eBay 2006 Annual Report Download - page 58

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Net revenues were positively impacted by foreign currency translation by approximately $40.1 million in 2006
and $12.0 million in 2005 as compared to the same periods of the prior year. Operating income was positively
impacted by foreign currency translation by approximately $14.4 million in 2006 and $5.6 million in 2005, as
compared to the same periods of the prior year.
We expect our international operations will continue to grow in significance. As a result, the impact of foreign
currency fluctuations in future periods could become more significant and may have a negative impact on our
consolidated net revenues and net income in the event the U.S. dollar strengthens relative to other currencies. See
the information in “Item 7A: Quantitative and Qualitative Disclosure About Market Risk” under the caption
“Foreign Currency Risk” for additional discussion of the impact of foreign currency translation and related hedging
activities.
Foreign Currency Exposures
We are a rapidly growing company, with an increasing proportion of our operations outside the United States.
Accordingly, our foreign currency exposures have increased substantially and are expected to continue to grow. The
objective of our foreign exchange exposure management program is to identify material foreign currency exposures
and to manage these exposures to minimize the potential effects of currency fluctuations on our reported
consolidated cash flow and results of operations.
Our primary foreign currency exposures are transaction, economic and translation:
Transaction Exposure: Around the world, we have certain assets and liabilities, primarily receivables,
investments and accounts payable (including inter-company transactions) that are denominated in currencies other
than the relevant entity’s functional currency. In certain circumstances, changes in the functional currency value of
these assets and liabilities create fluctuations in our reported consolidated financial position, results of operations
and cash flows. We may enter into foreign exchange forward contracts or other instruments to minimize the short-
term foreign currency fluctuations on such assets and liabilities. The gains and losses on the foreign exchange
forward contracts offset the transaction gains and losses on certain foreign currency receivables, investments and
payables recognized in earnings.
Economic Exposure: We also have anticipated future cash flows, including revenues and expenses, denom-
inated in currencies other than the relevant entity’s functional currency. Our primary economic exposures include
future royalty receivables, customer collections, and vendor payments. Changes in the relevant entity’s functional
currency value will cause fluctuations in the cash flows we expect to receive when these cash flows are realized or
settled. We may enter into foreign exchange forward contracts or other derivatives to hedge the value of a portion of
these cash flows. We account for these foreign exchange contracts as cash flow hedges. The effective portion of the
derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and
subsequently reclassified into earnings when the transaction is settled.
Earnings Translation Exposure: As our international operations grow, fluctuations in the foreign currencies
create volatility in our reported results of operations because we are required to consolidate the results of operations
of our foreign denominated subsidiaries. We may decide to purchase forward exchange contracts or other
instruments to offset the earnings impact of currency fluctuations. Such contracts will be marked-to-market on
a monthly basis and any unrealized gain or loss will be recorded in interest and other income, net.
Employee Stock-Based Incentive Plans
We continue to believe that employee stock-based incentive plans represent an appropriate and essential
component of our overall compensation program. We grant stock-based awards to substantially all employees and
believe that this broad-based program helps us to attract, motivate, and retain high quality employees, to the
ultimate benefit of our stockholders. We granted a limited number of restricted stock units and restricted stock
awards to employees during 2006. Stock options, restricted stock units and restricted stock awards granted during
the years ended December 31, 2006 and 2005, net of cancellations/forfeitures, represented less than 2% of our total
common stock outstanding as of December 31, 2006 and 2005. A substantial portion of our stock-based awards
granted during the year were granted to existing employees.
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