Note 1—Overview and Summary of Significant Accounting Policies
Overview and Organization
PayPal Holdings, Inc. (“PayPal,” the “Company,” “we,” “us,” or “our”) was incorporated in Delaware in January 2015 and is a leading technology platform and digital payments company that enables digital and mobile payments on behalf of consumers and merchants worldwide. PayPal is committed to democratizing financial services and empowering people and businesses to join and thrive in the global economy. Our goal is to enable our consumers and merchants to manage and move their money anywhere in the world, anytime, on any platform, and using any device. We also facilitate person-to-person payments through our PayPal, Venmo, and Xoom products. Our combined payment solutions, including our PayPal, PayPal Credit, Braintree, Venmo, Xoom, and iZettle products, comprise our proprietary Payments Platform.
We operate globally and in a rapidly evolving regulatory environment characterized by a heightened regulatory focus on all aspects of the payments industry. That focus continues to become even more heightened as regulators on a global basis focus on important issues such as countering terrorist financing, anti-money laundering, privacy, cybersecurity, and consumer protection. Some of the laws and regulations to which we are subject were enacted recently, and the laws and regulations applicable to us, including those enacted prior to the advent of digital and mobile payments, are continuing to evolve through legislative and regulatory action and judicial interpretation. New or changing laws and regulations, including the way laws and regulations are interpreted and implemented, as well as increased penalties and enforcement actions related to non-compliance could have a material adverse impact on our business, results of operations, and financial condition. Therefore, we monitor these areas closely to design compliant solutions for our customers who depend on us.
Significant Accounting Policies
Basis of Presentation and Principles of Consolidation
The condensed consolidated financial statements include the financial statements of PayPal and our wholly- and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Investments in entities where we 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 investee’s results of operations is included in other income (expense), net on our condensed consolidated statements of income and our investment balance is included in long-term investments on our condensed consolidated balance sheets. Investments in entities where we do not have the ability to exercise significant influence over the investee are accounted for at fair value or cost minus impairment, if any, adjusted for changes resulting from observable price changes, which are included in other income (expense), net on our condensed consolidated statements of income. Our investment balance is included in long-term investments on our condensed consolidated balance sheets.
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, 2018 (the “2018 Form 10-K”) filed with the Securities and Exchange Commission.
In the opinion of management, these condensed consolidated financial statements reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair statement of the condensed consolidated financial statements for interim periods. Certain amounts for prior years have been reclassified to conform to the financial statement presentation as of and for the three and nine months ended September 30, 2019.
Reclassifications
Beginning with the first quarter of 2019, we reclassified certain operating expenses within the condensed consolidated statements of income. Prior period amounts have been reclassified to conform to this presentation. These changes have no impact on our previously reported consolidated net income for prior periods, including total operating expenses, financial position, or cash flows for any periods presented.
The classification changes relate primarily to the combination of costs incurred to develop and operate our Payments Platform into a new caption entitled technology and development. This new caption includes: (a) costs incurred in operating, maintaining, and enhancing our Payments Platform, including network and infrastructure costs, which were previously classified in the customer support and operations caption, and (b) costs incurred in developing new and improving existing products, which were previously classified in the product development caption on our condensed consolidated statements of income. In addition, we have eliminated the presentation of depreciation and amortization expense as a separate financial statement caption by reclassifying these expenses into financial statement captions aligned with the internal organizations that are the primary beneficiaries of the depreciation and amortization of such assets.
The following tables present the effects of the changes on the presentation of these operating expenses to the previously reported condensed consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
|
(In millions)
|
|
|
As Previously Reported
|
|
Adjustments
|
|
Revised
|
|
|
|
|
|
|
|
|
Transaction expense
|
$
|
1,366
|
|
|
$
|
—
|
|
|
$
|
1,366
|
|
|
Transaction and loan losses
|
295
|
|
|
—
|
|
|
295
|
|
|
Customer support and operations
|
367
|
|
|
(17
|
)
|
|
350
|
|
|
Sales and marketing
|
326
|
|
|
(1
|
)
|
|
325
|
|
|
Product development
|
269
|
|
|
(269
|
)
|
|
—
|
|
|
Technology and development
|
—
|
|
|
452
|
|
|
452
|
|
|
General and administrative
|
354
|
|
|
23
|
|
|
377
|
|
|
Depreciation and amortization
|
188
|
|
|
(188
|
)
|
|
—
|
|
|
Restructuring and other charges
|
28
|
|
|
—
|
|
|
28
|
|
|
Total operating expenses
|
$
|
3,193
|
|
|
$
|
—
|
|
|
$
|
3,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2018
|
|
|
(In millions)
|
|
|
As Previously Reported
|
|
Adjustments
|
|
Revised
|
|
|
|
|
|
|
|
|
Transaction expense
|
$
|
4,003
|
|
|
$
|
—
|
|
|
$
|
4,003
|
|
|
Transaction and loan losses
|
934
|
|
|
—
|
|
|
934
|
|
|
Customer support and operations
|
1,075
|
|
|
(45
|
)
|
|
1,030
|
|
|
Sales and marketing
|
924
|
|
|
(11
|
)
|
|
913
|
|
|
Product development
|
782
|
|
|
(782
|
)
|
|
—
|
|
|
Technology and development
|
—
|
|
|
1,341
|
|
|
1,341
|
|
|
General and administrative
|
1,061
|
|
|
50
|
|
|
1,111
|
|
|
Depreciation and amortization
|
553
|
|
|
(553
|
)
|
|
—
|
|
|
Restructuring and other charges
|
297
|
|
|
—
|
|
|
297
|
|
|
Total operating expenses
|
$
|
9,629
|
|
|
$
|
—
|
|
|
$
|
9,629
|
|
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 and loan losses, loss contingencies, income taxes, revenue recognition, and the valuation of goodwill and intangible assets. We base our estimates on historical experience and various other assumptions which we believe to be reasonable under the circumstances. Actual results could differ from those estimates.
Leases
We determine whether an arrangement is a lease for accounting purposes at contract inception. Operating leases are recorded as right-of-use (“ROU”) assets, which are included in other assets, and lease liabilities, which are included in accrued expenses and other liabilities and other long-term liabilities on our condensed consolidated balance sheets. As of September 30, 2019, we had no finance leases.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. Our leases do not provide an implicit rate; we use an incremental borrowing rate for specific terms on a collateralized basis based on the information available on the commencement date in determining the present value of lease payments. The ROU asset calculation includes lease payments to be made and excludes lease incentives. The ROU asset and lease liability may include amounts attributed to options to extend or terminate the lease when it is reasonably certain we will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term.
We have lease agreements with lease and non-lease components. We have elected to apply the practical expedient and account for the lease and non-lease components as a single lease component for all leases. In addition, we have elected the practical expedients related to lease classification, hindsight, and land easement. We apply a single portfolio approach to account for the ROU assets and lease liabilities.
Recent Accounting Guidance
In 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance on the measurement of credit losses on financial instruments. Credit losses on loans, trade and other receivables, held-to-maturity debt securities, and other instruments will reflect our estimate of the current expected credit losses and generally will result in the earlier recognition of allowances for losses. Credit losses on available-for-sale debt securities with unrealized losses will be recognized as allowances for credit losses limited to the amount by which fair value is below amortized cost. Additional disclosures will be required, including information used to track credit quality by year of origination for most financing receivables. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. We will adopt the new guidance effective January 1, 2020. We are required to apply the provisions of this guidance as a cumulative effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted with impairment of available-for-sale debt securities applied prospectively after adoption.
We are in the process of refining models, designing business processes and controls, performing parallel runs, and model validation testing. Based on the models developed, which incorporate forecasts of macroeconomic conditions, the overall impact of adoption of the Current Expected Credit Loss framework is estimated to be an approximate 65% to 85% increase in our allowance for loans and interest receivable as compared to the incurred loss model applied today. The largest drivers of this increase are the change to a lifetime reserve model at the time the asset is initially recorded as well as inclusion of macro-economic factors within the model. Although the timing of the recognition of losses may result in an increase in loan losses in a given period, this increased allowance is not expected to result in a change in our economic losses. Expected credit loss reserves related to our other financing receivables, available-for-sale debt securities, and other financial instruments are not expected to have a material impact on our consolidated financial statements. The extent of the actual impact of the adoption of this guidance at the effective date will depend on the amount and asset quality of our financial instruments, current and forecasted economic conditions at the time of adoption, and any further refinements made to our models.
Recently Adopted Accounting Guidance
In 2016, the FASB issued new accounting guidance related to accounting for leases, which requires lessees to recognize lease assets and lease liabilities on the balance sheet for the rights and obligations created by all leases with terms greater than 12 months. As we are not a lessor, other changes in the guidance applicable to lessors do not apply. Additionally, in 2018, the FASB issued codification and targeted improvements to this guidance effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted. We adopted the new guidance on January 1, 2019, using a modified retrospective basis and applied the optional practical expedients related to the transition. We recorded $511 million for the ROU assets and $521 million for the lease liabilities associated with our operating leases upon adoption. The adoption of this guidance did not have a significant impact to our consolidated statements of earnings, stockholders’ equity, and cash flows. For additional information, see Note 6—“Leases.”
There are other new accounting pronouncements issued by the FASB that we have adopted or will adopt, as applicable, and we do not believe any of these accounting pronouncements have had, or will have, a material impact on our condensed consolidated financial statements or disclosures.
Note 2—Revenue
PayPal enables its customers to send and receive payments. We earn revenue primarily by completing payment transactions for our customers on our Payments Platform and from other value added services. Our revenues are classified into two categories, transaction revenues and revenues from other value added services.
Disaggregation of Revenue
We determine operating segments based on how our chief operating decision maker (“CODM”) manages the business, makes operating decisions around the allocation of resources, and evaluates operating performance. Our CODM is our Chief Executive Officer, who reviews our operating results on a consolidated basis. We operate in one segment and have one reportable segment. Based on the information provided to and reviewed by our CODM, we believe that the nature, amount, timing, and uncertainty of our revenue and cash flows and how they are affected by economic factors are most appropriately depicted through our primary geographical markets and type of revenue categories (transaction revenues and other value added services). Revenues recorded within these categories are earned from similar services for which the nature of associated fees and the related revenue recognition models are substantially the same.
The following table presents our revenue disaggregated by primary geographical market and category:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
(In millions)
|
|
Primary geographical markets
|
|
|
|
|
|
|
|
|
United States (“U.S.”)
|
$
|
2,327
|
|
|
$
|
1,962
|
|
|
$
|
6,811
|
|
|
$
|
6,135
|
|
|
United Kingdom (“U.K.”)
|
455
|
|
|
397
|
|
|
1,342
|
|
|
1,191
|
|
|
Other countries(1)
|
1,596
|
|
|
1,324
|
|
|
4,658
|
|
|
3,899
|
|
|
Total revenues(2)
|
$
|
4,378
|
|
|
$
|
3,683
|
|
|
$
|
12,811
|
|
|
$
|
11,225
|
|
|
|
|
|
|
|
|
|
|
|
Revenue category
|
|
|
|
|
|
|
|
|
Transaction revenues
|
$
|
3,955
|
|
|
$
|
3,343
|
|
|
$
|
11,564
|
|
|
$
|
9,858
|
|
|
Other value added services
|
423
|
|
|
340
|
|
|
1,247
|
|
|
1,367
|
|
|
Total revenues(2)
|
$
|
4,378
|
|
|
$
|
3,683
|
|
|
$
|
12,811
|
|
|
$
|
11,225
|
|
(1) No single country included in the other countries category generated more than 10% of total revenue.
(2) Total revenues include $295 million and $173 million for the three months ended September 30, 2019 and 2018, respectively, and $828 million and $973 million for the nine months ended September 30, 2019 and 2018, respectively, which do not represent revenues recognized in the scope of ASC Topic 606, Revenue from contracts with customers. Such revenues relate to interest, fees, and gains earned on loan and interest receivables, net and held for sale portfolio, as well as hedging gains or losses and interest earned on certain PayPal customer balances.
Net revenues are attributed to the country in which the merchant is located, or in the case of a cross-border transaction, may be earned from the country in which the consumer and the merchant respectively reside. Net revenues earned from other value added services are typically attributed to the country in which either the customer or partner reside.
Note 3—Net Income Per Share
Basic net income per share is computed by dividing net income for the period by the weighted average number of common shares outstanding during the period. Diluted net income per share is computed by dividing net income for the period by the weighted average number of shares of common stock and potentially dilutive common stock outstanding for the period. The dilutive effect of outstanding equity incentive awards is reflected in diluted net income per share by application of the treasury stock method. The calculation of diluted net income per share excludes all anti-dilutive common shares.
The following table sets forth the computation of basic and diluted net income per share for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
(In millions, except per share amounts)
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
$
|
462
|
|
|
$
|
436
|
|
|
$
|
1,952
|
|
|
$
|
1,473
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares of common stock - basic
|
1,175
|
|
|
1,181
|
|
|
1,174
|
|
|
1,187
|
|
|
Dilutive effect of equity incentive awards
|
13
|
|
|
18
|
|
|
14
|
|
|
19
|
|
|
Weighted average shares of common stock - diluted
|
1,188
|
|
|
1,199
|
|
|
1,188
|
|
|
1,206
|
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.39
|
|
|
$
|
0.37
|
|
|
$
|
1.66
|
|
|
$
|
1.24
|
|
|
Diluted
|
$
|
0.39
|
|
|
$
|
0.36
|
|
|
$
|
1.64
|
|
|
$
|
1.22
|
|
|
Common stock equivalents excluded from income per diluted share because their effect would have been anti-dilutive
|
1
|
|
|
—
|
|
|
2
|
|
|
—
|
|
Note 4—Business Combinations
There were no acquisitions or divestitures completed during the nine months ended September 30, 2019. During the three and nine months ended September 30, 2018, we completed two and three acquisitions, respectively, reflecting 100% of the equity interests of the acquired companies, for an aggregate purchase price of $2.3 billion.
Significant Acquisitions Completed in 2018
Hyperwallet
We completed the acquisition of HWLT Holdings Inc. (“Hyperwallet”) in November 2018 by acquiring all outstanding shares for a total purchase price of approximately $400 million, consisting of cash consideration. We acquired Hyperwallet to enhance our payout capabilities and improve our ability to provide an integrated suite of payment solutions to ecommerce platforms and marketplaces around the world. The allocation of purchase consideration resulted in approximately $100 million of customer-related intangible assets, approximately $30 million of developed technology intangible assets, and approximately $2 million of marketing related intangible assets with estimated useful lives ranging from 3 to 7 years, funds receivable and customer accounts of $412 million, funds payable and amounts due to customers of $412 million, net liabilities of approximately $32 million, and initial goodwill of approximately $300 million, which is attributable to the workforce of Hyperwallet and the synergies expected to arise from the acquisition. We do not expect goodwill to be deductible for income tax purposes. The allocation of the purchase price for this acquisition has been prepared on a preliminary basis and changes to the allocation to certain assets, liabilities, and tax estimates may occur as additional information becomes available.
iZettle
We completed the acquisition of iZettle AB (publ) (“iZettle”) in September 2018 by acquiring all outstanding shares for a total purchase price of $2.2 billion, consisting of cash consideration paid of approximately $2.1 billion (net of cash acquired of $103 million) and restricted shares of PayPal with a fair value of approximately $22 million. We acquired iZettle to expand our in-store presence and strengthen our Payments Platform to help small businesses around the world grow and thrive in an omnichannel retail environment.
The following table summarizes the final allocation of the purchase consideration to the fair value of the assets acquired and liabilities assumed:
|
|
|
|
|
|
|
|
|
(In millions)
|
|
Goodwill
|
$
|
1,600
|
|
|
Customer lists and user base
|
426
|
|
|
Marketing related
|
102
|
|
|
Developed technology
|
121
|
|
|
All other
|
1
|
|
|
Total intangibles
|
$
|
650
|
|
|
Cash
|
103
|
|
|
Funds receivable and customer accounts
|
47
|
|
|
Funds payable and amounts due to customers
|
(47
|
)
|
|
Deferred tax liabilities, net
|
(116
|
)
|
|
Other net liabilities
|
(55
|
)
|
|
Total purchase consideration
|
$
|
2,182
|
|
The intangible assets acquired consist primarily of merchant relationships, trade name/trademarks, developed technology, and existing acquirer relationships with estimated useful lives ranging from 3 to 7 years. The excess of the purchase consideration over the fair value of net tangible and identifiable intangible assets acquired was recorded as goodwill, which is attributable to the workforce of iZettle and the synergies expected to arise from the acquisition. We do not expect goodwill to be deductible for income tax purposes.
Simility
We completed the acquisition of Simility, Inc. (“Simility”) in July 2018 by acquiring all outstanding shares for a total purchase price of $107 million, consisting of cash consideration. We acquired Simility to enhance our ability to deliver fraud prevention and risk management solutions to merchants globally. The allocation of purchase consideration resulted in approximately $18 million of developed technology intangible assets with an estimated useful life of 3 years, net assets of approximately $10 million, and goodwill of approximately $79 million, which is attributable to the workforce of Simility and the synergies expected to arise from the acquisition. We do not expect goodwill to be deductible for income tax purposes.
Note 5—Goodwill and Intangible Assets
Goodwill
The following table presents goodwill balances and adjustments to those balances during the nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2018
|
|
Goodwill
Acquired
|
|
Adjustments
|
|
September 30,
2019
|
|
|
(In millions)
|
|
Total goodwill
|
$
|
6,284
|
|
|
$
|
—
|
|
|
$
|
(106
|
)
|
|
$
|
6,178
|
|
The adjustments to goodwill during the nine months ended September 30, 2019 are related to foreign currency translation adjustments.
Intangible Assets
The components of identifiable intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Weighted Average Useful Life (Years)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Weighted Average Useful Life (Years)
|
|
|
(In millions, except years)
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer lists and user base
|
$
|
1,106
|
|
|
$
|
(680
|
)
|
|
$
|
426
|
|
|
7
|
|
$
|
1,134
|
|
|
$
|
(623
|
)
|
|
$
|
511
|
|
|
7
|
|
Marketing related
|
293
|
|
|
(230
|
)
|
|
63
|
|
|
3
|
|
301
|
|
|
(207
|
)
|
|
94
|
|
|
3
|
|
Developed technology
|
443
|
|
|
(324
|
)
|
|
119
|
|
|
3
|
|
453
|
|
|
(269
|
)
|
|
184
|
|
|
3
|
|
All other
|
245
|
|
|
(224
|
)
|
|
21
|
|
|
5
|
|
245
|
|
|
(209
|
)
|
|
36
|
|
|
5
|
|
Intangible assets, net
|
$
|
2,087
|
|
|
$
|
(1,458
|
)
|
|
$
|
629
|
|
|
|
|
$
|
2,133
|
|
|
$
|
(1,308
|
)
|
|
$
|
825
|
|
|
|
Amortization expense for intangible assets was $52 million and $34 million for the three months ended September 30, 2019 and 2018, respectively. Amortization expense for intangible assets was $160 million and $90 million for the nine months ended September 30, 2019 and 2018, respectively.
Expected future intangible asset amortization as of September 30, 2019 was as follows (in millions):
|
|
|
|
|
|
|
|
Fiscal years:
|
|
|
Remaining 2019
|
$
|
49
|
|
|
2020
|
184
|
|
|
2021
|
132
|
|
|
2022
|
70
|
|
|
2023
|
70
|
|
|
Thereafter
|
124
|
|
|
Total
|
$
|
629
|
|
Note 6—Leases
PayPal enters into various leases, which are primarily real estate operating leases. We use these properties for executive and administrative offices, data centers, product development offices, and customer service and operations centers. Our leases have remaining lease terms of less than one year to eleven years, some of which include options to extend individual leases for up to five years, and some of which include options to terminate individual leases within one year. When we reach a decision to exercise a lease renewal or termination option, we recognize the associated impact to the ROU asset and lease liability.
While a majority of lease payments are based on the stated rate in the lease, some lease payments are subject to annual changes based on the Consumer Price Index or another referenced index. While lease liabilities are not re-measured as a result of changes to the relevant index, such changes to these indices are treated as variable lease payments and recognized in the period in which the obligation for those payments is incurred. All of PayPal’s variable lease payments are based on an index or rate.
The short-term lease exemption has been adopted for all leases with a duration of less than 12 months.
PayPal’s lease portfolio contains a small number of subleases. A sublease situation can arise when currently leased real estate space is available and is surplus to operational requirements.
The components of lease expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, 2019
|
|
Nine Months Ended
September 30, 2019
|
|
|
(In millions, except weighted-average figures)
|
|
Lease expense
|
|
|
|
|
Operating lease expense
|
$
|
33
|
|
|
$
|
99
|
|
|
Sublease income
|
(5
|
)
|
|
(9
|
)
|
|
Total lease expense cost
|
$
|
28
|
|
|
$
|
90
|
|
|
|
|
|
|
|
Other information:
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
|
Operating cash flows from operating leases
|
$
|
31
|
|
|
$
|
93
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
$
|
32
|
|
|
$
|
100
|
|
|
Weighted-average remaining lease term—operating leases
|
6.0 years
|
|
|
6.0 years
|
|
|
Weighted-average discount rate—operating leases
|
5
|
%
|
|
5
|
%
|
Future minimum lease payments for our operating leases as of September 30, 2019 were as follows:
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Fiscal years:
|
(In millions)
|
|
Remaining 2019
|
$
|
32
|
|
|
2020
|
120
|
|
|
2021
|
97
|
|
|
2022
|
77
|
|
|
2023
|
58
|
|
|
Thereafter
|
216
|
|
|
Total
|
$
|
600
|
|
|
Less: present value discount
|
(87
|
)
|
|
Lease liability
|
$
|
513
|
|
Future minimum lease payments for our operating leases as of December 31, 2018, prior to the adoption of new lease guidance as described in Note 1—“Overview and Summary of Significant Accounting Policies,” were as follows:
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
Fiscal years:
|
(In millions)
|
|
2019
|
$
|
124
|
|
|
2020
|
111
|
|
|
2021
|
96
|
|
|
2022
|
81
|
|
|
2023
|
63
|
|
|
Thereafter
|
189
|
|
|
Total minimum lease payments
|
$
|
664
|
|
Operating lease amounts include minimum lease payments under our non-cancelable operating leases primarily for office and data center facilities. The amounts presented are consistent with contractual terms and are not expected to differ significantly from actual results under our existing leases.
As of September 30, 2019, we also have additional operating leases that have not yet commenced, primarily for real estate and data centers, with minimum lease payments aggregating to $111.5 million. These operating leases will commence between fiscal years 2019 and 2021 with lease terms of one year to seven years.
Note 7—Other Financial Statement Details
Accumulated Other Comprehensive Income (Loss)
The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the three months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains (Losses) on Cash Flow Hedges
|
|
Unrealized Gains (Losses) on Investments
|
|
Foreign
Currency
Translation
|
|
Estimated Tax Benefit (Expense)
|
|
Total
|
|
|
(In millions)
|
|
Beginning balance
|
$
|
118
|
|
|
$
|
8
|
|
|
$
|
(151
|
)
|
|
$
|
(3
|
)
|
|
$
|
(28
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
141
|
|
|
(6
|
)
|
|
(90
|
)
|
|
—
|
|
|
45
|
|
|
Less: Amount of gain (loss) reclassified from accumulated other comprehensive income
|
70
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
69
|
|
|
Net current period other comprehensive income (loss)
|
71
|
|
|
(5
|
)
|
|
(90
|
)
|
|
—
|
|
|
(24
|
)
|
|
Ending balance
|
$
|
189
|
|
|
$
|
3
|
|
|
$
|
(241
|
)
|
|
$
|
(3
|
)
|
|
$
|
(52
|
)
|
The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the three months ended September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains (Losses) on Cash Flow Hedges
|
|
Unrealized Gains (Losses) on Investments
|
|
Foreign
Currency
Translation
|
|
Estimated Tax Benefit (Expense)
|
|
Total
|
|
|
(In millions)
|
|
Beginning balance
|
$
|
104
|
|
|
$
|
(22
|
)
|
|
$
|
(52
|
)
|
|
$
|
6
|
|
|
$
|
36
|
|
|
Other comprehensive income (loss) before reclassifications
|
41
|
|
|
5
|
|
|
(6
|
)
|
|
(2
|
)
|
|
38
|
|
|
Less: Amount of gain reclassified from accumulated other comprehensive income
|
7
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
Net current period other comprehensive income (loss)
|
34
|
|
|
4
|
|
|
(6
|
)
|
|
(2
|
)
|
|
30
|
|
|
Ending balance
|
$
|
138
|
|
|
$
|
(18
|
)
|
|
$
|
(58
|
)
|
|
$
|
4
|
|
|
$
|
66
|
|
The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains (Losses) on Cash Flow Hedges
|
|
Unrealized Gains (Losses) on Investments
|
|
Foreign
Currency
Translation
|
|
Estimated Tax Benefit (Expense)
|
|
Total
|
|
|
(In millions)
|
|
Beginning balance
|
$
|
182
|
|
|
$
|
(13
|
)
|
|
$
|
(93
|
)
|
|
$
|
2
|
|
|
$
|
78
|
|
|
Other comprehensive income (loss) before reclassifications
|
187
|
|
|
15
|
|
|
(148
|
)
|
|
(5
|
)
|
|
49
|
|
|
Less: Amount of gain (loss) reclassified from accumulated other comprehensive income
|
180
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
179
|
|
|
Net current period other comprehensive income (loss)
|
7
|
|
|
16
|
|
|
(148
|
)
|
|
(5
|
)
|
|
(130
|
)
|
|
Ending balance
|
$
|
189
|
|
|
$
|
3
|
|
|
$
|
(241
|
)
|
|
$
|
(3
|
)
|
|
$
|
(52
|
)
|
The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the nine months ended September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Gains (Losses) on Cash Flow Hedges
|
|
Unrealized Gains (Losses) on Investments
|
|
Foreign
Currency
Translation
|
|
Estimated Tax Benefit (Expense)
|
|
Total
|
|
|
(In millions)
|
|
Beginning balance
|
$
|
(111
|
)
|
|
$
|
(12
|
)
|
|
$
|
(25
|
)
|
|
$
|
6
|
|
|
$
|
(142
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
183
|
|
|
(6
|
)
|
|
(33
|
)
|
|
(2
|
)
|
|
142
|
|
|
Less: Amount of loss reclassified from accumulated other comprehensive income
|
(66
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(66
|
)
|
|
Net current period other comprehensive income (loss)
|
249
|
|
|
(6
|
)
|
|
(33
|
)
|
|
(2
|
)
|
|
208
|
|
|
Ending balance
|
$
|
138
|
|
|
$
|
(18
|
)
|
|
$
|
(58
|
)
|
|
$
|
4
|
|
|
$
|
66
|
|
The following table provides details of reclassifications from accumulated other comprehensive income (loss) for the three months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details of Accumulated Other Comprehensive
Income (Loss) Components
|
|
Amount of Gains (Losses) Reclassified from Accumulated Other Comprehensive Income (Loss)
|
|
Affected Line Item in the Statement of Income
|
|
|
|
Three Months Ended September 30,
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
(In millions)
|
|
|
|
Gains on cash flow hedges—foreign exchange contracts
|
|
$
|
70
|
|
|
$
|
7
|
|
|
Net revenues
|
|
Unrealized (losses) gains on investments
|
|
(1
|
)
|
|
1
|
|
|
Other income (expense), net
|
|
|
|
$
|
69
|
|
|
$
|
8
|
|
|
Income before income taxes
|
|
|
|
—
|
|
|
—
|
|
|
Income tax expense
|
|
Total reclassifications for the period
|
|
$
|
69
|
|
|
$
|
8
|
|
|
Net income
|
The following table provides details of reclassifications from accumulated other comprehensive income (loss) for the nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details of Accumulated Other Comprehensive
Income (Loss) Components
|
|
Amount of Gains (Losses) Reclassified from Accumulated Other Comprehensive Income (Loss)
|
|
Affected Line Item in the Statement of Income
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
(In millions)
|
|
|
|
Gains (losses) on cash flow hedges—foreign exchange contracts
|
|
$
|
180
|
|
|
$
|
(66
|
)
|
|
Net revenues
|
|
Unrealized (losses) gains on investments
|
|
(1
|
)
|
|
—
|
|
|
Other income (expense), net
|
|
|
|
$
|
179
|
|
|
$
|
(66
|
)
|
|
Income before income taxes
|
|
|
|
—
|
|
|
—
|
|
|
Income tax expense
|
|
Total reclassifications for the period
|
|
$
|
179
|
|
|
$
|
(66
|
)
|
|
Net income
|
Other Income (Expense), Net
The following table reconciles the components of other income (expense), net for the three and nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
(In millions)
|
|
Interest income
|
$
|
47
|
|
|
$
|
61
|
|
|
$
|
144
|
|
|
$
|
116
|
|
|
Interest expense
|
(29
|
)
|
|
(22
|
)
|
|
(78
|
)
|
|
(57
|
)
|
|
Gains (losses) on strategic investments
|
(228
|
)
|
|
—
|
|
|
170
|
|
|
31
|
|
|
Other
|
(3
|
)
|
|
4
|
|
|
(12
|
)
|
|
4
|
|
|
Other income (expense), net
|
$
|
(213
|
)
|
|
$
|
43
|
|
|
$
|
224
|
|
|
$
|
94
|
|
Note 8—Funds Receivable and Customer Accounts and Investments
The following table summarizes the assets underlying our funds receivable and customer accounts, short-term investments, and long-term investments as of September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2019
|
|
December 31,
2018
|
|
|
(In millions)
|
|
Funds receivable and customer accounts:
|
|
|
|
|
Cash and cash equivalents
|
$
|
8,097
|
|
|
$
|
5,642
|
|
|
Time deposits
|
469
|
|
|
389
|
|
|
Available-for-sale debt securities
|
9,502
|
|
|
10,940
|
|
|
Funds receivable
|
4,443
|
|
|
3,091
|
|
|
Total funds receivable and customer accounts
|
$
|
22,511
|
|
|
$
|
20,062
|
|
|
Short-term investments:
|
|
|
|
|
Time deposits
|
$
|
761
|
|
|
$
|
774
|
|
|
Available-for-sale debt securities
|
2,757
|
|
|
685
|
|
|
Restricted cash
|
67
|
|
|
75
|
|
|
Total short-term investments
|
$
|
3,585
|
|
|
$
|
1,534
|
|
|
Long-term investments:
|
|
|
|
|
Available-for-sale debt securities
|
$
|
983
|
|
|
$
|
676
|
|
|
Restricted cash
|
—
|
|
|
2
|
|
|
Strategic investments
|
1,788
|
|
|
293
|
|
|
Total long-term investments
|
$
|
2,771
|
|
|
$
|
971
|
|
As of September 30, 2019 and December 31, 2018, the estimated fair value of our available-for-sale debt securities included within funds receivable and customer accounts, short-term investments, and long-term investments was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
Gross
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
|
(In millions)
|
|
Funds receivable and customer accounts:
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
$
|
5,359
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
5,361
|
|
|
Foreign government and agency securities
|
770
|
|
|
—
|
|
|
—
|
|
|
770
|
|
|
Corporate debt securities
|
1,143
|
|
|
—
|
|
|
—
|
|
|
1,143
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
155
|
|
|
—
|
|
|
—
|
|
|
155
|
|
|
Foreign government and agency securities
|
379
|
|
|
—
|
|
|
—
|
|
|
379
|
|
|
Corporate debt securities
|
2,098
|
|
|
—
|
|
|
—
|
|
|
2,098
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
140
|
|
|
—
|
|
|
—
|
|
|
140
|
|
|
Foreign government and agency securities
|
252
|
|
|
—
|
|
|
—
|
|
|
252
|
|
|
Corporate debt securities
|
590
|
|
|
1
|
|
|
—
|
|
|
591
|
|
|
Total available-for-sale debt securities(1)
|
$
|
10,886
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
10,889
|
|
(1) Excludes foreign currency denominated available-for-sale investments accounted for under the fair value option. Refer to Note 9—“Fair Value Measurement of Assets and Liabilities.”
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
Gross
Amortized
Cost
|
|
Gross
Unrealized
Gains
|
|
Gross
Unrealized
Losses
|
|
Estimated
Fair Value
|
|
|
(In millions)
|
|
Funds receivable and customer accounts:
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
$
|
6,945
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
6,947
|
|
|
Foreign government and agency securities
|
772
|
|
|
—
|
|
|
(1
|
)
|
|
771
|
|
|
Corporate debt securities
|
883
|
|
|
—
|
|
|
—
|
|
|
883
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
393
|
|
|
—
|
|
|
(3
|
)
|
|
390
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
Foreign government and agency securities
|
38
|
|
|
—
|
|
|
—
|
|
|
38
|
|
|
Corporate debt securities
|
639
|
|
|
—
|
|
|
(11
|
)
|
|
628
|
|
|
Total available-for-sale debt securities(1)
|
$
|
9,670
|
|
|
$
|
2
|
|
|
$
|
(15
|
)
|
|
$
|
9,657
|
|
(1) Excludes foreign currency denominated available-for-sale investments accounted for under the fair value option. Refer to Note 9—“Fair Value Measurement of Assets and Liabilities.”
As of September 30, 2019 and December 31, 2018, the gross unrealized losses and estimated fair value of our available-for-sale debt securities included within funds receivable and customer accounts, short-term investments, and long-term investments by length of time those individual securities have been in a continuous loss position was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
|
(In millions)
|
|
Funds receivable and customer accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
$
|
594
|
|
|
$
|
—
|
|
(1)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
594
|
|
|
$
|
—
|
|
|
Foreign government and agency securities
|
390
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
390
|
|
|
—
|
|
|
Corporate debt securities
|
240
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
247
|
|
|
—
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign government and agency securities
|
92
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
92
|
|
|
—
|
|
|
Corporate debt securities
|
380
|
|
|
—
|
|
|
100
|
|
|
—
|
|
|
480
|
|
|
—
|
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
140
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
140
|
|
|
—
|
|
|
Foreign government and agency securities
|
160
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
160
|
|
|
—
|
|
|
Corporate debt securities
|
142
|
|
|
—
|
|
|
63
|
|
|
—
|
|
|
205
|
|
|
—
|
|
|
Total available-for-sale debt securities
|
$
|
2,138
|
|
|
$
|
—
|
|
|
$
|
170
|
|
|
$
|
—
|
|
|
$
|
2,308
|
|
|
$
|
—
|
|
(1) — Denotes gross unrealized loss or fair value of less than $1 million in a given position.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
Fair Value
|
|
Gross
Unrealized
Losses
|
|
|
(In millions)
|
|
Funds receivable and customer accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
$
|
2,419
|
|
|
$
|
—
|
|
(1)
|
$
|
18
|
|
|
$
|
—
|
|
|
$
|
2,437
|
|
|
$
|
—
|
|
|
Foreign government and agency securities
|
295
|
|
|
—
|
|
|
49
|
|
|
(1
|
)
|
|
344
|
|
|
(1
|
)
|
|
Corporate debt securities
|
281
|
|
|
—
|
|
|
7
|
|
|
—
|
|
|
288
|
|
|
—
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities
|
57
|
|
|
—
|
|
|
333
|
|
|
(3
|
)
|
|
390
|
|
|
(3
|
)
|
|
Long-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign government and agency securities
|
10
|
|
|
—
|
|
|
28
|
|
|
—
|
|
|
38
|
|
|
—
|
|
|
Corporate debt securities
|
94
|
|
|
(2
|
)
|
|
534
|
|
|
(9
|
)
|
|
628
|
|
|
(11
|
)
|
|
Total available-for-sale debt securities
|
$
|
3,156
|
|
|
$
|
(2
|
)
|
|
$
|
969
|
|
|
$
|
(13
|
)
|
|
$
|
4,125
|
|
|
$
|
(15
|
)
|
(1) — Denotes gross unrealized loss or fair value of less than $1 million in a given position.
We believe the decline in value is due to temporary market conditions and expect to recover the entire amortized cost basis of the available-for-sale debt securities. We neither intend nor anticipate the need to sell the securities before recovery. We will continue to monitor the performance of the investment portfolio and assess market and interest rate risk when evaluating whether an other-than-temporary impairment exists. Amounts reclassified to earnings from unrealized gains and losses were not material for the three and nine months ended September 30, 2019 and 2018.
Our available-for-sale debt securities included within funds receivable and customer accounts, short-term investments, and long-term investments classified by date of contractual maturity were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
|
Amortized Cost
|
|
Fair Value
|
|
|
(In millions)
|
|
One year or less
|
$
|
9,137
|
|
|
$
|
9,140
|
|
|
After one year through five years
|
1,745
|
|
|
1,745
|
|
|
After five years through ten years
|
4
|
|
|
4
|
|
|
Total
|
$
|
10,886
|
|
|
$
|
10,889
|
|
Strategic Investments
Our strategic investments include marketable equity securities, which are publicly traded, and non-marketable equity securities, which are investments in privately held companies. Our marketable equity securities have readily determinable fair values and are recorded as long-term investments on our condensed consolidated balance sheets at fair value with changes in fair value recorded in other income (expense), net. Marketable equity securities totaled $1.3 billion as of September 30, 2019. We had no such securities as of December 31, 2018.
Non-marketable equity securities are recorded in long-term investments on our condensed consolidated balance sheets. Our non-marketable equity securities do not have a readily determinable fair value, therefore we measure these equity investments at cost minus impairment, if any, and adjust for changes resulting from observable price changes in orderly transactions for an identical or similar investment in the same issuer (the “Measurement Alternative”). All gains and losses on these investments, realized and unrealized, are recognized in other income (expense), net on our condensed consolidated statements of income. The carrying value of our non-marketable equity securities totaled $501 million and $293 million as of September 30, 2019 and December 31, 2018, respectively.
Measurement Alternative Adjustments
The adjustments to the carrying value of our non-marketable equity securities accounted for under the Measurement Alternative in the nine months ended September 30, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
|
(In millions)
|
|
Carrying amount, beginning of period
|
$
|
293
|
|
|
$
|
88
|
|
|
Adjustments related to non-marketable equity securities:
|
|
|
|
|
Additions, net of sales
|
75
|
|
|
73
|
|
|
Gross unrealized gains
|
133
|
|
|
31
|
|
|
Carrying amount, end of period
|
$
|
501
|
|
|
$
|
192
|
|
Cumulative gross unrealized gains and cumulative gross unrealized losses and impairment related to non-marketable equity securities accounted for under the Measurement Alternative held at September 30, 2019 were approximately $224 million and $5 million, respectively. Cumulative gross unrealized gains and cumulative gross unrealized losses and impairment related to non-marketable equity securities accounted for under the Measurement Alternative held at December 31, 2018 were approximately $91 million and $5 million, respectively.
Gains (losses) on marketable and non-marketable equity securities
We recognized $228 million in net unrealized losses and no unrealized gains or losses, respectively, in the three months ended September 30, 2019 and 2018 related to marketable and non-marketable equity securities held at September 30, 2019 and September 30, 2018. Net unrealized gains recognized in the nine months ended September 30, 2019 and 2018 related to marketable and non-marketable equity securities held at September 30, 2019 and September 30, 2018 were approximately $170 million and $31 million, respectively.
Note 9—Fair Value Measurement of Assets and Liabilities
Financial Assets and Liabilities Measured and Recorded at Fair Value on a Recurring Basis
The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
|
(In millions)
|
|
Assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents(1)
|
|
$
|
1,943
|
|
|
$
|
—
|
|
|
$
|
1,943
|
|
|
Short-term investments(2):
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
155
|
|
|
—
|
|
|
155
|
|
|
Foreign government and agency securities
|
|
432
|
|
|
—
|
|
|
432
|
|
|
Corporate debt securities
|
|
2,170
|
|
|
—
|
|
|
2,170
|
|
|
Total short-term investments
|
|
$
|
2,757
|
|
|
$
|
—
|
|
|
$
|
2,757
|
|
|
Funds receivable and customer accounts(3):
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
2,300
|
|
|
—
|
|
|
2,300
|
|
|
U.S. government and agency securities
|
|
5,361
|
|
|
—
|
|
|
5,361
|
|
|
Foreign government and agency securities
|
|
2,560
|
|
|
—
|
|
|
2,560
|
|
|
Corporate debt securities
|
|
1,581
|
|
|
—
|
|
|
1,581
|
|
|
Total funds receivable and customer accounts
|
|
$
|
11,802
|
|
|
$
|
—
|
|
|
$
|
11,802
|
|
|
Derivatives
|
|
293
|
|
|
—
|
|
|
293
|
|
|
Long-term investments(4):
|
|
|
|
|
|
|
|
U.S. government and agency securities
|
|
140
|
|
|
—
|
|
|
140
|
|
|
Foreign government and agency securities
|
|
252
|
|
|
—
|
|
|
252
|
|
|
Corporate debt securities
|
|
591
|
|
|
—
|
|
|
591
|
|
|
Marketable equity securities
|
|
1,287
|
|
|
1,287
|
|
|
—
|
|
|
Total long-term investments
|
|
$
|
2,270
|
|
|
$
|
1,287
|
|
|
$
|
983
|
|
|
Total financial assets
|
|
$
|
19,065
|
|
|
$
|
1,287
|
|
|
$
|
17,778
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
Derivatives
|
|
$
|
69
|
|
|
$
|
—
|
|
|
$
|
69
|
|
(1) Excludes cash of $4.9 billion not measured and recorded at fair value.
(2) Excludes restricted cash of $67 million and time deposits of $761 million not measured and recorded at fair value.
(3) Excludes cash, time deposits, and funds receivable of $10.7 billion underlying funds receivable and customer accounts not measured and recorded at fair value.
(4) Excludes non-marketable equity securities of $501 million measured using the Measurement Alternative.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
|
(In millions)
|
|
Assets:
|
|
|
|
|
|
Cash and cash equivalents(1)
|
|
$
|
3,678
|
|
|
$
|
3,678
|
|
|
Short-term investments(2):
|
|
|
|
|
|
Foreign government and agency securities
|
|
235
|
|
|
235
|
|
|
Corporate debt securities
|
|
450
|
|
|
450
|
|
|
Total short-term investments
|
|
685
|
|
|
685
|
|
|
Funds receivable and customer accounts(3):
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
605
|
|
|
605
|
|
|
U.S. government and agency securities
|
|
6,946
|
|
|
6,946
|
|
|
Foreign government and agency securities
|
|
2,434
|
|
|
2,434
|
|
|
Corporate debt securities
|
|
1,560
|
|
|
1,560
|
|
|
Total funds receivable and customer accounts
|
|
11,545
|
|
|
11,545
|
|
|
Derivatives
|
|
320
|
|
|
320
|
|
|
Long-term investments(2),(4):
|
|
|
|
|
|
Foreign government and agency securities
|
|
48
|
|
|
48
|
|
|
Corporate debt securities
|
|
628
|
|
|
628
|
|
|
Total long-term investments
|
|
676
|
|
|
676
|
|
|
Total financial assets
|
|
$
|
16,904
|
|
|
$
|
16,904
|
|
|
Liabilities:
|
|
|
|
|
|
Derivatives
|
|
$
|
67
|
|
|
$
|
67
|
|
(1) Excludes cash of $3.9 billion not measured and recorded at fair value.
(2) Excludes restricted cash of $77 million and time deposits of $774 million not measured and recorded at fair value.
(3) Excludes cash, time deposits, and funds receivable of $8.5 billion underlying funds receivable and customer accounts not measured and recorded at fair value.
(4) Excludes non-marketable equity investments of $293 million measured using the Measurement Alternative.
Our marketable equity securities are valued using quoted prices for identical assets in active markets (Level 1). All other financial assets and liabilities are valued using quoted prices for identical instruments in less active markets, readily available pricing sources for comparable instruments, or models using market observable inputs (Level 2).
A 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 currency rates, interest rate yield curves, option volatility, and equity prices. Our derivative instruments 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.
We did not have any transfers of financial instruments between valuation levels during the nine months ended September 30, 2019 and 2018. As of September 30, 2019 and December 31, 2018, we did not have any assets or liabilities requiring measurement at fair value without observable market values that would require a high level of judgment to determine fair value (Level 3).
We elect to account for foreign currency denominated available-for-sale debt securities under the fair value option. Election of the fair value option allows us to recognize any gains and losses from fair value changes on such investments in other income (expense), net on the condensed consolidated statements of income to significantly reduce the accounting asymmetry that would otherwise arise when recognizing the corresponding foreign exchange gains and losses relating to customer liabilities. The following table summarizes the estimated fair value of our available-for-sale debt securities included within funds receivable and customer accounts, short-term investments and long-term investments under the fair value option as of September 30, 2019 and December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
|
|
(In millions)
|
|
Funds receivable and customer accounts
|
$
|
2,228
|
|
|
$
|
2,339
|
|
|
Short-term investments
|
$
|
125
|
|
|
$
|
295
|
|
|
Long-term investments
|
$
|
—
|
|
|
$
|
10
|
|
The following table summarizes the gains (losses) from fair value changes recognized in other income (expense), net related to the available-for-sale debt securities included within funds receivable and customer accounts, short-term investments, and long-term investments under the fair value option for the three and nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
(In millions)
|
|
Funds receivable and customer accounts
|
$
|
(86
|
)
|
|
$
|
(18
|
)
|
|
$
|
(88
|
)
|
|
$
|
(87
|
)
|
|
Short-term investments
|
$
|
(4
|
)
|
|
$
|
(4
|
)
|
|
$
|
(8
|
)
|
|
$
|
(10
|
)
|
Financial Assets and Liabilities Measured and Recorded at Fair Value on a Non-Recurring Basis
The following table summarizes our financial assets and liabilities held as of September 30, 2019 and December 31, 2018 for which a non-recurring fair value measurement was recorded during the nine months ended September 30, 2019 and the year ended December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
|
(In millions)
|
|
Non-marketable equity investments measured using the Measurement Alternative(1)
|
|
$
|
307
|
|
|
307
|
|
(1) Excludes non-marketable equity investments of $194 million for which no observable price changes occurred during the nine months ended September 30, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
|
(In millions)
|
|
Non-marketable equity investments measured using the Measurement Alternative(1)
|
|
$
|
116
|
|
|
116
|
|
(1) Excludes non-marketable equity investments of $177 million for which no observable price changes occurred during the year ended December 31, 2018.
We measured these non-marketable equity investments at cost minus impairment, if any, adjusted for observable price changes in orderly transactions for an identical or a similar investment in the same issuer.
Financial Assets and Liabilities Not Measured and Recorded at Fair Value
Our financial instruments, including cash, restricted cash, time deposits, loans and interest receivable, net, certain customer accounts, notes receivable, and short-term debt are carried at amortized cost, which approximates their fair value. Our long-term debt had a fair value of $5.0 billion as of September 30, 2019. If these financial instruments were measured at fair value in the financial statements, cash would be classified as Level 1; restricted cash, time deposits, certain customer accounts, short-term debt, and long-term debt would be classified as Level 2; and the remaining financial instruments would be classified as Level 3 in the fair value hierarchy.
Note 10—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. Our derivatives expose us to credit risk to the extent that our 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 and by entering into collateral security arrangements. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored on an ongoing basis.
Foreign Currency Exchange Contracts
We transact business in various foreign currencies and have significant international revenues and costs denominated in foreign currencies, which subjects us to foreign currency risk. We have a foreign currency exposure management program whereby we designate certain foreign currency exchange contracts, generally with maturities of 18 months or less, to reduce the volatility of cash flows primarily related to forecasted revenues denominated in foreign currencies. The objective of the foreign exchange contracts is to help mitigate the risk that the U.S. dollar-equivalent cash flows are adversely affected by changes in the applicable U.S. dollar/foreign currency exchange rate. These derivative instruments are designated as cash flow hedges and accordingly, the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into revenue in the same period the forecasted transaction affects earnings. We evaluate the effectiveness of our foreign currency exchange contracts on a quarterly basis by comparing the critical terms of the derivative instruments with the critical terms of the forecasted cash flows of the hedged item; if the critical terms are the same we conclude the hedge will be perfectly effective. We did not exclude any component of the changes in fair value of the derivative instruments from the assessment of hedge effectiveness. We do not use any foreign currency exchange contracts for trading or speculative purposes.
As of September 30, 2019, we estimate that $172 million of net derivative gains related to our cash flow hedges included in accumulated other comprehensive income (loss) is expected to be reclassified into earnings within the next 12 months. During the three and nine months ended September 30, 2019 and 2018, we did not discontinue any cash flow hedges because it was probable that the original forecasted transaction would not occur and as such, did not reclassify any gains or losses to earnings prior to the occurrence of the hedged transaction. If we elect to discontinue our cash flow hedges and it is probable that the original forecasted transaction will occur, we continue to report the derivative's gain or loss in accumulated other comprehensive income (loss) until the forecasted transaction affects earnings, at which point we also reclassify it into earnings. Gains and losses on derivatives held after we discontinue our cash flow hedges and gains and losses on derivative instruments that are not designated as cash flow hedges are recorded in the same financial statement line item to which the derivative relates.
We have an additional foreign currency exposure management program whereby we use foreign currency exchange contracts to offset the foreign currency exchange risk on our assets and liabilities denominated in currencies other than the functional currency of our subsidiaries. These contracts are not designated as hedging instruments and reduce, but do not entirely eliminate, the impact of foreign currency exchange rate movements on our assets and liabilities. The foreign currency exchange gains and losses on our assets and liabilities are recorded in other income (expense), net, which is offset by the gains and losses on the foreign currency exchange contracts.
Fair Value of Derivative Contracts
The fair value of our outstanding derivative instruments as of September 30, 2019 and December 31, 2018 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Location
|
|
September 30,
2019
|
|
December 31,
2018
|
|
|
|
|
(In millions)
|
|
Derivative Assets:
|
|
|
|
|
|
|
Foreign exchange contracts designated as cash flow hedges
|
Other current assets
|
|
$
|
172
|
|
|
$
|
170
|
|
|
Foreign exchange contracts designated as cash flow hedges
|
Other assets (non-current)
|
|
17
|
|
|
11
|
|
|
Foreign exchange contracts not designated as hedging instruments
|
Other current assets
|
|
104
|
|
|
139
|
|
|
Total derivative assets
|
|
|
$
|
293
|
|
|
$
|
320
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities:
|
|
|
|
|
|
|
Foreign exchange contracts designated as cash flow hedges
|
Other current liabilities
|
|
$
|
—
|
|
|
$
|
3
|
|
|
Foreign exchange contracts not designated as hedging instruments
|
Other current liabilities
|
|
69
|
|
|
64
|
|
|
Total derivative liabilities
|
|
|
$
|
69
|
|
|
$
|
67
|
|
Master Netting Agreements - Rights of Setoff
Under master netting agreements with respective counterparties to our foreign exchange 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 in our condensed consolidated balance sheets. Rights of setoff associated with our foreign exchange contracts represented a potential offset to both assets and liabilities by $49 million as of September 30, 2019 and $45 million as of December 31, 2018. We have entered into collateral security arrangements that provide for collateral to be received or posted when the net fair value of certain financial instruments fluctuates from contractually established thresholds. We posted $1 million and nil in cash collateral related to our derivative liabilities as of September 30, 2019 and December 31, 2018, respectively, which is recognized in other current assets on our condensed consolidated balance sheets, and is related to the right to reclaim cash collateral. We received $207 million and $195 million in counterparty cash collateral related to our derivative assets as of September 30, 2019 and December 31, 2018, respectively, which is recognized in other current liabilities on our condensed consolidated balance sheets, and is related to the obligation to return cash collateral. Additionally, as of September 30, 2019 and December 31, 2018, we received $4 million and $6 million, respectively, in counterparty non-cash collateral in the form of debt securities.
Effect of Derivative Contracts on Condensed Consolidated Statements of Income
The following table provides the location in the condensed consolidated statements of income and amount of recognized gains or losses related to our derivative instruments designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
(In millions)
|
|
|
Net revenues
|
|
Total amounts presented in the condensed consolidated statements of income in which the effects of cash flow hedges are recorded
|
$
|
4,378
|
|
|
$
|
3,683
|
|
|
$
|
12,811
|
|
|
$
|
11,225
|
|
|
Gains (losses) on foreign exchange contracts designated as cash flow hedges reclassified from accumulated other comprehensive income
|
$
|
70
|
|
|
$
|
7
|
|
|
$
|
180
|
|
|
$
|
(66
|
)
|
The following table provides the location in the condensed consolidated statements of income and amount of recognized gains or losses related to our derivative instruments not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
(In millions)
|
|
Gains (losses) on foreign exchange contracts recognized in other income (expense), net
|
$
|
31
|
|
|
$
|
12
|
|
|
$
|
30
|
|
|
$
|
27
|
|
|
Gains (losses) on foreign exchange contracts recognized in net revenues
|
—
|
|
|
4
|
|
|
—
|
|
|
5
|
|
|
Total gains (losses) recognized from foreign exchange contracts not designated as hedging instruments
|
$
|
31
|
|
|
$
|
16
|
|
|
$
|
30
|
|
|
$
|
32
|
|
Notional Amounts of Derivative Contracts
Derivative transactions are measured in terms of the notional amount; however, 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 underlying 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, 2019
|
|
December 31, 2018
|
|
|
(In millions)
|
|
Foreign exchange contracts designated as cash flow hedges
|
$
|
3,354
|
|
|
$
|
3,831
|
|
|
Foreign exchange contracts not designated as hedging instruments
|
13,736
|
|
|
10,703
|
|
|
Total
|
$
|
17,090
|
|
|
$
|
14,534
|
|
Note 11—Loans and Interest Receivable
We offer credit products to consumers and certain small and medium-sized merchants. We work with independent chartered financial institutions that extend credit to the consumer or merchant using our credit products in the U.S. For our consumer credit products outside the U.S., we extend credit through our Luxembourg banking subsidiary. For our merchant credit products outside the U.S., we extend working capital advances in the U.K. and working capital loans in Germany through our Luxembourg banking subsidiary, and extend working capital loans in Australia through an Australian subsidiary. Prior to July 2018, we purchased receivables related to credit extended to U.S. consumers by independent chartered financial institutions and were responsible for servicing functions related to that portfolio. Following the completion of the sale of our U.S. consumer credit receivables portfolio to Synchrony Bank in July 2018, we no longer purchased receivables related to the U.S. consumer loans, but remained responsible for the servicing functions related to the sold portfolio through a transition period which ended in the second quarter of 2019. We purchase receivables related to credit extended to U.S. merchants by an independent chartered financial institution and are responsible for servicing functions related to that portfolio. During the nine months ended September 30, 2019 and 2018, we purchased credit receivables of approximately $3.4 billion and $7.0 billion, respectively. The credit receivables purchased during the nine months ended September 30, 2018 included purchases associated with our U.S. consumer credit receivables portfolio, which was designated as held for sale until the completion of sale to Synchrony Bank in July 2018.
Consumer Receivables
We offer credit products to consumers who choose PayPal Credit at checkout. As of September 30, 2019 and December 31, 2018, the outstanding balance of consumer receivables, which primarily consisted of loans and interest receivable due from international consumer accounts, was $1.0 billion and $704 million, respectively.
We closely monitor credit quality for our consumer receivables to manage and evaluate our related exposure to credit risk. Credit risk management begins with initial underwriting and continues through to full repayment of a loan. To assess a consumer who requests a loan, we use, among other indicators, internally developed risk models using detailed information from external sources, such as credit bureaus where available, and internal historical experience, including the consumer’s prior repayment history with PayPal Credit products as well as other measures. We use delinquency status and trends to assist in making new and ongoing credit decisions, to adjust our models, to plan our collection practices and strategies, and in our determination of our allowance for consumer loans and interest receivable.
Consumer Receivables Delinquency and Allowance
The following tables present the delinquency status of the principal amount of consumer loans and interest receivable. The amounts shown below are based on the number of days past the billing date to the consumer. Current represents balances that are within 30 days of the billing date.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
(In millions)
|
|
Current
|
|
30 - 59 Days Past Due
|
|
60 - 89 Days Past Due
|
|
90 - 180 Days Past Due
|
|
Total Past Due
|
|
Total
|
|
$
|
965
|
|
|
$
|
31
|
|
|
$
|
12
|
|
|
$
|
22
|
|
|
$
|
65
|
|
|
$
|
1,030
|
|
|
93.7
|
%
|
|
3.0
|
%
|
|
1.2
|
%
|
|
2.1
|
%
|
|
6.3
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
(In millions)
|
|
Current
|
|
30 - 59 Days Past Due
|
|
60 - 89 Days Past Due
|
|
90 - 180 Days Past Due
|
|
Total Past Due
|
|
Total
|
|
$
|
668
|
|
|
$
|
18
|
|
|
$
|
6
|
|
|
$
|
12
|
|
|
$
|
36
|
|
|
$
|
704
|
|
|
94.9
|
%
|
|
2.5
|
%
|
|
0.9
|
%
|
|
1.7
|
%
|
|
5.1
|
%
|
|
100
|
%
|
We charge off consumer loan receivable balances in the month in which a customer's balance becomes 180 days past the payment due date. Bankrupt accounts are charged off within 90 days after receipt of notification of bankruptcy. Loans receivable past the payment due date continue to accrue interest until they are charged off. We record an allowance for loss against the interest receivable.
The following table summarizes the activity in the allowance for consumer loans and interest receivable for the nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
September 30, 2018
|
|
|
Consumer Loans Receivable
|
Interest Receivable
|
Total Allowance
|
|
Consumer Loans Receivable
|
Interest Receivable
|
Total Allowance(1)
|
|
|
(In millions)
|
|
Beginning balance
|
$
|
27
|
|
$
|
3
|
|
$
|
30
|
|
|
$
|
57
|
|
$
|
6
|
|
$
|
63
|
|
|
Provisions
|
18
|
|
6
|
|
24
|
|
|
50
|
|
9
|
|
59
|
|
|
Charge-offs
|
(31
|
)
|
(4
|
)
|
(35
|
)
|
|
(97
|
)
|
(12
|
)
|
(109
|
)
|
|
Recoveries(2)
|
25
|
|
—
|
|
25
|
|
|
12
|
|
—
|
|
12
|
|
|
Ending balance
|
$
|
39
|
|
$
|
5
|
|
$
|
44
|
|
|
$
|
22
|
|
$
|
3
|
|
$
|
25
|
|
(1) Beginning balance includes approximately $50 million of U.S. consumer credit receivables that were fully reserved and have been charged off as of September 30, 2018.
(2) The recoveries were primarily related to fully charged off U.S. consumer receivables not subject to the sale to Synchrony Bank.
The tables above exclude receivables from other consumer credit products of $99 million and $96 million at September 30, 2019 and December 31, 2018, respectively, and allowances of $11 million and $12 million at September 30, 2019 and December 31, 2018, respectively.
The provision for loan losses relating to our consumer loans receivable portfolio is recognized in transaction and loan losses. The provision for interest receivable due to interest earned on our consumer loans receivable portfolio is recognized in net revenues from other value added services as a reduction to revenue. Charge-offs that are recovered are recorded as a reduction to our allowance for loans and interest receivable.
Merchant Receivables
We offer business financing solutions to certain small and medium-sized merchants through our PayPal Working Capital (“PPWC”) and PayPal Business Loan (“PPBL”) products. As of September 30, 2019 and December 31, 2018, the total outstanding balance in our pool of merchant loans, advances, and interest and fees receivable was $2.6 billion and $1.9 billion, respectively, net of the participation interest sold to an independent chartered financial institution of $115 million and $84 million, respectively.
Through our PPWC product, a merchant can borrow a certain percentage of its annual payment volume processed by PayPal and is charged a fixed fee for the loan or advance, which targets an annual percentage rate based on the overall credit assessment of the merchant. Loans and advances are repaid through a fixed percentage of the merchant’s future payment volume that PayPal processes. Through our PPBL product, we provide merchants with access to short-term business financing for a fixed fee based on an evaluation of both the applying business as well as the business owner. PPBL repayments are collected by periodic payments until the balance has been satisfied.
The interest or fee is fixed at the time the loan or advance is extended and recognized as deferred revenues included in accrued expenses and other current liabilities in our condensed consolidated balance sheets. The fixed interest or fee is amortized to revenues from other value added services based on the amount repaid over the repayment period. We estimate the repayment period based on the merchant’s payment processing history with PayPal, where available. For PPWC, there is a general requirement that at least 10% of the original amount of the loan or advance plus the fixed fee must be repaid every 90 days. We calculate the repayment rate of the merchant’s future payment volume so that repayment of the loan or advance and fixed fee is expected to generally occur within 9 to 12 months from the date of the loan or advance. On a monthly basis, we recalculate the repayment period based on the repayment activity on the receivable. As such, actual repayment periods are dependent on actual merchant payment processing volumes. For PPBL, we receive fixed periodic payments over the contractual term of the loan which generally ranges from 3 to 12 months. We actively monitor receivables with repayment periods greater than the original expected or contractual repayment period.
We closely monitor credit quality for our merchant loans and advances that we extend or purchase so that we can evaluate, quantify, and manage our credit risk exposure. To assess a merchant seeking a business financing loan or advance, we use, among other indicators, risk models developed internally which utilize information obtained from multiple data sources, both external and internal data to predict the likelihood of timely and satisfactory repayment by the merchant of the loan or advance amount, and the related interest or fee. Primary drivers of the models include the merchant’s annual payment volume, payment processing history with PayPal, and prior repayment history with the PayPal products where available, elements sourced from consumer credit bureau and business credit bureau reports, and other information obtained during the application process. We use delinquency status and trends to assist in making ongoing credit decisions, to adjust our internal models, to plan our collection practices and strategies, and in our determination of our allowance for these loans and advances.
Merchant Receivables Delinquency and Allowance
The following tables present our estimate of the principal amount of merchant loans, advances, and interest and fees receivable past their original expected or contractual repayment period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
(In millions)
|
|
Within Original Expected Repayment Period
|
|
30 - 59 Days Greater
|
|
60 - 89 Days Greater
|
|
90 - 180 Days Greater
|
|
180+ Days
|
|
Total Past Original Expected Repayment Period
|
|
Total
|
|
$
|
2,344
|
|
|
$
|
96
|
|
|
$
|
52
|
|
|
$
|
83
|
|
|
$
|
16
|
|
|
$
|
247
|
|
|
$
|
2,591
|
|
|
90.5
|
%
|
|
3.7
|
%
|
|
2.0
|
%
|
|
3.2
|
%
|
|
0.6
|
%
|
|
9.5
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018(1)
|
|
(In millions)
|
|
Within Original Expected Repayment Period
|
|
30 - 59 Days Greater
|
|
60 - 89 Days Greater
|
|
90 - 180 Days Greater
|
|
180+ Days
|
|
Total Past Original Expected Repayment Period
|
|
Total
|
|
$
|
1,706
|
|
|
$
|
66
|
|
|
$
|
32
|
|
|
$
|
57
|
|
|
$
|
13
|
|
|
$
|
168
|
|
|
$
|
1,874
|
|
|
91.0
|
%
|
|
3.6
|
%
|
|
1.7
|
%
|
|
3.0
|
%
|
|
0.7
|
%
|
|
9.0
|
%
|
|
100
|
%
|
(1) Excludes $30 million of loan receivables related to iZettle merchant receivables.
The following table summarizes the activity in the allowance for merchant loans, advances, and interest and fees receivable, for the nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
September 30, 2018
|
|
|
Merchant Loans and Advances
|
Interest and Fees Receivable
|
Total Allowance
|
|
Merchant Loans and Advances
|
Interest and Fees Receivable
|
Total Allowance
|
|
|
(In millions)
|
|
Beginning balance
|
$
|
115
|
|
$
|
15
|
|
$
|
130
|
|
|
$
|
52
|
|
$
|
7
|
|
$
|
59
|
|
|
Provisions
|
181
|
|
22
|
|
203
|
|
|
120
|
|
18
|
|
138
|
|
|
Charge-offs
|
(140
|
)
|
(16
|
)
|
(156
|
)
|
|
(80
|
)
|
(8
|
)
|
(88
|
)
|
|
Recoveries
|
11
|
|
—
|
|
11
|
|
|
7
|
|
—
|
|
7
|
|
|
Ending balance
|
$
|
167
|
|
$
|
21
|
|
$
|
188
|
|
|
$
|
99
|
|
$
|
17
|
|
$
|
116
|
|
For merchant loans and advances, the determination of delinquency, from current to 180 days past due, is based on the current expected or contractual repayment period of the loan or advance and fixed interest or fee payment as compared to the original expected or contractual repayment period. We charge off the receivables outstanding under our PPBL product when the repayments are 180 days past due. We charge off the receivables outstanding under our PPWC product when the repayments are 180 days past our expectation of repayments and the merchant has not made a payment in the last 60 days or when the repayments are 360 days past due regardless of whether the merchant has made a payment within the last 60 days. Bankrupt accounts are charged off within 60 days of receiving notification of bankruptcy. The provision for loan losses is recognized in transaction and loan losses, and the provisions for interest and fees receivable is recognized as a reduction of deferred revenues included in other current liabilities in our condensed consolidated balance sheets. Charge-offs that are recovered are recorded as a reduction to our allowance for loans and interest receivable.
Note 12—Debt
Long-term Debt
On September 26, 2019, we issued fixed rate notes with varying maturity dates for an aggregate principal amount of $5.0 billion (collectively referred to as the “Notes”). The Notes are senior unsecured obligations. Interest is payable in arrears semiannually (payable March 26 and September 26 for the notes due in 2022 and payable April 1 and October 1 for the remaining notes). We may redeem the Notes in whole at any time or in part from time to time, prior to maturity, at the redemption price. Upon the occurrence of both a change of control and a downgrade of the Notes below an investment grade rating, we will be required to offer to repurchase each series of Notes at a price equal to 101% of the then outstanding principal amount, plus accrued and unpaid interest. The Notes are subject to covenants including limitations on our ability to create liens on our assets, enter into sale and leaseback transactions, and merge or consolidate with another entity, in each case subject to certain exceptions, limitations, and qualifications. Proceeds from the issuance of these Notes may be used for general corporate purposes, which may include funding the repayment or redemption of outstanding debt, share repurchases, ongoing operations, capital expenditures, and possible acquisitions of businesses, assets, or strategic investments.
As of September 30, 2019, we had an outstanding aggregate principal amount of $5.0 billion related to the Notes. The following table summarizes the Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2019
|
|
|
Maturities
|
|
Amount
|
|
Effective Interest Rate
|
|
|
|
|
(in millions)
|
|
|
|
Fixed-rate 2.200% notes
|
9/26/2022
|
|
$
|
1,000
|
|
|
2.39%
|
|
Fixed-rate 2.400% notes
|
10/1/2024
|
|
1,250
|
|
|
2.52%
|
|
Fixed-rate 2.650% notes
|
10/1/2026
|
|
1,250
|
|
|
2.78%
|
|
Fixed-rate 2.850% notes
|
10/1/2029
|
|
1,500
|
|
|
2.96%
|
|
Total term debt
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
Unamortized premium (discount) and issuance costs, net
|
|
|
(36
|
)
|
|
|
|
Total carrying amount of term debt
|
|
|
$
|
4,964
|
|
|
|
The effective interest rates for the Notes include interest on the Notes, amortization of debt issuance costs, and amortization of the debt discount. The interest expense recorded for the Notes, including amortization of the debt discount and debt issuance costs, was $2 million for the three and nine months ended September 30, 2019.
Credit Facilities
Five-Year Revolving Credit Facility
On September 11, 2019, we entered into a credit agreement (the “Credit Agreement”) that provides for an unsecured $5.0 billion, five-year revolving credit facility that includes a $150 million letter of credit sub-facility and a $500 million swingline sub-facility, with available borrowings under the revolving credit facility reduced by the amount of any letters of credit and swingline borrowings outstanding from time to time. Loans borrowed under the Credit Agreement are available in U.S. dollar, Euro, British Pound, Canadian dollar, and Australian dollar, and in each case subject to the sub-limits and other limitations provided in the Credit Agreement. We may also, subject to the agreement of the applicable lenders and satisfaction of specified conditions, increase the commitments under the revolving credit facility by up to $2.0 billion. Subject to specific conditions, we may designate one or more of our subsidiaries as additional borrowers under the Credit Agreement, provided PayPal Holdings, Inc. guarantees all borrowings and other obligations of any such subsidiaries under the Credit Agreement. As of September 30, 2019, no subsidiaries were designated as additional borrowers. Funds borrowed under the Credit Agreement may be used for working capital, capital expenditures, acquisitions, and other purposes not in contravention with the Credit Agreement.
We are obligated to pay interest on loans under the Credit Agreement and other customary fees for a credit facility of this size and type, including an upfront fee and an unused commitment fee based on our debt rating. Loans under the Credit Agreement bear interest at either (i) the applicable eurocurrency rate plus a margin (based on our public debt ratings) ranging from 0.875 percent to 1.375 percent, (ii) the applicable overnight rate plus a margin (based on our public debt ratings) ranging from 0.875 percent to 1.375 percent, or (iii) a formula based on the prime rate, the federal funds effective rate or London Interbank Offered Rate (“LIBOR”) plus a margin (based on our public debt ratings) ranging from zero percent to 0.375 percent. The Credit Agreement will terminate and all amounts owed thereunder will be due and payable in September 2024, unless the commitments are terminated earlier. The Credit Agreement contains customary representations, warranties, affirmative and negative covenants, including a financial covenant, events of default, and indemnification provisions in favor of the lenders. The negative covenants include restrictions regarding the incurrence of liens and the incurrence of subsidiary indebtedness, in each case subject to certain exceptions. The financial covenant requires us to meet a quarterly financial test with respect to a maximum consolidated leverage ratio.
As of September 30, 2019, no borrowings or letters of credit were outstanding under the Credit Agreement. Accordingly, at September 30, 2019, $5.0 billion of borrowing capacity was available for the purposes permitted by the Credit Agreement, subject to customary conditions to borrowing.
Upon our entry into the Credit Agreement, the credit agreement that we entered into in the third quarter of 2015 that provided for an unsecured $2.0 billion, five-year revolving credit facility was terminated.
364-Day Revolving Credit Facility
On September 11, 2019, we entered into a 364-day credit agreement (“364-Day Credit Agreement”) that provides for an unsecured $1.0 billion 364-day revolving credit facility. Subject to specific conditions, we may designate one or more of our subsidiaries as additional borrowers under the 364-Day Credit Agreement provided PayPal Holdings, Inc. guarantees all borrowings and other obligations of any such subsidiaries under the 364-Day Credit Agreement. As of September 30, 2019, no subsidiaries were designated as additional borrowers. Funds borrowed under the 364-Day Credit Agreement may be used for working capital, capital expenditures, acquisitions, and other purposes not in contravention with the Credit Agreement.
We are obligated to pay interest on loans under the 364-Day Credit Agreement and other customary fees for a credit facility of this size and type, including an upfront fee and an unused commitment fee based on our debt rating. Loans under the 364-Day Credit Agreement bear interest at either (i) LIBOR plus a margin (based on our debt ratings) ranging from 0.875 percent to 1.375 percent or (ii) a formula based on the agent bank’s prime rate, the New York Federal Reserve Bank rate (the greater of the federal funds effective rate and the overnight bank funding rate), or LIBOR plus a margin (based on our public debt ratings) ranging from zero percent to 0.375 percent. The 364-Day Credit Agreement will terminate and all amounts owed thereunder will be due and payable in September 2020, unless the commitments are terminated earlier. The 364-Day Credit Agreement contains customary representations, warranties, affirmative and negative covenants (including a financial covenant), events of default, and indemnification provisions in favor of the lenders. The negative covenants include restrictions regarding the incurrence of liens and the incurrence of subsidiary indebtedness, in each case subject to certain exceptions. The financial covenant requires us to meet a quarterly financial test with respect to a maximum consolidated leverage ratio.
As of September 30, 2019, no borrowings were outstanding under the 364-Day Credit Agreement. Accordingly, at September 30, 2019, $1.0 billion of borrowing capacity was available for the purposes permitted by the 364-Day Credit Agreement, subject to customary conditions to borrowing.
Other Facilities
In the fourth quarter of 2018, we entered into an amended credit agreement (“Amended Credit Agreement”), which amended and restated in its entirety the previous agreement entered into in 2017. The Amended Credit Agreement provided for an unsecured $5.0 billion, 364-day delayed-draw term loan credit facility, which was available in up to four separate borrowings until April 6, 2019. We were obligated to pay interest on loans under the Amended Credit Agreement and other customary fees for a credit facility of this size and type, including an upfront fee and an unused commitment fee based on our debt rating. As of December 31, 2018, $2.0 billion was outstanding under the Amended Credit Agreement. On April 5, 2019, the Company drew down an additional $500 million under the Amended Credit Agreement. On September 26, 2019, the Amended Credit Agreement was terminated and we repaid $2.5 billion of borrowings outstanding under such agreement. The total interest expense and fees we recorded related to the Amended Credit Agreement were approximately $25 million and $69 million for the three and nine months ended September 30, 2019.
We also maintain committed and uncommitted credit facilities in various regions throughout the world, with borrowing capacity of approximately $230 million in the aggregate. This available credit, a portion of which is guaranteed by PayPal Holdings, Inc., includes facilities where we can withdraw and utilize the funds at our discretion for general corporate purposes, capital expenditures, and acquisitions. Interest rate terms for these facilities vary by region and reflect prevailing market rates for companies with strong credit ratings. As of September 30, 2019, substantially all of the borrowing capacity under these credit facilities was available, subject to customary conditions to borrowing.
Future Principal Payments
As of September 30, 2019, the future principal payments associated with our long term debt were as follows (in millions):
|
|
|
|
|
|
|
|
2019
|
$
|
—
|
|
|
2020
|
—
|
|
|
2021
|
—
|
|
|
2022
|
1,000
|
|
|
2023
|
—
|
|
|
Thereafter
|
4,000
|
|
|
Total
|
$
|
5,000
|
|
Other than as provided above, there are no significant changes to the information disclosed in our 2018 Form 10-K.
Note 13—Commitments and Contingencies
Commitments
As of September 30, 2019 and December 31, 2018, approximately $2.6 billion and $1.8 billion, respectively, of unused credit was available to PayPal Credit account holders. While this amount represents the total unused credit available, we have not experienced, and do not anticipate, that all our PayPal Credit account holders will access their entire available credit at any given point in time. In addition, the individual lines of credit that make up this unused credit are subject to periodic review and termination based on, among other things, account usage and customer creditworthiness.
Litigation and Regulatory 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 of losses arising directly from the proceeding (i.e., monetary damages or amounts paid in judgment or settlement) are not material. If we cannot estimate the probable or reasonably possible loss or range of losses arising from a legal proceeding, we have disclosed that fact. In assessing the materiality of a legal proceeding, we evaluate, among other factors, the amount of monetary damages claimed, as well as the potential impact of non-monetary remedies sought by plaintiffs (e.g., injunctive relief) that may require us to change our business practices in a manner that could have a material adverse impact on our business. With respect to the matters disclosed in this Note 13, 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, 2019. Except as otherwise noted for the proceedings described in this Note 13, 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.
Regulatory Proceedings
We are required to comply with U.S. economic and trade sanctions administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (“OFAC”). We have self-reported to OFAC certain transactions that were inadvertently processed but subsequently identified as possible violations of U.S. economic and trade sanctions. In March 2015, we reached a settlement with OFAC regarding possible violations arising from our sanctions compliance practices between 2009 and 2013, prior to the implementation of our real-time transaction scanning program. Subsequently, we have self-reported additional transactions as possible violations, and we have received new subpoenas from OFAC seeking additional information about certain of these transactions. Such self-reported transactions could result in claims or actions against us, including litigation, injunctions, damage awards, fines or penalties, or require us to change our business practices in a manner that could result in a material loss, require significant management time, result in the diversion of significant operational resources, or otherwise harm our business.
On March 28, 2016, we received a Civil Investigative Demand (“CID”) from the Federal Trade Commission (“FTC”) as part of its investigation to determine whether we, through our Venmo service, have been or are engaged in deceptive or unfair practices in violation of the Federal Trade Commission Act. The CID requested the production of documents and answers to written questions related to our Venmo service. We have cooperated with the FTC in connection with the CID. On February 27, 2018, we entered into a Consent Order with the FTC in which we settled potential allegations arising from our Venmo services between 2013 and 2017. The Consent Order does not contain a monetary penalty, but requires PayPal to make various changes to Venmo’s disclosures and business practices. The FTC approved the final Consent Order on May 24, 2018. As required by the Consent Order, we are working with the FTC making changes necessary to comply with the Consent Order. Any failure to comply with the Consent Order may increase the possibility of additional adverse consequences, including litigation, additional regulatory actions, injunctions, or monetary penalties, or require further changes to our business practices, significant management time, or the diversion of significant operational resources, all of which could result in a material loss or otherwise harm our business.
Legal Proceedings
In November 2017, we announced that we had suspended the operations of TIO Networks (“TIO”) as part of an ongoing investigation of security vulnerabilities of the TIO platform. On December 1, 2017, we announced that we had identified evidence of unauthorized access to TIO’s network, including locations that stored personal information of some of TIO’s customers and customers of TIO billers and the potential compromise of personally identifiable information for approximately 1.6 million customers. We have received a number of governmental inquiries, including from state attorneys general, and we may be subject to additional governmental inquiries and investigations in the future. In addition, on December 6, 2017, a putative class action lawsuit captioned Sgarlata v. PayPal Holdings, Inc., et al., Case No. 3:17-cv-06956-EMC was filed in the U.S. District Court for the Northern District of California (the “Court”) against the Company, its Chief Executive Officer, its Chief Financial Officer and Hamed Shahbazi, the former chief executive officer of TIO (the “Defendants”) alleging violations of federal securities laws. The initial complaint alleged that Defendants made false or misleading statements or failed to disclose that TIO’s data security program was inadequate to safeguard the personally identifiable information of its users, those vulnerabilities threatened continued operation of TIO’s platform, the Company’s revenues derived from TIO services were thus unsustainable, and consequently, the Company overstated the benefits of the TIO acquisition, and, as a result, the Company’s public statements were materially false and misleading at all relevant times. The plaintiff who initiated the lawsuit sought to represent a class of shareholders who acquired shares of the Company’s common stock between February 14, 2017 through December 1, 2017 and sought damages and attorneys’ fees, among other relief. On March 16, 2018, the Court appointed two new plaintiffs, not the original plaintiff who filed the case, as interim co-lead plaintiffs in the case and appointed two law firms as interim co-lead counsel. On June 13, 2018, the interim co-lead plaintiffs filed a first amended complaint, which named TIO Networks ULC, TIO Networks USA, Inc., and John Kunze (the Company’s Vice President, Global Consumer Products and Xoom) as additional defendants. The first amended complaint was purportedly brought on behalf of all persons other than the Defendants who acquired the Company’s securities between November 10, 2017 and December 1, 2017. The amended complaint alleged that the Company’s and TIO’s November 10, 2017 announcement of the suspension of TIO’s operations was false and misleading because the announcement only disclosed security vulnerabilities on TIO’s platform, rather than an actual security breach that Defendants were allegedly aware of at the time of the announcement. Defendants’ filed their motion to dismiss the first amended complaint on July 13, 2018 and the Court granted the motion, without prejudice, on December 13, 2018. Plaintiffs filed a second amended complaint on January 14, 2019. The second amended complaint alleges substantially the same theory of liability as the first amended complaint, but no longer names Hamed Shabazi as a defendant. The remaining Defendants filed their motion to dismiss the second amended complaint on March 15, 2019, and a hearing was held on July 16, 2019. The court granted Defendant's motion to dismiss with prejudice on September 18, 2019; plaintiffs have filed a notice of appeal. We may be subject to additional litigation relating to TIO’s data security platform or the suspension of TIO’s operations in the future.
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 may be entitled to contractual indemnification under their contracts with us), and we are subject to increased exposure to such claims as a result of our acquisitions, particularly in cases where we are introducing new products or services in connection with such acquisitions. We have in the past been forced to litigate such claims, and we believe that additional lawsuits alleging such claims will be filed against us. Intellectual property claims, whether meritorious or not, are time consuming and costly to defend and resolve, could require expensive changes in our methods of doing business, or could require us to enter into costly royalty or licensing agreements on unfavorable terms or make substantial payments to settle claims or to satisfy damages awarded by courts.
From time to time, we are involved in other disputes or regulatory inquiries that arise in the ordinary course of business, including suits by our customers (individually or as class actions) alleging, among other things, improper disclosure of our prices, rules, or policies, that our practices, prices, rules, policies, or customer/user agreements violate applicable law or that we have acted unfairly and/or not acted in conformity with such prices, rules, policies, or agreements. In addition to these types of disputes and regulatory inquiries, our operations are also subject to regulatory and/or legal review and/or challenges that tend to reflect the increasing global regulatory focus to which the payments industry is subject and, when taken as a whole with other regulatory and legislative action, such actions could result in the imposition of costly new compliance burdens on our business and customers and may lead to increased costs and decreased transaction volume and revenue. Further, the number and significance of these disputes and inquiries are increasing as we have grown larger, our business has expanded in scope (both in terms of the range of products and services that we offer and our geographical operations), and our products and services have increased in complexity. Any claims or regulatory actions against us, whether meritorious or not, could be time consuming, result in costly litigation, settlement payments, damage awards (including statutory damages for certain causes of action in certain jurisdictions), fines, penalties, injunctive relief, or increased costs of doing business through adverse judgment or settlement, require us to change our business practices in expensive ways, require significant amounts of management time, result in the diversion of significant operational resources, or otherwise harm our business.
Indemnification Provisions
We entered into a separation and distribution agreement, a tax matters agreement, an operating agreement, and various other agreements with eBay Inc. (“eBay”) to govern the separation of the two companies in 2015 and the relationship of the two companies going forward. These agreements provide for specific indemnity and liability obligations for both eBay and us. Disputes between eBay and us have arisen and others may arise in the future, and an adverse outcome in such matters could materially and adversely impact our business, results of operations, and financial condition. In addition, the indemnity rights we have against eBay under the agreements may not be sufficient to protect us, and our indemnity obligations to eBay may be significant.
In the ordinary course of business, we include limited indemnification provisions in certain of our agreements with parties with whom we have commercial relationships. 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 any third party with respect to our domain names, trademarks, logos, and other branding elements to the extent that such marks are related to the subject agreement. We have provided an indemnity for other types of third-party claims, which are indemnities mainly related to intellectual property rights, confidentiality, willful misconduct, data privacy obligations, and certain breach of contract claims. We have also provided an indemnity to our payments processors in the event of card association fines against the processor arising out of conduct by us or our customers. 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 situation. To date, no significant costs have been incurred, either individually or collectively, in connection with our indemnification provisions.
Off-Balance Sheet Arrangements
As of September 30, 2019 and December 31, 2018, we had no off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our consolidated financial condition, results of operations, liquidity, capital expenditures, or capital resources.
Protection Programs
We provide merchants and consumers with protection programs on most transactions completed on our Payments Platform, except for transactions using our gateway products or where our customer agreements specifically do not provide for protections. These programs protect both merchants and consumers from loss primarily due to fraud and counterparty performance. Our buyer protection program provides protection to consumers for qualifying purchases by reimbursing the consumer for the full amount of the purchase if a purchased item does not arrive or does not match the seller’s description. Our seller protection programs provide protection to merchants against claims that a transaction was not authorized by the buyer or claims that an item was not received by covering the seller for the full amount of the payment on eligible sales. These protection programs are considered assurance-type warranties for which we estimate and record associated costs in transaction and loan losses during the period the payment transaction is completed.
The maximum potential exposure under our protection programs is estimated to be the portion of total eligible transaction volume (TPV) for which buyer or seller protection claims may be raised under our existing user agreements. Since eligible transactions are typically completed in a period significantly shorter than the period under which disputes may be opened, and based on our historical losses to date, we do not believe that the maximum potential exposure is representative of our actual potential exposure. The actual amount of potential exposure cannot be quantified as we are unable to determine total eligible transactions where performance by a merchant or consumer is incomplete or completed transactions that may result in a claim under our protection programs. We record a liability with respect to losses under these protection programs when they are probable and the amount can be reasonably estimated. The following table shows changes in the allowance for transaction losses and negative customer balances related to our protection programs for the three and nine months ended September 30, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
(In millions)
|
|
Beginning balance
|
$
|
395
|
|
|
$
|
304
|
|
|
$
|
344
|
|
|
$
|
266
|
|
|
Provisions, net of recoveries
|
256
|
|
|
259
|
|
|
789
|
|
|
764
|
|
|
Realized losses
|
(295
|
)
|
|
(244
|
)
|
|
(777
|
)
|
|
(711
|
)
|
|
Ending balance
|
$
|
356
|
|
|
$
|
319
|
|
|
$
|
356
|
|
|
$
|
319
|
|
Note 14—Stock Repurchase Programs
During the nine months ended September 30, 2019, we repurchased approximately $1.1 billion of our common stock, including approximately $350 million in the open market and approximately $750 million pursuant to the accelerated share repurchase (“ASR”) agreement under our stock repurchase program authorized in April 2017.
In February 2019, we entered into an ASR agreement with an unrelated third party financial institution to repurchase shares of our common stock. Under the terms of the ASR agreement, we made an upfront payment of $750 million to the third party financial institution and received approximately 7.7 million shares of our common stock, at an average price of $96.91 per share of common stock during the term of the transaction, which ended in March 2019. The total number of shares of our common stock repurchased was based on the volume-weighted average share price of our common stock during the term of the transaction, less a discount, and subject to adjustments pursuant to the terms of the ASR agreement. We recorded the initial payment of $750 million as a reduction to stockholders’ equity on our condensed consolidated balance sheets. All common stock received under the ASR agreement was recorded as treasury stock and the forward contract indexed to our own common stock met all applicable criteria for equity classification.
As of September 30, 2019, a total of approximately $374 million and $10 billion remained available for future repurchases of our common stock under our April 2017 and July 2018 stock repurchase programs, respectively.
Note 15—Stock-Based Plans
Stock-Based Compensation Expense
We record stock-based compensation expense for our equity incentive plans in accordance with U.S. GAAP, which requires the measurement and recognition of compensation expense based on estimated fair values.
The impact on our results of operations of recording stock-based compensation expense under our equity incentive plans for the three and nine months ended September 30, 2019 and 2018 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
|
(In millions)
|
|
Customer support and operations
|
$
|
51
|
|
|
$
|
46
|
|
|
$
|
144
|
|
|
$
|
129
|
|
|
Sales and marketing
|
31
|
|
|
30
|
|
|
95
|
|
|
93
|
|
|
Technology and development
|
119
|
|
|
76
|
|
|
292
|
|
|
222
|
|
|
General and administrative
|
72
|
|
|
65
|
|
|
226
|
|
|
192
|
|
|
Total stock-based compensation expense
|
$
|
273
|
|
|
$
|
217
|
|
|
$
|
757
|
|
|
$
|
636
|
|
|
Capitalized as part of internal use software and website development costs
|
$
|
10
|
|
|
$
|
9
|
|
|
$
|
29
|
|
|
$
|
26
|
|
Note 16—Income Taxes
Our effective tax rate for the three and nine months ended September 30, 2019 was 5% and 9%, respectively. Our effective tax rate for the three and nine months ended September 30, 2018 was 18% and 13%, respectively. The difference between our effective tax rate and the U.S. federal statutory rate of 21% in all periods was primarily the result of foreign income taxed at different rates and discrete tax adjustments. During the third quarter of 2019, we settled a U.S. Federal tax audit. This settlement did not have a material impact on our condensed consolidated statements of income.
In June 2019, the U.S. Court of Appeals for the Ninth Circuit reversed the July 2015 decision of the U.S. Tax Court in Altera Corp. v. Commissioner. In the June 2019 decision, the U.S. Court of Appeals held that a Treasury Regulation requiring stock-based compensation to be included in a qualified intercompany cost sharing arrangement was valid. We have reviewed this case and determined no adjustment is required to PayPal’s condensed consolidated financial statements as a result of this ruling.
Note 17—Restructuring
During the first quarter of 2019 and 2018, management approved strategic reductions of the existing global workforce, which resulted in restructuring charges of $78 million and $25 million, respectively. The approved strategic reductions for 2019 are to better align our teams to support key business priorities and also includes the transfer of certain operational functions between geographies, as well as the impact of the transition of interim servicing activities provided to Synchrony Bank, which ended in the second quarter of 2019. We primarily incurred employee severance and benefits expenses under the 2019 strategic reductions. The cash payments associated with the 2019 restructuring are expected to be substantially completed by the end of 2019. The strategic reduction approved in the first quarter of 2018 includes restructuring charges related to the decision to wind down TIO’s operations. We incurred employee and severance benefits expenses under the 2018 strategic reduction, which was substantially completed by the end of 2018.
The following table summarizes the restructuring reserve activity during the nine months ended September 30, 2019:
|
|
|
|
|
|
|
|
|
Employee Severance and Benefits
|
|
|
(In millions)
|
|
Accrued liability as of January 1, 2019
|
$
|
3
|
|
|
Charges
|
78
|
|
|
Payments
|
(60
|
)
|
|
Accrued liability as of September 30, 2019
|
$
|
21
|
|