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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

OR

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

For the transition period from _______ to _______

Commission file number 001-37713

 

We assigned the goodwill to our Classifieds segment. The goodwill recognized is primarily attributable to expected synergies and the assembled workforce of Motors.co.uk. We generally do not expect goodwill to be deductible for income tax purposes.

Our condensed consolidated financial statements include the operating results of Motors.co.uk from the date of acquisition. Separate post acquisition operating results and pro forma results of operations for this acquisition have not been presented as the effect of the acquisition is not material to our financial results.

Note 4 — Discontinued Operations

StubHub

On February 13, 2020, we completed the previously announced sale of our StubHub business to an affiliate of viagogo for a purchase price of $4.05 billion in cash, subject to certain adjustments specified in the purchase agreement, including adjustments for indebtedness, cash, working capital and transaction expenses of StubHub at the closing of the transaction. The sale was completed for $4.1 billion in proceeds ($3.2 billion, net of income taxes of $900 million) and a pre-tax gain of $3.9 billion upon closing within income from discontinued operations, both subject to working capital adjustments.

At December 31, 2019, our StubHub segment did not meet the criteria for assets held for sale due to uncertainty that closing conditions of the sale, such as the buyer obtaining debt and equity financing, would be met on a timely basis. Upon the completion of the sale in the first quarter of 2020, we classified the results of our previous StubHub segment as discontinued operations in our condensed consolidated statement of income, condensed consolidated balance sheet and condensed consolidated statement of cash flows for all prior periods presented.

In connection with the sale of StubHub, we entered into a transition service agreement (“TSA”) with viagogo pursuant to which we will provide services, including, but not limited to, business support services for StubHub after the divestiture for fees of $40 million. These agreements commenced with the close of the transaction and have minimum initial terms ranging from 12 to 18 months and can be extended by viagogo for a maximum of 12 months.

The financial results of StubHub are presented as income from discontinued operations, net of income taxes in our condensed consolidated statement of income. The following table presents financial results from discontinued operations (in millions):

⁽¹⁾ Includes StubHub financial results from January 1, 2020 to February 13, 2020, in addition to the gain on sale recorded during the three months ended March 31, 2020.

The following table presents cash flows for StubHub (in millions):

⁽¹⁾ Includes StubHub financial results from January 1, 2020 to February 13, 2020, in addition to the gain on sale recorded during the three months ended March 31, 2020.

The financial results of StubHub are presented as income from discontinued operations, net of income taxes on our condensed consolidated statement of income. The following table presents the financial results of StubHub (in millions):

⁽¹⁾ Includes StubHub financial results from January 1, 2020 to February 13, 2020, in addition to the gain on sale recorded during the three months ended March 31, 2020.

For the three months ended March 31, 2020 and 2019, the loss from discontinued operations related to PayPal and Enterprise was immaterial.

The adjustments to goodwill during the three months ended March 31, 2020 were primarily due to foreign currency translation.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Intangible Assets

The components of identifiable intangible assets are as follows (in millions, except years): 

			March 31, 2020																																										December 31, 2019
			Gross Carrying Amount						Accumulated Amortization						Net Carrying Amount						Weighted Average Useful Life (Years)						Gross Carrying Amount						Accumulated Amortization						Net Carrying Amount						Weighted Average Useful Life (Years)
Intangible assets:
Customer lists and user base			$	424					$	(382)					$	42					5						$	432					$	(383)					$	49					5
Marketing related			477						(473)						4						5						491						(486)						5						5
Developed technologies			232						(229)						3						3						235						(230)						5						3
All other			161						(160)						1						4						161						(158)						3						4
Total			$	1,294					$	(1,244)					$	50											$	1,319					$	(1,257)					$	62

Amortization expense for intangible assets was $10 million and $13 million for the three months ended March 31, 2020 and 2019, respectively.

Expected future intangible asset amortization as of March 31, 2020 is as follows (in millions):

Note 6 — Segments

We have two reportable segments to reflect the way management and our CODM review and assess performance of the business. During the first quarter of 2020, we classified the results of our previous StubHub segment as discontinued operations in our condensed consolidated statement of income for all prior periods presented. Our two reportable segments are Marketplace and Classifieds. Marketplace includes our online marketplace located at www.ebay.com, its localized counterparts and the eBay suite of mobile apps. Classifieds includes a collection of brands such as mobile.de, Kijiji, Gumtree, Marktplaats, eBay Kleinanzeigen and others. The accounting policies of our segments are the same as those described in “Note 1 – The Company and Summary of Significant Accounting Policies”. Prior period segment information has been reclassified to conform to the current period segment presentation.

Our reportable segments reflect the way management and our CODM review and assess performance of the business. Our CODM reviews revenue and operating income (loss) for each reportable segment. Our CODM does not evaluate reportable segments using asset information. Corporate and other costs includes: (i) corporate management costs, such as human resources, finance and legal, that are not allocated to our segments; (ii) amortization of intangible assets; (iii) restructuring charges; (iv) stock-based compensation; and (v) results of operations of various initiatives that support all of our reportable segments.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Segment net revenue and operating income were as follows (in millions):

															Three Months Ended March 31,
															2020						2019
Net Revenues
Marketplace
Net transaction revenues															$	1,900					$	1,885
Marketing services and other revenues															230						277
Total Marketplace															2,130						2,162
Classifieds (1)															248						256
Elimination of inter-segment net revenue (2)															(4)						(5)
Total consolidated net revenue															$	2,374					$	2,413
Operating income (loss)
Marketplace															$	761					$	769
Classifieds															83						91
Corporate and other costs															(215)						(267)
Total operating income															629						593
Interest and other, net															2						64
Income before income taxes															$	631					$	657

(1)Classifieds net revenues consists entirely of marketing services and other revenue.

(2)Represents revenue generated between our reportable segments.

The following table summarizes the allocation of net revenues based on geography (in millions):  

Net revenues, inclusive of the effects of foreign exchange during each period, are attributed to U.S. and international geographies primarily based upon the country in which the seller, platform that displays advertising, other service provider or customer, as the case may be, is located.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 7 — Investments

The following tables summarize the unrealized gains and losses and estimated fair value of our investments classified as available-for-sale (in millions):

			March 31, 2020
			Gross Amortized Cost						Gross Unrealized Gains						Gross Unrealized Losses						Estimated Fair Value
Short-term investments:
Restricted cash			$	19					$	—					$	—					$	19
Corporate debt securities			3,436						1						(6)						3,431
Government and agency securities			100						—						—						100
			$	3,555					$	1					$	(6)					$	3,550
Long-term investments:
Corporate debt securities			765						—						(21)						744
			$	765					$	—					$	(21)					$	744

 

			December 31, 2019
			Gross Amortized Cost						Gross Unrealized Gains						Gross Unrealized Losses						Estimated Fair Value
Short-term investments:
Restricted cash			$	21					$	—					$	—					$	21
Corporate debt securities			1,653						1						—						1,654
Government and agency securities			175						—						—						175
			$	1,849					$	1					$	—					$	1,850
Long-term investments:
Corporate debt securities			957						4						—						961
			$	957					$	4					$	—					$	961

Investments classified as available-for-sale are carried at fair value with changes reflected in other comprehensive income. Where there is an intention or a requirement to sell an impaired available-for-sale debt security, the entire impairment is recognized in earnings with a corresponding adjustment to the amortized cost basis of the security. We presently do not intend to sell any of the securities in an unrealized loss position and expect to realize the full value of all these investments upon maturity or sale.

We regularly review investment securities for credit impairment using both qualitative and quantitative criteria. In making this assessment, we consider the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, any adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses will be recorded through interest and other, net for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through an allowance for credit losses is recognized in other comprehensive income. We did not recognize any credit-related impairment through an allowance for credit losses as of March 31, 2020.

Investment securities in a continuous loss position for less than 12 months had an estimated fair value of $2.7 billion and $28 million of unrealized losses as of March 31, 2020, and an estimated fair value of $774 million and an immaterial amount of unrealized losses as of December 31, 2019. As of March 31, 2020 there were no investment securities in a continuous loss position for greater than 12 months. Investment securities in a continuous loss position for greater than 12 months had an estimated fair value of $92 million and an immaterial amount of unrealized losses as of December 31, 2019. 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 as of March 31, 2020 are as follows (in millions):  

The following table summarizes the change in total carrying value during the three months ended March 31, 2020 and 2019 related to equity investments without readily determinable fair values still held (in millions):

For such equity investments without readily determinable fair values still held at March 31, 2020, cumulative downward adjustments for price changes and impairment was $81 million. There have been no upward adjustments for price changes to our equity investments without readily determinable fair values still held at March 31, 2020.

Note 8 — 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. These hedging contracts reduce, but do not entirely eliminate, the impact of adverse foreign exchange rate and interest rate movements. We do not use any of our derivative instruments for trading purposes.

We use foreign currency exchange contracts to reduce the volatility of cash flows related to forecasted revenues, expenses, assets and liabilities, including intercompany balances denominated in foreign currencies. These contracts are generally one month to one year in duration but with maturities up to 24 months. The objective of the foreign exchange contracts is to better ensure that ultimately the U.S. dollar-equivalent cash flows are not adversely affected by changes in the applicable U.S. dollar/foreign currency exchange rate. We evaluate the effectiveness of our foreign exchange contracts designated as cash flow or net investment hedges on a quarterly basis.

During the first quarter of 2020, we began to hedge the variability of forecasted interest payments on anticipated debt issuance using forward-starting interest rate swaps. The total notional amount of these forward-starting interest swaps was $100 million as of March 31, 2020 with terms calling for us to receive interest at a variable rate and to pay interest at a fixed rate. These interest rate swaps effectively fix the benchmark interest rate and have the economic effect of hedging the variability of forecasted interest payments for up to 10 years on an anticipated debt issuance in 2022, and they will be terminated upon issuance of the debt. Similar to other cash flow hedges, we record changes in the fair value of these interest rate swaps in accumulated other comprehensive income (loss) until the anticipated debt issuance. Upon debt issuance and termination of the derivative instruments, their fair value will be amortized over the term of the new debt to interest expense. We evaluate the effectiveness of interest rate swaps designated as cash flow hedges on a quarterly basis.

We used interest rate swaps to manage interest rate risk on our fixed rate notes issued in July 2014 and maturing in 2019, 2021 and 2024. These interest rate swaps had 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. There were no interest rate swaps designated as fair value hedges outstanding as of March 31, 2020.

Cash Flow Hedges

For derivative instruments that are designated as cash flow hedges, the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (“AOCI”) and subsequently reclassified into earnings in the same period the forecasted hedged transaction affects earnings. Derivative instruments designated as cash flow hedges must be de-designated as hedges when it is probable the forecasted hedged transaction will not occur in the initially identified time period or within a subsequent two-month time period. Unrealized gains and losses in AOCI associated with such derivative instruments are immediately reclassified into earnings. As of March 31, 2020, we have estimated that approximately $38 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. We classify cash flows related to our cash flow hedges as operating activities in our condensed consolidated statement of cash flows.

Net Investment Hedges

For derivative instruments that are designated as net investment hedges, the derivative’s gain or loss is initially reported in the translation adjustments component of AOCI and is reclassified to net earnings in the period in which the hedged subsidiary is either sold or substantially liquidated.

Fair Value Hedges

We designated the interest rate swaps used to manage interest rate risk on our fixed rate notes issued in July 2014 and maturing in 2019, 2021 and 2024 as qualifying hedging instruments and accounted for them as fair value hedges. These transactions were designated as fair value hedges for financial accounting purposes because they protected us against changes in the fair value of certain of our fixed rate borrowings due to benchmark interest rate movements. In 2019, $1.15 billion related to our 2.200% senior notes due 2019 of the $2.4 billion aggregate notional amount matured. In addition, during 2019, we terminated the interest rate swaps related to $750 million of our 2.875% senior notes due July 2021 and $500 million of our 3.450% senior notes due July 2024. As a result of the early termination, hedge accounting was discontinued prospectively and the gain on termination was recorded as an increase to the long-term debt balance and is being recognized over the remaining life of the underlying debt as a reduction to interest expense. The gain recognized during the three months ended March 31, 2020 was immaterial.

Non-Designated Hedges

Our derivatives not designated as hedging instruments consist of foreign currency forward contracts that we primarily use to hedge monetary assets or liabilities, including intercompany balances denominated in non-functional currencies. The gains and losses on our derivatives not designated as hedging instruments are recorded in interest and other, net, which are offset by the foreign currency gains and losses on the related assets and liabilities that are also recorded in interest and other, net. We classify cash flows related to our non-designated hedging instruments as operating activities in our condensed consolidated statement of cash flows.

Warrant

We entered into a warrant agreement in conjunction with a commercial agreement with Adyen that, subject to meeting certain conditions, entitles us to acquire a fixed number of shares up to 5% of Adyen’s fully diluted issued and outstanding share capital at a specific date. The warrant has a term of seven years and will vest in a series of four tranches, at a specified price per share (fixed for the first two tranches) upon meeting processing volume milestone targets on a calendar year basis. If and when a relevant milestone is reached, the warrant becomes exercisable with respect to the corresponding tranche of warrant shares up until the warrant expiration date of January 31, 2025. The maximum number of tranches that can vest in one calendar year is two.

 

The warrant is accounted for as a derivative under ASC Topic 815, Derivatives and Hedging. We report the warrant at fair value within other assets in our condensed consolidated balance sheets and changes in the fair value of the warrant are recognized in interest and other, net in our condensed consolidated statement of income. The day-one value attributable to the other side of the warrant, which was recorded as a deferred credit, is reported within other liabilities in our condensed consolidated balance sheets and will be amortized over the life of the commercial arrangement.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Fair Value of Derivative Contracts

The fair values of our outstanding derivative instruments were as follows (in millions):

			Balance Sheet Location						March 31, 2020						December 31, 2019
Derivative Assets:
Foreign exchange contracts designated as cash flow hedges			Other Current Assets						$	70					$	36
Foreign exchange contracts designated as net investment hedges			Other Current Assets						4						—
Foreign exchange contracts not designated as hedging instruments			Other Current Assets						23						15
Warrant			Other Assets						293						281
Foreign exchange contracts designated as cash flow hedges			Other Assets						24						15
Total derivative assets									$	414					$	347
Derivative Liabilities:
Foreign exchange contracts designated as cash flow hedges			Other Current Liabilities						$	2					$	2
Foreign exchange contracts designated as net investment hedges			Other Current Liabilities						1						2
Foreign exchange contracts not designated as hedging instruments			Other Current Liabilities						18						19
Total derivative liabilities									$	21					$	23
Total fair value of derivative instruments									$	393					$	324

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 March 31, 2020, the potential effect of rights of set-off associated with the foreign exchange contracts would be an offset to both assets and liabilities by $21 million, resulting in net derivative assets of $100 million and net derivative liabilities of zero.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Effect of Derivative Contracts on Condensed Consolidated Statement of Income

The following table provides a summary of the total gain (loss) recognized in the condensed consolidated statement of income from our foreign exchange derivative contracts by location (in millions): 

															Three Months Ended March 31,
															2020						2019
Foreign exchange contracts designated as cash flow hedges recognized in net revenues															$	1					$	20
Foreign exchange contracts not designated as hedging instruments recognized in interest and other, net															9						(5)
Total gain (loss) recognized from foreign exchange derivative contracts in the condensed consolidated statement of income															$	10					$	15

The following table provides a summary of the total gain (loss) recognized in the condensed consolidated statement of income from our interest rate derivative contracts by location (in millions): 

The following table provides a summary of the total gain (loss) recognized in the condensed consolidated statement of income due to changes in the fair value of the warrant (in millions):