EBAY INC. FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that involve expectations, plans or intentions (such as those relating to future business, future results of operations or financial condition, new or planned features or services, management strategies or timing and other expectations regarding our sale ofStubHub to viagogo). You can identify these forward-looking statements by words such as "may," "will," "would," "should," "could," "expect," "anticipate," "believe," "estimate," "intend," "plan" and other similar expressions. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those expressed or implied in our forward-looking statements. Such risks and uncertainties include, among others, those discussed in "Item 1A: Risk Factors" of this Annual Report on Form 10-K, as well as in our consolidated financial statements, related notes, and the other information appearing elsewhere in this report and our other filings with theSecurities and Exchange Commission . We do not intend, and undertake no obligation, to update any of our forward-looking statements after the date of this report to reflect actual results or future events or circumstances. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements. You should read the following Management's Discussion and Analysis of Financial Condition and Results of Operations in conjunction with the consolidated financial statements and the related notes included in this report. OVERVIEW BusinesseBay Inc. , a global commerce leader, includes Marketplace,StubHub and Classifieds platforms. Collectively,eBay connects millions of buyers and sellers around the world, empowering people and creating opportunity for all. Founded in 1995 inSan Jose, California ,eBay is one of the world's largest and most vibrant marketplaces for discovering great value and unique selection. Our technologies and services are designed to give buyers choice and a breadth of relevant inventory and to enable sellers worldwide to organize and offer their inventory for sale, virtually anytime and anywhere. In 2019,eBay enabled over$90 billion of Gross Merchandise Volume.
Presentation
In addition to the corresponding measures under generally accepted accounting
principles ("GAAP"), management uses non-GAAP measures in reviewing our
financial results. The foreign exchange neutral ("FX-Neutral"), or constant
currency, net revenue amounts discussed below are non-GAAP financial measures
and are not in accordance with, or an alternative to, measures prepared in
accordance with GAAP. Accordingly, the FX-Neutral information appearing in the
following discussion of our results of operations should be read in conjunction
with the information provided below in "Non-GAAP Measures of Financial
Performance," which includes reconciliations of FX-Neutral financial measures to
the most directly comparable GAAP measures. We calculate the year-over-year
impact of foreign currency movements using prior period foreign currency rates
applied to current year transactional currency amounts.
Our commerce platforms operate globally, resulting in certain revenues that are
denominated in foreign currencies, primarily the euro, British pound, Korean won
and Australian dollar, subjecting us to foreign currency risk which may impact
our financial results. Because of this and the fact that we generate a majority
of our net revenues internationally, including during the years ended
December 31, 2019 , 2018 and 2017, we are subject to the risks related to doing
business in foreign countries as discussed under "Item 1A: Risk Factors."
The effect of foreign currency exchange rate movements during 2019 was primarily
attributable to the strengthening of the U.S. dollar against the euro, British
pound and Korean won.
Fiscal Year Highlights
Net revenues increased 1% to $10.8 billion in 2019 compared to 2018, primarily
driven by Marketplace net transaction revenues and Classifieds marketing
services and other revenues. FX-Neutral net revenue (as defined above) increased
2% in 2019 compared to 2018. Operating margin increased to 21.5% in 2019
compared to 20.7% in 2018.
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We generated cash flow from continuing operating activities of
In the first quarter of 2019, we completed the acquisition of theU.K. based classifieds site, Motors.co.uk for$93 million in cash. During the third quarter of 2019,$400 million of floating rate notes and$1.15 billion of 2.200% fixed rate notes matured and were repaid. During the year endedDecember 31, 2019 we paid$473 million in cash dividends. In the fourth quarter of 2019, we entered into a definitive agreement to sellStubHub to viagogo for a purchase price of$4.05 billion in cash. The sale is expected to close in the first quarter of 2020, subject to regulatory approval and closing conditions. Diluted earnings per share from continuing operations was$2.10 in 2019 compared to diluted earnings per share of$2.55 in 2018. InJanuary 2020 , we declared a quarterly cash dividend of$0.16 per share of common stock to be paid onMarch 20, 2020 to stockholders of record as ofMarch 2, 2020 . 38
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RESULTS OF OPERATIONSNet Revenues Seasonality
We expect transaction activity patterns on our platforms to mirror general consumer buying patterns and expect that these trends will continue. The following table sets forth, for the periods presented, our total net revenues and the sequential quarterly movements of these net revenues (in millions, except percentages):
Quarter Ended
March 31 June 30 September 30 December 31
2017
Net revenues $ 2,303 $ 2,419 $ 2,498 $ 2,707
Percent change from prior quarter (7 )% 5 % 3 % 8 %
2018
Net revenues $ 2,580 $ 2,640 $ 2,649 $ 2,877
Percent change from prior quarter (5 )% 2 % 0 % 9 %
2019
Net revenues $ 2,643 $ 2,687 $ 2,649 $ 2,821
Percent change from prior quarter (8 )% 2 % (1 )% 7 %
Net Revenues by Geography
Revenues 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. The following
table presents net revenues by geography for the periods presented (in millions,
except percentages):
Year Ended December 31,
2019 % Change 2018 % Change 2017
U.S. $ 4,337 (1 )% 4,373 4 % $ 4,187
Percentage of net revenues 40 % 41 % 42 %
International 6,463 1 % 6,373 11 %
5,740
Percentage of net revenues 60 % 59 % 58 % Total net revenues$ 10,800 1 %$ 10,746 8 %$ 9,927 Net revenues included$81 million of hedging gains and$8 million and$28 million of hedging losses during the years endedDecember 31, 2019 , 2018 and 2017, respectively. The hedging activity in net revenues specifically relates to hedges of net transaction revenues generated by our Marketplace segment. Foreign currency movements relative to theU.S. dollar had an unfavorable impact of$211 million , a favorable impact of$174 million and unfavorable impact of$39 million on net revenues for the yearsDecember 31, 2019 , 2018 and 2017, respectively. The effect of foreign currency exchange rate movements in 2019 compared to 2018 was primarily attributable to the strengthening of theU.S. dollar against the euro, British pound and Korean won. The effect of foreign currency exchange rate movements in 2018 compared to 2017 was primarily attributable to the weakening of theU.S. dollar against the euro, British pound and Korean won. 39
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Net Revenues by Type and Segment
We generate two types of net revenues:
Net transaction revenues primarily include final value fees, feature fees, including fees to promote listings, and listing fees from sellers on our Marketplace platforms and final value fees from sellers and buyers on ourStubHub platforms. Our net transaction revenues also include store subscription and other fees often from large enterprise sellers. Our net transaction revenues are reduced by incentives, including discounts, coupons and rewards, provided to our customers.
Marketing services and other ("MS&O") revenues consist of Marketplace,
The following table presents net revenues by type and segment (in millions,
except percentages):
Year Ended December 31,
2019 % Change 2018 % Change 2017
Net transaction revenues:
Marketplace $ 7,578 2 % $ 7,416 9 % $ 6,809
StubHub 1,057 (1 )% 1,068 6 % 1,011
Total net transaction revenues 8,635 2 % 8,484 8 % 7,820
Marketing services and other
revenues:
Marketplace 1,060 (13 )% 1,225 3 % 1,192
Classifieds 1,061 4 % 1,022 14 % 897
StubHub 64 ** 15 (17 )% 18
Elimination of inter-segment net
revenues (20 ) ** - - % -
Total marketing services and
other revenues 2,165 (4 )% 2,262 7 % 2,107
Total net revenues $ 10,800 1 % $ 10,746 8 % $ 9,927
** Not meaningful
Net Transaction Revenues
Key Operating Metrics
Gross Merchandise Volume ("GMV") and take rate are significant factors that we believe affect our net transaction revenues.
GMV consists of the total value of all successfully closed transactions between users on our Marketplace orStubHub platforms during the applicable period, regardless of whether the buyer and seller actually consummated the transaction. Despite GMV's divergence from revenue during 2019, we still believe that GMV provides a useful measure of the overall volume of closed transactions that flow through our platforms in a given period, notwithstanding the inclusion in GMV of closed transactions that are not ultimately consummated.
Take rate is defined as net transaction revenues divided by GMV.
40
--------------------------------------------------------------------------------The following table presents GMV and take rate by segment for the periods presented (in millions, except percentages):
Year Ended December 31,
2019 % Change 2018 % Change 2017
GMV:
Marketplace $ 85,510 (5 )% $ 89,829 7 % $ 83,883
StubHub 4,700 (1 )% 4,751 5 % 4,520
Total $ 90,210 (5 )% $ 94,580 7 % $ 88,403
Transaction take rate:
Marketplace 8.86 % 0.61 % 8.25 % 0.13 % 8.12 %
StubHub 22.49 % 0.01 % 22.48 % 0.11 % 22.37 %
Total transaction take rate 9.57 % 0.60 % 8.97 % 0.12 % 8.85 %
Marketplace Net Transaction Revenues
Year Ended December 31, % Change Year Ended December 31, % Change
2019 2018 As Reported FX-Neutral 2018 2017 As Reported FX-Neutral
Marketplace
net
transaction
revenues
(1) 7,578 7,416 2 % 4 % 7,416 6,809 9 % 7 %
Marketplace
GMV 85,510 89,829 (5 )% (2 )% 89,829 83,883 7 % 5 %
Marketplace
take rate 8.86 % 8.25 % 0.61 % 8.25 % 8.12 % 0.13 %
(1) Marketplace net transaction revenues were net of
and 2017 respectively.
Marketplace net transaction revenues increased in 2019 compared to
2018 primarily due to growth in promoted listing fees and a higher take rate.
Marketplace transaction take rate was higher in 2019 compared to 2018, primarily
due to growth in promoted listing fees, which along with final value fees are
calculated as a percentage of an item's sale price, and category mix. The
increase in Marketplace net transaction revenues in 2019 compared to 2018 was
due to take rate considerations discussed above, despite declining Marketplace
GMV. We expect that the divergence between Marketplace net transaction revenues
and Marketplace GMV will continue. Despite GMV's divergence from net transaction
revenues during the year, we still believe the metric provides a useful measure
of overall volume of closed transactions that flow through the platform in a
given period.
The increase in Marketplace net transaction revenues in 2018 compared to 2017
was primarily due to an increase in Marketplace GMV and a favorable impact from
foreign currency movements relative to the U.S. dollar. Marketplace transaction
take rate was higher in 2018 compared to 2017, primarily due to growth in
promoted listing fees, which along with final value fees are calculated as a
percentage of an items sale price, and a decrease in seller incentives,
partially offset by a decrease in revenues from final value fees attributable to
pricing and category mix.
StubHub Net Transaction Revenues
The following table presents
Year Ended December 31, % Change Year Ended December 31, % Change
2019 2018 As Reported FX-Neutral 2018 2017 As Reported FX-Neutral
StubHub net
transaction
revenues 1,057 1,068 (1 )% (1 )% 1,068 1,011 6 % 6 %
StubHub GMV 4,700 4,751 (1 )% (1 )% 4,751 4,520 5 % 5 %
StubHub
take rate 22.49 % 22.48 % 0.01 % 22.48 % 22.37 % 0.11 %
41--------------------------------------------------------------------------------StubHub net transaction revenues in 2019 compared to 2018 decreased slightly primarily driven by lower GMV from concerts and theater, partially offset by an increase in sporting events and a slightly higher take rate. The slight increase inStubHub transaction take rate in 2019 compared to 2018 was primarily due to pricing changes partially offset by event mix. The increase inStubHub net transaction revenues in 2018 compared to 2017 was primarily due to an increase in StubHub GMV. The increase in StubHub GMV in 2018 compared to 2017 was primarily driven by concerts and sporting events. The increase inStubHub transaction take rate in 2018 compared to 2017 was primarily due to pricing changes on the platform.
Marketing Services and Other Revenues
The following table presents MS&O revenues (in millions, except percentages):
Year Ended December 31, % Change Year Ended December 31, % Change
2019 2018 As Reported FX-Neutral 2018 2017 As Reported FX-Neutral
Marketplace
$ 1,225 $ 1,192 3 % 1 % Classifieds 1,061 1,022 4 % 9 % 1,022 897 14 % 10 % StubHub 64 15 ** ** 15 18 (17 )% (18 )% Elimination of inter-segment net revenues$ (20 ) $ - ** ** $ - $ - - % - % Total MS&O revenues$ 2,165 $ 2,262 (4 )% (1 )%$ 2,262 $ 2,107 7 % 5 % Percentage of net revenues 20 % 21 % 21 % 21 % ** Not meaningful Marketplace MS&O Revenues The decrease in Marketplace MS&O revenues during 2019 compared to 2018 was primarily due to a decrease in advertising revenues that was driven by our ongoing shift to promoted listing fees, which are recognized in net transaction revenues and lower revenues resulting from the sale of brands4friends. These decreases were partially offset by increases in first-party inventory program inKorea in 2019 compared to 2018. The increase in Marketplace MS&O revenues in 2018 compared to 2017 was primarily driven by an increase in revenues attributable to our first-party inventory program inKorea and revenue sharing arrangements, particularly shipping, partially offset by a decrease in advertising revenues that was driven by our ongoing shift to promoted listing fees, which are recognized in net transaction revenues. Classifieds MS&O Revenues The increases in Classifieds MS&O revenues in 2019 compared to 2018 and in 2018 compared to 2017 was primarily driven by increased revenue from our Classifieds horizontal and vertical motors platforms primarily inGermany .
StubHub MS&O Revenues
The increase in StubHub MS&O revenues in 2019 compared to 2018 primarily related
to growth in revenues from first-party inventory sales from sporting events. The
change in StubHub MS&O revenue in 2018 compared to 2017 was relatively flat.
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Cost of Net Revenues
Cost of net revenues primarily consists of costs associated with customer
support, site operations, costs of goods sold and payment processing.
Significant components of these costs include employee compensation, contractor
costs, facilities costs, depreciation of equipment and amortization expense,
first party inventory costs, bank transaction fees, and credit card interchange
and assessment fees. The following table presents cost of net revenues (in
millions, except percentages):
Year Ended December 31,
2019 % Change 2018 % Change 2017
Cost of net revenues $ 2,508 5 % $ 2,382 7 % $ 2,221
As a percentage of net revenues 23.2 % 22.2 % 22.4 %
The increase in cost of net revenues in 2019 compared to 2018 and 2018 compared to 2017 was primarily due to an increase in site operation and payment processing costs as we increased our investments in our business, and an increase in costs of goods sold driven by our first-party inventory program inKorea . Cost of net revenues, net of immaterial hedging activities, was favorably impacted by$56 million attributable to foreign currency movements relative to theU.S. dollar in 2019 compared to 2018. Cost of net revenues was unfavorably impacted by$34 million attributable to foreign currency movements relative to theU.S. dollar in 2018. There was no hedging activity within cost of net revenues in 2018. Operating Expenses The following table presents operating expenses (in millions, except percentages): Year Ended December 31, 2019 % Change 2018 % Change 2017 Sales and marketing$ 3,194 (6 )%$ 3,391 18 %$ 2,878 Percentage of net revenues 30 % 32 % 29 % Product development 1,240 (4 )% 1,285 5 % 1,224 Percentage of net revenues 11 % 12 % 12 % General and administrative 1,189 5 % 1,131 10 % 1,030 Percentage of net revenues 11 % 11 % 10 % Provision for transaction losses 300 5 % 286 5 % 272 Percentage of net revenues 3 % 3 % 3 % Amortization of acquired intangible assets 48 (1 )% 49 27 % 38 Total operating expenses$ 5,971 (3 )%$ 6,142 13 %$ 5,442 Foreign currency movements relative to theU.S. dollar had a favorable impact of$118 million on operating expenses in 2019 compared to 2018. Operating expenses were unfavorably impacted by$68 million attributable to foreign currency movements relative to theU.S. dollar in 2018 compared to 2017. There was no hedging activity within operating expenses in 2019 and 2018. 43 --------------------------------------------------------------------------------
Sales and Marketing
Sales and marketing expenses primarily consist of advertising and marketing program costs (both online and offline), employee compensation, certain user coupons and rewards, contractor costs, facilities costs and depreciation on equipment. Online marketing expenses represent traffic acquisition costs in various channels such as paid search, affiliates marketing and display advertising. Offline advertising primarily includes brand campaigns and buyer/seller communications.
The decrease in sales and marketing expense in 2019 compared to 2018 was primarily due to a favorable impact from foreign currency movements relative to theU.S. dollar and decreases in offline advertising spend and employee-related costs. These costs were partially offset by online marketing spend and user coupons and rewards largely driven by ourJapan platform acquired in the second quarter of 2018.
The increase in sales and marketing expense in 2018 compared to 2017 was primarily due to an increase in user coupons and rewards and traffic acquisition costs.
Product Development Product development expenses primarily consist of employee compensation, contractor costs, facilities costs and depreciation on equipment. Product development expenses are net of required capitalization of major platform and other product development efforts, including the development and maintenance of our technology platform. Our top technology priorities include payment intermediation capabilities and improved seller tools and buyer experiences built on a foundation of structured data. Capitalized internal use and platform development costs were$137 million and$147 million in 2019 and 2018, respectively, and are primarily reflected as a cost of net revenues when amortized in future periods. The decrease in product development expenses in 2019 compared to 2018 was primarily due to decreases in employee-related costs, foreign currency movement relative to theU.S. dollar and depreciation on equipment. The increase in product development expenses in 2018 compared to 2017 was primarily due to an increase in employee-related costs, partially offset by a decrease in depreciation on equipment.
General and Administrative
General and administrative expenses primarily consist of employee compensation, contractor costs, facilities costs, depreciation of equipment, employer payroll taxes on stock-based compensation, legal expenses, restructuring, insurance premiums and professional fees. Our legal expenses, including those related to various ongoing legal proceedings, may fluctuate substantially from period to period.
The increase in general and administrative expenses in 2019 compared to 2018 was primarily due to severance costs incurred in 2019 related to our CEO transition.
The increase in general and administrative expenses in 2018 compared to 2017 was primarily due to restructuring costs related to our global workforce reduction and an increase in employee-related costs. For additional details related to the restructuring, refer to "Note 18 - Restructuring" to the consolidated financial statements included in this report.
Provision for Transaction Losses
Provision for transaction losses primarily consists of transaction loss expense
associated with our buyer protection programs, fraud and bad debt expense
associated with our accounts receivable balance. We expect our provision for
transaction losses to fluctuate depending on many factors, including changes to
our protection programs and the impact of regulatory changes.
The increase in provision for transaction losses in 2019 compared to 2018 was
primarily due to an increase in bad debt expense. The increase in provision for
transaction losses in 2018 compared to 2017 was not significant.
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--------------------------------------------------------------------------------Income from Operations
The following table presents income from operations (in millions, except percentages):
Year Ended December 31,
2019 % Change 2018 % Change 2017
Income from operations
20.7 % 22.8 %
The increase in income from operations in 2019 compared 2018 was primarily due
to an increase in income from our Marketplace segment. Income from our StubHub
and Classifieds segments was not a significant contributor to the increase in
total income from operations in 2019 compared to 2018. The decrease in income
from operations in 2018 compared to 2017 was primarily due to global workforce
reduction and an increase in employee related costs, partially offset by an
increase in income from our Marketplace and Classifieds segments.
Interest and Other, Net
Interest and other, net primarily consists of interest earned on cash, cash
equivalents and investments, as well as foreign exchange transaction gains and
losses, gains and losses due to changes in fair value of the warrant received
from Adyen, our portion of operating results from investments accounted for
under the equity method of accounting, investment gain/loss on acquisitions or
disposals and interest expense, consisting of interest charges on any amounts
borrowed and commitment fees on unborrowed amounts under our credit agreement
and interest expense on our outstanding debt securities and commercial paper, if
any. The following table presents interest and other, net (in millions, except
percentages):
Year Ended December 31,
2019 % Change 2018 % Change 2017
Interest income $ 120 (32 )% $ 176 (1 )% $ 177
Interest expense (311 ) (5 )% (326 ) 12 % (292 )
Gains on investments and sale of business 80 ** 663 ** 115
Other (3 ) ** (17 ) ** 11
Total interest and other, net $ (114 ) ** $ 496 **
The decrease in interest and other, net in 2019 compared to 2018 was primarily attributable to the gain recognized on the sale of our investment in Flipkart of$313 million and the relinquishment of our existing equity method investment inGiosis of$266 million that did not occur in 2019, the loss recorded upon the divestiture of brands4friends of$52 million partially offset by the gain recognized due to the change in fair value of the Adyen warrant of$133 million that occurred in 2019. The increase in interest and other, net in 2018 compared to 2017 was primarily attributable to the$313 million gain recognized on the sale of our investment in Flipkart and$266 million gain recognized upon relinquishment of our existing equity method investment inGiosis and$104 million gain recognized due to the change in fair value of the warrant. 45 --------------------------------------------------------------------------------
Income Tax Provision
The following table presents provision for income taxes (in millions, except
percentages):
Year Ended December 31,
2019 2018 2017
Income tax provision (benefit)
18.8 % 7.0 % 144.5 %
The increase in our effective tax rate in 2019 compared to 2018 was primarily
due to a reduction in 2018 to the provisional tax amounts recorded in 2017
related to the Tax Cuts and Jobs Act and the gain recognized from the
relinquishment of our existing equity method investment in Giosis that was not
subject to U.S. federal income tax on a current basis that did not recur in
2019, and certain expenses in 2019 including a negotiated reduction in the tax
basis of the intangible assets in our Classifieds platforms. These impacts were
partially offset in 2019 by the effective settlements of audits, reduction in
the U.S. deferred tax liability for minimum tax on foreign earnings, related to
the above reduction in tax basis of intangible assets, and a benefit due to the
enacted New York state legislation regarding the taxability of foreign earnings.
The decrease in our effective tax rate in 2018 compared to 2017 was primarily
due to the $3.1 billion provisional tax charge related to the Tax Cuts and Jobs
Act (the "Act" or "U.S. tax reform") recorded in 2017. In 2018, as we completed
our analysis of U.S. tax reform, we recorded a $463 million reduction to the
provisional tax amounts recorded in 2017. Further, the 2018 effective tax rate
was favorably impacted by U.S. tax reform and the gain recognized from the
relinquishment of our existing equity method investment in Giosis in the second
quarter 2018 that is not subject to U.S. federal income tax on a current basis.
On December 22, 2017 , the Tax Cuts and Jobs Act was enacted. U.S. tax reform,
among other things, reduced the U.S. federal income tax rate from 35% to 21%
beginning in 2018, instituted a dividends received deduction for foreign
earnings with a related tax for the deemed repatriation of unremitted foreign
earnings in 2017 and created a new U.S. minimum tax on earnings of foreign
subsidiaries. We recognized a provisional income tax charge of $3.1 billion in
the fourth quarter of 2017, which was included as a component of the income tax
provision on our consolidated statement of income. We completed our analysis of
the impacts of U.S. tax reform in the fourth quarter of 2018 and recognized a
$463 million reduction to the provisional tax amounts recorded in the fourth
quarter of 2017, which is included as a component of income tax expense from
continuing operations in 2018.
Included in the 2017 provisional amount was $1.4 billion for the income tax on
the deemed repatriation of unremitted foreign earnings. We completed the
computation of this amount as part of the 2017 income tax return filing and
reduced the provisional amount by $18 million and we utilized $213 million of
foreign tax credits to reduce the net liability, both in 2018.
The remaining provisional amount of $1.7 billion was for the deferred income tax
effects of the Act, primarily the impact of the new U.S. minimum tax on foreign
earnings, partially offset by the reversal of our existing deferred tax
liability associated with repatriation of unremitted foreign earnings. We
completed our analysis of the components of the deferred tax computation in the
fourth quarter of 2018 and recognized a tax benefit of $445 million as a
reduction to the provisional amounts recorded in the fourth quarter of 2017 for
the deferred income tax effects of the Act. This amount includes a $389 million
tax benefit as a result of clarification by Swiss tax authorities regarding the
applicability of withholding tax to repatriated earnings in October 2018 .
As a result of U.S. tax reform, our earnings in foreign jurisdictions are taxed
at substantially the same rate as the U.S. federal statutory tax rate of 21%. In
2017, our provision for income taxes differed from the provision computed by
applying the U.S. federal statutory rate of 35% primarily due to lower tax rates
associated with certain earnings from our operations in jurisdictions outside
the U.S. The impact on our provision for income taxes of foreign income being
taxed at different rates that the U.S. federal statutory rate was a benefit of
approximately $217 million in 2017. The foreign jurisdictions with lower tax
rates that had the most significant impact on our provision for income taxes in
2017 include Switzerland . See "Note 15 - Income Taxes" to the consolidated
financial statements included in this report for more information on our tax
rate reconciliation.
46-------------------------------------------------------------------------------- From time to time we engage in certain intercompany transactions. We consider many factors when evaluating these transactions. These transactions may impact our tax rate and/or result in additional cash tax payments. The impact in any period may be significant. These transactions are complex and the impact of such transactions on future periods may be difficult to estimate. We are regularly under examination by tax authorities both domestically and internationally. We believe that adequate amounts have been reserved for any adjustments that may ultimately result from these examinations, although we cannot assure you that this will be the case given the inherent uncertainties in these examinations. Due to the ongoing tax examinations, it is generally impractical to determine the amount and timing of these adjustments. However, we expect several tax examinations to close within the next twelve months. See "Note 15 - Income Taxes" to the consolidated financial statements included in this report for more information on estimated settlements within the next twelve months.
Non-GAAP Measures of Financial Performance
To supplement our consolidated financial statements presented in accordance with
generally accepted accounting principles we use FX-Neutral net revenues, which
are non-GAAP financial measures. Management uses the foregoing non-GAAP measures
in reviewing our financial results. We define FX-Neutral net revenues as net
revenues minus the exchange rate effect. We define exchange rate effect as the
year-over-year impact of foreign currency movements using prior period foreign
currency rates applied to current year transactional currency amounts, excluding
hedging activity.
These non-GAAP measures are not in accordance with, or an alternative to,
measures prepared in accordance with GAAP and may be different from non-GAAP
measures used by other companies. In addition, these non-GAAP measures are not
based on any comprehensive set of accounting rules or principles. Non-GAAP
measures have limitations in that they do not reflect all of the amounts
associated with our results of operations as determined in accordance with GAAP.
These measures should only be used to evaluate our results of operations in
conjunction with the corresponding GAAP measures.
These non-GAAP measures are provided to enhance investors' overall understanding
of our current financial performance and its prospects for the future.
Specifically, we believe these non-GAAP measures provide useful information to
both management and investors by excluding the foreign currency exchange rate
impact that may not be indicative of our core operating results and business
outlook. In addition, because we have historically reported certain non-GAAP
results to investors, we believe that the inclusion of these non-GAAP measures
provide consistency in our financial reporting.
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The following tables set forth a reconciliation of FX-Neutral GMV and FX-Neutral
net revenues (each as defined below) to our reported GMV and net revenues for
the periods presented (in millions, except percentages):
Year Ended Year Ended
December 31, 2019 December 31, 2018
Exchange Rate FX-Neutral
As Reported Effect (1) FX-Neutral (2) As Reported As Reported % Change % Change
GMV:
Marketplace $ 85,510 $ (2,745 ) $ 88,255 $ 89,829 (5 )% (2 )%
StubHub 4,700 (17 ) 4,717 4,751 (1 )% (1 )%
Total GMV $ 90,210 $ (2,762 ) $ 92,972 $ 94,580 (5 )% (2 )%
Net Revenues
Net transaction
revenues:
Marketplace (3) $ 7,578 $ (123 ) $ 7,701 $ 7,416 2 % 4 %
StubHub 1,057 (3 ) 1,060 1,068 (1 )% (1 )%
Total 8,635 (126 ) 8,761 8,484 2 % 3 %
Marketing
services and
other revenues:
Marketplace 1,060 (30 ) 1,090 1,225 (13 )% (11 )%
Classifieds 1,061 (55 ) 1,116 1,022 4 % 9 %
StubHub 64 - 64 15 ** **
Elimination of
inter-segment
net revenue (20 ) - (20 ) - ** **
Total 2,165 (85 ) 2,250 2,262 (4 )% (1 )%
Total net
revenues $ 10,800 $ (211 ) $ 11,011 $ 10,746 1 % 2 %
Year Ended Year Ended
December 31, 2018 December 31, 2017
Exchange Rate FX-Neutral
As Reported Effect (1) FX-Neutral (2) As Reported As Reported % Change % Change
GMV:
Marketplace $ 89,829 $ 1,659 $ 88,170 $ 83,883 7 % 5 %
StubHub 4,751 5 4,746 4,520 5 % 5 %
Total GMV $ 94,580 $ 1,664 $ 92,916 $ 88,403 7 % 5 %
Net Revenues
Net transaction
revenues:
Marketplace (3) $ 7,416 $ 118 $ 7,298 $ 6,809 9 % 7 %
StubHub 1,068 1 1,067 1,011 6 % 6 %
Total 8,484 119 8,365 7,820 8 % 7 %
Marketing
services and
other revenues:
Marketplace 1,225 22 1,203 1,192 3 % 1 %
Classifieds 1,022 33 989 897 14 % 10 %
StubHub 15 - 15 18 (17 )% (18 )%
Total 2,262 55 2,207 2,107 7 % 5 %
Total net
revenues $ 10,746 $ 174 $ 10,572 $ 9,927 8 % 6 %
** Not meaningful
(1) We define exchange rate effect as the year-over-year impact of foreign
currency movements using prior period foreign currency rates applied to
current year transactional currency amounts, excluding hedging activity.
(2) We define FX-Neutral GMV as GMV minus the exchange rate effect. We define the
non-GAAP financial measures of FX-Neutral net revenues as net revenues minus
the exchange rate effect.
(3) Marketplace net transaction revenues were net of
of hedging activity in 2019 and 2018, respectively.
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Liquidity and Capital Resources
Cash Flows
Year Ended December 31,
2019 2018 2017
(In millions)
Net cash provided by (used in):
Continuing operating activities $ 3,114 $ 2,661 $ 3,146
Investing activities 2,787 2,894 (1,295 )
Financing activities (7,091 ) (5,398 ) (1,784 )
Effect of exchange rates on cash, cash
equivalents and restricted cash (33 ) (75 ) 238
Net increase (decrease) in cash, cash equivalents - discontinued operations - (3 ) - Net increase (decrease) in cash, cash equivalents and restricted cash$ (1,223 ) $ 79
Continuing Operating Activities
Cash provided by continuing operating activities of$3.1 billion in 2019 was primarily attributable to net income of$1.8 billion with adjustments of$681 million in depreciation and amortization,$505 million in stock-based compensation,$300 million in provision for transaction losses,$117 million for deferred income taxes,$52 million loss on the sale of a business, partially offset by a decrease of$200 million in changes in assets and liabilities, net of acquisition effects, and$133 million for changes in the fair value of the Adyen warrant. Cash provided by continuing operating activities of$2.7 billion in 2018 was primarily attributable to net income of$2.5 billion with adjustments of$696 million in depreciation and amortization,$538 million in stock-based compensation and$286 million in provision for transaction losses, partially offset by a decrease of$577 million in changes in assets and liabilities, net of acquisition effects, and adjustments of$572 million for gain on investments,$153 million for deferred income taxes and$104 million for changes in fair value of the Adyen warrant. The net cash provided by continuing operating activities of$3.1 billion in 2017 was primarily due to$1.1 billion of changes in assets and liabilities, net of acquisition effects, and a net loss of$1.0 billion offset by adjustments of$1.7 billion in deferred income taxes,$676 million in depreciation and amortization and$483 million in stock-based compensation. Cash paid for income taxes in 2019, 2018 and 2017 was$333 million ,$597 million and$308 million , respectively. Cash paid for income taxes in 2018 included tax payments related to our liability for deemed repatriation of foreign earnings underU.S. tax reform of$168 million , including a prepayment of$72 million .
Investing Activities
Cash provided by investing activities of$2.8 billion in 2019 was primarily attributable to proceeds of$50.5 billion from the maturities and sales of investments, partially offset by cash paid for purchases of investments of$47.0 billion , property and equipment of$554 million , equity investment inPaytm Mall of$160 million and acquisitions of$93 million . Cash provided by investing activities of$2.9 billion in 2018 was primarily attributable to proceeds of$30.9 billion from the maturities and sales of investments and$1.0 billion from the sale of equity investment in Flipkart, partially offset by cash paid for purchases of investments of$28.1 billion , property and equipment of$651 million and acquisitions of$302 million . The net cash used in investing activities of$1.3 billion in 2017 was primarily due to cash paid for property and equipment of$666 million and cash paid for our equity investment in Flipkart of$514 million .
The largely offsetting effects of purchases of investments and maturities and sale of investments results from the management of our investments. As our immediate cash needs change, purchase and sale activity will fluctuate.
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--------------------------------------------------------------------------------Financing Activities
Cash used in financing activities of$7.1 billion in 2019 was primarily used to repurchase$5.0 billion of common stock, repay outstanding debt of$1.6 billion and pay$473 million of cash dividends.
Cash used in financing activities of
The net cash used in financing activities of$1.8 billion in 2017 was primarily due to$2.7 billion of cash used to repurchase common stock and$1.5 billion of cash used to repay outstanding debt, partially offset by$2.5 billion of cash proceeds from debt issuances. The negative effect of exchange rate movements on cash, cash equivalents and restricted cash was due to the strengthening of theU.S. dollar against other currencies, primarily the Korean won, euro and British pound during 2019. The negative effect of exchange rate movements on cash, cash equivalents and restricted cash was due to the strengthening of theU.S. dollar against other currencies, primarily the euro, Korean won and British pound, during 2018. The positive effect of exchange rate movements on cash, cash equivalents and restricted cash was due to the weakening of theU.S. dollar against other currencies, primarily the euro and Korean won, during 2017.
Stock Repurchases
InJanuary 2018 , our Board authorized a$6.0 billion stock repurchase program and inJanuary 2019 , our Board authorized an additional$4.0 billion stock repurchase program. These stock repurchase programs have no expiration from the date of authorization. Our stock repurchase programs are intended to programmatically offset the impact of dilution from our equity compensation programs and, subject to market conditions and other factors, to make opportunistic and programmatic 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. During 2019, we repurchased approximately$5.0 billion of our common stock under our stock repurchase programs. As ofDecember 31, 2019 , a total of approximately$2.2 billion remained available for future repurchases of our common stock under our stock repurchase programs. InJanuary 2020 , our Board authorized an additional$5.0 billion stock repurchase program, with no expiration from the date of authorization. We expect, subject to market conditions and other uncertainties, to continue making opportunistic and programmatic repurchases of our common stock. However, 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. Dividends The company paid a total of$473 million in cash dividends during the year endedDecember 31, 2019 . No cash dividends were paid in 2018 and 2017. InJanuary 2020 , we declared a cash dividend of$0.16 per share of common stock to be paid onMarch 20, 2020 to stockholders of record as ofMarch 2, 2020 .
Shelf Registration Statement and Debt
As ofDecember 31, 2019 , we had an effective shelf registration statement on file with theSecurities and Exchange Commission that allows us to issue various types of debt securities, as well as common stock, preferred stock, warrants, depositary shares representing fractional interest in shares of preferred stock, purchase contracts and units from time to time in one or more offerings. Each issuance under the shelf registration statement will require the filing of a prospectus supplement identifying the amount and terms of the securities to be issued. The registration statement does not limit the amount of securities that may be issued thereunder. Our ability to issue securities is subject to market conditions and other factors including, in the case of our debt securities, our credit ratings and compliance with the covenants in our credit agreement. 50 --------------------------------------------------------------------------------
Senior Notes
As ofDecember 31, 2019 , we had floating- and fixed-rate senior notes outstanding for an aggregate principal amount of$7.8 billion . The net proceeds from the issuances of these senior notes are used for general corporate purposes, including, among other things, capital expenditures, share repurchases, repayment of indebtedness and possible acquisitions. The floating rate notes are not redeemable prior to maturity. On and afterMarch 1, 2021 , we may redeem some or all of the 6.000% fixed rate notes due 2056 at any time and from time to time prior to their maturity, at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus accrued and unpaid interest. We may redeem some or all of the other fixed rate notes of each series at any time and from time to time prior to their maturity, generally at a make-whole redemption price plus accrued and unpaid interest. If a change of control triggering event occurs with respect to the 2.150% fixed rate notes due 2020, the 3.800% fixed rate notes due 2022, the floating rate notes due 2023, the 2.750% fixed rate notes due 2023, the 3.600% fixed rate notes due 2027 or the 6.000% fixed rate notes due 2056, we must, subject to certain exceptions, offer to repurchase all of the notes of the applicable series at a price equal to 101% of the principal amount plus accrued and unpaid interest. For additional details related to our senior notes, please see "Note 10 - Debt" to the consolidated financial statements included in this report. To help achieve our interest rate risk management objectives, in connection with the previous issuance of certain senior notes, we entered into interest rate swap agreements that effectively converted$2.4 billion of the fixed rate notes to floating rate debt based on the London InterBank Offered Rate ("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. As ofDecember 31, 2019 , we had no interest rate swaps outstanding as$1.15 billion related to our 2.200% senior notes of the$2.4 billion aggregate notional amount matured. In addition, during the year endedDecember 31, 2019 , we terminated the interest rate swaps related to$750 million of our 2.875% senior notes dueJuly 2021 and$500 million of our 3.450% senior notes dueJuly 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 year endedDecember 31, 2019 was immaterial. For additional details related to the interest rate swap termination, please see, "Note 10 - Debt" to the consolidated financial statements included in this report. 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.
Commercial Paper
We have a commercial paper program pursuant to which we may issue commercial paper notes in an aggregate principal amount at maturity of up to$1.5 billion outstanding at any time with maturities of up to 397 days from the date of issue. As ofDecember 31, 2019 , there were no commercial paper notes outstanding.
Credit Agreement
InNovember 2015 , we entered into a credit agreement that provides for an unsecured$2 billion five-year revolving credit facility. We may also, subject to the agreement of the applicable lenders, increase the commitments under the revolving credit facility by up to an aggregate amount of$1 billion . Funds borrowed under the credit agreement may be used for working capital, capital expenditures, dividends, acquisitions and other general corporate purposes. As ofDecember 31, 2019 , no borrowings were outstanding under our$2 billion credit agreement. However, as described above, we have an up to$1.5 billion commercial paper program and therefore maintain$1.5 billion of available borrowing capacity under our credit agreement in order to repay commercial paper borrowings in the event we are unable to repay those borrowings from other sources when they become due. As a result,$500 million of borrowing capacity was available as ofDecember 31, 2019 for other purposes permitted by the credit agreement. Loans under the credit agreement bear interest at either (i) LIBOR plus a margin (based on our public debt credit ratings) ranging from 0.875 percent to 1.5 percent or (ii) a formula based on the agent bank's prime rate, the federal funds effective rate plus 0.5 percent or LIBOR plus 1.0 percent, plus a margin (based on our public debt credit ratings) ranging from zero percent to 0.5 percent. The credit agreement will terminate and all amounts owing thereunder will be due and payable onNovember 9, 2020 , unless (a) the commitments are terminated earlier, either at our request 51 -------------------------------------------------------------------------------- or, if an event of default occurs, by the lenders (or automatically in the case of certain bankruptcy-related events of default), or (b) the maturity date is extended upon our request, subject to the agreement of the lenders. The credit agreement includes customary representations, warranties, affirmative and negative covenants, including financial covenants, events of default and indemnification provisions in favor of the banks. The negative covenants include restrictions regarding the incurrence of liens and subsidiary indebtedness, in each case, subject to certain exceptions. The financial covenants require us to meet a quarterly financial test with respect to a minimum consolidated interest coverage ratio and a maximum consolidated leverage ratio. The events of default include the occurrence of a change of control (as defined in the credit agreement) with respect to us.
We were in compliance with all covenants in our outstanding debt instruments for
the period ended
Credit Ratings
As ofDecember 31, 2019 , we were rated investment grade byStandard and Poor's Financial Services, LLC (long-term rated BBB+, short-term rated A-2, with a stable outlook), Moody's Investor Service (long-term rated Baa1, short-term rated P-2, with a stable outlook), andFitch Ratings, Inc. (long-term rated BBB, short-term rated F-2, with a stable outlook). We disclose these ratings to enhance the understanding of our sources of liquidity and the effects of our ratings on our costs of funds. Our borrowing costs depend, in part, on our credit ratings and any actions taken by these credit rating agencies to lower our credit ratings will likely increase our borrowing costs.
Commitments and Contingencies
We have certain fixed contractual obligations and commitments that include future estimated payments for general operating purposes. Changes in our business needs, contractual cancellation provisions, fluctuating interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of these payments. The following table summarizes our fixed contractual obligations and commitments (in millions): Payments Due During the Year Ending Purchase December 31, Debt Leases Obligations Total 2020$ 1,257 $ 200 $ 140$ 1,597 2021 980 174 82 1,236 2022 1,933 151 69 2,153 2023 1,284 98 1 1,383 2024 871 45 1 917 Thereafter 4,349 78 3 4,430$ 10,674 $ 746 $ 296$ 11,716
The significant assumptions used in our determination of amounts presented in the above table are as follows:
• Debt amounts include the principal and interest amounts of the respective
debt instruments. For additional details related to our debt, please see
"Note 10 - Debt" to the consolidated financial statements included in
this report. This table does not reflect any amounts payable under our
billion revolving credit facility or $1.5 billion commercial paper
program, for which no borrowings were outstanding as of December 31,
2019 .
• Lease amounts include payments for our operating and finance leases for
office space, data centers, as well as fulfillment centers and other
corporate assets that we utilize under lease arrangements. The amounts
presented are consistent with contractual terms and are not expected to
differ significantly from actual results under our existing leases,
unless a substantial change in our headcount needs requires us to expand
our occupied space or exit an office facility early.
• Purchase obligation amounts include minimum purchase commitments for
advertising, capital expenditures (computer equipment, softwareapplications, engineering development services, construction contracts)
and other goods and services entered into in the ordinary course of
business.
As we are unable to reasonably predict the timing of settlement of liabilities
related to unrecognized tax benefits, net, the table does not include $285
million of such non-current liabilities included in other liabilities on our
consolidated
52
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balance sheet as of
Liquidity and Capital Resource Requirements
As ofDecember 31, 2019 andDecember 31, 2018 , we had assets classified as cash and cash equivalents, as well as short-term and long-term non-equity investments, in an aggregate amount of$3.8 billion and$8.6 billion , respectively. As ofDecember 31, 2019 , this amount included assets held in certain of our foreign operations totaling approximately$3.4 billion . As we repatriate these funds to theU.S. , we will be required to pay income taxes in certainU.S. states and applicable foreign withholding taxes on those amounts during the period when such repatriation occurs. We have accrued deferred taxes for the tax effect of repatriating the funds to theU.S. We actively monitor all counterparties that hold our cash and cash equivalents and non-equity investments, focusing primarily on the safety of principal and secondarily on improving yield on these assets. We diversify our cash and cash equivalents and investments among various counterparties in order to reduce our exposure should any one of these counterparties fail or encounter difficulties. To date, we have not experienced any material loss or lack of access to our invested cash, cash equivalents or short-term investments; however, we can provide no assurances that access to our invested cash, cash equivalents or short-term investments will not be impacted by adverse conditions in the financial markets. At any point in time we have funds in our operating accounts and customer accounts that are deposited and invested with third party financial institutions. We believe that our existing cash, cash equivalents and short-term and long-term investments, together with cash expected to be generated from operations, borrowings available under our credit agreement and commercial paper program, and our access to capital markets, will be sufficient to fund our operating activities, anticipated capital expenditures, repayment of debt, stock repurchases and dividends for the foreseeable future.
Off-Balance Sheet Arrangements
As of
We have a cash pooling arrangement with a financial institution for cash
management purposes. This arrangement allows for cash withdrawals from the
financial institution based upon our aggregate operating cash balances held
within the same financial institution ("Aggregate Cash Deposits"). This
arrangement also allows us to withdraw amounts exceeding the Aggregate Cash
Deposits up to an agreed-upon limit. The net balance of the withdrawals and the
Aggregate Cash Deposits are used by the financial institution as a basis for
calculating our net interest expense or income under the arrangement. As of
December 31, 2019 , we had a total of $4.8 billion in aggregate cash deposits,
partially offset by $4.7 billion in cash withdrawals, held within the financial
institution under the cash pooling arrangement.
Indemnification Provisions
We entered into a separation and distribution agreement and various other agreements with PayPal to govern the separation and relationship of the two companies. These agreements provide for specific indemnity and liability obligations and could lead to disputes between us and PayPal, which may be significant. In addition, the indemnity rights we have against PayPal under the agreements may not be sufficient to protect us and our indemnity obligations to PayPal may be significant. In addition, we have entered into indemnification agreements with each of our directors, executive officers and certain other officers. These agreements require us to indemnify such individuals, to the fullest extent permitted byDelaware law, for certain liabilities to which they may become subject as a result of their affiliation with us. In the ordinary course of business, we have included limited indemnification provisions in certain of our agreements with parties with which we have commercial relations, including our standard marketing, promotions and application-programming-interface license agreements. Under these contracts, we generally indemnify, hold harmless and agree to reimburse the indemnified party for losses suffered or incurred by the indemnified party in connection with claims by a third party with respect to our domain names, trademarks, logos and other branding elements to the 53 -------------------------------------------------------------------------------- extent that such marks are applicable to our performance under the subject agreement. In certain cases, we have agreed to provide indemnification for intellectual property infringement. It is not possible to determine the maximum potential loss under these indemnification provisions due to our limited history of prior indemnification claims and the unique facts and circumstances involved in each particular provision. To date, losses recorded in our consolidated statement of income in connection with our indemnification provisions have not been significant, either individually or collectively.
Critical Accounting Policies, Judgments and Estimates
General
The preparation of our consolidated financial statements and related notes requires us to make judgments, estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We have based our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of our Board of Directors. Actual results may differ from these estimates under different assumptions or conditions. An accounting policy is considered to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, and if different estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the consolidated financial statements. We believe the following critical accounting policies reflect the more significant estimates and assumptions used in the preparation of our consolidated financial statements. The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and related notes and other disclosures included in this report. Revenue Recognition We may enter into certain revenue contracts that include promises to transfer multiple goods or services including discounts on future services. We also may enter into arrangements to purchase services from certain customers. As a result, significant interpretation and judgment is sometimes required to determine the appropriate accounting for these transactions including: (1) whether services are considered distinct performance obligations that should be accounted for separately or combined; (2) developing an estimate of the stand-alone selling price of each distinct performance obligation; (3) whether revenue should be reported gross (aseBay is acting as a principal), or net (aseBay is acting as an agent); (4) evaluating whether a promotion or incentive is a payment to a customer; and (5) whether the arrangement would be characterized as revenue or reimbursement of costs incurred. Changes in judgments with respect to these assumptions and estimates could impact the timing or amount of revenue recognition. Income Taxes Our annual tax rate is based on our income, statutory tax rates and tax planning opportunities available to us in the various jurisdictions in which we operate. Tax laws are complex and subject to different interpretations by the taxpayer and respective government taxing authorities. Significant judgment is required in determining our tax expense and in evaluating our tax positions, including evaluating uncertainties and the complexity of taxes on foreign earnings. We review our tax positions quarterly and adjust the balances as new information becomes available. Tax positions are evaluated for potential reserves for uncertainty based on the estimated probability of sustaining the position under examination. Our income tax rate is affected by the tax rates that apply to our foreign earnings includingU.S. minimum taxes on foreign earnings. The deferred tax benefit derived from the amortization of our intellectual property is based on the fair value, which has been agreed with foreign tax authorities. The deferred tax benefit may from time to time change based on changes in tax rates. As a result ofU.S. tax reform and the currentU.S. taxation of deemed repatriated earnings, management has no specific plans to indefinitely reinvest the undistributed earnings of our foreign subsidiaries at the balance sheet date. Deferred tax assets represent amounts available to reduce income taxes payable on taxable income in future years. Such assets arise because of temporary differences between the financial reporting and tax bases of assets and liabilities, as well as from net operating loss and tax credit carryforwards. We evaluate the recoverability of these future tax deductions and credits by assessing the adequacy of future expected taxable income from all sources, 54 -------------------------------------------------------------------------------- including reversal of taxable temporary differences, forecasted operating earnings and available tax planning strategies. These sources of income rely heavily on estimates that are based on a number of factors, including our historical experience and short-range and long-range business forecasts. As ofDecember 31, 2019 , we had a valuation allowance on certain net operating loss and tax credit carryforwards based on our assessment that it is more likely than not that the deferred tax asset will not be realized. We recognize and measure uncertain tax positions in accordance with generally accepted accounting principles in theU.S. , or GAAP, pursuant to which we only recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement. We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. GAAP further requires that a change in judgment related to the expected ultimate resolution of uncertain tax positions be recognized in earnings in the quarter in which such change occurs. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense. We file annual income tax returns in multiple taxing jurisdictions around the world. A number of years may elapse before an uncertain tax position is audited by the relevant tax authorities and finally resolved. While it is often difficult to predict the final outcome or the timing of resolution of any particular uncertain tax position, we believe that our reserves for income taxes reflect the most likely outcome. We adjust these reserves, as well as the related interest, where appropriate in light of changing facts and circumstances. Settlement of any particular position could require the use of cash.
The following table illustrates our effective tax rates for 2019, 2018 and 2017:
Year Ended December 31,
2019 2018 2017
(In millions, except percentages)
Income tax provision (benefit)
18.8 % 7.0 % 144.5 %
Our future effective tax rates could be adversely affected by earnings being
lower than anticipated in countries where we have lower statutory rates and
higher than anticipated in countries where we have higher statutory rates, by
changes in the valuation of our deferred tax assets or liabilities, or by
changes or interpretations in tax laws, regulations or accounting principles. In
addition, we are subject to the continuous examination of our income tax returns
by the Internal Revenue Service, as well as various state and foreign tax
authorities. We regularly assess the likelihood of adverse outcomes resulting
from these examinations to determine the adequacy of our provision for income
taxes.
Based on our results for the year ended December 31, 2019 , a one-percentage
point change in our provision for income taxes as a percentage of income before
taxes would have resulted in an increase or decrease in the provision of
approximately $22 million , resulting in an approximate $0.03 change in diluted
earnings per share.
The purchase price of an acquired company is allocated between intangible assets and the net tangible assets of the acquired business with the residual of the purchase price recorded as goodwill. The determination of the value of the intangible assets acquired involves certain judgments and estimates. These judgments can include, but are not limited to, the cash flows that an asset is expected to generate in the future and the appropriate weighted average cost of capital. As ofDecember 31, 2019 , our goodwill totaled$5.2 billion and our identifiable intangible assets, net totaled$67 million . We assess the impairment of goodwill of our reporting units annually, or more often if events or changes in circumstances indicate that the carrying value may not be recoverable.Goodwill is tested for impairment at the reporting unit level by first performing a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying value. If the reporting unit does not pass the qualitative assessment, then the reporting unit's carrying value is compared to its fair value. The fair values of the reporting units are estimated using market and discounted cash flow approaches.Goodwill is considered impaired if the carrying value of the reporting unit exceeds its fair value. The discounted cash flow approach uses expected future operating results. The market 55 -------------------------------------------------------------------------------- approach uses comparable company information to determine revenue and earnings multiples to value our reporting units. Failure to achieve these expected results or market multiples may cause a future impairment of goodwill at the reporting unit. We conducted our annual impairment test of goodwill as ofAugust 31, 2019 and 2018. As ofDecember 31, 2019 , we determined that no impairment of the carrying value of goodwill for any reporting units was required. See "Note 4 -Goodwill and Intangible Assets" to the consolidated financial statements included in this report.
Legal Contingencies
In connection with certain pending litigation and other claims, we have estimated the range of probable loss, net of expected recoveries, and provided for such losses through charges to our consolidated statement of income. These estimates have been based on our assessment of the facts and circumstances at each balance sheet date and are subject to change based upon new information and future events. From time to time, we are involved in disputes and regulatory inquiries that arise in the ordinary course of business. We are currently involved in legal proceedings, some of which are discussed in "Item 1A: Risk Factors," "Item 3: Legal Proceedings" and "Note 12 - Commitments and Contingencies" to the consolidated financial statements included in this report. We believe that we have meritorious defenses to the claims against us, and we intend to defend ourselves vigorously. However, even if successful, our defense against certain actions will be costly and could require significant amounts of management's time and result in the diversion of significant operational resources. If the plaintiffs were to prevail on certain claims, we might be forced to pay significant damages and licensing fees, modify our business practices or even be prohibited from conducting a significant part of our business. Any such results could materially harm our business and could result in a material adverse impact on the financial position, results of operations or cash flows.
Recent Accounting Pronouncements
See "Note 1 - The Company and Summary of Significant Accounting Policies" to the
consolidated financial statements included in this report, regarding the impact
of certain recent accounting pronouncements on our consolidated financial
statements.
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