millions)
One year or less (including restricted cash of $30)
$
2,174

One year through two years
1,186

Two years through three years
1,273

Three years through four years
866

Four years through five years
115

Five years through six years

Six years through seven years

Seven years through eight years
8

Eight years through nine years

Nine years through ten years
1

 
$
5,623

Equity and cost method investments
We have made multiple equity and cost method investments which are reported in long-term investments on our condensed consolidated balance sheet. As of September 30, 2015 and December 31, 2014, our equity and cost method investments totaled $123 million and $184 million, respectively. During the second quarter of 2015, we sold our equity interest in craigslist, Inc. During the third quarter of 2015, we sold a portion of our equity interest in Jasper Infotech Private Limited (Snapdeal) and our entire interest in Baixing Holdings Limited. The resulting gains are recorded in interest and other, net on our condensed consolidated statement of income.


16


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


Note 7 — 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, 2015 and December 31, 2014:
Description
Balance as of
September 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
$
2,387

 
$
1,954

 
$
433

Short-term investments:
 
 
 
 
 
Restricted cash
30

 
30

 

Corporate debt securities
2,039

 

 
2,039

Government and agency securities
55

 

 
55

Time deposits
50

 

 
50

Equity instruments
740

 
740

 

Total short-term investments
2,914

 
770

 
2,144

Derivatives
139

 

 
139

Long-term investments:
 
 
 
 
 
Corporate debt securities
3,449

 

 
3,449

Total long-term investments
3,449

 

 
3,449

Total financial assets
$
8,889

 
$
2,724

 
$
6,165

 
 
 
 
 
 
Liabilities:
 
 
 
 
 
Derivatives
$
32

 
$

 
$
32




17


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
 
$
4,105

 
$
1,694

 
$
2,411

Short-term investments:
 
 
 
 
 
 
Restricted cash
 
19

 
19

 

Corporate debt securities
 
2,519

 

 
2,519

Government and agency securities
 
3

 

 
3

Time deposits
 
152

 

 
152

Equity instruments
 
1,037

 
1,037

 

Total short-term investments
 
3,730

 
1,056

 
2,674

Derivatives
 
84

 

 
84

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
 
$
13,471

 
$
2,750

 
$
10,721

 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Derivatives
 
$
20

 
$

 
$
20

 
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, 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.

In addition, we had cost and equity method investments of approximately $123 million and $184 million included in long-term investments on our condensed consolidated balance sheet at September 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 September 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.

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


18


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


Note 8 — Derivative Instruments

Summary of Derivative Instruments

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

Foreign Exchange Contracts

We transact business in various foreign currencies and have significant international revenues as well as costs denominated in foreign currencies, which subjects us to foreign currency risk. We use foreign currency exchange contracts, 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 September 30, 2015, we have estimated that approximately $19 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.

19


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, 2015 and December 31, 2014 were as follows:
 
Balance Sheet Location
 
September 30,
2015
 
December 31,
2014
 
 
 
(In millions)
Derivative Assets:
 
 
 
 
 
Foreign exchange contracts designated as cash flow hedges
Other Current Assets
 
$
30

 
$
42

Foreign exchange contracts not designated as hedging instruments
Other Current Assets
 
32

 
20

Interest rate contracts designated as fair value hedges
Other Assets
 
77

 
22

Total derivative assets
 
 
$
139

 
$
84

 
 
 
 
 
 
Derivative Liabilities:
 
 
 
 
 
Foreign exchange contracts designated as cash flow hedges
Other Current Liabilities
 
$
5

 
$

Foreign exchange contracts not designated as hedging instruments
Other Current Liabilities
 
27

 
20

Total derivative liabilities
 
 
$
32

 
$
20

 
 
 
 
 
 
Total fair value of derivative instruments
 
 
$
107

 
$
64


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, 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 $22 million, resulting in net derivative assets and derivative liabilities of $40 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 September 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 September 30, 2015 and December 31, 2014, and the impact of these derivative contracts on accumulated other comprehensive income for the nine months ended September 30, 2015
 
December 31, 2014
 
Amount of gain (loss)
recognized in other
comprehensive income
(effective portion) 
 
Amount of gain (loss)
reclassified from
accumulated other
comprehensive income
to net revenue and operating expense
(effective portion)
 
September 30, 2015
 
(In millions)
Foreign exchange contracts designated as cash flow hedges
$
41

 
$
29

 
$
51

 
$
19



20


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, 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
$
(15
)
 
$
42

 
$
(8
)
 
$
35



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,
 
2015

2014
 
2015
 
2014
 
(In millions)
Foreign exchange contracts designated as cash flow hedges recognized in cost of net revenues and operating expenses
$
19

 
$

 
$
51

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

 
13

 
(2
)
 
(1
)
Total gain (loss) recognized from foreign exchange derivative contracts in the condensed consolidated statement of income
$
32

 
$
13

 
$
49

 
$
(9
)

$8 million in net derivative gains and $8 million in net derivative losses recognized in interest and other, net, during the three and nine months ended September 30, 2015, respectively, 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
September 30,
 
Nine Months Ended
September 30,
 
2015
 
2014
 
2015
 
2014
 
(In millions)
Gain (loss) from interest rate contracts designated as fair value hedges recognized in interest and other, net
$
56

 
$
(10
)
 
$
55

 
$
(10
)
Gain (loss) from hedged items attributable to hedged risk recognized in interest and other, net
(56
)
 
10

 
(55
)
 
10

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

 
$

 
$

 
$



21


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,
 
2015
 
2014
 
(In millions)
Foreign exchange contracts designated as cash flow hedges
$
705

 
$
429

Foreign exchange contracts not designated as hedging instruments
2,890

 
2,275

Interest rate contracts designated as fair value hedges
2,400

 
2,400

Total
$
5,995

 
$
5,104


Note 9 — 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, 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

 
0.574
%
 
$
450

 
0.560
%
Senior notes due 2019
 
LIBOR plus 0.48%

 
400

 
0.819
%
 
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
%
 
499

 
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
 
 
 
6,737

 
 
 
6,736

 
 
Hedge accounting fair value adjustments
 
 
 
77

 
 
 
22

 
 
Other indebtedness
 
 
 

 
 
 
19

 
 
Total long-term debt
 
 
 
$
6,814

 
 
 
$
6,777

 
 
 
 
 
 
 
 
 
 
 
 
 
Short-Term Debt
 
 
 
 
 
 
 
 
 
 
Senior notes due 2015
 
%
 

 
0.820
%
 
250

 
0.820
%
Senior notes due 2015
 
1.625
%
 
600

 
1.805
%
 
600

 
1.805
%
Other indebtedness
 
 
 
25

 
 
 

 
 
Total short-term debt
 
 
 
625

 
 
 
850

 
 
Total Debt
 
 
 
$
7,439

 
 
 
$
7,627

 
 

22


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


Senior Notes

During the nine months ended September 30, 2015, $250 million aggregate principal amount of 0.70% fixed rate notes due 2015 matured and was repaid during the quarter.

Interest on the floating rate notes is paid quarterly. Interest on the fixed rate notes is payable semi-annually. 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 previous 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 September 30, 2015 and 2014 was approximately $46 million and $32 million, respectively. At September 30, 2015, the estimated fair value of these senior notes was approximately $7.1 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 September 30, 2015, there were no commercial paper notes outstanding.

Credit Agreement

As of September 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 September 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 September 30, 2015.


23


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


Note 10 — Commitments and Contingencies

Litigation and Other Legal Matters
 
Overview
We are involved in legal and regulatory proceedings on an ongoing basis. Many of these proceedings are in early stages and may seek an indeterminate amount of damages. If we believe that a loss arising from such matters is probable and can be reasonably estimated, we accrue the estimated liability in our financial statements. If only a range of estimated losses can be determined, we accrue an amount within the range that, in our judgment, reflects the most likely outcome; if none of the estimates within that range is a better estimate than any other amount, we accrue the low end of the range. For those proceedings in which an unfavorable outcome is reasonably possible but not probable, we have disclosed an estimate of the reasonably possible loss or range of losses or we have concluded that an estimate of the reasonably possible loss or range arising directly from the proceeding (i.e., monetary damages or amounts paid in judgment or settlement) are not material. If we cannot estimate the probable or reasonably possible loss or range of losses arising from a proceeding, we have disclosed that fact. In assessing the materiality of a proceeding, we evaluate, among other factors, the amount of monetary damages claimed, as well as the potential impact of non-monetary remedies sought by plaintiffs (e.g., injunctive relief) that may require us to change our business practices in a manner that could have a material adverse impact on our business. With respect to the matters disclosed in this Note 10, we are unable to estimate the possible loss or range of losses that could potentially result from the application of such non-monetary remedies.

Amounts accrued for legal and regulatory proceedings for which we believe a loss is probable were not material for the nine months ended September 30, 2015. Except as otherwise noted for the proceedings described in this Note 10, we have concluded, based on currently available information, that reasonably possible losses arising directly from the proceedings (i.e., monetary damages or amounts paid in judgment or settlement) in excess of our recorded accruals are also not material. However, legal and regulatory proceedings are inherently unpredictable and subject to significant uncertainties. If one or more matters were resolved against us in a reporting period for amounts in excess of management’s expectations, the impact on our operating results or financial condition for that reporting period could be material.

Litigation

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. Upon making this announcement, we required all buyers and sellers on our platform to reset their passwords in order to login to their account. In addition to making this public announcement, we proactively approached a number of regulatory and governmental bodies, including those with the most direct supervisory authority over our data privacy and data security programs, to specifically inform them of the incident and our actions to protect our customers in response. Certain of those regulatory agencies have requested us to provide further, more detailed information regarding the incident, and we believe that we have fully cooperated in all of those requests. To date, we have not been informed by any regulatory authority of an intention to bring any enforcement action arising from this incident; however, in the future we may be subject to fines or other regulatory action.  In addition, in July 2014, a putative class action lawsuit was filed against us for alleged violations and harm resulting from the incident. The lawsuit was 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 business as our products and services continue to expand in scope and complexity. Such claims may be brought directly or indirectly against our companies and/or against our customers (who

24