UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20172023
OR
o☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 000-55409
001-38654QVC, Inc.
(Exact name of Registrant as specified in its charter)
| | | | | | | | |
State of Delaware | | 23-2414041 |
(State or other jurisdiction of | | (I.R.S. Employer Identification |
incorporation or organization) | | Number) |
| |
State of Delaware
(State or other jurisdiction of
incorporation or organization)
| 23-2414041
(I.R.S. Employer Identification Number)
|
| |
1200 Wilson Drive | | 19380 |
West Chester, Pennsylvania | | (AddressZip Code) |
(Address of principal executive offices) | 19380
(Zip Code)
| |
Registrant's telephone number, including area code: (484) 701-1000
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
Title of each class | Trading Symbol | Name of each exchange on which registered |
6.375% Senior Secured Notes due 2067 | QVCD | New York Stock Exchange |
6.250% Senior Secured Notes due 2068 | QVCC | New York Stock Exchange |
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer ☒ Smaller reporting company Emerging growth
☐ company ☐
| | | | | | | | | | | | | | |
| | | | |
Large accelerated filer o
| Accelerated filer o
| Non-accelerated filer x
| Smaller reporting company o
| Emerging growth company o
|
(do not check if smaller reporting company) |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x
None of the voting stock of the registrant is held by a non-affiliate of the registrant. There is no publicly traded market for any class of voting stock of the registrant. There is one holder of record of
the registrant'sour equity,
Liberty QVC Holding, LLC,Qurate Retail Group, Inc., an indirect wholly-owned subsidiary of
Liberty Interactive Corporation.Qurate Retail, Inc.
QVC, Inc.
20172023 QUARTERLY REPORT ON FORM 10-Q
Table of Contents
| | | | | | | | |
| Part I | Page |
| | |
| Part I | Page |
| | |
Item 1. | | |
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| | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
| | |
| Part II | |
Item 6.5. | | |
Item 6. | | |
| | |
Item 1. Financial Statements
QVC, Inc.
Condensed Consolidated Balance Sheets
(unaudited) | | | | | | | | |
| June 30, | December 31, |
(in millions, except share amounts) | 2023 | 2022 |
Assets | | |
Current assets: | | |
Cash and cash equivalents | $ | 649 | | 357 | |
Restricted cash | 9 | | 10 | |
Accounts receivable, less allowance for credit losses of $91 at June 30, 2023 and $102 at December 31, 2022 | 919 | | 1,362 | |
Inventories | 933 | | 1,035 | |
Prepaid expenses and other current assets | 136 | | 144 | |
Total current assets | 2,646 | | 2,908 | |
Property and equipment, net of accumulated depreciation of $965 at June 30, 2023 and $929 at December 31, 2022 | 439 | | 472 | |
Operating lease right-of-use assets (note 5) | 475 | | 419 | |
Television distribution rights, net (note 2) | 129 | | 72 | |
Goodwill (note 3) | 3,469 | | 3,470 | |
Other intangible assets, net (note 3) | 3,146 | | 3,184 | |
Note receivable - related party (note 1) | 1,740 | | 1,740 | |
Other noncurrent assets | 57 | | 68 | |
Assets held for sale noncurrent (note 5) | — | | 71 | |
Total assets | $ | 12,101 | | 12,404 | |
Liabilities and equity | | |
Current liabilities: | | |
Current portion of debt and finance lease obligations (note 4) | $ | 424 | | 216 | |
Accounts payable-trade | 623 | | 832 | |
Accrued liabilities | 762 | | 911 | |
Other current liabilities | 49 | | 57 | |
Total current liabilities | 1,858 | | 2,016 | |
Long-term portion of debt and finance lease obligations (note 4) | 4,482 | | 4,721 | |
Deferred income taxes (note 6) | 619 | | 577 | |
Long-term operating lease liabilities | 441 | | 377 | |
Other long-term liabilities | 84 | | 141 | |
Total liabilities | 7,484 | | 7,832 | |
Commitments and contingencies (note 7) | | |
Equity: | | |
QVC, Inc. stockholder's equity: | | |
Common stock, $0.01 par value, 1 authorized share | — | | — | |
Additional paid-in capital | 10,886 | | 10,869 | |
Accumulated deficit | (6,050) | | (6,080) | |
Accumulated other comprehensive loss | (308) | | (312) | |
Total QVC, Inc. stockholder's equity | 4,528 | | 4,477 | |
Noncontrolling interest | 89 | | 95 | |
Total equity | 4,617 | | 4,572 | |
Total liabilities and equity | $ | 12,101 | | 12,404 | |
|
| | | | | |
| September 30, |
| December 31, |
|
(in millions, except share amounts) | 2017 |
| 2016 |
|
Assets | | |
Current assets: | | |
Cash and cash equivalents | $ | 343 |
| 284 |
|
Restricted cash | 11 |
| 10 |
|
Accounts receivable, less allowance for doubtful accounts of $84 at September 30, 2017 and $97 at December 31, 2016 | 888 |
| 1,246 |
|
Inventories | 1,164 |
| 950 |
|
Prepaid expenses and other current assets | 55 |
| 46 |
|
Total current assets | 2,461 |
| 2,536 |
|
Property and equipment, net of accumulated depreciation of $1,161 at September 30, 2017 and $1,004 at December 31, 2016 | 998 |
| 1,031 |
|
Television distribution rights, net | 78 |
| 183 |
|
Goodwill | 5,066 |
| 4,995 |
|
Other intangible assets, net | 2,599 |
| 2,738 |
|
Other noncurrent assets | 61 |
| 62 |
|
Total assets | $ | 11,263 |
| 11,545 |
|
Liabilities and equity |
|
|
Current liabilities: |
|
|
Current portion of debt and capital lease obligations | $ | 17 |
| 14 |
|
Accounts payable-trade | 726 |
| 678 |
|
Accrued liabilities | 630 |
| 769 |
|
Total current liabilities | 1,373 |
| 1,461 |
|
Long-term portion of debt and capital lease obligations | 5,073 |
| 5,275 |
|
Deferred income taxes | 730 |
| 778 |
|
Other long-term liabilities | 127 |
| 136 |
|
Total liabilities | 7,303 |
| 7,650 |
|
Equity: |
|
|
QVC, Inc. stockholder's equity: |
|
|
Common stock, $0.01 par value, 1 authorized share | — |
| — |
|
Additional paid-in capital | 6,867 |
| 6,851 |
|
Accumulated deficit | (2,904 | ) | (2,832 | ) |
Accumulated other comprehensive loss | (118 | ) | (224 | ) |
Total QVC, Inc. stockholder's equity | 3,845 |
| 3,795 |
|
Noncontrolling interest | 115 |
| 100 |
|
Total equity | 3,960 |
| 3,895 |
|
Total liabilities and equity | $ | 11,263 |
| 11,545 |
|
See accompanying notes to condensed consolidated financial statements.
I-1
QVC, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
| | | | | | | | | | | | | | |
| Three months ended June 30, | Six months ended June 30, |
(in millions) | 2023 | 2022 | 2023 | 2022 |
Net revenue | $ | 2,224 | | 2,392 | | 4,417 | | 4,746 | |
Operating costs and expenses: | | | | |
Cost of goods sold (exclusive of depreciation and amortization shown separately below) | 1,456 | | 1,608 | | 2,944 | | 3,249 | |
Operating | 177 | | 179 | | 355 | | 357 | |
Selling, general and administrative, including stock-based compensation | 340 | | 303 | | 665 | | 597 | |
Depreciation | 22 | | 32 | | 45 | | 67 | |
Amortization | 72 | | 70 | | 138 | | 144 | |
Restructuring and fire related costs, net of (recoveries) (note 10) | (211) | | 1 | | (215) | | 3 | |
Gains on sale of intangible asset and sale leaseback transactions | (6) | | (243) | | (119) | | (243) | |
| 1,850 | | 1,950 | | 3,813 | | 4,174 | |
Operating income | 374 | | 442 | | 604 | | 572 | |
Other (expense) income: | | | | |
(Losses) gains on financial instruments | — | | — | | (1) | | 1 | |
Interest expense, net | (67) | | (63) | | (104) | | (125) | |
Foreign currency (loss) gain | (3) | | 21 | | (9) | | 29 | |
Gain (loss) on extinguishment of debt | 10 | | (6) | | 10 | | (6) | |
Other income | — | | — | | — | | 20 | |
| (60) | | (48) | | (104) | | (81) | |
Income before income taxes | 314 | | 394 | | 500 | | 491 | |
Income tax expense | (88) | | (109) | | (139) | | (150) | |
Net income | 226 | | 285 | | 361 | | 341 | |
Less net income attributable to the noncontrolling interest | (13) | | (15) | | (26) | | (29) | |
Net income attributable to QVC, Inc. stockholder | $ | 213 | | 270 | | 335 | | 312 | |
|
| | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | |
(in millions) | 2017 |
| 2016 |
| 2017 |
| 2016 |
|
Net revenue | $ | 2,010 |
| 1,948 |
| 5,954 |
| 6,024 |
|
Cost of goods sold | 1,282 |
| 1,251 |
| 3,755 |
| 3,816 |
|
Gross profit | 728 |
| 697 |
| 2,199 |
| 2,208 |
|
Operating expenses: | | |
|
|
|
|
Operating | 145 |
| 140 |
| 419 |
| 428 |
|
Selling, general and administrative, including stock-based compensation | 180 |
| 172 |
| 489 |
| 533 |
|
Depreciation | 38 |
| 38 |
| 116 |
| 103 |
|
Amortization | 91 |
| 116 |
| 324 |
| 345 |
|
| 454 |
| 466 |
| 1,348 |
| 1,409 |
|
Operating income | 274 |
| 231 |
| 851 |
| 799 |
|
Other (expense) income: | | | | |
Equity in losses of investee | — |
| (2 | ) | (3 | ) | (4 | ) |
Interest expense, net | (54 | ) | (52 | ) | (165 | ) | (159 | ) |
Foreign currency gain (loss) | 4 |
| 5 |
| (6 | ) | 27 |
|
| (50 | ) | (49 | ) | (174 | ) | (136 | ) |
Income before income taxes | 224 |
| 182 |
| 677 |
| 663 |
|
Income tax expense | (58 | ) | (66 | ) | (225 | ) | (244 | ) |
Net income | 166 |
| 116 |
| 452 |
| 419 |
|
Less net income attributable to the noncontrolling interest | (12 | ) | (9 | ) | (33 | ) | (28 | ) |
Net income attributable to QVC, Inc. stockholder | $ | 154 |
| 107 |
| 419 |
| 391 |
|
See accompanying notes to condensed consolidated financial statements.
I-2
QVC, Inc.
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
| | | | | | | | | | | | | | |
| Three months ended June 30, | Six months ended June 30, |
(in millions) | 2023 | 2022 | 2023 | 2022 |
Net income | $ | 226 | | 285 | | 361 | | 341 | |
Foreign currency translation adjustments, net of tax | (24) | | (143) | | (4) | | (203) | |
Total comprehensive income | 202 | | 142 | | 357 | | 138 | |
Comprehensive income attributable to noncontrolling interest | (6) | | (2) | | (18) | | (10) | |
Comprehensive income attributable to QVC, Inc. stockholder | $ | 196 | | 140 | | 339 | | 128 | |
|
| | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | |
(in millions) | 2017 |
| 2016 |
| 2017 |
| 2016 |
|
Net income | $ | 166 |
| 116 |
| 452 |
| 419 |
|
Foreign currency translation adjustments, net of tax | 28 |
| (3 | ) | 110 |
| 36 |
|
Total comprehensive income | 194 |
| 113 |
| 562 |
| 455 |
|
Comprehensive income attributable to noncontrolling interest | (12 | ) | (11 | ) | (37 | ) | (46 | ) |
Comprehensive income attributable to QVC, Inc. stockholder | $ | 182 |
| 102 |
| 525 |
| 409 |
|
See accompanying notes to condensed consolidated financial statements.
I-3
QVC, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited) | | | | | | | | |
| Six months ended June 30, |
(in millions) | 2023 | 2022 |
Operating activities: | | |
Net income | $ | 361 | | 341 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | |
Deferred income taxes | 53 | | (14) | |
Foreign currency loss (gain) | 9 | | (29) | |
Depreciation | 45 | | 67 | |
Amortization | 138 | | 144 | |
Change in fair value of financial instruments and noncash interest | 1 | | (1) | |
Other charges, net | (7) | | 6 | |
(Gain) loss on extinguishment of debt | (10) | | 6 | |
Stock-based compensation | 20 | | 18 | |
Gains on sale of intangible asset and leaseback transactions | (119) | | (243) | |
Gain on insurance proceeds, net of fire related costs | (228) | | — | |
Insurance proceeds received for operating expenses and business interruption losses | 226 | | 30 | |
Change in operating assets and liabilities | | |
Decrease in accounts receivable | 400 | | 416 | |
Decrease (increase) in inventories | 108 | | (81) | |
Decrease in prepaid expenses and other current assets | 13 | | 9 | |
Decrease in accounts payable-trade | (213) | | (331) | |
Decrease in accrued liabilities and other | (206) | | (294) | |
Net cash provided by operating activities | 591 | | 44 | |
Investing activities: | | |
Capital expenditures | (79) | | (81) | |
Expenditures for television distribution rights | (107) | | (15) | |
Insurance proceeds received for fixed asset loss | 54 | | 70 | |
Proceeds from derivative instruments | 167 | | — | |
Payments for derivative instruments | (179) | | — | |
Changes in other noncurrent assets | (1) | | (4) | |
Proceeds from sale of fixed assets | 200 | | 256 | |
Other investing activities | — | | 20 | |
Net cash provided by investing activities | 55 | | 246 | |
Financing activities: | | |
Principal payments of debt and finance lease obligations | (515) | | (876) | |
Principal borrowings of debt from senior secured credit facility | 887 | | 1,223 | |
Principal repayment of senior secured notes | (396) | | (536) | |
Payment of premium on redemption of senior secured notes | — | | (6) | |
Dividends paid to Qurate Retail, Inc. | (300) | | (121) | |
Dividends paid to noncontrolling interest | (24) | | (27) | |
Withholding taxes on net share settlements of stock-based compensation | — | | (5) | |
Net cash used in financing activities | (348) | | (348) | |
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | (7) | | (39) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | 291 | | (97) | |
Cash, cash equivalents and restricted cash, beginning of period | 367 | | 519 | |
Cash, cash equivalents and restricted cash, end of period | $ | 658 | | 422 | |
|
| | | | | |
| Nine months ended September 30, | |
(in millions) | 2017 |
| 2016 |
|
Operating activities: | | |
Net income | $ | 452 |
| 419 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
Equity in losses of investee | 3 |
| 4 |
|
Deferred income taxes | (73 | ) | (68 | ) |
Foreign currency loss (gain) | 6 |
| (27 | ) |
Depreciation | 116 |
| 103 |
|
Amortization | 324 |
| 345 |
|
Change in fair value of financial instruments and noncash interest | 5 |
| 5 |
|
Stock-based compensation | 23 |
| 24 |
|
Change in other long-term liabilities | (7 | ) | — |
|
Effects of changes in working capital items | 58 |
| 44 |
|
Net cash provided by operating activities | 907 |
| 849 |
|
Investing activities: | | |
Capital expenditures | (83 | ) | (140 | ) |
Expenditures for television distribution rights | (35 | ) | (8 | ) |
Changes in other noncurrent assets | (2 | ) | (2 | ) |
Other investing activities | — |
| (3 | ) |
Net cash used in investing activities | (120 | ) | (153 | ) |
Financing activities: | | |
Principal payments of debt and capital lease obligations | (1,791 | ) | (1,300 | ) |
Principal borrowings of debt from senior secured credit facility | 1,574 |
| 1,048 |
|
Payment of debt origination fees | — |
| (2 | ) |
Dividends paid to Liberty Interactive Corporation | (491 | ) | (427 | ) |
Dividends paid to noncontrolling interest | (22 | ) | (21 | ) |
Other financing activities | (10 | ) | (9 | ) |
Net cash used in financing activities | (740 | ) | (711 | ) |
Effect of foreign exchange rate changes on cash and cash equivalents | 12 |
| 7 |
|
Net increase (decrease) in cash and cash equivalents | 59 |
| (8 | ) |
Cash and cash equivalents, beginning of period | 284 |
| 327 |
|
Cash and cash equivalents, end of period | $ | 343 |
| 319 |
|
Effects of changes in working capital items: | | |
Decrease in accounts receivable | $ | 369 |
| 583 |
|
Increase in inventories | (191 | ) | (192 | ) |
Increase in prepaid expenses and other current assets | (4 | ) | (14 | ) |
Increase (decrease) in accounts payable-trade | 20 |
| (40 | ) |
Decrease in accrued liabilities and other | (136 | ) | (293 | ) |
Effects of changes in working capital items | $ | 58 |
| 44 |
|
See accompanying notes to condensed consolidated financial statements.
I-4
QVC, Inc.
Condensed Consolidated StatementStatements of Equity
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Common stock | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive loss | Noncontrolling interest | Total equity |
(in millions, except share data) | Shares | Amount |
Balance, December 31, 2021 | 1 | | $ | — | | 10,687 | | (2,942) | | (146) | | 122 | | 7,721 | |
Net income | — | | — | | — | | 312 | | — | | 29 | | 341 | |
Foreign currency translation adjustments, net of tax | — | | — | | — | | — | | (184) | | (19) | | (203) | |
Dividends paid to Qurate Retail, Inc. and noncontrolling interest | — | | — | | — | | (121) | | — | | (27) | | (148) | |
Impact of tax liability allocation and indemnification agreement with Qurate Retail, Inc. | — | | — | | 4 | | — | | — | | — | | 4 | |
Withholding taxes on net share settlements of stock-based compensation | — | | — | | (5) | | — | | — | | — | | (5) | |
Stock-based compensation | — | | — | | 18 | | — | | — | | — | | 18 | |
Common control transaction with Qurate Retail, Inc. | — | | — | | (76) | | — | | — | | — | | (76) | |
Balance, June 30, 2022 | 1 | $ | — | | 10,628 | | (2,751) | | (330) | | 105 | | 7,652 | |
|
| | | | | | | | | | | | | | | |
| Common stock | Additional paid-in capital |
| Accumulated deficit |
| Accumulated other comprehensive loss |
| Noncontrolling interest |
| Total equity |
|
(in millions, except share data) | Shares |
| Amount |
|
Balance, December 31, 2016 | 1 |
| $ | — |
| 6,851 |
| (2,832 | ) | (224 | ) | 100 |
| 3,895 |
|
Net income | — |
| — |
| — |
| 419 |
| — |
| 33 |
| 452 |
|
Foreign currency translation adjustments, net of tax | — |
| — |
| — |
| — |
| 106 |
| 4 |
| 110 |
|
Dividends paid to Liberty Interactive Corporation and noncontrolling interest and other | — |
| — |
| — |
| (491 | ) | — |
| (22 | ) | (513 | ) |
Impact of tax liability allocation and indemnification agreement with Liberty Interactive Corporation | — |
| — |
| 3 |
| — |
| — |
| — |
| 3 |
|
Withholding taxes on net share settlements of stock-based compensation | — |
| — |
| (10 | ) | — |
| — |
| — |
| (10 | ) |
Stock-based compensation | — |
| — |
| 23 |
| — |
| — |
| — |
| 23 |
|
Balance, September 30, 2017 | 1 |
| $ | — |
| 6,867 |
| (2,904 | ) | (118 | ) | 115 |
| 3,960 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Common stock | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive loss | Noncontrolling interest | Total equity |
(in millions, except share data) | Shares | Amount |
Balance, March 31, 2022 | 1 | | $ | — | | 10,643 | | (3,012) | | (200) | | 116 | | 7,547 | |
Net income | — | | — | | — | | 270 | | — | | 15 | | 285 | |
Foreign currency translation adjustments, net of tax | — | | — | | — | | — | | (130) | | (13) | | (143) | |
Dividends paid to Qurate Retail, Inc. and noncontrolling interest | — | | — | | — | | (9) | | — | | (13) | | (22) | |
Impact of tax liability allocation and indemnification agreement with Qurate Retail, Inc. | — | | — | | 2 | | — | | — | | — | | 2 | |
Stock-based compensation | — | | — | | 10 | | — | | — | | — | | 10 | |
Common control transaction with Qurate Retail, Inc. | — | | — | | (27) | | — | | — | | — | | (27) | |
Balance, June 30, 2022 | 1 | $ | — | | 10,628 | | (2,751) | | (330) | | 105 | | 7,652 | |
See accompanying notes to condensed consolidated financial statements.5
I-5
QVC, Inc.
Condensed Consolidated Statements of Equity
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Common stock | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive loss | Noncontrolling interest | Total equity |
(in millions, except share data) | Shares | Amount |
Balance, December 31, 2022 | 1 | | $ | — | | 10,869 | | (6,080) | | (312) | | 95 | | 4,572 | |
Net income | — | | — | | — | | 335 | | — | | 26 | | 361 | |
Foreign currency translation adjustments, net of tax | — | | — | | — | | — | | 4 | | (8) | | (4) | |
Dividends paid to Qurate Retail, Inc. and noncontrolling interest | — | | — | | — | | (300) | | — | | (24) | | (324) | |
Impact of tax liability allocation and indemnification agreement with Qurate Retail, Inc. | — | | — | | — | | (5) | | — | | — | | (5) | |
Stock-based compensation | — | | — | | 17 | | — | | — | | — | | 17 | |
Balance, June 30, 2023 | 1 | | $ | — | | 10,886 | | (6,050) | | (308) | | 89 | | 4,617 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Common stock | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive loss | Noncontrolling interest | Total equity |
(in millions, except share data) | Shares | Amount |
Balance, March 31, 2023 | 1 | | $ | — | | 10,821 | | (6,161) | | (291) | | 95 | | 4,464 | |
Net income | — | | — | | — | | 213 | | — | | 13 | | 226 | |
Foreign currency translation adjustments, net of tax | — | | — | | — | | — | | (17) | | (7) | | (24) | |
Dividends paid to Qurate Retail, Inc. and noncontrolling interest | — | | — | | — | | (101) | | — | | (12) | | (113) | |
Impact of tax liability allocation and indemnification agreement with Qurate Retail, Inc. | — | | — | | — | | (1) | | — | | — | | (1) | |
Stock-based compensation | — | | — | | 8 | | — | | — | | — | | 8 | |
Common control transaction with Qurate Retail, Inc. | — | — | | 57 | | — | — | | — | | 57 | |
Balance, June 30, 2023 | 1 | | $ | — | | 10,886 | | (6,050) | | (308) | | 89 | | 4,617 | |
QVC, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(1) Basis of Presentation
QVC, Inc. and its consolidated subsidiaries ("QVC"(unless otherwise indicated or required by the context, the terms "we," "our," "us," the "Company") and "QVC" refer to QVC, Inc. and its consolidated subsidiaries) is a retailer of a wide range of consumer products, which are marketed and sold primarily by merchandise-focused televised shopping programs, the Internet and mobile applications.
In the United States ("U.S."), QVC's televised shopping programs, including live and recorded content, are broadcastdistributed across multiple channels nationally on a full-time basis, including QVC, QVC2, (f/k/a QVC Plus)QVC3, HSN and Beauty iQ.HSN2. The Company's U.S. programming is also available on QVC.com QVC's U.S. website; mobileand HSN.com, which we refer to as our "U.S. websites"; virtual multichannel video programming distributors (including Hulu + Live TV, DirecTV Stream, and YouTube TV); applications via streaming video; over-the-air broadcasters; and over-the-top content platforms (Roku,Facebook Live, Roku, Apple TV, etc.).Amazon Fire, Xfinity Flex and Samsung TV Plus; mobile applications; social media pages and over-the-air broadcasters.
QVC believes that the Company'sQVC's digital platforms complement the Company's televised shopping programs by allowingenable consumers to purchase goods offered on our televised programming, along with a wide assortment of goods offered on QVC's televised programs, as well as other products that are available only on the Company's digital platforms. The Company views e-commerce as a natural extension of the Company's business, allowing the Company to stream live videoour U.S. websites and offer on-demand video segments of items recently presented live on QVC's televised programs. The Company'sour other digital platforms (including our mobile applications, social media pages and others) are natural extensions of our business model, allowing customers to engage in our shopping experience wherever they are, with live or on-demand content customized to the device they are using. In addition to offering video content, our U.S. websites allow shoppers to browse, research, compare and perform targeted searches for products, read customer reviews, control the order-entry process and conveniently access their QVC account.
Internationally, QVC's international televised shopping programs, including live and recorded content, are distributed to households outside of the U.S., primarily in Germany, Austria, Japan, the United Kingdom ("U.K."), the Republic of Ireland Italy and France.Italy. In some of the countries where QVC operates, QVC's televised shopping programs are broadcastdistributed across multiple QVC channels: QVC Beauty & Style and QVC PlusQVC2 in Germany and QVC Beauty, QVC Extra QVC Style and QVC +1Style in the U.K. The programming created for most of these markets isSimilar to the U.S., our international businesses also availableengage customers via streaming video on QVC's digital platforms.websites, mobile applications, and social media pages. QVC's international business employs product sourcing teams who select products tailored to the interests of each local market.
The Company's Japanese operations ("QVC-Japan") are conducted through a joint venture with Mitsui & Co., LTD ("Mitsui") for a television and multimedia retailing service in Japan.. QVC-Japan is owned 60% by the Company and 40% by Mitsui. The Company and Mitsui share in all profits and losses based on their respective ownership interests. During the ninesix months ended SeptemberJune 30, 20172023 and 2016,2022, QVC-Japan paid dividends to Mitsui of $22$24 million and $21$27 million, respectively.
The Company also has a joint venture with CNR Media Group, formerly known as China Broadcasting Corporation, a limited liability company owned by China National Radio (''CNR''). The Company owns a 49% interest in a CNR subsidiary, CNR Home Shopping Co., Ltd. (''CNRS''). CNRS operates a retail business in China through a shopping television channel with an associated website. This joint venture is accounted for as an equity method investment recorded as equity in losses of investee in the condensed consolidated statements of operations.
The Company is an indirect wholly-owned subsidiary of Liberty Interactive CorporationQurate Retail, Inc. ("Liberty"Qurate Retail") (Nasdaq: QRTEA, QRTEB and QRTEP), which owns interests in a broad range of digital commerce businesses, andCornerstone Brands, Inc. ("CBI"), as well as other minority investments. QVC is attributed to Liberty's QVC Group. The QVC Group common stock (Nasdaq: QVCA and QVCB) tracks the assets and liabilitiespart of the Qurate Retail Group ("QRG"), a portfolio of brands including QVC Group. Theand CBI. Zulily, LLC (“Zulily”) was a wholly owned subsidiary of Qurate Retail until its divestiture on May 24, 2023.
During each of the six months ended June 30, 2023 and 2022, QVC Group tracksand Zulily engaged in multiple transactions relating to sales, sourcing of merchandise, marketing initiatives and business advisory services. Prior to Qurate Retail's divestiture of Zulily, QVC allocated expenses of $3 million and $4 million to Zulily for the six months ended June 30, 2023 and 2022, respectively. Zulily allocated expenses of $2 million and $5 million to QVC for the six months ended June 30, 2023 and 2022, respectively.
In September 2020, QVC and Zulily executed a Master Promissory Note ("Promissory Note") whereby Zulily could borrow up to $100 million at a variable interest rate equal to the LIBOR rate plus an applicable margin rate. In connection with the Qurate Retail's divestiture of Zulily, the Promissory Note was terminated in May 2023. There were no borrowings on the Promissory Note as of December 31, 2022.
During each of the six months ended June 30, 2023 and 2022, QVC and CBI engaged in multiple transactions relating to personnel and business advisory services. QVC allocated expenses of $13 million to CBI for each of the six months ended June 30, 2023 and 2022. CBI allocated expenses of $1 million to QVC for each of the six months ended June 30, 2023 and 2022.
On December 30, 2020, the Company zulily, llc ("zulily") and Liberty's 38% equity interest in HSN, Inc. ("HSN"), one of the Company's two closest televised shopping competitors, cash and certain liabilities. On July 6, 2017, Liberty announced plans to acquire the remaining interest in HSN, which would make it a wholly-owned subsidiary of Liberty following the closing. On April 4, 2017, Liberty entered into an agreement with General Communication, Inc. ("GCI"), an Alaska corporation, and Liberty Interactive LLC ("LIC") completed an internal realignment of the Company's global finance structure that resulted in a Delaware limited liability company andcommon control transaction with Qurate Retail. As part of the common control transaction, LIC issued a direct wholly-ownedpromissory note (“LIC Note”) to a subsidiary of Liberty, whereby Liberty will acquire GCI through a reorganization in which certain assets and liabilities attributed to Liberty’s Ventures Group will be contributed to GCI in exchange for a controlling interest in GCI. Liberty will then effect a tax-free separationthe Company with an initial face amount of its controlling interest in the combined company, leaving QVC Group common stock as the only outstanding common stock of Liberty. Neither the proposed transactions involving GCI nor the acquisition of HSN is conditioned on the completion of the other, and no assurance can be given as to which of these transactions will be completed first. The QVC Group does not represent a separate legal entity; rather, it represents those businesses, assets and liabilities that are attributed to that group.
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
On October 1, 2015, Liberty acquired all$1.8 billion, a stated interest rate of 0.48% and a maturity of December 29, 2029. Interest on the outstanding sharesLIC Note is paid annually. QVC recorded $4 million of zulily, inc. (now known as zulily, llc). zulily is an online retailer offering customers a fun and entertaining shopping experience with a fresh selection of new product styles launched each dayrelated party interest income for a limited time period. zulily is attributed to the QVC Group and the Company believes that its business is complementary to the Company. zulily is not part of the results of operations or financial position of QVC presented in these condensed consolidated financial statements. During each of the ninesix months ended SeptemberJune 30, 20172023 and 2016, QVC and zulily engaged2022, included in multiple transactions relating to sales, sourcinginterest expense, net in the consolidated statement of merchandise, marketing initiatives, business advisory services and software development. The gross value of these transactions totaled approximately $7 million and $11 million, respectively, which did not have a material impact on QVC's financial position, results of operations, or liquidity.operations.
On June 23, 2016,27, 2022, Qurate Retail announced a five-point turnaround plan designed to stabilize and differentiate its core QxH and QVC-International businesses and expand the Company's leadership in video streaming commerce (“Project Athens”). Project Athens main initiatives include: (i) improve customer experience and grow relationships; (ii) rigorously execute core processes; (iii) lower cost to serve; (iv) optimize the brand portfolio; and (v) build new high growth businesses anchored in strength.
During 2022 QVC amendedcommenced the first phase of Project Athens including actions to reduce inventory and restateda planned workforce reduction. These initiatives are consistent with QVC’s strategy to operate more efficiently as it implements its senior secured credit facility (the "Third Amendedturnaround plan. During the six months ended June 30, 2023, QVC implemented a workforce reduction and Restated Credit Agreement") increasingrecorded restructuring charges of $13 million, in Restructuring and fire related costs, net of (recoveries) in the revolving credit facility from $2.25 billion to $2.65 billion as explained further in note 6. The Third Amended and Restated Credit Agreement includes a $400 million tranche that may be borrowed by QVC or zulily. Under the termscondensed consolidated statement of the Third Amended and Restated Credit Agreement, QVC and zulily are jointly and severally liable for all amounts borrowed on the $400 million tranche. In accordance with the accounting guidance for obligations resulting from joint and several liability arrangements, QVC will record a liability for amounts it has borrowed under the credit facility plus any additional amount it expects to repay on behalf of zulily. As of September 30, 2017, there was $300 million borrowed by zulily on the $400 million tranche of the Third Amended and Restated Credit Agreement, none of which the Company expects to repay on behalf of zulily.operations.
The condensed consolidated financial statements include the accounts of QVC, Inc. and its majority-owned subsidiaries. All significant intercompany accounts and transactions were eliminated in consolidation.
The accompanying (a) condensed consolidated balance sheet as of December 31, 2016,2022, which has been derived from audited financial statements, and (b) the interim unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for such periods have been included. The results of operations for any interim period are not necessarily indicative of results for the full year. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in QVC's Annual Report on Form 10-K for the year ended December 31, 2016.2022. Certain prior period balances were reclassified to conform to the current year's presentation.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Estimates include, but are not limited to, sales returns, uncollectible receivables, inventory obsolescence, depreciable lives of fixed assets, internally-developed software, valuation of acquired intangible assets and goodwill and income taxestaxes.
(2) Television Distribution Rights, Net
Television distribution rights consisted of the following:
| | | | | | | | |
(in millions) | June 30, 2023 | December 31, 2022 |
Television distribution rights | $ | 607 | | 664 | |
Less accumulated amortization | (478) | | (592) | |
Television distribution rights, net | $ | 129 | | 72 | |
The Company recorded amortization expense of $26 million and stock‑based compensation.
$28 million for the three months ended June 30, 2023 and 2022, respectively, related to television distribution rights. For the six months ended June 30, 2023 and 2022, amortization expense for television distribution rights was $50 million and $59 million, respectively.
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
On May 28, 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amountAs of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments, changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In March 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies principal versus agent considerations, in April 2016, the FASB issued ASU No. 2016-10, Identifying Performance Obligations and Licensing, which clarifies the identification of performance obligations and the implementation guidance for licensing, and in May 2016, the FASB issued ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients, which clarifies assessing collectibility, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. The updated guidance will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or modified retrospective transition method. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and early adoption is permitted only for fiscal years beginning after December 15, 2016. The Company has reviewed the applicable ASU and has selected the modified retrospective transition method. In addition, the Company expects to elect the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component when its payment terms are less than one year, as well as the practical expedient to exclude from the measurement of the transaction price sales and similar taxes collected from customers. To date, the Company has concluded it will recognize revenue at the time of shipment to its customers consistent with when title passes. This is a change from the current practice whereby the Company recognizes revenue at the time of delivery to the customers and deferred revenue is recorded to account for the shipments in-transit. At the current time, the Company is continuing to evaluate the impact of the standard including its determination of whether the Company acts as principal or agent in certain vendor arrangements. The Company is also evaluating the impact of the standard on the presentation and timing of credit card income for its QVC-branded credit card and its financial statement disclosures, among other areas. The Company has not quantified the effects of this pronouncement, but it is working through the relevant aspects to evaluate the quantitative effects of the new guidance. The Company plans to be able to quantify the effects of these ASU's no later than the fourth quarter of 2017 in its annual report for the year ending December 31, 2017.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. The new principle is part of the FASB’s simplification initiative and applies to entities that measure inventory using a method other than last-in, first-out (LIFO) or the retail inventory method. The Company adopted this guidance as of January 1, 2017, and there was no significant effect of the standard on its financial reporting.
In January 2016, the FASB issued ASU No. 2016-01, Financial Statements - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which requires equity investments with readily determinable fair values (except those accounted for under the equity method of accounting or those that result in consolidation) to be measured at fair value with changes in fair value recognized in net income and simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2017. The adoption of this standard is not expected to have a material impact on the Company’s ongoing financial reporting.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which revises the accounting treatment related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new lease guidance also simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. The amendments in this ASU are effective for the Company beginning on January 1, 2019 and should be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. The Company is currently evaluating the effect that the updated standard will have on its ongoing financial reporting.
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company adopted this guidance in the third quarter of 2016. In accordance with the new guidance, excess tax benefits and tax deficiencies are recognized as income tax benefit or expense rather than as additional paid-in capital. The Company has elected to recognize forfeitures as they occur rather than continue to estimate expected forfeitures. In addition, pursuant to the new guidance, excess tax benefits are classified as an operating activity on the condensed consolidated statements of cash flows. The recognition of excess tax benefits and deficiencies are applied prospectively from January 1, 2016.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues to reduce the diversity in practice for appropriate classification on the statement of cash flows. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted. The Company does not expect the adoption will have a material effect on its condensed consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires an entity to recognize at the transaction date the income tax consequences of intercompany asset transfers other than inventory. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the effect that the updated standard will have on its condensed consolidated financial statements and related disclosures.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company does not expect the adoption will have a material effect on its condensed consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the measurement for impairment by calculating the difference between the carrying amount and the fair value of the reporting unit. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company does not expect the adoption will have a material effect on its condensed consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, to provide clarity to which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments in this update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted. The Company does not expect the adoption will have a material effect on its condensed consolidated financial statements.
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
(2) Television Distribution Rights, Net
Television distribution rights consisted of the following: |
| | | | | |
(in millions) | September 30, 2017 |
| December 31, 2016 |
|
Television distribution rights | $ | 2,348 |
| 2,279 |
|
Less accumulated amortization | (2,270 | ) | (2,096 | ) |
Television distribution rights, net | $ | 78 |
| 183 |
|
The Company recorded amortization expense of $39 million and $47 million for the three months ended SeptemberJune 30, 2017 and 2016, respectively, related to television distribution rights. For the nine months ended September 30, 2017 and 2016, amortization expense for television distribution rights was $141 million and $143 million, respectively.As of September 30, 2017,2023, related amortization expense for each of the next five years ended December 31 was as follows (in millions): |
| | | |
Remainder of 2017 | $ | 11 |
|
2018 | 37 |
|
2019 | 16 |
|
2020 | 10 |
|
2021 | 3 |
|
| | | | | |
Remainder of 2023 | $ | 50 | |
2024 | 72 | |
2025 | 7 | |
2026 | — | |
2027 | — | |
(3) Goodwill and Other Intangible Assets, Net
The changes in the carrying amount of goodwill by operating segment for the ninesix months ended SeptemberJune 30, 20172023 were as follows: | | (in millions) | QVC-U.S. |
| QVC-Germany |
| QVC-Japan |
| QVC-U.K. |
| QVC-Italy |
| Total |
| (in millions) | QxH | QVC-International | Total |
Balance as of December 31, 2016 | $ | 4,190 |
| 267 |
| 258 |
| 161 |
| 119 |
| 4,995 |
| |
Balance as of December 31, 2022 | | Balance as of December 31, 2022 | $ | 2,692 | | 778 | | 3,470 | |
Exchange rate fluctuations | — |
| 33 |
| 11 |
| 13 |
| 14 |
| 71 |
| Exchange rate fluctuations | — | | (1) | | (1) | |
Balance as of September 30, 2017 | $ | 4,190 |
| 300 |
| 269 |
| 174 |
| 133 |
| 5,066 |
| |
Balance as of June 30, 2023 | | Balance as of June 30, 2023 | $ | 2,692 | | 777 | | 3,469 | |
(4) Other Intangible Assets, Net
Other intangible assets consisted of the following: | | | September 30, 2017 | | December 31, 2016 | | | June 30, 2023 | December 31, 2022 |
(in millions) | Gross cost |
| Accumulated amortization |
| Other intangible assets, net |
| Gross cost |
| Accumulated amortization |
| Other intangible assets, net |
| (in millions) | Gross cost | Accumulated amortization | Other intangible assets, net | Gross cost | Accumulated amortization | Other intangible assets, net |
Purchased and internally developed software | $ | 696 |
| (541 | ) | 155 |
| 646 |
| (466 | ) | 180 |
| Purchased and internally developed software | $ | 1,015 | | (736) | | 279 | | 962 | | (670) | | 292 | |
Affiliate and customer relationships | 2,416 |
| (2,406 | ) | 10 |
| 2,397 |
| (2,274 | ) | 123 |
| Affiliate and customer relationships | 2,823 | | (2,659) | | 164 | | 2,818 | | (2,630) | | 188 | |
Debt origination fees | 8 |
| (2 | ) | 6 |
| 8 |
| (1 | ) | 7 |
| Debt origination fees | 9 | | (4) | | 5 | | 9 | | (3) | | 6 | |
Trademarks (indefinite life) | 2,428 |
| — |
| 2,428 |
| 2,428 |
| — |
| 2,428 |
| Trademarks (indefinite life) | 2,698 | | — | | 2,698 | | 2,698 | | — | | 2,698 | |
| $ | 5,548 |
| (2,949 | ) | 2,599 |
| 5,479 |
| (2,741 | ) | 2,738 |
| | $ | 6,545 | | (3,399) | | 3,146 | | 6,487 | | (3,303) | | 3,184 | |
The Company recorded amortization expense of $52$46 million and $69$42 million for the three months ended SeptemberJune 30, 20172023 and 2016,2022, respectively, related to other intangible assets. For the ninesix months ended SeptemberJune 30, 20172023 and 2016,2022, amortization expense for other intangible assets was $183$88 million and $202$85 million, respectively.
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
As of SeptemberJune 30, 2017,2023, the related amortization and interest expense for each of the next five years ended December 31 was as follows (in millions):
| | | | | |
Remainder of 2023 | $ | 106 | |
2024 | 168 | |
2025 | 109 | |
2026 | 65 | |
2027 | — | |
QVC’s results have been challenged as a result of current business trends and global economic conditions. The Company will continue to monitor its current business performance versus the current and updated long-term forecasts, among other relevant considerations, to determine if the carrying value of its assets (including Goodwill and Trademarks) are appropriate. Future outlook declines in revenue, cash flows, or other factors could result in a sustained decrease in fair value that may result in a determination that material carrying value adjustments are required.
|
| | | |
Remainder of 2017 | $ | 25 |
|
2018 | 83 |
|
2019 | 47 |
|
2020 | 15 |
|
2021 | 1 |
|
(5) Accrued LiabilitiesNotes to Condensed Consolidated Financial Statements (continued)
Accrued liabilities consisted of the following:(unaudited)
|
| | | | | |
(in millions) | September 30, 2017 |
| December 31, 2016 |
|
Accounts payable non-trade | $ | 193 |
| 215 |
|
Accrued compensation and benefits | 116 |
| 92 |
|
Allowance for sales returns | 73 |
| 93 |
|
Deferred revenue | 63 |
| 69 |
|
Sales and other taxes | 50 |
| 62 |
|
Income taxes | 40 |
| 120 |
|
Accrued interest | 37 |
| 58 |
|
Other | 58 |
| 60 |
|
| $ | 630 |
| 769 |
|
(6)(4) Long-Term Debt and CapitalFinance Lease Obligations
Long-term debt and capitalfinance lease obligations consisted of the following: | | (in millions) | September 30, 2017 |
| December 31, 2016 |
| (in millions) | June 30, 2023 | December 31, 2022 |
3.125% Senior Secured Notes due 2019, net of original issue discount | $ | 399 |
| 399 |
| |
5.125% Senior Secured Notes due 2022 | 500 |
| 500 |
| |
4.375% Senior Secured Notes due 2023, net of original issue discount | 750 |
| 750 |
| 4.375% Senior Secured Notes due 2023, net of original issue discount | $ | — | | 214 | |
4.85% Senior Secured Notes due 2024, net of original issue discount | 600 |
| 600 |
| 4.85% Senior Secured Notes due 2024, net of original issue discount | 423 | | 600 | |
4.45% Senior Secured Notes due 2025, net of original issue discount | 599 |
| 599 |
| 4.45% Senior Secured Notes due 2025, net of original issue discount | 585 | | 599 | |
4.75% Senior Secured Notes due 2027 | | 4.75% Senior Secured Notes due 2027 | 575 | | 575 | |
4.375% Senior Secured Notes due 2028 | | 4.375% Senior Secured Notes due 2028 | 500 | | 500 | |
5.45% Senior Secured Notes due 2034, net of original issue discount | 399 |
| 399 |
| 5.45% Senior Secured Notes due 2034, net of original issue discount | 399 | | 399 | |
5.95% Senior Secured Notes due 2043, net of original issue discount | 300 |
| 300 |
| 5.95% Senior Secured Notes due 2043, net of original issue discount | 300 | | 300 | |
6.375% Senior Secured Notes due 2067 | | 6.375% Senior Secured Notes due 2067 | 225 | | 225 | |
6.25% Senior Secured Notes due 2068 | | 6.25% Senior Secured Notes due 2068 | 500 | | 500 | |
Senior secured credit facility | 1,390 |
| 1,596 |
| Senior secured credit facility | 1,430 | | 1,057 | |
Capital lease obligations | 74 |
| 69 |
| |
Build to suit lease obligation | 102 |
| 105 |
| |
Finance lease obligations | | Finance lease obligations | 3 | | 4 | |
Less debt issuance costs, net | (23 | ) | (28 | ) | Less debt issuance costs, net | (34) | | (36) | |
Total debt and capital lease obligations | 5,090 |
| 5,289 |
| |
Total debt and finance lease obligations | | Total debt and finance lease obligations | 4,906 | | 4,937 | |
Less current portion | (17 | ) | (14 | ) | Less current portion | (424) | | (216) | |
Long-term portion of debt and capital lease obligations | $ | 5,073 |
| 5,275 |
| |
Long-term portion of debt and finance lease obligations | | Long-term portion of debt and finance lease obligations | $ | 4,482 | | 4,721 | |
Senior Secured Notes
All of QVC's senior secured notes are secured by the capital stock of QVC and certain of its subsidiaries and have equal priority to QVC'sthe senior secured credit facility. The interest on all of QVC's senior secured notes is payable semi-annually.semi-annually with the exception of the 6.375% Senior Secured Notes due 2067 (the "2067 Notes") and the 6.25% Senior Secured Notes due 2068 (the "2068 Notes"), which is payable quarterly. The remaining outstanding 4.375% Senior Secured Notes due 2023 were repaid at maturity in March 2023.
During the second quarter of 2023, QVC purchased $177 million of the outstanding 4.85% Senior Secured Notes due 2024 (the "2024 Notes") and $15 million of the outstanding 4.45% Senior Secured Notes due 2025. As a result of the repurchases, the Company recorded a gain on extinguishment of debt in the condensed consolidated statements of operations of $10 million for the three and six months ended June 30, 2023. As of June 30, 2023, the remaining outstanding 2024 Notes are classified within the current portion of long term debt as they mature in less than one year.
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
Senior Secured Credit Facility
On June 23, 2016,October 27, 2021, QVC entered into the ThirdFifth Amended and Restated Credit Agreement with zulilyZulily, CBI, and QVC Global, each a direct or indirect wholly owned subsidiary of Qurate Retail, as borrowers (collectively, the “Borrowers”), which. The Fifth Amended and Restated Credit Agreement is a multi-currency facility that providesproviding for a $2.65$3.25 billion revolving credit facility, with a $300$450 million sub-limit for standby letters of credit and $1.5 billionan alternative currency revolving sub-limit equal to 50% of uncommitted incrementalthe revolving loan commitments or incremental term loans.thereunder. The ThirdFifth Amended and Restated Credit Agreement includes a $400 million tranche that may be borrowed by any Borrower, with each Borrower jointly and severally liable for the Companyoutstanding borrowings. Borrowings bear interest at either the alternate base rate (“ABR Rate”) or zulily with an additional $50 million sub-limit for standby letters of credit (see notes 1 and 13). The remaining $2.25 billion and any incremental loans may be borrowed only bya LIBOR-based rate (or the Company.applicable non-U.S. Dollar equivalent rate) (“Term Benchmark/RFR Rate”) at the applicable Borrower’s election in each case plus a margin. Borrowings that are alternate base rateABR Rate loans will bear interest at a per annum rate equal to the base rate plus a margin that varies between 0.25% and 0.75%0.625% depending on the Borrowers’ combined ratio of Consolidated Total Debtconsolidated total debt to Consolidatedconsolidated EBITDA for the most recent four fiscal quarter periods (the “Combined Consolidated Leverage Ratio”“consolidated leverage ratio”). Borrowings that are London Interbank OfferedTerm Benchmark/RFR Rate ("LIBOR") loans will bear interest at a per annum rate equal to the applicable LIBOR rate plus a margin that varies between 1.25% and 1.75%1.625% depending on the Borrowers’ Combined Consolidated Leverage Ratio. Because the calculation of the Combined Consolidated Leverage Ratio was revised to include zulily, the effective interest rate margins, on the date that the Third Amended and Restated Credit Agreement was entered into, decreased from the interest rate margins under the previous bank credit facility.consolidated leverage ratio. Each loan may be prepaid at any time and from time to time without penalty other than customary breakage costs. No mandatory prepayments will be required other than when borrowings and letter of credit usage exceed availability; provided that, if zulily ceases to be controlled by Liberty,Zulily, CBI, QVC Global or any other borrower (other than QVC) is removed, at the election of QVC, as a borrower thereunder, all of its loans must be repaid and its letters of credit are terminated or cash collateralized. Any amounts prepaid may be reborrowed. The facility matures on June 23, 2021, except that $140 million of the $2.25 billion commitment available to QVC matures on March 9, 2020. Any amounts prepaid on the revolving facility may be reborrowed.October 27, 2026. Payment of loans may be accelerated following certain customary events of default.
QVC had $950 million, including In connection with Qurate Retail's divestiture of Zulily (see note 1), Zulily is no longer a co-borrower in the remaining portion of the $400 million tranche that zulily may also borrow on, availableCredit Facility, and Zulily repaid its outstanding borrowings under the termsFifth Amended and Restated Credit Agreement using cash contributed from Qurate Retail.
On June 20, 2023, QVC, QVC Global and CBI, as borrowers, JPMorgan Chase Bank, N.A., as administrative agent, and the other parties thereto entered into a SOFR Transition and Other Agreements agreement whereby, in accordance with the Fifth Amended and Restated Credit Agreement, LIBOR-based rate loans denominated in US dollars made on or after June 30, 2023 would be replaced with Secured Overnight Financing Rate ("SOFR")-based rate loans. Borrowings that are SOFR-based loans will bear interest at a per annum rate equal to the applicable SOFR rate, plus a credit spread adjustment, plus a margin that varies between 1.25% and 1.625% depending on the Borrowers’ consolidated leverage ratio.
In accordance with the accounting guidance for obligations resulting from joint and several liability arrangements, QVC will record a liability for amounts it has borrowed under the senior secured credit facility plus any additional amount it expects to repay on behalf of CBI. There were no borrowings by CBI outstanding on the ThirdFifth Amended and Restated Credit Agreement as of June 30, 2023. As of December 31, 2022, there was $18 million borrowed by CBI on the senior secured credit facility, none of which the Company expected to repay on behalf of CBI.
Prior to the removal of Zulily as a co-borrower, QVC recorded a liability for amounts it expected to repay on behalf of Zulily as part of a common control transaction with Qurate Retail. Upon repayment of Zulily's outstanding borrowings, QVC removed a $57 million liability for Zulily's borrowings during the three months ended June 30, 2023, which was treated as additional paid in capital in the consolidated statements of equity. There were no borrowings by Zulily outstanding on the Fifth Amended and Restated Credit Agreement as of December 31, 2022.
Availability under the Fifth Amended and Restated Credit Agreement at SeptemberJune 30, 2017.2023 was $1.76 billion. The interest rate on the Third Amended and Restated Credit Agreement was 2.7% at September 30, 2017.
The purpose of the amendment was to, among other things, extend the maturity of the Company's senior secured credit facility, provide zulily the opportunity to borrow on the senior secured credit facility (see note 1),was 6.6% and lower the interest rate on borrowings. 3.0% at June 30, 2023 and 2022, respectively.
The payment and performance of the Borrowers’ obligations under the ThirdFifth Amended and Restated Credit Agreement are guaranteed by each of QVC’s, QVC Global’s and CBI’s Material Domestic Subsidiaries (as defined in the ThirdFifth Amended and Restated Credit Agreement)., if any, and certain other subsidiaries of any Borrower that such Borrower has chosen to provide guarantees. Further, the borrowings under the ThirdFifth Amended and Restated Credit Agreement are secured, pari passu with QVC’s existing notes, by a pledge of all of QVC’s equity interests. The borrowings under the capital stock of QVC. The payment and performance of the Borrowers’ obligations with respect to the $400 million tranche available to both QVC and zulily are also guaranteed by each of zulily’s Material Domestic Subsidiaries (as defined in the ThirdFifth Amended and Restated Credit Agreement), if any, andAgreement are also secured by a pledge of all of zulily’sCBI’s equity interests.
The ThirdFifth Amended and Restated Credit Agreement contains certain affirmative and negative covenants, including certain restrictions on the Company and zulilyBorrowers and each of their respective restricted subsidiaries (subject to certain exceptions) with respect to, among other things: incurring additional indebtedness; creating liens on property or assets; making certain loans or investments; selling or disposing of assets; paying certain dividends and other restricted payments; dissolving, consolidating or merging; entering into certain transactions with affiliates; entering into sale or leaseback transactions; restricting subsidiary distributions; and limiting the Company’sBorrowers’ consolidated leverage ratio and the Borrowers’ Combined Consolidated Leverage Ratio.
Interest Rate Swap Arrangements
During the year ended December 31, 2016, QVC entered into a three-year interest rate swap arrangement with a notional amount of $125 million to mitigate the interest rate risk associated with interest payments related to its variable rate debt. The swap arrangement does not qualify as a cash flow hedge under U.S. GAAP. Accordingly, changes in the fair value of the swap are reflected in gain on financial instruments in the accompanying condensed consolidated statements of operations. At September 30, 2017, the fair value of the swap instrument was in a net asset position of approximately $2 million which was included in other noncurrent assets.
ratio.
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
Other Debt Related Information
QVC was in compliance with all of its debt covenants at Septemberas of June 30, 2017.2023.
DuringThere are no restrictions under the quarter,debt agreements on QVC's ability to pay dividends or make other restricted payments if QVC is not in default on its senior secured notes or the Fifth Amended and Restated Credit Agreement and (i) with respect to QVC’s senior secured notes, QVC's consolidated leverage ratio would be no greater than 3.5 to 1.0 (“senior secured notes leverage basket”) and (ii) with respect to the Fifth Amended and Restated Credit Agreement, the consolidated net leverage ratio for QVC, QVC Global and CBI, would be no greater than 4.0 to 1.0. As of June 30, 2023, QVC’s consolidated leverage ratio (as calculated under QVC’s senior secured notes) was greater than 3.5 to 1.0 and as a result QVC is restricted in its ability to make dividends or other restricted payments under the senior secured notes. Although QVC will not be able to make unlimited dividends or other restricted payments under the senior secured notes leverage basket, QVC will continue to be permitted to make unlimited dividends under the senior secured notes to parent entities of QVC to service the principal and interest when due in respect of indebtedness of such parent entities (so long as there wereis no significant changesdefault under the indentures governing QVC’s senior secured notes) and permitted to QVC's debt credit ratings.make certain restricted payments to Qurate Retail under an intercompany tax sharing agreement (the “Tax Agreement”) in respect of certain tax obligations of QVC and its subsidiaries.
The weighted average interest rate applicable to all of the outstanding debt (excluding capital and build to suitfinance leases) prior to amortization of bond discounts and related debt issuance costs was 4.1%5.6% and 4.7% and as of SeptemberJune 30, 2017.2023 and 2022, respectively.
(7)
(5) Leases
Future minimum payments under noncancelable operating leasesSale-Leaseback Transactions
In November 2022, QVC-International entered into agreements to sell two properties located in Germany and
capital transponder leases with initialthe U.K. to an independent third party. Under the terms of
one year or more and the
leaseagreements, QVC received net cash proceeds of $102 million related to
its German facility and $80 million related to its U.K. facility when the
Company's California distribution center (build to suit lease) at September 30, 2017 consisted ofsale closed in January 2023. Concurrent with the
following: |
| | | | | | | |
(in millions) | Capital Leases |
| Operating leases |
| Build to suit lease |
|
Remainder of 2017 | $ | 4 |
| 5 |
| 1 |
|
2018 | 16 |
| 18 |
| 6 |
|
2019 | 16 |
| 14 |
| 6 |
|
2020 | 13 |
| 11 |
| 6 |
|
2021 | 12 |
| 9 |
| 6 |
|
Thereafter | 18 |
| 71 |
| 67 |
|
Total | $ | 79 |
| 128 |
| 92 |
|
Thesale, the Company has entered into fourteen separate capitalagreements to lease agreements with transponder and transmitter network suppliers to transmit its signals in the U.S., Germany and France at an aggregate monthly cost of $1 million. Depreciation expense related to the capital leases was $3 million for each of the three months ended September 30, 2017 and 2016. Forproperties back from the nine months ended September 30, 2017 and 2016, depreciation expense related to the capital leases was $9 million and $8 million, respectively. Total future minimum capital lease payments of $79 million include $5 million of imputed interest. The transponder service agreements for our U.S. transponders expire between 2019 and 2023. The transponder and transmitter network service agreements for our international transponders expire between 2019 and 2027.
Expenses for operating leases, principally for data processing equipment, facilities, satellite uplink service agreements and the California distribution center land, amounted to $5 million and $6 million for the three months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, expenses for operating leases were $17 million and $18 million, respectively.
On July 2, 2015, QVC entered into a lease (the “Lease”) for a California distribution center. Pursuant to the Lease, the landlord built an approximately one million square foot rental building in Ontario, California (the “Premises”), and thereafter leased the Premises to QVC as its new California distribution center forpurchaser over an initial term of 15 years. Under20 years with the Lease, QVC is required to pay an initial base rent of approximately $6 million per year, increasing to approximately $8 million per year by the final year of the initial term, as well as all real estate taxes and other building operating costs. QVC also has an option to extend the terms of the property leases for up to four consecutive terms of five years. QVC recognized a $69 million and $44 million gain related to the successful sale leaseback of the German and U.K. properties, respectively, during the first quarter of 2023 calculated as the difference between the aggregate consideration received and the carrying value of the properties. The Company accounted for the leases as operating leases and recorded a $42 million and $32 million right-of-use asset and operating lease liability for the German and U.K. properties, respectively.
As of December 31, 2022, assets of $71 million primarily related to the Germany and U.K. properties were classified as held for sale and included in Assets held for sale noncurrent in the consolidated balance sheet, as the proceeds from the sale were used to repay a portion of QVC's senior secured credit facility borrowings which were classified as noncurrent as of December 31, 2022. QVC classifies obligations as current when they are contractually required to be satisfied in the next twelve months.
In June 2022, QVC modified the finance lease for its distribution center in Ontario, California which reduced the term of the Leaselease and removed QVC’s ability to take ownership of the distribution center at the end of the lease term. QVC will make annual payments over the modified lease term. Since the lease was modified and removed QVC’s ability to take ownership at the end of the lease term, the Company accounted for upthe modification similar to two consecutive termsa sale and leaseback transaction and, as a result, recognized a $240 million gain on the sale of 10 years each.
QVC has the right to purchase the Premises and related land from the landlord by entering into an amended and restated agreement at any timedistribution center during the twenty-fifth or twenty-sixth monthssecond quarter of 2022, calculated as the difference between the aggregate consideration received (including cash of $250 million and forgiveness of the Lease's initial term, which will occurremaining financing obligation of $84 million) and the carrying value of the distribution center. The gain is included in Junegains on sale of intangible asset and Julysale leaseback transactions in the consolidated statement of 2018, with a $10 million initial payment and annual payments of $12 million over a term of 13 years.
operations. The Company concluded that it wasaccounted for the deemed owner (for accounting purposes only) of the Premises during the construction period under build to suitmodified lease accounting. Building construction began in July of 2015. During the construction period, the Companyas an operating lease and recorded estimated project construction costs incurred by the landlord as a projects in progress$37 million right-of-use asset and a corresponding long-term$31 million operating lease liability, in Property and equipment, net and Other long-term liabilities, respectively, on its consolidated balance sheet. In addition,with the Company paid for normal tenant improvements and certain structural improvements and recorded these amounts as part of the projects in progress asset. Upon completion of construction, the long-term liability was reclassifieddifference attributable to debt.prepaid rent.
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
On August 29, 2016, the California distribution center officially opened. The Company evaluated whether the Lease met the criteria for "sale-leaseback" treatment under U.S. GAAP and concluded that it did not. Therefore, the Company treats the Lease as a financing obligation and lease payments are attributed to: (1) a reduction of the principal financing obligation; (2) imputed interest expense; and (3) land lease expense representing an imputed cost to lease the underlying land of the Premises. In addition, the building asset is being depreciated over its estimated useful life of 20 years. Although the Company did not begin making monthly lease payments pursuant to the Lease until February 2017, the portion of the lease obligations allocated to the land has been treated for accounting purposes as an operating lease that commenced in 2015. If the Company does not exercise its right to purchase the Premises and related land, the Company will derecognize both the net book values of the asset and the financing obligation at the conclusion of the lease term.
(8)(6) Income Taxes
The Company calculates its interim income tax provision by applying its best estimate of the annual expected effective tax rate to its ordinary year-to-date income or loss. The tax or benefit related to significant, unusual or extraordinary items that will be separately reported or reported net of their related tax effect are individually computed and recognized in the interim period in which those items occur.
The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in foreign jurisdictions, permanent and temporary differences as a result of differences between amounts measured and recognized in accordance with tax laws and financial accounting standards, and the likelihood of recovering deferred tax assets. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the tax environment changes. To the extent that the estimated annual effective tax rate changes during a quarter, the effect of the change on the prior quarters is included in the tax expense for the current quarter.
For the three months ended SeptemberJune 30, 2017,2023 and 2022, the Company recorded a tax provision of $58$88 million and $109 million, respectively, which represented an effective tax rate of 25.9%.28.0% and 27.7%, respectively. For the ninesix months ended SeptemberJune 30, 2017,2023 and 2022, the Company recorded a tax provision of $225$139 million and $150 million, respectively, which represented an effective tax rate of 33.2%. These rates differ27.8% and 30.5%, respectively. The 2023 rate differs from the U.S. federal income tax rate of 35.0%21% primarily due to state and foreign tax expense and permanent items. The 2023 effective tax rate has decreased from the prior year for the six months ended June 30, 2023 primarily due to the impactreversal of discrete permanent differencestax expense accrued in prior periods related to foreign currency losses realizedthe settlement of state income tax reserves.
The Company participates in a consolidated federal return filing with Qurate Retail. As of June 30, 2023, the Company's tax years through 2017 are closed for federal income tax purposes, offset by state tax expense.
QVC is party to ongoing discussions withand the Internal Revenue Service ("IRS") has completed its examination of the Company's tax years through 2021. The Company's 2022 and 2023 tax years are being examined currently as part of the Qurate Retail consolidated return under the IRS's Compliance Assurance Process audit program. The Company files Federal tax returns on a consolidated basis with its parent company, Liberty. The Company, or one of its subsidiaries, files income tax returns in various states and foreign jurisdictions. As of SeptemberJune 30, 2017, the income tax returns of2023, the Company or one of its subsidiaries, werewas under examination in Colorado, Florida, Minnesota, New Jersey, Pennsylvania, New York City, South Carolina, Wisconsin, Germany for 2012 through 2014 and the U.K. for 2015. In addition, as of September 30, 2017, income tax returns of the Company, or one of its subsidiaries, were under examination in California, New York State, and Pennsylvania.
The Company is a party to athe Tax Liability Allocation and Indemnification Agreement (the “Tax Agreement”) with Liberty.Qurate Retail. The Tax Agreement establishes the methodology for the calculation and payment of income taxes in connection with the consolidation of the Company with LibertyQurate Retail for income tax purposes. Generally, the Tax Agreement provides that the Company will pay LibertyQurate Retail an amount equal to the tax liability, if any, that it would have if it were to file as a consolidated group separate and apart from Liberty,Qurate Retail, with exceptions for the treatment and timing of certain items, including but not limited to deferred intercompany transactions, credits, and net operating and capital losses. To the extent that the separate company tax expense is different from the payment terms of the Tax Agreement, the difference is recorded as either a dividend or capital contribution.
The amountamounts of the tax-related balances due from Liberty at September 30, 2017 were $3 million. The amount of tax related balancespayable due to Liberty atQurate Retail as of June 30, 2023 and December 31, 20162022 were $75 million. These amounts$10 million and $23 million, respectively, and were included in accrued liabilities in the accompanying condensed consolidated balance sheets.
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
(9)(7) Commitments and Contingencies
The Company has contingent liabilities related to legal and tax proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible the Company may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. In the opinion of management, it is expected that the amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying condensed consolidated financial statements.
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
Network and information systems, including the Internet and telecommunication systems, third party delivery services and other technologies are critical to ourQVC's business activities. Substantially all ourof QVC's customer orders, fulfillment and delivery services are dependent upon the use of network and information systems, including the use of third party telecommunication and delivery service providers. If information systems including the Internet or telecommunication services are disrupted, or if the third party delivery services experience a disruption in their transportation delivery services, wethe Company could face a significant disruption in fulfilling ourQVC's customer orders and shipment of ourQVC's products. We haveThe Company has active disaster recovery programs in place to help mitigate risks associated with these critical business activities.
(10)
(8) Financial Instruments and Fair Value Measurements
For assets and liabilities required to be reported or disclosed at fair value, U.S. GAAP provides a hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs, other than quoted market prices included within Level 1, are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability.
The Company measures the fair value of money market funds based on quoted prices in active markets for identical assets. Money market funds are included as cash equivalents Level 1 fair value instruments in the table below. The 2067 Notes (ticker: QVCD) and the 2068 Notes (ticker: QVCC) are traded on the New York Stock Exchange, which the Company considers to be an "active market," as defined by U.S. GAAP. Therefore, these Notes are measured based on quoted prices in an active market and included as Level 1 fair value instruments in the table below. The remainder of the Company's debt instruments and derivative instruments are considered Level 2 fair value instruments and measured based on quoted market prices that are not considered to be traded on "active markets." Accordingly, these financial instruments are reported in the below tables as Level 2 fair value instruments.
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
The Company's assets and liabilities measured or disclosed at fair value were as follows:
| |
|
| Fair value measurements at September 30, 2017 using | | | Fair value measurements at June 30, 2023 using |
(in millions) | Total |
| Quoted prices in active markets for identical assets (Level 1) |
| Significant other observable inputs (Level 2) |
| Significant unobservable inputs (Level 3) |
| (in millions) | Total | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) |
Current assets: |
|
| Current assets: | |
Cash equivalents | $ | 88 |
| 88 |
| — |
| — |
| Cash equivalents | $ | 144 | | 144 | | — | | — | |
Noncurrent assets: |
|
| |
Interest rate swap arrangements | 2 |
| — |
| 2 |
| — |
| |
Current liabilities: | | Current liabilities: | |
Debt (note 4) | | Debt (note 4) | 414 | | — | | 414 | | — | |
Long-term liabilities: |
|
| Long-term liabilities: | |
Debt (note 6) | 5,044 |
| — |
| 5,044 |
| — |
| |
Debt (note 4) | | Debt (note 4) | 3,251 | | 306 | | 2,945 | | — | |
| | | | | | | | | | | | | | |
| | Fair value measurements at December 31, 2022 using |
(in millions) | Total | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | Significant unobservable inputs (Level 3) |
Current assets: | | | | |
Cash equivalents | $ | 64 | | 64 | | — | | — | |
Current liabilities: | | | | |
Debt (note 4) | 213 | | — | | 213 | | — | |
Foreign currency forwards | 10 | | — | | 10 | | — | |
Long-term liabilities: | | | | |
Debt (note 4) | 3,520 | | 346 | | 3,174 | | — | |
|
| | | | | | | | | |
|
| Fair value measurements at December 31, 2016 using | |
(in millions) | Total |
| Quoted prices in active markets for identical assets (Level 1) |
| Significant other observable inputs (Level 2) |
| Significant unobservable inputs (Level 3) |
|
Current assets: |
|
|
|
|
Cash equivalents | $ | 113 |
| 113 |
| — |
| — |
|
Noncurrent assets: |
|
|
|
|
|
|
|
|
Interest rate swap arrangements | 2 |
| — |
| 2 |
| — |
|
Long-term liabilities: |
|
|
|
|
|
|
|
|
Debt (note 6) | 5,092 |
| — |
| 5,092 |
| — |
|
Interest Rate Swap ArrangementThe majority ofIn July 2019, the Company's Level 2 financial liabilities are debt instruments with quoted market prices that are not considered to be traded on "active markets," as defined in U.S. GAAP. Accordingly, the financial instruments are reported in the foregoing tables as Level 2 fair value instruments.
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
During the year ended December 31, 2016, QVCCompany entered into a three-year interest rate swap arrangement with a notional amount of $125 million to mitigate the interest rate risk associated with interest payments related to its variable rate debt. The swap arrangement did not qualify as a cash flow hedge under U.S. GAAP. Accordingly, changesChanges in the fair value of the swap arrangement are reflected in gain(losses) gains on financial instruments in the accompanying condensed consolidated statements of operations. At September 30, 2017,The swap arrangement expired in July 2022.
Foreign Currency Forward Contracts
On October 31, 2022, the Company entered into foreign currency forward contracts with an aggregate notional amount of $167 million to mitigate the foreign currency risk associated with the sale and leaseback of Germany and U.K. properties. The forwards did not qualify as a cash flow hedge under U.S. GAAP. Changes in the fair value of the swap instrument wasforwards are reflected in (losses) gains on financial instruments in the consolidated statements of operations. The forwards were in a net assetliability position of $2$10 million as of December 31, 2022, which iswas included in other noncurrent assets.accrued liabilities. The contract expired in January 2023 which resulted in a net cash settlement of $12 million.
(11)
(9) Information about QVC's Operating Segments
The Company has identified two reportable operating segments: QVC-U.S. and QVC-International. Both operating segments are retailers of a wide range of consumer products, which are marketed and sold primarily by merchandise-focused televised-shopping programs as well as via the Internet and mobile applications in certain markets.
QVC'sCompany's chief operating decision maker ("CODM") is QVC'sthe Company's Chief Executive Officer. QVC's CODMOfficer who has ultimate responsibility for enterprise decisions. QVC's CODM determines, in particular, resource allocation for, and monitors performance of, the consolidated enterprise, QVC-U.S.QxH, and QVC-International. The segment managers have responsibility for operating decisions, allocating resources and assessing performance within their respective segments. QVC's CODM relies on internal management reporting that analyzes enterprise results and segment results to the Adjusted OIBDA level (see below).
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
For the three and six months ended June 30, 2023 and 2022, QVC identified QxH and QVC-International as its two reportable segments. Both operating segments are retailers of a wide range of consumer products, which are marketed and sold primarily by merchandise-focused televised-shopping programs as well as via the Internet and mobile applications in certain markets.
Performance measures
The Company evaluates performance and makes decisions about allocating resources to its operating segments based on financial measures such as net revenue, Adjusted OIBDA (defined below), gross margin, average sales price per unit, number of units shipped and revenue or sales per subscriber equivalent. Thecustomer. For segment reporting purposes, the Company defines Adjusted OIBDA, as net revenue less cost of goods sold (excluding fire related costs, net of recoveries and Rocky Mount inventory losses, see note 10), operating expenses, and selling, general and administrative expenses (excluding stock-based compensation)compensation and restructuring costs). The Company believes this measure is an important indicator of the operational strength and performance of its segments including the ability to service debt and fund capital expenditures.by identifying those items that are not directly a reflection of each segment's performance or indicative of ongoing business trends. In addition, this measure allows management to view operating results and perform analytical comparisons and benchmarking among the Company's businesses and identify strategies to improve performance. This measure of performance excludes depreciation, amortization, impairment losses, gains on sale of intangible asset and sale leaseback transactions, restructuring and fire related costs, net of recoveries, Rocky Mount inventory losses and stock-based compensation that are included in the measurement of operating income pursuant to U.S. GAAP. Accordingly, Adjusted OIBDA should be considered in addition to, but not as a substitute for, operating income, net income, cash flow provided by operating activities and other measures of financial performance prepared in accordance with U.S. GAAP.
Performance measures
|
| | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | |
| 2017 | | 2016 | | 2017 | | 2016 | |
(in millions) | Net revenue |
| Adjusted OIBDA |
| Net revenue |
| Adjusted OIBDA |
| Net revenue |
| Adjusted OIBDA |
| Net revenue |
| Adjusted OIBDA |
|
QVC-U.S. | $ | 1,374 |
| 313 |
| 1,338 |
| 308 |
| 4,111 |
| 1,010 |
| 4,173 |
| 997 |
|
QVC-International | 636 |
| 99 |
| 610 |
| 85 |
| 1,843 |
| 304 |
| 1,851 |
| 274 |
|
Consolidated QVC | $ | 2,010 |
| 412 |
| 1,948 |
| 393 |
| 5,954 |
| 1,314 |
| 6,024 |
| 1,271 |
|
NetDisaggregated revenue amounts by segment and product category are not available from our general purpose financial statements.consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, 2023 | Six months ended June 30, 2023 |
(in millions) | QxH | QVC-International | Total | QxH | QVC-International | Total |
Home | $ | 602 | | 244 | | 846 | | 1,237 | | 481 | | 1,718 | |
Apparel | 340 | | 111 | | 451 | | 635 | | 224 | | 859 | |
Beauty | 264 | | 143 | | 407 | | 510 | | 276 | | 786 | |
Accessories | 223 | | 56 | | 279 | | 415 | | 107 | | 522 | |
Electronics | 82 | | 15 | | 97 | | 192 | | 32 | | 224 | |
Jewelry | 65 | | 35 | | 100 | | 142 | | 74 | | 216 | |
Other revenue | 42 | | 2 | | 44 | | 88 | | 4 | | 92 | |
Total net revenue | $ | 1,618 | | 606 | | 2,224 | | 3,219 | | 1,198 | | 4,417 | |
| | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, 2022 | Six months ended June 30, 2022 |
(in millions) | QxH | QVC-International | Total | QxH | QVC-International | Total |
Home | $ | 680 | | 248 | | 928 | | 1,329 | | 521 | | 1,850 | |
Apparel | 356 | | 117 | | 473 | | 652 | | 234 | | 886 | |
Beauty | 253 | | 145 | | 398 | | 514 | | 290 | | 804 | |
Accessories | 241 | | 58 | | 299 | | 443 | | 113 | | 556 | |
Electronics | 112 | | 25 | | 137 | | 259 | | 51 | | 310 | |
Jewelry | 71 | | 42 | | 113 | | 158 | | 94 | | 252 | |
Other revenue | 41 | | 3 | | 44 | | 83 | | 5 | | 88 | |
Total net revenue | $ | 1,754 | | 638 | | 2,392 | | 3,438 | | 1,308 | | 4,746 | |
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
Adjusted OIBDA is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | Six months ended June 30, |
| 2023 | 2022 | 2023 | 2022 |
(in millions) | Net revenue | Adjusted OIBDA | Net revenue | Adjusted OIBDA | Net revenue | Adjusted OIBDA | Net revenue | Adjusted OIBDA |
QxH | $ | 1,618 | | 185 | | 1,754 | | 232 | | 3,219 | | 324 | | 3,438 | | 457 | |
QVC-International | 606 | | 77 | | 638 | | 95 | | 1,198 | | 149 | | 1,308 | | 199 | |
Consolidated QVC | $ | 2,224 | | 262 | | 2,392 | | 327 | | 4,417 | | 473 | | 4,746 | | 656 | |
Other information
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | Six months ended June 30, |
| 2023 | 2022 | 2023 | 2022 |
(in millions) | Depreciation | Amortization | Depreciation | Amortization | Depreciation | Amortization | Depreciation | Amortization |
QxH | $ | 14 | | 67 | | 22 | | 66 | | 29 | | 130 | | 45 | | 137 | |
QVC-International | 8 | | 5 | | 10 | | 4 | | 16 | | 8 | | 22 | | 7 | |
Consolidated QVC | $ | 22 | | 72 | | 32 | | 70 | | 45 | | 138 | | 67 | | 144 | |
| | | Three months ended September 30, | | Nine months ended September 30, | | | | | | | | | | | | |
| 2017 | | 2016 | | 2017 | | 2016 | | | June 30, 2023 |
(in millions) | Depreciation |
| Amortization |
| Depreciation |
| Amortization |
| Depreciation |
| Amortization |
| Depreciation |
| Amortization |
| (in millions) | Total assets | Capital expenditures | Property and equipment, net |
QVC-U.S. | $ | 24 |
| 83 |
| 22 |
| 103 |
| 70 |
| 293 |
| 55 |
| 308 |
| |
QxH | | QxH | $ | 10,217 | | 61 | | 262 | |
QVC-International | 14 |
| 8 |
| 16 |
| 13 |
| 46 |
| 31 |
| 48 |
| 37 |
| QVC-International | 1,884 | | 18 | | 177 | |
Consolidated QVC | $ | 38 |
| 91 |
| 38 |
| 116 |
| 116 |
| 324 |
| 103 |
| 345 |
| Consolidated QVC | $ | 12,101 | | 79 | | 439 | |
|
| | | | | | | | | |
| September 30, 2017 | | December 31, 2016 | |
(in millions) | Total assets |
| Capital expenditures |
| Total assets |
| Capital expenditures |
|
QVC-U.S. | $ | 9,107 |
| 63 |
| 9,595 |
| 152 |
|
QVC-International | 2,156 |
| 20 |
| 1,950 |
| 27 |
|
Consolidated QVC | $ | 11,263 |
| 83 |
| 11,545 |
| 179 |
|
Long-lived assets, net of accumulated depreciation, by segment were as follows: |
| | | | | |
(in millions) | September 30, 2017 |
| December 31, 2016 |
|
QVC-U.S. | $ | 552 |
| 594 |
|
QVC-International | 446 |
| 437 |
|
Consolidated QVC | $ | 998 |
| 1,031 |
|
The following table provides a reconciliation of Adjusted OIBDA to operating income and income before income taxes:
| | | | | | | | | | | | | | |
| Three months ended June 30, | Six months ended June 30, |
(in millions) | 2023 | 2022 | 2023 | 2022 |
Adjusted OIBDA | $ | 262 | | 327 | | 473 | | 656 | |
Gains on sale of intangible asset and sale leaseback transactions | 6 | | 243 | | 119 | | 243 | |
Restructuring and fire related (costs), net of recoveries (including Rocky Mount inventory losses) | 211 | | (16) | | 215 | | (98) | |
Stock-based compensation | (11) | | (10) | | (20) | | (18) | |
Depreciation and amortization | (94) | | (102) | | (183) | | (211) | |
Operating income | 374 | | 442 | | 604 | | 572 | |
(Losses) gains on financial instruments | — | | — | | (1) | | 1 | |
Interest expense, net | (67) | | (63) | | (104) | | (125) | |
Foreign currency (loss) gain | (3) | | 21 | | (9) | | 29 | |
Gain (loss) on extinguishment of debt | 10 | | (6) | | 10 | | (6) | |
Other income | — | | — | | — | | 20 | |
Income before income taxes | $ | 314 | | 394 | | 500 | | 491 | |
|
| | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | |
(in millions) | 2017 |
| 2016 |
| 2017 |
| 2016 |
|
Adjusted OIBDA | $ | 412 |
| 393 |
| 1,314 |
| 1,271 |
|
Stock-based compensation | (9 | ) | (8 | ) | (23 | ) | (24 | ) |
Depreciation and amortization | (129 | ) | (154 | ) | (440 | ) | (448 | ) |
Equity in losses of investee | — |
| (2 | ) | (3 | ) | (4 | ) |
Interest expense, net | (54 | ) | (52 | ) | (165 | ) | (159 | ) |
Foreign currency gain (loss) | 4 |
| 5 |
| (6 | ) | 27 |
|
Income before income taxes | $ | 224 |
| 182 |
| 677 |
| 663 |
|
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
(10) Fire at Rocky Mount Fulfillment Center
(12) Other Comprehensive (Loss) Income
On December 18, 2021, QVC experienced a fire at its Rocky Mount fulfillment center in North Carolina. Rocky Mount was the Company’s second-largest fulfillment center for QxH and the Company’s primary returns center for hard goods. The changeCompany maintains property, general liability and business interruption insurance coverage. Based on the provisions of QVC’s insurance policies, the Company recorded estimated insurance recoveries for fire related costs for which recovery was deemed probable. As of December 31, 2022 the Company had an insurance receivable of $40 million recorded in accounts receivable in the component of accumulated other comprehensive loss, net of taxes ("AOCL"), is summarized as follows:consolidated balance sheet. |
| | | | | |
(in millions) | Foreign currency translation adjustments |
| AOCL |
|
Balance at January 1, 2017 | $ | (224 | ) | (224 | ) |
Other comprehensive income attributable to QVC, Inc. stockholder | 106 |
| 106 |
|
Balance at September 30, 2017 | (118 | ) | (118 | ) |
| | |
Balance at January 1, 2016 | $ | (140 | ) | (140 | ) |
Other comprehensive income attributable to QVC, Inc. stockholder | 18 |
| 18 |
|
Balance at September 30, 2016 | (122 | ) | (122 | ) |
The component of other comprehensive income is reflected in QVC's condensed consolidated statements of comprehensive income, net of taxes. The following table summarizesIn June 2023, the tax effectsCompany agreed to a final insurance settlement with its insurance company and received all remaining proceeds related to the componentRocky Mount claim. As of other comprehensive income:December 31, 2022 and June 30, 2023, the Company recorded cumulative fire related costs of $407 million and $434 million, respectively, of which $16 million and $27 million, were recorded during the three and six months ended June 30, 2023, respectively. Cumulative costs as of December 31, 2022 and June 30,2023 include $119 million of costs that were not reimbursable by QVC’s insurance policies. As of December 31, 2022 and June 30, 2023 the Company received cumulative insurance proceeds of $380 million and $660 million, respectively, and recorded net gains, representing the proceeds received in excess of recoverable losses recognized, of $132 million during the year ended December 31, 2022 and $209 million and $213 million, respectively, during the three and six months ended June 30, 2023. Of the $280 million of insurance proceeds received during the six months ended June 30, 2023, $210 million represents recoveries for business interruption losses. The fire related costs and gains related to insurance recoveries are included in restructuring and fire related costs, net of (recoveries) in the condensed consolidated statement of operations.
In February 2023, QVC sold the Rocky Mount fulfillment center to an independent third party and received net cash proceeds of $15 million. During the three months ended June 30,2023, QVC received an additional $2 million of proceeds from the sale that were released from escrow. QVC recognized gains on the sale of $2 million and $15 million during the three and six months ended June 30, 2023, respectively, calculated as the difference between the aggregate consideration received and the carrying value of the property. The gain is included in fire related costs, net of (recoveries) in the condensed consolidated statement of operations.
During the six months ended June 30, 2022, the Company recorded $135 million of fire related costs including $95 million for the write-down of Rocky Mount inventory which was included in Cost of goods sold. Due to the circumstances surrounding the write-down of the inventory, this write-down has been excluded from Adjusted OIBDA (as defined in note 9).
(11) Subsequent Events
|
| | | | | | | |
(in millions) | Before-tax amount |
| Tax (expense) benefit |
| Net-of-tax amount |
|
Three months ended September 30, 2017 | | | |
Foreign currency translation adjustments | $ | 33 |
| (5 | ) | 28 |
|
Other comprehensive income | 33 |
| (5 | ) | 28 |
|
| | | |
Three months ended September 30, 2016 | | | |
Foreign currency translation adjustments | $ | (7 | ) | 4 |
| (3 | ) |
Other comprehensive loss | (7 | ) | 4 |
| (3 | ) |
| | | |
Nine months ended September 30, 2017: |
|
|
|
Foreign currency translation adjustments | $ | 135 |
| (25 | ) | 110 |
|
Other comprehensive income | 135 |
| (25 | ) | 110 |
|
| | | |
Nine months ended September 30, 2016: |
|
|
|
Foreign currency translation adjustments | $ | 23 |
| 13 |
| 36 |
|
Other comprehensive income | 23 |
| 13 |
| 36 |
|
(13) Subsequent Event
Subsequent to September 30, 2017, QVC declared and paid dividends to LibertyQurate Retail in the amount of $300 million.
As of November 9, 2017, zulily had $275$33 million outstanding on the shared tranche within the Third Amended and Restated Credit Agreement.
from July 1, 2023 to August 4, 2023.
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
(14) Guarantor/Non-guarantor Subsidiary Financial Information
The following information contains the condensed consolidating financial statements for the Company, the parent on a stand-alone basis (QVC, Inc.), the combined subsidiary guarantors (Affiliate Relations Holdings, Inc.; Affiliate Investment, Inc.; AMI 2, Inc.; ER Marks, Inc.; QVC Rocky Mount, Inc.; QVC San Antonio, LLC; QVC Global Holdings I, Inc.; and QVC Global Holdings II, Inc.) and the combined non-guarantor subsidiaries pursuant to Rule 3-10 of Regulation S-X.
In connection with the Third Amended and Restated Credit Agreement (see notes 1 and 6), QVC International Ltd is no longer a guarantor subsidiary, and is reflected with the combined non-guarantor subsidiaries.
These condensed consolidating financial statements have been prepared from the Company's financial information on the same basis of accounting as the Company's condensed consolidated financial statements. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions, such as management fees, royalty revenue and expense, interest income and expense and gains on intercompany asset transfers. Goodwill and other intangible assets have been allocated to the subsidiaries based on management’s estimates. Certain costs have been partially allocated to all of the subsidiaries of the Company.
The subsidiary guarantors are 100% owned by the Company. All guarantees are full and unconditional and are joint and several. There are no significant restrictions on the ability of the Company to obtain funds from its U.S. subsidiaries, including the guarantors, by dividend or loan. The Company has not presented separate notes and other disclosures concerning the subsidiary guarantors as the Company has determined that such material information is available in the notes to the Company's condensed consolidated financial statements.
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
Condensed Consolidating Balance Sheets
|
| | | | | | | | | | | |
September 30, 2017 | |
(in millions) | Parent issuer- QVC, Inc. |
| Combined subsidiary guarantors |
| Combined non-guarantor subsidiaries |
| Eliminations |
| Consolidated- QVC, Inc. and subsidiaries |
|
Assets |
Current assets: |
|
|
|
|
|
Cash and cash equivalents | $ | 3 |
| 50 |
| 290 |
| — |
| 343 |
|
Restricted cash | 8 |
| — |
| 3 |
| — |
| 11 |
|
Accounts receivable, net | 628 |
| — |
| 260 |
| — |
| 888 |
|
Inventories | 868 |
| — |
| 296 |
| — |
| 1,164 |
|
Prepaid expenses and other current assets | 26 |
| 1 |
| 28 |
| — |
| 55 |
|
Total current assets | 1,533 |
| 51 |
| 877 |
| — |
| 2,461 |
|
Property and equipment, net | 286 |
| 59 |
| 653 |
| — |
| 998 |
|
Television distribution rights, net | — |
| 78 |
| — |
| — |
| 78 |
|
Goodwill | 4,190 |
| — |
| 876 |
| — |
| 5,066 |
|
Other intangible assets, net | 534 |
| 2,048 |
| 17 |
| — |
| 2,599 |
|
Other noncurrent assets | 15 |
| — |
| 46 |
| — |
| 61 |
|
Investments in subsidiaries | 3,190 |
| 64 |
| — |
| (3,254 | ) | — |
|
Total assets | $ | 9,748 |
| 2,300 |
| 2,469 |
| (3,254 | ) | 11,263 |
|
Liabilities and equity |
Current liabilities: |
|
|
|
|
|
Current portion of debt and capital lease obligations | $ | 3 |
| — |
| 14 |
| — |
| 17 |
|
Accounts payable-trade | 458 |
| — |
| 268 |
| — |
| 726 |
|
Accrued liabilities | 70 |
| 157 |
| 403 |
| — |
| 630 |
|
Intercompany accounts payable (receivable) | 270 |
| (1,434 | ) | 1,164 |
| — |
| — |
|
Total current liabilities | 801 |
| (1,277 | ) | 1,849 |
| — |
| 1,373 |
|
Long-term portion of debt and capital lease obligations | 4,927 |
| — |
| 146 |
| — |
| 5,073 |
|
Deferred income taxes | 73 |
| 718 |
| (61 | ) | — |
| 730 |
|
Other long-term liabilities | 102 |
| — |
| 25 |
| — |
| 127 |
|
Total liabilities | 5,903 |
| (559 | ) | 1,959 |
| — |
| 7,303 |
|
Equity: |
|
|
|
|
|
QVC, Inc. stockholder's equity | 3,845 |
| 2,859 |
| 395 |
| (3,254 | ) | 3,845 |
|
Noncontrolling interest | — |
| — |
| 115 |
| — |
| 115 |
|
Total equity | 3,845 |
| 2,859 |
| 510 |
| (3,254 | ) | 3,960 |
|
Total liabilities and equity | $ | 9,748 |
| 2,300 |
| 2,469 |
| (3,254 | ) | 11,263 |
|
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
Condensed Consolidating Balance Sheets
|
| | | | | | | | | | | |
December 31, 2016 | |
(in millions) | Parent issuer- QVC, Inc. |
| Combined subsidiary guarantors |
| Combined non-guarantor subsidiaries |
| Eliminations |
| Consolidated- QVC, Inc. and subsidiaries |
|
Assets |
Current assets: |
|
|
|
|
|
Cash and cash equivalents | $ | 2 |
| 97 |
| 185 |
| — |
| 284 |
|
Restricted cash | 8 |
| — |
| 2 |
| — |
| 10 |
|
Accounts receivable, net | 958 |
| — |
| 288 |
| — |
| 1,246 |
|
Inventories | 726 |
| — |
| 224 |
| — |
| 950 |
|
Prepaid expenses and other current assets | 22 |
| — |
| 24 |
| — |
| 46 |
|
Total current assets | 1,716 |
| 97 |
| 723 |
| — |
| 2,536 |
|
Property and equipment, net | 317 |
| 63 |
| 651 |
| — |
| 1,031 |
|
Television distribution rights, net | — |
| 167 |
| 16 |
| — |
| 183 |
|
Goodwill | 4,190 |
| — |
| 805 |
| — |
| 4,995 |
|
Other intangible assets, net | 666 |
| 2,049 |
| 23 |
| — |
| 2,738 |
|
Other noncurrent assets | 15 |
| — |
| 47 |
| — |
| 62 |
|
Investments in subsidiaries | 3,389 |
| 1,030 |
| — |
| (4,419 | ) | — |
|
Total assets | $ | 10,293 |
| 3,406 |
| 2,265 |
| (4,419 | ) | 11,545 |
|
Liabilities and equity |
Current liabilities: |
|
|
|
|
|
Current portion of debt and capital lease obligations | $ | 3 |
| — |
| 11 |
| — |
| 14 |
|
Accounts payable-trade | 425 |
| — |
| 253 |
| — |
| 678 |
|
Accrued liabilities | 74 |
| 234 |
| 461 |
| — |
| 769 |
|
Intercompany accounts payable (receivable) | 623 |
| (246 | ) | (377 | ) | — |
| — |
|
Total current liabilities | 1,125 |
| (12 | ) | 348 |
| — |
| 1,461 |
|
Long-term portion of debt and capital lease obligations | 5,132 |
| — |
| 143 |
| — |
| 5,275 |
|
Deferred income taxes | 145 |
| 707 |
| (74 | ) | — |
| 778 |
|
Other long-term liabilities | 96 |
| — |
| 40 |
| — |
| 136 |
|
Total liabilities | 6,498 |
| 695 |
| 457 |
| — |
| 7,650 |
|
Equity: |
|
|
|
|
|
QVC, Inc. stockholder's equity | 3,795 |
| 2,711 |
| 1,708 |
| (4,419 | ) | 3,795 |
|
Noncontrolling interest | — |
| — |
| 100 |
| — |
| 100 |
|
Total equity | 3,795 |
| 2,711 |
| 1,808 |
| (4,419 | ) | 3,895 |
|
Total liabilities and equity | $ | 10,293 |
| 3,406 |
| 2,265 |
| (4,419 | ) | 11,545 |
|
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
Condensed Consolidating Statements of Operations
|
| | | | | | | | | | | |
Three months ended September 30, 2017 | |
(in millions) | Parent issuer- QVC, Inc. |
| Combined subsidiary guarantors |
| Combined non-guarantor subsidiaries |
| Eliminations |
| Consolidated- QVC, Inc. and subsidiaries |
|
Net revenue | $ | 1,419 |
| 234 |
| 688 |
| (331 | ) | 2,010 |
|
Cost of goods sold | 864 |
| 37 |
| 422 |
| (41 | ) | 1,282 |
|
Gross profit | 555 |
| 197 |
| 266 |
| (290 | ) | 728 |
|
Operating expenses: |
|
|
|
|
|
Operating | 106 |
| 64 |
| 70 |
| (95 | ) | 145 |
|
Selling, general and administrative, including stock-based compensation | 262 |
| — |
| 113 |
| (195 | ) | 180 |
|
Depreciation | 17 |
| 2 |
| 19 |
| — |
| 38 |
|
Amortization | 47 |
| 35 |
| 9 |
| — |
| 91 |
|
| 432 |
| 101 |
| 211 |
| (290 | ) | 454 |
|
Operating income | 123 |
| 96 |
| 55 |
| — |
| 274 |
|
Other (expense) income: |
|
|
|
|
|
Interest expense, net | (54 | ) | — |
| — |
| — |
| (54 | ) |
Foreign currency (loss) gain | (1 | ) | 1 |
| 4 |
| — |
| 4 |
|
Intercompany interest (expense) income | (1 | ) | 23 |
| (22 | ) | — |
| — |
|
| (56 | ) | 24 |
| (18 | ) | — |
| (50 | ) |
Income before income taxes | 67 |
| 120 |
| 37 |
| — |
| 224 |
|
Income tax expense | (13 | ) | (24 | ) | (21 | ) | — |
| (58 | ) |
Equity in earnings of subsidiaries, net of tax | 112 |
| 19 |
| — |
| (131 | ) | — |
|
Net income | 166 |
| 115 |
| 16 |
| (131 | ) | 166 |
|
Less net income attributable to the noncontrolling interest | (12 | ) | — |
| (12 | ) | 12 |
| (12 | ) |
Net income attributable to QVC, Inc. stockholder | $ | 154 |
| 115 |
| 4 |
| (119 | ) | 154 |
|
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
Condensed Consolidating Statements of Operations
|
| | | | | | | | | | | |
Three months ended September 30, 2016 | |
(in millions) | Parent issuer- QVC, Inc. |
| Combined subsidiary guarantors |
| Combined non-guarantor subsidiaries |
| Eliminations |
| Consolidated- QVC, Inc. and subsidiaries |
|
Net revenue | $ | 1,369 |
| 224 |
| 662 |
| (307 | ) | 1,948 |
|
Cost of goods sold | 847 |
| 38 |
| 416 |
| (50 | ) | 1,251 |
|
Gross profit | 522 |
| 186 |
| 246 |
| (257 | ) | 697 |
|
Operating expenses: | | | | | |
Operating | 94 |
| 61 |
| 64 |
| (79 | ) | 140 |
|
Selling, general and administrative, including stock-based compensation | 246 |
| — |
| 104 |
| (178 | ) | 172 |
|
Depreciation | 16 |
| 1 |
| 21 |
| — |
| 38 |
|
Amortization | 62 |
| 41 |
| 13 |
| — |
| 116 |
|
| 418 |
| 103 |
| 202 |
| (257 | ) | 466 |
|
Operating income | 104 |
| 83 |
| 44 |
| — |
| 231 |
|
Other (expense) income: | | | | | |
Equity in losses of investee | — |
| — |
| (2 | ) | — |
| (2 | ) |
Interest expense, net | (52 | ) | — |
| — |
| — |
| (52 | ) |
Foreign currency gain | 3 |
| — |
| 2 |
| — |
| 5 |
|
| (49 | ) | — |
| — |
| — |
| (49 | ) |
Income before income taxes | 55 |
| 83 |
| 44 |
| — |
| 182 |
|
Income tax expense | (13 | ) | (26 | ) | (27 | ) | — |
| (66 | ) |
Equity in earnings of subsidiaries, net of tax | 74 |
| 24 |
| — |
| (98 | ) | — |
|
Net income | 116 |
| 81 |
| 17 |
| (98 | ) | 116 |
|
Less net income attributable to the noncontrolling interest | (9 | ) | — |
| (9 | ) | 9 |
| (9 | ) |
Net income attributable to QVC, Inc. stockholder | $ | 107 |
| 81 |
| 8 |
| (89 | ) | 107 |
|
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
Condensed Consolidating Statements of Operations
|
| | | | | | | | | | | |
Nine months ended September 30, 2017 | |
(in millions) | Parent issuer- QVC, Inc. |
| Combined subsidiary guarantors |
| Combined non-guarantor subsidiaries |
| Eliminations |
| Consolidated- QVC, Inc. and subsidiaries |
|
Net revenue | $ | 4,225 |
| 679 |
| 1,992 |
| (942 | ) | 5,954 |
|
Cost of goods sold | 2,557 |
| 106 |
| 1,210 |
| (118 | ) | 3,755 |
|
Gross profit | 1,668 |
| 573 |
| 782 |
| (824 | ) | 2,199 |
|
Operating expenses: |
|
|
|
|
|
Operating | 301 |
| 182 |
| 204 |
| (268 | ) | 419 |
|
Selling, general and administrative, including stock-based compensation | 743 |
| — |
| 302 |
| (556 | ) | 489 |
|
Depreciation | 50 |
| 6 |
| 60 |
| — |
| 116 |
|
Amortization | 167 |
| 125 |
| 32 |
| — |
| 324 |
|
| 1,261 |
| 313 |
| 598 |
| (824 | ) | 1,348 |
|
Operating income | 407 |
| 260 |
| 184 |
| — |
| 851 |
|
Other (expense) income: | | | | | |
Equity in losses of investee | — |
| — |
| (3 | ) | — |
| (3 | ) |
Interest expense, net | (163 | ) | — |
| (2 | ) | — |
| (165 | ) |
Foreign currency (loss) gain | (4 | ) | 1 |
| (3 | ) | — |
| (6 | ) |
Intercompany interest (expense) income | (3 | ) | 68 |
| (65 | ) | — |
| — |
|
| (170 | ) | 69 |
| (73 | ) | — |
| (174 | ) |
Income before income taxes | 237 |
| 329 |
| 111 |
| — |
| 677 |
|
Income tax expense | (84 | ) | (86 | ) | (55 | ) | — |
| (225 | ) |
Equity in earnings of subsidiaries, net of tax | 299 |
| 34 |
| — |
| (333 | ) | — |
|
Net income | 452 |
| 277 |
| 56 |
| (333 | ) | 452 |
|
Less net income attributable to the noncontrolling interest | (33 | ) | — |
| (33 | ) | 33 |
| (33 | ) |
Net income attributable to QVC, Inc. stockholder | $ | 419 |
| 277 |
| 23 |
| (300 | ) | 419 |
|
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
Condensed Consolidating Statements of Operations
|
| | | | | | | | | | | |
Nine months ended September 30, 2016 | |
(in millions) | Parent issuer- QVC, Inc. |
| Combined subsidiary guarantors |
| Combined non-guarantor subsidiaries |
| Eliminations |
| Consolidated- QVC, Inc. and subsidiaries |
|
Net revenue | $ | 4,272 |
| 688 |
| 2,009 |
| (945 | ) | 6,024 |
|
Cost of goods sold | 2,594 |
| 116 |
| 1,245 |
| (139 | ) | 3,816 |
|
Gross profit | 1,678 |
| 572 |
| 764 |
| (806 | ) | 2,208 |
|
Operating expenses: |
|
|
|
|
|
Operating | 296 |
| 180 |
| 204 |
| (252 | ) | 428 |
|
Selling, general and administrative, including stock-based compensation | 773 |
| — |
| 314 |
| (554 | ) | 533 |
|
Depreciation | 41 |
| 5 |
| 57 |
| — |
| 103 |
|
Amortization | 182 |
| 125 |
| 38 |
| — |
| 345 |
|
| 1,292 |
| 310 |
| 613 |
| (806 | ) | 1,409 |
|
Operating income | 386 |
| 262 |
| 151 |
| — |
| 799 |
|
Other (expense) income: |
|
|
|
|
|
Equity in losses of investee | — |
| — |
| (4 | ) | — |
| (4 | ) |
Interest expense, net | (159 | ) | — |
| — |
| — |
| (159 | ) |
Foreign currency gain | 12 |
| — |
| 15 |
| — |
| 27 |
|
Intercompany interest (expense) income | (1 | ) | 1 |
| — |
| — |
| — |
|
| (148 | ) | 1 |
| 11 |
| — |
| (136 | ) |
Income before income taxes | 238 |
| 263 |
| 162 |
| — |
| 663 |
|
Income tax expense | (75 | ) | (85 | ) | (84 | ) | — |
| (244 | ) |
Equity in earnings of subsidiaries, net of tax | 256 |
| 106 |
| — |
| (362 | ) | — |
|
Net income | 419 |
| 284 |
| 78 |
| (362 | ) | 419 |
|
Less net income attributable to the noncontrolling interest | (28 | ) | — |
| (28 | ) | 28 |
| (28 | ) |
Net income attributable to QVC, Inc. stockholder | $ | 391 |
| 284 |
| 50 |
| (334 | ) | 391 |
|
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
Condensed Consolidating Statements of Comprehensive Income
|
| | | | | | | | | | | |
Three months ended September 30, 2017 | |
(in millions) | Parent issuer- QVC, Inc. |
| Combined subsidiary guarantors |
| Combined non-guarantor subsidiaries |
| Eliminations |
| Consolidated- QVC, Inc. and subsidiaries |
|
Net income | $ | 166 |
| 115 |
| 16 |
| (131 | ) | 166 |
|
Foreign currency translation adjustments, net of tax | 28 |
| — |
| 28 |
| (28 | ) | 28 |
|
Total comprehensive income | 194 |
| 115 |
| 44 |
| (159 | ) | 194 |
|
Comprehensive income attributable to noncontrolling interest | (12 | ) | — |
| (12 | ) | 12 |
| (12 | ) |
Comprehensive income attributable to QVC, Inc. stockholder | $ | 182 |
| 115 |
| 32 |
| (147 | ) | 182 |
|
Condensed Consolidating Statements of Comprehensive Income
|
| | | | | | | | | | | |
Three months ended September 30, 2016 | |
(in millions) | Parent issuer- QVC, Inc. |
| Combined subsidiary guarantors |
| Combined non-guarantor subsidiaries |
| Eliminations |
| Consolidated- QVC, Inc. and subsidiaries |
|
Net income | $ | 116 |
| 81 |
| 17 |
| (98 | ) | 116 |
|
Foreign currency translation adjustments, net of tax | (3 | ) | — |
| (3 | ) | 3 |
| (3 | ) |
Total comprehensive income | 113 |
| 81 |
| 14 |
| (95 | ) | 113 |
|
Comprehensive income attributable to noncontrolling interest | (11 | ) | — |
| (11 | ) | 11 |
| (11 | ) |
Comprehensive income attributable to QVC, Inc. stockholder | $ | 102 |
| 81 |
| 3 |
| (84 | ) | 102 |
|
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
Condensed Consolidating Statements of Comprehensive Income
|
| | | | | | | | | | | |
Nine months ended September 30, 2017 | |
(in millions) | Parent issuer- QVC, Inc. |
| Combined subsidiary guarantors |
| Combined non-guarantor subsidiaries |
| Eliminations |
| Consolidated- QVC, Inc. and subsidiaries |
|
Net income | $ | 452 |
| 277 |
| 56 |
| (333 | ) | 452 |
|
Foreign currency translation adjustments, net of tax | 110 |
| — |
| 110 |
| (110 | ) | 110 |
|
Total comprehensive income | 562 |
| 277 |
| 166 |
| (443 | ) | 562 |
|
Comprehensive income attributable to noncontrolling interest | (37 | ) | — |
| (37 | ) | 37 |
| (37 | ) |
Comprehensive income attributable to QVC, Inc. stockholder | $ | 525 |
| 277 |
| 129 |
| (406 | ) | 525 |
|
Condensed Consolidating Statements of Comprehensive Income
|
| | | | | | | | | | | |
Nine months ended September 30, 2016 | |
(in millions) | Parent issuer- QVC, Inc. |
| Combined subsidiary guarantors |
| Combined non-guarantor subsidiaries |
| Eliminations |
| Consolidated- QVC, Inc. and subsidiaries |
|
Net income | $ | 419 |
| 284 |
| 78 |
| (362 | ) | 419 |
|
Foreign currency translation adjustments, net of tax | 36 |
| — |
| 36 |
| (36 | ) | 36 |
|
Total comprehensive income | 455 |
| 284 |
| 114 |
| (398 | ) | 455 |
|
Comprehensive income attributable to noncontrolling interest | (46 | ) | — |
| (46 | ) | 46 |
| (46 | ) |
Comprehensive income attributable to QVC, Inc. stockholder | $ | 409 |
| 284 |
| 68 |
| (352 | ) | 409 |
|
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
Condensed Consolidating Statements of Cash Flows
|
| | | | | | | | | | | |
Nine months ended September 30, 2017 | |
(in millions) | Parent issuer- QVC, Inc. |
| Combined subsidiary guarantors |
| Combined non-guarantor subsidiaries |
| Eliminations |
| Consolidated- QVC, Inc. and subsidiaries |
|
Operating activities: |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities | $ | 550 |
| 306 |
| 51 |
| — |
| 907 |
|
Investing activities: | | | | | |
Capital expenditures | (54 | ) | (2 | ) | (27 | ) | — |
| (83 | ) |
Expenditures for television distribution rights | — |
| (35 | ) | — |
| — |
| (35 | ) |
Changes in other noncurrent assets | (1 | ) | — |
| (1 | ) | — |
| (2 | ) |
Intercompany investing activities | 385 |
| (1,087 | ) | — |
| 702 |
| — |
|
Net cash provided by (used in) investing activities | 330 |
| (1,124 | ) | (28 | ) | 702 |
| (120 | ) |
Financing activities: | | | | | |
Principal payments of debt and capital lease obligations | (1,785 | ) | — |
| (6 | ) | — |
| (1,791 | ) |
Principal borrowings of debt from senior secured credit facility | 1,574 |
| — |
| — |
| — |
| 1,574 |
|
Dividends paid to Liberty Interactive Corporation
| (491 | ) | — |
| — |
| — |
| (491 | ) |
Dividends paid to noncontrolling interest | — |
| — |
| (22 | ) | — |
| (22 | ) |
Other financing activities | (10 | ) | — |
| — |
| — |
| (10 | ) |
Net short-term intercompany debt (repayments) borrowings | (353 | ) | (1,188 | ) | 1,541 |
| — |
| — |
|
Other intercompany financing activities | 186 |
| 1,959 |
| (1,443 | ) | (702 | ) | — |
|
Net cash (used in) provided by financing activities | (879 | ) | 771 |
| 70 |
| (702 | ) | (740 | ) |
Effect of foreign exchange rate changes on cash and cash equivalents | — |
| — |
| 12 |
| — |
| 12 |
|
Net increase (decrease) in cash and cash equivalents | 1 |
| (47 | ) | 105 |
| — |
| 59 |
|
Cash and cash equivalents, beginning of period | 2 |
| 97 |
| 185 |
| — |
| 284 |
|
Cash and cash equivalents, end of period | $ | 3 |
| 50 |
| 290 |
| — |
| 343 |
|
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
Condensed Consolidating Statements of Cash Flows
|
| | | | | | | | | | | |
Nine months ended September 30, 2016 | |
(in millions) | Parent issuer- QVC, Inc. |
| Combined subsidiary guarantors |
| Combined non-guarantor subsidiaries |
| Eliminations |
| Consolidated- QVC, Inc. and subsidiaries |
|
Operating activities: | | | | | |
Net cash provided by operating activities | $ | 586 |
| 256 |
| 7 |
| — |
| 849 |
|
Investing activities: |
|
|
|
|
|
Capital expenditures | (113 | ) | (3 | ) | (24 | ) | — |
| (140 | ) |
Expenditures for television distribution rights | — |
| (8 | ) | — |
| — |
| (8 | ) |
Changes in other noncurrent assets | 6 |
| — |
| (8 | ) | — |
| (2 | ) |
Other investing activities | (12 | ) | — |
| 9 |
| — |
| (3 | ) |
Intercompany investing activities | 432 |
| 137 |
| — |
| (569 | ) | — |
|
Net cash provided by (used in) investing activities | 313 |
| 126 |
| (23 | ) | (569 | ) | (153 | ) |
Financing activities: |
|
|
|
|
|
Principal payments of debt and capital lease obligations | (1,295 | ) | — |
| (5 | ) | — |
| (1,300 | ) |
Principal borrowings of debt from senior secured credit facility | 1,048 |
| — |
| — |
| — |
| 1,048 |
|
Payment of debt origination fees | (2 | ) | — |
| — |
| — |
| (2 | ) |
Dividends paid to Liberty Interactive Corporation
| (427 | ) | — |
| — |
| — |
| (427 | ) |
Dividends paid to noncontrolling interest | — |
| — |
| (21 | ) | — |
| (21 | ) |
Other financing activities | (9 | ) | — |
| — |
| — |
| (9 | ) |
Net short-term intercompany debt (repayments) borrowings | (83 | ) | (1,474 | ) | 1,557 |
| — |
| — |
|
Other intercompany financing activities | (129 | ) | 1,079 |
| (1,519 | ) | 569 |
| — |
|
Net cash (used in) provided by financing activities | (897 | ) | (395 | ) | 12 |
| 569 |
| (711 | ) |
Effect of foreign exchange rate changes on cash and cash equivalents | — |
| — |
| 7 |
| — |
| 7 |
|
Net increase (decrease) in cash and cash equivalents | 2 |
| (13 | ) | 3 |
| — |
| (8 | ) |
Cash and cash equivalents, beginning of period | — |
| 112 |
| 215 |
| — |
| 327 |
|
Cash and cash equivalents, end of period | $ | 2 |
| 99 |
| 218 |
| — |
| 319 |
|
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our business, product and marketing strategies; new service offerings;the impact of the fire at the Rocky Mount fulfillment center; insurance recoveries; the remediation of a material weakness; capital expenditures; revenue growth and subscriber trends;growth; the recoverability of our goodwill and other long-lived assets; our projected sources and uses of cashcash; repayment of debt; and the anticipated impact of certain contingent liabilities related to legal and tax proceedings and other matters arising in the ordinary course of business. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:
•the continuing global and regional economic impacts of the COVID-19 pandemic and other public health-related risks and events, on our customers, our vendors and our businesses generally;
•customer demand for our products and services and our ability to adaptattract new customers and retain existing customers by anticipating customer demand and adapting to changes in demand;
•competitor responses to our products and services;
•increased digital TV penetration and the impact on channel positioning of our programs;
•the levels of online traffic on our websites and our ability to convert visitors into consumers or contributors;
•uncertainties inherent in the development and integration of new business lines and business strategies;
•our future financial performance, including availability, terms and deployment of capital;
•our ability to successfully integrateeffectively manage our installment sales plans and recognize anticipated efficienciesrevolving credit card programs;
•the cost and benefits from the businesses we acquire;
the ability of shipping companies, manufacturers, suppliers, digital marketing channels and vendors to deliver products, equipment, software and services;
•the outcome of any pending or threatened litigation;
•availability of qualified personnel;
•the impact of the seasonality of our business;
•changes in, or failure or inability to comply with, government regulations, including, without limitation, regulations of the Federal Communications Commission, and adverse outcomes from regulatory proceedings;
•changes in the nature of key strategic relationships with partners, distributors, suppliers and vendors;
•domestic and international economic and business conditions and industry trends;trends, including the impact of inflation and increased labor costs;
•increases in market interest rates;
•changes in tariffs, trade policy and trade relations following the 2016 U.S. presidential election and the vote by the United Kingdom ("U.K. to")'s exit from the European Union (“Brexit”);Union;
•changes in trade policy and trade relations with China;
•consumer spending levels, including the availability and amount of individual consumer debt;
•the effects of our debt obligations;
•advertising spending levels;
•system interruption and the lack of integration and redundancy in the systems and infrastructures of our business;
•changes in distribution and viewing of television programming, including the expanded deployment of personal video recorders, video on demand technologies and Internet Protocol television and their impact on home shopping programming;
rapid technological changes;
•failure to protect the security of personal information, subjecting us to potentially costly government enforcement actions and/or private litigation and reputational damage;
•the regulatory and competitive environment of the industries in which we operate;
•threatened terrorist attacks, political unrest in international markets and ongoing military action around the world;
•fluctuations in foreign currency exchange rates;
•natural disasters, public health crises (including resurgences of COVID-19 and its variants), political crises, and other catastrophic events or other events outside of our control, including climate change;
Liberty Interactive Corporation’s ("Liberty")•failure to successfully implement Project Athens (defined below); and
•Qurate Retail's dependence on our cash flow for servicing its debt and for other purposes.
debt.
For additional risk factors, please see Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016 as well as Part II, Item 1A. Risk Factors of our Quarterly Report on Form 10-Q for the quarter ended June 30, 2017.2022 (the "2022 10-K"). These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report on Form 10-Q, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.
The following discussion and analysis provides information concerning our results of operations and financial condition. This discussion should be read in conjunction with our accompanying condensed consolidated financial statements and the notes thereto and our Annual Report on Form 10-K for the year ended December 31, 2016.2022 10-K.
Overview
QVC, Inc. and its consolidated subsidiaries (unless otherwise indicated or required by the context, the terms "we," "our," "us," the "Company" and "QVC" refer to QVC, Inc. and its consolidated subsidiaries) is a retailer of a wide range of consumer products, which are marketed and sold primarily by merchandise-focused televised shopping programs, the Internet and mobile applications.
In QVC is comprised of the United States ("U.S."), our televised shopping programs, including live and recorded content, are broadcast across multiple channels nationally on a full-time basis, including QVC, QVC2 (f/k/a QVC Plus) and Beauty iQ. Our U.S. programming is also available on QVC.com, our U.S. website; mobile applications via streaming video; over-the-air broadcasters; and over-the-top content platforms (Roku, Apple TV, etc.).
We believe that our digital platforms complement our televised shopping programs by allowing consumers to purchase a wide assortment of goods offered on our televised programs, as well as other products that are available only on our digital platforms. We view e-commerce as a natural extension of our business, allowing us to stream live video and offer on-demand videoreportable segments of items recently presented live on our televised programs. Our digital platforms allow shoppers to browse, research, compareQxH, which is comprised of QVC-U.S. and perform targeted searches for products, control the order-entry process and conveniently access their QVC account.
Our international televised shopping programs, including live and recorded content, are distributed to households outside of the U.S., primarily in Germany, Austria, Japan, the United Kingdom ("U.K."), the Republic of Ireland, Italy and France. In some of the countries where we operate, our televised shopping programs are broadcast across multiple QVC channels: QVC Beauty & Style and QVC Plus in Germany and QVC Beauty, QVC Extra, QVC Style and QVC +1 in the U.K. The programming created for most of these markets is also available via streaming video on our digital platforms. Our international business employs product sourcing teams who select products tailored to the interests of each local market.
The Company's Japanese operations ("QVC-Japan") are conducted through a joint venture with Mitsui & Co., LTD ("Mitsui") for a television and multimedia retailing service in Japan. QVC-Japan is owned 60% by the Company and 40% by Mitsui. The Company and Mitsui share in all profits and losses based on their respective ownership interests. During the nine months ended September 30, 2017 and 2016, QVC-Japan paid dividends to Mitsui of $22 million and $21 million, respectively.
The Company also has a joint venture with CNR Media Group, formerly known as China Broadcasting Corporation, a limited liability company owned by China National Radio (''CNR''). The Company owns a 49% interest in a CNR subsidiary, CNR Home Shopping Co., Ltd. (''CNRS''). CNRS operates a retail business in China through a shopping television channel with an associated website. This joint venture is accounted for as an equity method investment recorded as equity in losses of investee in the condensed consolidated statements of operations.
The Company is an indirect wholly-owned subsidiary of Liberty, which owns interests in a broad range of digital commerce businesses, and is attributed to Liberty's QVC Group. The QVC Group common stock (Nasdaq: QVCA and QVCB) tracks the assets and liabilities of the QVC Group. The QVC Group tracks the Company, zulily, llc ("zulily") and Liberty's 38% equity interest in HSN, Inc. ("HSN"), one ofand QVC-International. These segments reflect the Company's two closest televised shopping competitors, cash and certain liabilities. On July 6, 2017, Liberty announced plans to acquire the remaining interest in HSN, which would make it a wholly-owned subsidiary of Liberty following the closing. On April 4, 2017, Liberty entered into an agreement with General Communication, Inc. ("GCI"), an Alaska corporation, and Liberty Interactive LLC, a Delaware limited liability company and a direct wholly-owned subsidiary of Liberty, whereby Liberty will acquire GCI through a reorganization in which certain assets and liabilities attributed to Liberty’s Ventures Group will be contributed to GCI in exchange for a controlling interest in GCI. Liberty will then effect a tax-free separation of its controlling interest in the combined company, leaving QVC Group common stock as the only outstanding common stock of Liberty. Neither the proposed transactions involving GCI nor the acquisition of HSN is conditioned on the completion of the other, and no assurance can be given as to which of these transactions will be completed first. The QVC Group does not represent a separate legal entity; rather, it represents those businesses, assets and liabilities that are attributed to that group.
On October 1, 2015, Liberty acquired all of the outstanding shares of zulily, inc. (now known as zulily, llc). zulily is an online retailer offering customers a fun and entertaining shopping experience with a fresh selection of new product styles launched each day for a limited time period. zulily is attributed to the QVC Group andway the Company believes thatevaluates its business is complementary to the Company. zulily is not part of the results of operations or financial position of QVC presented in the accompanying condensed consolidated financial statements. During each of the nine months ended September 30, 2017performance and 2016, QVC and zulily engaged in multiple transactions relating to sales, sourcing of merchandise, marketing initiatives, business advisory services and software development. The gross value of these transactions totaled approximately $7 million and $11 million, respectively, which did not have a material impact on QVC's financial position, results of operations, or liquidity.
On June 23, 2016, QVC amended and restatedmanages its senior secured credit facility (the "Third Amended and Restated Credit Agreement") increasing the revolving credit facility from $2.25 billion to $2.65 billion as explained further in note 6 to the Company's condensed consolidated financial statements. The Third Amended and Restated Credit Agreement includes a $400 million tranche that may be borrowed by QVC or zulily. Under the terms of the Third Amended and Restated Credit Agreement, QVC and zulily are jointly and severally liable for all amounts borrowed on the $400 million tranche. In accordance with the accounting guidance for obligations resulting from joint and several liability arrangements, QVC will record a liability for amounts it has borrowed under the credit facility plus any additional amount it expects to repay on behalf of zulily. As of September 30, 2017, there was $300 million borrowed by zulily on the $400 million tranche of the Third Amended and Restated Credit Agreement, none of which the Company expects to repay on behalf of zulily.operations.
Strategies and challenges of business units
QVC'sThe goal of QVC is to becomeextend its leadership in video commerce, e-commerce, streaming commerce and social commerce by continuing to create the preeminent global multimediaworld’s most engaging shopping communityexperiences, combining the best of retail, media, and social, highly differentiated from traditional brick-and-mortar stores or transactional e-commerce. QVC provides customers with curated collections of unique products, made personal and relevant by the power of storytelling. We curate experiences, conversations and communities for people who lovemillions of highly discerning shoppers, and we also reach large audiences, across our many platforms, for our thousands of brand partners.
On June 27, 2022, Qurate Retail announced a five-point turnaround plan designed to shop,stabilize and differentiate its core QxH and QVC-International businesses and expand the Company's leadership in video streaming commerce (“Project Athens”). Project Athens main initiatives include: (i) improve customer experience and grow relationships; (ii) rigorously execute core processes; (iii) lower cost to offerserve; (iv) optimize the brand portfolio; and (v) build new high growth businesses anchored in strength. In support of Project Athens QVC’s strategies are as follows.
QVC is focused on rebuilding stronger connections with their customers. In order to improve customer experience and grow relationships, QVC is working to optimize programming using advanced analytics to align product offerings, promotions and airtime with customer preferences. In addition, we expect to invest in infrastructure which will endeavor to improve the
customer's order to delivery experience by increasing personalization, reducing shipping time and improving shipment tracking visibility. We expect to develop a customer loyalty program which will provide customers with a more personalized experience.
QVC is enhancing its core processes to deliver the human story telling experience behind a product while also sharing a clear and compelling value proposition. In order to rigorously execute core processes, QVC will optimize pricing and assortment by investing in enhanced Information Technology systems that will support real-time pricing and promotion adjustments at an item level. We will also focus on growing our private label brands to drive revenue and margin at productive scale.
QVC is right sizing its cost base to improve profitability and cash generation. In order to lower cost to serve, QVC will enhance review of spending to identify cost savings opportunities, including opportunities for workforce reduction. Additionally, we will improve product margin through market vendor efficiency and lower fulfillment costs through freight optimization and higher productivity.
Finally, QVC is focused on expanding in the video streaming shopping market. In order to build new high growth businesses anchored in strength, QVC expects to expand streaming viewership by improving the current streaming experience that is as much about entertainmentwith enhanced video and enrichmentnavigation and seamless transactions. Additionally, we are shaping the future streaming experience with exclusive content, program and deal concepts. We are also building a next generation shopping app featuring vendors with self-made content.
During 2022 QVC commenced the first phase of Project Athens, including actions to reduce inventory and a planned workforce reduction. These initiatives are consistent with QVC’s strategy to operate more efficiently as it is about buying. QVC's objective isimplements its turnaround plan, and QVC expects to provide an integrated shopping experience that utilizes all formsincur additional expenses related to Project Athens initiatives in future periods. During the six months ended June 30, 2023, QVC implemented a workforce reduction and recorded restructuring charges of media including television,$13 million in Restructuring and fire related costs, net of (recoveries) in the Internet and mobile devices. QVC intends to employ several strategies to achieve these goals and objectives. Among these strategies are to (i) extend the breadth, relevance and exposurecondensed consolidated statement of the QVC brand; (ii) source products that represent unique quality and value; (iii) create engaging presentation content in televised programming, mobile and online; (iv) leverage customer loyalty and continue multi-platform expansion; and (v) create a compelling and differentiated customer experience.operations.
QVC'sQVC’s future net revenue growth will primarily depend on sales growthits ability to grow through digital platforms, retain and grow revenue from e-commerceexisting customers, and mobile platforms, additions ofattract new customers from households already receiving QVC's television programming and increased spending from existing customers. QVC's future net revenue may also be affected by (i) the willingness of cable television and direct-to-home satellite system operators to continue carrying QVC's programming service; (ii) QVC's ability to maintain favorable channel positioning, which may become more difficult due to governmental action or from distributors converting analog customers to digital; (iii) changes in television viewing habits because of personal video recorders, video-on-demand technologies and Internet video services; (iv) QVC's ability to source new and (iv)compelling products; and (v) general economic conditions.
The prolongedcurrent economic uncertainty in various regions of the world in which our subsidiaries and affiliates operate could adversely affect demand for our products and services since a substantial portion of our revenue is derived from discretionary spending by individuals, which typically falls during times of economic instability. Global financial markets continue tomay experience disruptions, including increased volatility and diminished liquidity and credit availability. If economic and financial market conditions in the U.S. or other key markets, including Japan and Europe, remaincontinue to be uncertain persist, or deteriorate, further, our customers may respond by suspending, delaying or reducing their discretionary spending. A suspension, delay or reduction in discretionary spending could adversely affect revenue. Accordingly, our ability to increase or maintain revenue and earnings could be adversely affected to the extent that relevant economic environments remaindecline. Such weak or decline.economic conditions may also inhibit our expansion into new European and other markets. We currently are unable to predict the extent of any of these potential adverse effects.
The Company has seen inflationary pressures during the period including higher wages and merchandise costs. If these pressures persist, inflated costs may result in certain increased costs outpacing our pricing power in the near term.
On June 23, 2016,December 18, 2021, QVC experienced a fire at its Rocky Mount fulfillment center in North Carolina. Rocky Mount was the U.K. held a referendum in which British citizens approved an exit from the European Union (the "E.U.")Company’s second-largest fulfillment center, processing approximately 25% to 30% of volume for QVC-U.S., commonly referred toand also served as “Brexit.” AsQVC-U.S.’s primary returns center for hard goods. The building was significantly damaged as a result of the referendum,fire and related smoke and will not reopen. The Company took steps to mitigate disruption to operations including diverting inbound orders, leveraging its existing fulfillment centers and supplementing these facilities with short-term leased space as needed. QVC sold the global marketsproperty in February 2023 and currenciesreceived net cash proceeds of $15 million. During the three months ended June 30,2023, QVC received an additional $2 million of proceeds from the sale that were released from escrow. QVC recognized gains on the sale of $2 million and $15 million during the three and six months ended June 30, 2023, respectively. We are currently evaluating long-term alternatives to alleviate the strain on our network caused by the loss of the Rocky Mount fulfillment center.
Based on the provisions of QVC’s insurance policies and discussions with insurance carriers, the Company determined that recovery of certain fire related costs was probable, and recorded an insurance receivable.
In June 2023, the Company agreed to a final insurance settlement with its insurance company and received all remaining proceeds related to the Rocky Mount claim. As of December 31, 2022 and June 30, 2023, the Company recorded cumulative fire related costs of $407 million and $434 million, respectively, of which $16 million and $27 million, were recorded during the three and six months ended June 30, 2023, respectively. Cumulative costs as of December 31, 2022 and June 30,2023 include $119 million of costs that were not reimbursable by QVC’s insurance policies. As of December 31, 2022 and June 30, 2023 the Company received cumulative insurance proceeds of $380 million and $660 million, respectively, and recorded net gains, representing the proceeds received in excess of recoverable losses recognized, of $132 million during the year ended December 31, 2022 and $209 million and $213 million, respectively, during the three and six months ended June 30, 2023. Of the $280 million of insurance proceeds received during the six months ended June 30, 2023, $210 million represents recoveries for business interruption losses. The fire related costs and gains related to insurance recoveries are included in restructuring and fire related costs, net of (recoveries) in the condensed consolidated statement of operations.
We expect to continue to record additional costs during 2023 related to exiting the Rocky Mount facility. While the Company took steps to minimize the overall impact to the business, we experienced increased warehouse and logistics costs during the six months ended June 30, 2023 and 2022. We do not anticipate these increased warehouse and logistics costs will have been adversely impacted, including a sharp declinematerial impact on future periods.
In November 2022, QVC-International entered into agreements to sell two properties located in Germany and the U.K. to an independent third party. Under the terms of the agreements, QVC received net cash proceeds of $102 million related to its German facility and $80 million related to its U.K. facility when the sale closed in January 2023. Concurrent with the sale, the Company entered into agreements to lease each of the properties back from the purchaser over an initial term of 20 years with the option to extend the terms of the property leases for up to four consecutive terms of five years. QVC recognized a $69 million and $44 million gain related to the successful sale leaseback of the German and U.K. properties, respectively, during the first quarter of 2023 calculated as the difference between the aggregate consideration received and the carrying value of the properties. The Company accounted for the leases as operating leases and recorded a $42 million and $32 million right-of-use asset and operating lease liability for the German and U.K. Pound Sterlingproperties, respectively.
In June 2022, QVC modified the finance lease for its distribution center in Ontario, California which reduced the term of the lease and removed QVC’s ability to take ownership of the distribution center at the end of the lease term. QVC will make annual payments over the modified lease term. Since the lease was modified and removed QVC’s ability to take ownership at the end of the lease term, the Company accounted for the modification similar to a sale and leaseback transaction and, as compared toa result, recognized a $240 million gain on the U.S. Dollar. Volatilitysale of the distribution center during the second quarter of 2022, calculated as the difference between the aggregate consideration received (including cash of $250 million and forgiveness of the remaining financing obligation of $84 million) and the carrying value of the distribution center. The gain is included in exchange rates is expected to continuegains on sale of intangible asset and sale leaseback transactions in the short termconsolidated statement of operations. The Company accounted for the modified lease as an operating lease and recorded a $37 million right-of-use asset and a $31 million operating lease liability, with the U.K. negotiates its exit from the E.U. In the longer term, any impact from Brexit on us will depend, in part, on the outcome of tariff, trade, regulatory and other negotiations. Although it is unknown what the result of those negotiations will be, it is possible that new terms may adversely affect our operations and financial results. On March 29, 2017, the U.K. invoked Article 50 of the Treaty of Lisbon, which is the first step of the U.K.’s formal exit from the EU. This started the two-year window in which the U.K. and the European Commission can negotiate future terms for imports, exports, taxes, employment, immigration and other areas, ending in the exit of the U.K. from the E.U.difference attributable to prepaid rent.
The current President of the U.S. has expressed apprehension towards existing trade agreements, such as the North American Free Trade Agreement and the Trans-Pacific Partnership, and suggested that the U.S. would renegotiate or withdraw from these agreements. He also raised the possibility of significantly increasing tariffs on goods imported into the United States, particularly from China and Mexico. On January 23, 2017, the President of the U.S. signed a presidential memorandum to withdraw the U.S. from the Trans-Pacific Partnership. This and the other proposed actions, if implemented, could adversely affect our business because we sell imported products.
Results of Operations
QVC's operating results were as follows: | | | Three months ended September 30, | | Nine months ended September 30, | | | Three months ended June 30, | Six months ended June 30, |
(in millions) | 2017 |
| 2016 |
| 2017 |
| 2016 |
| (in millions) | 2023 | 2022 | 2023 | 2022 |
Net revenue | $ | 2,010 |
| 1,948 |
| 5,954 |
| 6,024 |
| Net revenue | $ | 2,224 | | 2,392 | | 4,417 | | 4,746 | |
Costs of goods sold | 1,282 |
| 1,251 |
| 3,755 |
| 3,816 |
| |
Gross profit | 728 |
| 697 |
| 2,199 |
| 2,208 |
| |
Operating expenses: | | | |
Operating costs and expenses: | | Operating costs and expenses: | |
Cost of goods sold (exclusive of depreciation, amortization and Rocky Mount inventory losses shown below) | | Cost of goods sold (exclusive of depreciation, amortization and Rocky Mount inventory losses shown below) | 1,456 | | 1,593 | | 2,944 | | 3,154 | |
Operating | 145 |
| 140 |
| 419 |
| 428 |
| Operating | 177 | | 179 | | 355 | | 357 | |
Selling, general and administrative, excluding stock-based compensation | 171 |
| 164 |
| 466 |
| 509 |
| Selling, general and administrative, excluding stock-based compensation | 329 | | 293 | | 645 | | 579 | |
Adjusted OIBDA | 412 |
| 393 |
| 1,314 |
| 1,271 |
| |
Adjusted OIBDA (defined below) | | Adjusted OIBDA (defined below) | 262 | | 327 | | 473 | | 656 | |
Restructuring and fire related costs, net of (recoveries) (including Rocky Mount inventory losses) | | Restructuring and fire related costs, net of (recoveries) (including Rocky Mount inventory losses) | (211) | | 16 | | (215) | | 98 | |
Gains on sale of intangible asset and sale leaseback transactions | | Gains on sale of intangible asset and sale leaseback transactions | (6) | | (243) | | (119) | | (243) | |
Stock-based compensation | 9 |
| 8 |
| 23 |
| 24 |
| Stock-based compensation | 11 | | 10 | | 20 | | 18 | |
Depreciation | 38 |
| 38 |
| 116 |
| 103 |
| Depreciation | 22 | | 32 | | 45 | | 67 | |
Amortization | 91 |
| 116 |
| 324 |
| 345 |
| Amortization | 72 | | 70 | | 138 | | 144 | |
Operating income | 274 |
| 231 |
| 851 |
| 799 |
| Operating income | 374 | | 442 | | 604 | | 572 | |
Other (expense) income: | | | Other (expense) income: | |
Equity in losses of investee | — |
| (2 | ) | (3 | ) | (4 | ) | |
Losses on financial instruments | | Losses on financial instruments | — | | — | | (1) | | 1 | |
Interest expense, net | (54 | ) | (52 | ) | (165 | ) | (159 | ) | Interest expense, net | (67) | | (63) | | (104) | | (125) | |
Foreign currency gain (loss) | 4 |
| 5 |
| (6 | ) | 27 |
| |
Foreign currency (loss) gain | | Foreign currency (loss) gain | (3) | | 21 | | (9) | | 29 | |
Gain (loss) on extinguishment of debt | | Gain (loss) on extinguishment of debt | 10 | | (6) | | 10 | | (6) | |
Other income | | Other income | — | | — | | — | | 20 | |
| (50 | ) | (49 | ) | (174 | ) | (136 | ) | | (60) | | (48) | | (104) | | (81) | |
Income before income taxes | 224 |
| 182 |
| 677 |
| 663 |
| Income before income taxes | 314 | | 394 | | 500 | | 491 | |
Income tax expense | (58 | ) | (66 | ) | (225 | ) | (244 | ) | Income tax expense | (88) | | (109) | | (139) | | (150) | |
Net income | 166 |
| 116 |
| 452 |
| 419 |
| Net income | 226 | | 285 | | 361 | | 341 | |
Less net income attributable to the noncontrolling interest | (12 | ) | (9 | ) | (33 | ) | (28 | ) | Less net income attributable to the noncontrolling interest | (13) | | (15) | | (26) | | (29) | |
Net income attributable to QVC, Inc. stockholder | $ | 154 |
| 107 |
| 419 |
| 391 |
| Net income attributable to QVC, Inc. stockholder | $ | 213 | | 270 | | 335 | | 312 | |
Net revenue
Net revenue by segment was as follows:
| | | | | | | | | | | | | | |
| Three months ended June 30, | Six months ended June 30, |
(in millions) | 2023 | 2022 | 2023 | 2022 |
QxH | $ | 1,618 | | 1,754 | | 3,219 | | 3,438 | |
QVC-International | 606 | | 638 | | 1,198 | | 1,308 | |
Consolidated QVC | $ | 2,224 | | 2,392 | | 4,417 | | 4,746 | |
|
| | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | |
(in millions) | 2017 |
| 2016 |
| 2017 |
| 2016 |
|
QVC-U.S. | $ | 1,374 |
| 1,338 |
| 4,111 |
| 4,173 |
|
QVC-International | 636 |
| 610 |
| 1,843 |
| 1,851 |
|
Consolidated QVC | $ | 2,010 |
| 1,948 |
| 5,954 |
| 6,024 |
|
QVC's consolidated net revenue increased 3.2%decreased 7.0% and decreased 1.2%6.9% for the three and ninesix months ended SeptemberJune 30, 2017,2023, respectively, as compared to the corresponding periods in the prior year. The three month increasedecrease in net revenue of $62 million wasis primarily comprised of an increase of $199 million due to a 9.2% increase10.2% decrease in units sold. This wasshipped across both segments, a $17 million decrease in shipping and handling primarily at QxH and to a lesser extent QVC-International and $11 million in unfavorable foreign exchange rates. These decreases were partially offset by a decrease of $92 million due to a 3.9% decrease5.0% increase in average selling price per unit ("ASP"), an increase across both segments. The six month decrease in estimated product returns of $26 million, $8 millionnet revenue is primarily due to an 8.2% decrease in units shipped across both segments, $67 million in unfavorable foreign exchange rates and a $36 million decrease in shipping and handling revenue $7 million due to unfavorable foreign currency rates, and a $4 million decrease in miscellaneous income. The nine month decrease in net revenue of $70 million was primarily comprised of $206 million due to a 2.9% decrease in ASP, $65 million due to unfavorable foreign currency rates, a decrease in shipping and handling revenue of $20 million, and a $12 million decrease in miscellaneous income. The decrease wasdriven by QxH. These declines were partially offset by a $212 million4.1% increase in units sold and a $21 million decrease in estimated product returns.
ASP across both segments.
During the three and ninesix months ended SeptemberJune 30, 20172023 and 2016,2022, the changes in revenue and expenses were affected by changes in the exchange rates for the Japanese Yen,U.K. Pound Sterling, the Euro and the U.K. Pound Sterling.Japanese Yen. In the event the U.S. Dollar strengthens against these foreign currencies in the future, QVC's revenue and operating cash flow will be negatively affected. Our product margins may continue to be under pressure due to the devaluation of the U.K. Pound Sterling, we will attempt to reduce our exposure through pricing and vendor negotiations, as Brexit negotiations progress.
In discussing our operating results, the term currency"currency exchange ratesrates" refers to the currency exchange rates we use to convert the operating results for all countries where the functional currency is not the U.S. Dollar. We calculate the effect of changes in currency exchange rates as the difference between current period activity translated using the prior period's currency exchange rates. Throughout our discussion, we refer to the results of this calculation as the impact of currency exchange rate fluctuations. When we refer to constant"constant currency operating results,results", this means operating results without the impact of the currency exchange rate fluctuations. The disclosure of constant currency amounts or results permits investors to understand better QVC’s underlying performance without the effects of currency exchange rate fluctuations.
The percentage increase (decrease)change in net revenue for each of QVC's segments in U.S. Dollars and in constant currency was as follows: | | | | | | | | | | | | | | | Three months ended June 30, 2023 | Six months ended June 30, 2023 |
| Three months ended September 30, 2017 | | Nine months ended September 30, 2017 | | | U.S. Dollars | Foreign Currency Exchange Impact | Constant Currency | U.S. Dollars | Foreign Currency Exchange Impact | Constant Currency |
| U.S. Dollars | Foreign Currency Exchange Impact | Constant currency | U.S. Dollars | Foreign Currency Exchange Impact | Constant currency | |
QVC-U.S. | 2.7 | % | — | % | 2.7 | % | (1.5 | )% | — | % | (1.5 | )% | |
QxH | | QxH | (7.8) | % | — | % | (7.8) | % | (6.4) | % | — | % | (6.4) | % |
QVC-International | 4.3 | % | (1.0 | )% | 5.3 | % | (0.4 | )% | (3.4 | )% | 3.0 | % | QVC-International | (5.0) | % | (1.7) | % | (3.3) | % | (8.4) | % | (5.1) | % | (3.3) | % |
QVC-U.S.QxH's net revenue increasedecline for the three months ended SeptemberJune 30, 20172023 was primarily due to a 8.7% increasean 11.6% decrease in units shipped. The increase was offset byshipped and a decrease of 3.5% in ASP, a $19 million increase in estimated product returns, a $11$14 million decrease in shipping and handling revenue, andrevenue. These declines were partially offset by a $5 million decrease in miscellaneous income. QVC-U.S. experienced a system outage during the second quarter of 2017 which resulted in an estimated 1% shift in net revenue to the third quarter. The5.4% increase in returns is driven by an increase in sales during the third quarter. Additionally, the Company experienced a decrease in shipping and handling revenue per unit due to promotional offers.ASP. For the three months ended SeptemberJune 30, 2017, QVC-U.S.2023, QxH experienced shipped sales increasesgrowth in apparel, electronics, beauty and accessories offset by decreases in jewelry and home.with declines across all other categories. For the ninesix months ended SeptemberJune 30, 2017, QVC U.S.2023, QxH net revenue decline wasdecreased due to an 8.7% decrease in units shipped and a decrease of 3.2% in ASP, a $24$31 million decrease in shipping and handling revenue, and an $11 million decrease in miscellaneous income. The decrease wasrevenue. These declines were partially offset by a 2.1%3.8% increase in units shipped, and a $30 million decrease in estimated product returns. The decrease in net shipping and handling revenue was a result of a decrease in shipping and handling revenue per unit from promotional offers. The decrease in estimated product returns was primarily due to an overall lower return rate and reduced sales.ASP. For the ninesix months ended SeptemberJune 30, 2017, QVC-U.S.2023, QxH experienced shipped sales increases in apparel, beauty and electronics offset by decreases in jewelry, home and accessories.declines across all categories.
QVC-International
QVC-International's net revenue growthdecline in constant currency for the three months ended SeptemberJune 30, 20172023 was primarily due to a 9.9% increase7.0% decrease in units shipped driven by increases in Japan, Germany, the U.K., and France, offset by a decrease in Italy. Thereacross all markets. This decline was a $3 million increase in shipping and handling revenue, primarily driven by Japan and Germany. This waspartially offset by a 4.5% decreaseincrease in ASP primarily driven by Japan and Germany, and a $7 million increase in estimated product returns driven byacross all markets except for Japan.markets. For the three months ended SeptemberJune 30, 2017,2023, QVC-International experienced shipped sales growth in constant currency in apparel, accessories, home and beauty with declines in electronics and jewelry. Netacross all other product categories except home which remained flat. QVC-International's net revenue growthdecline in constant currency for the ninesix months ended SeptemberJune 30, 20172023 was primarily due to a 4.9% increase7.0% decrease in units shipped driven by increases in Japan, Germany, and France, offset by decreases in units shipped in the U.K. and Italy. There was a $4 million increase in shipping and handling revenue, primarily driven by Japan. This wasacross all markets. These declines were partially offset by a 2% decrease4.7% increase in ASP primarily driven in Japan and Germany offset by increases in the U.K. and Italy and France, and a $9 million increase in estimated product returns, driven byacross all markets except for Japan.markets. For the ninesix months ended SeptemberJune 30, 2017,2023, QVC-International experienced shipped sales growth in constant currency inacross beauty, accessories and apparel beauty and accessories with declines in electronics, jewelryall other categories.
Cost of goods sold (excluding depreciation, amortization and home.
Gross profitfire related costs, net)
QVC's gross profitcost of goods sold as a percentage of net revenue was 36.2%65.5% and 36.9%66.7% for the three and ninesix months ended SeptemberJune 30, 2017,2023, respectively, compared to 35.8%66.6% and 36.7%66.5% for the three and ninesix months ended SeptemberJune 30, 2016. For2022, respectively. The decrease in cost of goods sold as a percentage of revenue for the three months ended SeptemberJune 30, 2017, the gross profit percentage increased2023 across both segments is primarily due to an increase in product margins. The increase wasmargin favorability, lower freight costs and lower inventory obsolescence. These decreases were partially offset by an unfavorable inventory obsolescence provision in the U.S. and increased freight costs.higher warehousing costs across both segments. The increase in freight and warehouse costs wascost of goods sold as a percentage of revenue for the six months ended June 30, 2023 across both segments is primarily due to increased units shipped in both segments. Forhigher warehousing costs partially offset by lower inventory obsolescence and lower freight costs. Higher warehousing costs for the ninethree and six months ended SeptemberJune 30, 2017, the gross profit percentage increased2023 are primarily due to increased product margins.
higher rent expense of $12 million and $25 million, respectively, as a result of warehouses sold and leased back during the prior year and current period. The lower inventory obsolescence for the three and six months ended June 30, 2023 was driven by lower levels of inventory in the current period.
Operating expenses
QVC's operating expenses are principally comprised of commissions, order processing and customer service expenses, credit card processing fees and telecommunications expenses. Operating expenses increased $5 million or 3.6% and decreased $9 million or 2.1%were 8.0% of net revenue for each of the three and ninesix months ended SeptemberJune 30, 2017 as compared to2023, respectively, and were 7.5% for each of the three and ninesix months ended SeptemberJune 30, 2016,2022, respectively.
For the three and six months ended SeptemberJune 30, 2017,2023, the increases in operating expenses increasedas a percent of sales are primarily due to a $3 million increase in credit card processing fees and a $3 million increase inhigher commissions expense at QxH related to fixed commissions payments, partially offset by $1 million fromlower personnel costs at QxH and favorable foreign currency exchange rates. Credit card fees and commissions increased primarily due to the increase in U.S. sales. In addition, credit card interchange processing fees have increased compared to the three months ended September 30, 2016.
For the nine months ended September 30, 2017 operating expenses decreased primarily due to a $6 million decrease in customer service expenses related to lower call volumes in the U.S., favorable foreign currency exchange rates and offset somewhat by higher credit card fees primarily in the U.S.
Selling, general and administrative expenses (excluding stock-based compensation)
QVC's selling, general, and administrative expenses (excluding stock-based compensation) include personnel, information technology, provision for doubtful accounts, production costs, credit card income,and marketing and advertising expenses. Such expenses increased $7$36 million for the three months ended SeptemberJune 30, 2017, and decreased $43 million for the nine months ended September 30, 2017,2023, as compared to the same periods in the prior year. Such expenses increased from 8.4% to 8.5%three months ended June 30, 2022 and decreased from 8.4% to 7.8%, as a percentage of net revenue from 12.2% to 14.8%. Selling, general, and administrative expenses increased $66 million for the six months ended June 30, 2023, as compared to the three and ninesix months ended SeptemberJune 30, 2016, respectively.2022 and increased as a percentage of net revenue from 12.2% to 14.6%.
For the three months ended SeptemberJune 30, 2017,2023, the increase was primarily due to ana $20 million increase in consulting expenses, mainly at QxH and a $19 million increase in personnel costs of $10across both segments. These increases were partially offset by an $11 million decrease in credit losses, primarily at QxH. For the six months ended June 30, 2023, the increase was primarily due to a $48 million increase in consulting expenses mainly at QxH, a $31 million increase in personnel costs across both segments and an $8 million increase in franchise taxes of $4 millionrent expense at QxH. These increases were partially offset by a $17 million decrease in bad debt expense of $5 million andcredit losses, primarily at QxH, a $2$9 million decrease in marketing expenses.expenses, primarily at QxH and $9 million in favorable exchange rates. The increase in consulting expenses for the three and six months ended June 30, 2023 is primarily related to Project Athens. The increase in personnel costs for the three and six months ended June 30, 2023 was driven by higher benefits expense in comparison to the prior year. The decrease to estimated credit losses for the three and six months ended June 30, 2023 was due to higher than expected collections in the current year compared to unfavorable adjustments recognized in the prior year based on actual collections experience.
Restructuring and fire related costs, net of (recoveries) (including Rocky Mount inventory losses)
QVC recorded a gain of $211 million and $215 million for the three and six months ended June 30, 2023 in restructuring and fire related costs, net of recoveries. For the three months ended June 30, 2023, the gain primarily related to a $225 million gain on insurance proceeds received in excess of fire losses partially offset by $16 million of other fire related costs. For the six months ended June 30, 2023, the gain related to a $240 million gain on insurance proceeds received in excess of fire losses and a $15 million gain on the sale of the Rocky Mount property, partially offset by $27 million of other fire related costs and $13 million of restructuring costs related to workforce reduction. QVC recorded $16 million and $98 million restructuring and fire related costs, net of recoveries for the three and six months ended June 30, 2022, respectively, primarily due to an increase in bonus expense offset by decreases in severance expense and salaries and wages, mostly in the U.S. The decrease in bad debt expense was primarilywrite-downs on Rocky Mount inventory. Fire related costs, net includes expenses directly related to lower default rates experienced from prior periods mostly associated with the Easy-Pay programRocky Mount fulfillment center fire net of expected and received insurance recoveries and gain on the sale of the Rocky Mount property. Expenses indirectly related to the Rocky Mount fulfillment center fire, including operational inefficiencies, are primarily included in Cost of goods sold.
Gains on sale of intangible asset and sale leaseback transactions
QVC recorded $6 million and $119 million of gain on intangible asset and sale leaseback transactions for the U.S.three and six months ended June 30, 2023, respectively. The decrease in marketing expenses$6 million gain for the three months ended June 30, 2023 is primarily related to discontinuing the naming rights tosale of a channel positioning right. The $119 million gain for the Chiba Marine Stadium in Japan.
For the ninesix months ended SeptemberJune 30, 2017, the decrease was primarily due to a decrease in bad debt expense of $26 million, $8 million from favorable foreign currency rates, a $7 million increase in credit card income, a $4 million decrease in marketing expenses, and a $5 million decrease in various other expenses offset by an increase in personnel cost of $7 million. The decrease in bad debt expense was primarily related to lower default rates experienced from prior periods mostly associated with the Easy-Pay program in the U.S. The increase in credit card income was due to the favorable economics of the QVC-branded credit card portfolio in the U.S. The decrease in marketing expenses2023 is primarily related to discontinuing the naming rightssale leaseback of two properties located in Germany and the U.K. For the three and six months ended June 30, 2022, QVC recorded a $243 million gain primarily related to the Chiba Marine Stadium in Japan. The increase in personnel costs was primarily due to an increase in bonus expense offset by decreases in severance expenses and salaries and wages.sale-leaseback of the Ontario distribution center.
Stock-based compensation
Stock-based compensation includes compensation related to options and restricted stock units granted to certain officers and employees. QVC recorded $9$11 million and $8$20 million of stock-based compensation expense for the three and six months ended SeptemberJune 30, 2017 and 2016,2023, respectively, and $23recorded $10 million and $24$18 million of stock-based compensation expense for the ninethree and six months ended SeptemberJune 30, 2017 and 2016,2022, respectively.
Depreciation and amortization
Depreciation and amortization consisted of the following: | | | Three months ended September 30, | | Nine months ended September 30, | | | Three months ended June 30, | Six months ended June 30, |
(in millions) | 2017 |
| 2016 |
| 2017 |
| 2016 |
| (in millions) | 2023 | 2022 | 2023 | 2022 |
Affiliate agreements | $ | 25 |
| 37 |
| 98 |
| 110 |
| |
Customer relationships | 28 |
| 43 |
| 112 |
| 128 |
| Customer relationships | 11 | | 11 | | 23 | | 23 | |
Other technology | | Other technology | 4 | | 4 | | 8 | | 8 | |
Acquisition related amortization | 53 |
| 80 |
| 210 |
| 238 |
| Acquisition related amortization | 15 | | 15 | | 31 | | 31 | |
Property and equipment | 38 |
| 38 |
| 116 |
| 103 |
| Property and equipment | 22 | | 32 | | 45 | | 67 | |
Software amortization | 24 |
| 26 |
| 70 |
| 73 |
| Software amortization | 31 | | 27 | | 57 | | 54 | |
Channel placement amortization and related expenses | 14 |
| 10 |
| 44 |
| 34 |
| Channel placement amortization and related expenses | 26 | | 28 | | 50 | | 59 | |
Total depreciation and amortization | $ | 129 |
| 154 |
| 440 |
| 448 |
| Total depreciation and amortization | $ | 94 | | 102 | | 183 | | 211 | |
For the three and ninesix months ended SeptemberJune 30, 2017, acquisition related amortization expense2023, property and equipment depreciation decreased primarily due to assets disposed of related to the endsix owned and operated U.S. properties sold and leased back during 2022 and the Germany and U.K properties sold and leased back during the first quarter of the useful lives of certain affiliate agreements and customer relationships established at the time of Liberty’s acquisition of QVC in 2003. This was offset by an increase2023. The decrease in channel placement amortization and related expenses for the six months ended June 30, 2023 is due to adjustments recognized related to lower subscriber counts. The increase in software amortization for the addition of Beauty iQthree and six months ended June 30, 2023 is due to software additions including an enhancement to QVC's Enterprise Resource Planning system that was placed into service in the U.S. For the nine months ended September 30, 2017, the amortization decrease mentioned above was offset by an increase in depreciation related to the addition of the California distribution center in the thirdsecond quarter of 2016.
Equity in losses of investee
The losses were associated with our joint venture in China that is accounted for as an equity method investment.2023.
Interest expense, net
For the three and ninesix months ended SeptemberJune 30, 2017,2023, consolidated interest expense, net increased $2$4 million or 3.8% and increased $6decreased $21 million, or 3.8%, respectively, as compared to the corresponding periodperiods in the prior year. ForThe increase in interest expense for the three and nine months ended SeptemberJune 30, 2017, interest expense, net increased2023 is primarily due to incomehigher outstanding debt and a higher interest rate on the senior secured credit facility. The decrease in interest expense for the six months ended June 30, 2023 is primarily due to the reversal of interest expense accrued in prior periods related to the ineffective portionsettlement of state income tax reserves during the current period, partially offset by higher interest expense as a hedgeresult of higher outstanding debt and a net investment inhigher interest rate on the prior year.senior secured credit facility.
Foreign currency (loss) gain (loss)
Certain loans between QVC and its subsidiaries are deemed to be short-term in nature, and accordingly, the translation of these loans is recorded in the accompanying condensed consolidated statements of operations. For the three and ninesix months ended SeptemberJune 30, 2017,2023, the change in foreign currency (loss) gain (loss) was also due to variances in interest and operating payables balances between QVC and its international subsidiaries denominated in the currency of the subsidiary and the effects of currency exchange rate changes on those balances.
Gain (loss) on extinguishment of debt
For the three and six months ended June 30, 2023, the Company recorded a gain on extinguishment of debt of $10 million related to the repurchase of the 4.85% and 4.45% Senior Secured Notes. For the three and six months ended June 30, 2022, the Company recorded a loss on extinguishment of debt of $6 million related to the repayment of $536 million of the outstanding 4.375% Senior Secured Notes due 2023.
Income taxes
Our effective tax rate was 25.9%28.0% and 33.2%27.8% for the three and ninesix months ended SeptemberJune 30, 2017. These rates differed2023, respectively, compared to an effective tax rate of 27.7% and 30.5% for the three and six months ended June 30, 2022, respectively. The 2023 rate differs from the U.S. federal income tax rate of 35%21% due primarily to state and foreign tax expense and permanent items. The 2023 effective tax rate has decreased from the prior year for the six months ended June 30, 2023 primarily due to the impactreversal of discrete permanent differencestax expense accrued in prior periods related to foreign currency losses realized for tax purposes offset somewhat bythe settlement of state tax expense. Our effective tax rate for the three and nine months ended September 30, 2016 was 36.3% and 36.8%, respectively. These rates differ from the U.S. federal income tax rate of 35.0% primarily due to state tax expense.reserves.
Adjusted Operating Income before Depreciation and Amortization (Adjusted OIBDA)
To provide investors with additional information regarding our financial statements, we disclose Adjusted OIBDA, which is a non-U.S. generally accepted accounting principles ("U.S. GAAP") measure. QVC defines Adjusted OIBDA as operating income plus depreciation and amortization, stock-based compensation and excluding restructuring and fire related costs, net revenue less cost of goods sold, operating expensesrecoveries (including Rocky Mount inventory losses) and selling, generalgains on sale of intangible asset and administrative expenses (excluding stock-based compensation).sale leaseback transactions. QVC's chief operating decision maker and management team use this measure of performance in conjunction with other measures to evaluate the businesses and make decisions about allocating resources among the businesses. QVC believes that this is an important indicator of the operational strength and performance of the businesses, including the ability to service debt and fund capital expenditures.segments by identifying those items that are not directly a reflection of each segment's performance or indicative of ongoing business trends. In addition, this measure allows QVC to view operating results, perform analytical comparisons and perform benchmarking among its businesses and identify strategies to improve performance. This measure of performance excludes such costs as depreciation, amortization and stock-based compensation that are included in the measurement of operating income pursuant to U.S. generally accepted accounting principles ("U.S. GAAP"). Accordingly, Adjusted OIBDA should be considered in addition to, but not as a substitute for, operating income, net income, cash flow provided by operating activities and other measures of financial performance prepared in accordance with U.S. GAAP.
The primary material limitations associated with the use of Adjusted OIBDA as compared to U.S. GAAP results are (i) it may not be comparable to similarly titled measures used by other companies in the industry, and (ii) it excludes financial information that some may consider important in evaluating QVC's performance. QVC compensates for these limitations by providing disclosure of the difference between Adjusted OIBDA and U.S. GAAP results, including providing a reconciliation of Adjusted OIBDA to U.S. GAAP results, to enable investors to perform their own analysis of QVC's operating results. See to note 11 to the accompanying condensed consolidated financial statements forThe following table provides a reconciliation of operating income to Adjusted OIBDA.
| | | | | | | | | | | | | | |
| Three months ended June 30, | Six months ended June 30, |
(in millions) | 2023 | 2022 | 2023 | 2022 |
Operating income | $ | 374 | | 442 | | 604 | | 572 | |
Depreciation and amortization | 94 | | 102 | | 183 | | 211 | |
Stock-based compensation | 11 | | 10 | | 20 | | 18 | |
Restructuring and fire related costs, net of (recoveries) (including Rocky Mount inventory losses) (see note 10) | (211) | | 16 | | (215) | | 98 | |
Gains on sale of intangible asset and sale leaseback transactions | (6) | | (243) | | (119) | | (243) | |
Adjusted OIBDA | $ | 262 | | 327 | | 473 | | 656 | |
QVC Adjusted OIBDA decreased by $65 million for the three months ended June 30, 2023 compared to income before income taxes.the three months ended June 30, 2022. The decrease is comprised of a $47 million decrease in QxH and an $18 million decrease in QVC-International.
QVC Adjusted OIBDA decreased by $183 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The decrease is comprised of a $133 million decrease in QxH and a $50 million decrease in QVC-International.
Seasonality
QVC's business is seasonal due to a higher volume of sales in the fourth calendar quarter related to year-end holiday shopping. In recent years, QVC has earned, on average, between 22%21% and 24% of its revenue in each of the first three quarters of the year and between 30% and 32% of its revenue in the fourth quarter of the year.
Financial Position, Liquidity and Capital Resources
General
Historically, QVC's primary sources of cash have been cash provided by operating activities and borrowings. In general, QVC uses this cash to fund its operations, make capital purchases, make dividend and tax sharing payments to Liberty,Qurate Retail, make interest payments and minimize QVC's outstanding senior secured credit facility balance.repay borrowings.
As of SeptemberJune 30, 2017,2023, substantially all of QVC's cash and cash equivalents were invested in AAA rated money market funds and time deposits with banks rated equal to or above A.
Senior Secured Notes
All of QVC's senior secured notes are secured by the capital stock of QVC and certain of its subsidiaries and have equal priority to QVC'sthe senior secured credit facility. The interest on all of QVC's senior secured notes is payable semi-annually.semi-annually with the exception of the 6.375% Senior Secured Notes due 2067 (the "2067 Notes") and the 6.25% Senior Secured Notes due 2068 (the "2068 Notes"), which is payable quarterly. The remaining outstanding 4.375% Senior Secured Notes due 2023 were repaid at maturity in March 2023.
During the second quarter of 2023, QVC purchased $177 million of the outstanding 4.85% Senior Secured Notes due 2024 (the "2024 Notes") and $15 million of the outstanding 4.45% Senior Secured Notes due 2025. As a result of the repurchases, the Company recorded a gain on extinguishment of debt in the condensed consolidated statements of operations of $10 million for the three and six months ended June 30, 2023. As of June 30, 2023, the remaining outstanding 2024 Notes are classified within the current portion of long term debt as they mature in less than one year.
The senior secured notes contains certain covenants, including certain restrictions on QVC and its restricted subsidiaries (subject to certain exceptions), with respect to, among other things: incurring additional indebtedness; creating liens on property or assets; making certain loans or investments; selling or disposing of assets; paying certain dividends and other restricted payments; consolidating or merging; entering into certain transactions with affiliates; entering into sale or leaseback transactions; and restricting subsidiary distributions.
The senior secured notes permit QVC to make unlimited dividends or other restricted payments so long as QVC is not in default under the indentures governing the senior secured notes and QVC’s consolidated leverage ratio is not greater than 3.5 to 1.0 (the “senior secured notes leverage basket”). As of June 30, 2023, QVC’s consolidated leverage ratio (as calculated under QVC’s senior secured notes) was greater than 3.5 to 1.0 and as a result QVC is restricted in its ability to make dividends or other restricted payments under the senior secured notes. Although QVC will not be able to make unlimited dividends or other restricted payments under the senior secured notes leverage basket, QVC will continue to be permitted to make unlimited dividends to parent entities of QVC to service the principal and interest when due in respect of indebtedness of such parent entities (so long as there is no default under the indentures governing QVC’s senior secured notes) and permitted to make certain restricted payments to Qurate Retail under an intercompany tax sharing agreement in respect of certain tax obligations of QVC and its subsidiaries.
Senior Secured Credit Facility
On June 23, 2016,October 27, 2021, QVC entered into the ThirdFifth Amended and Restated Credit Agreement with zulilyZulily, CBI, and QVC Global, each a direct or indirect wholly owned subsidiary of Qurate Retail, as borrowers (collectively, the “Borrowers”), which. The Fifth Amended and Restated Credit Agreement is a multi-currency facility that providesproviding for a $2.65$3.25 billion revolving credit facility, with a $300$450 million sub-limit for standby letters of credit and $1.5 billionan alternative currency revolving sub-limit equal to 50% of uncommitted incrementalthe revolving loan commitments or incremental term loans.thereunder. The ThirdFifth Amended and Restated Credit Agreement includes a $400 million tranche that may be borrowed by any Borrower, with each Borrower jointly and severally liable for the Companyoutstanding borrowings. Borrowings bear interest at either the alternate base rate (“ABR Rate”) or zulily with an additional $50 million sub-limit for standby letters of credit. The remaining $2.25 billion and any incremental loans may be borrowed only bya LIBOR-based rate (or the Company.applicable non-U.S. Dollar equivalent rate) (“Term Benchmark/RFR Rate”) at the applicable Borrower’s election in each case plus a margin. Borrowings that are alternate base rateABR Rate loans will bear interest at a per annum rate equal to the base rate plus a margin that varies between 0.25% and 0.75%0.625% depending on the Borrowers’ combined ratio of Consolidated Total Debtconsolidated total debt to Consolidatedconsolidated EBITDA for the most recent four fiscal quarter periods (the “Combined Consolidated Leverage Ratio”“consolidated leverage ratio”). Borrowings that are London Interbank OfferedTerm Benchmark/RFR Rate ("LIBOR") loans will bear interest at a per annum rate equal to the applicable LIBOR rate plus a margin that varies between 1.25% and 1.75%1.625% depending on the Borrowers’ Combined Consolidated Leverage Ratio. Because the calculation of the Combined Consolidated Leverage Ratio was revised to include zulily, the effective interest rate margins, on the date that the Third Amended and Restated Credit Agreement was entered into, decreased from the interest rate margins under the previous bank credit facility.consolidated leverage ratio. Each loan may be prepaid at any time and from time to time without penalty other than customary breakage costs. No mandatory prepayments will be required other than when borrowings and letter of credit usage exceed availability; provided that, if zulily ceases to be controlled by Liberty,Zulily, CBI, QVC Global or any other borrower (other than QVC) is removed, at the election of QVC, as a borrower thereunder, all of its loans must be repaid and its letters of credit are terminated or cash collateralized. Any amounts prepaid may be reborrowed. The facility matures on June 23, 2021, except that $140 million of the $2.25 billion commitment available to QVC matures on March 9, 2020. Any amounts prepaid on the revolving facility may be reborrowed.October 27, 2026. Payment of loans may be accelerated following certain customary events of default.
QVC had $950 million, including In connection with Qurate Retail's divestiture of Zulily (see note 1), Zulily is no longer a co-borrower in the remaining portion of the $400 million tranche that zulily may also borrow on, availableCredit Facility, and Zulily repaid its outstanding borrowings under the terms ofFifth Amended and Restated Credit Agreement.
On June 20, 2023, QVC, QVC Global and CBI, as borrowers, JPMorgan Chase Bank, N.A., as administrative agent, and the Thirdother parties thereto entered into a SOFR Transition and Other Agreements agreement whereby, in accordance with the Fifth Amended and Restated Credit Agreement, LIBOR-based rate loans denominated in US dollars made on or after June 30, 2023 would be replaced with Secured Overnight Financing Rate ("SOFR")-based rate loans. Borrowings that are SOFR-based loans will bear interest at a per annum rate equal to the applicable SOFR rate, plus a credit spread adjustment, plus a margin that varies between 1.25% and 1.625% depending on the Borrowers’ consolidated leverage ratio.
Availability under the Fifth Amended and Restated Credit Agreement at SeptemberJune 30, 2017.2023 was $1.76 billion. The interest rate on the Third Amended and Restated Credit Agreement was 2.7% at September 30, 2017.
The purpose of the amendment was to, among other things, extend the maturity of the Company's senior secured credit facility, provide zulily the opportunity to borrow on the senior secured credit facility (see notes 1was 6.6% and 6 to the accompanying condensed consolidated financial statements),3.0% at June 30, 2023 and lower the interest rate on borrowings. 2022, respectively.
The payment and performance of the Borrowers’ obligations under the ThirdFifth Amended and Restated Credit Agreement are guaranteed by each of QVC’s, QVC Global’s and CBI’s Material Domestic Subsidiaries (as defined in the ThirdFifth Amended and Restated Credit Agreement)., if any, and certain other subsidiaries of any Borrower that such Borrower has chosen to provide guarantees. Further, the borrowings under the ThirdFifth Amended and Restated Credit Agreement are secured, pari passu with QVC’s existing notes, by a pledge of all of QVC’s equity interests. The borrowings under the capital stock of QVC. The payment and performance of the Borrowers’ obligations with respect to the $400 million tranche available to both QVC and zulily are also guaranteed by each of zulily’s Material Domestic Subsidiaries (as defined in the ThirdFifth Amended and Restated Credit Agreement), if any, andAgreement are also secured by a pledge of all of zulily’sCBI’s equity interests.
The ThirdFifth Amended and Restated Credit Agreement contains certain affirmative and negative covenants, including certain restrictions on the Company and zulilyBorrowers and each of their respective restricted subsidiaries (subject to certain exceptions) with respect to, among other things: incurring additional indebtedness; creating liens on property or assets; making certain loans or investments; selling or disposing of assets; paying certain dividends and other restricted payments; dissolving, consolidating or merging; entering into certain transactions with affiliates; entering into sale or leaseback transactions; restricting subsidiary distributions; and limiting the Company’sBorrowers’ consolidated leverage ratioratio.
Parent Issuer and Subsidiary Guarantor Summarized Financial Information
The following information contains the summarized financial information for the combined parent (QVC, Inc.) and subsidiary guarantors (Affiliate Relations Holdings, Inc.; Affiliate Investment, Inc.; AMI 2, Inc.; ER Marks, Inc.; QVC Global Corporate Holdings, LLC; QVC GCH Company, LLC; QVC Rocky Mount, Inc.; QVC San Antonio, LLC; QVC Global Holdings I, Inc.; HSN, Inc; HSNi, LLC; HSN Holding LLC; AST Sub, Inc.; Home Shopping Network En Espanol, L.P.; Home Shopping Network En Espanol, L.L.C; Ingenious Designs LLC; NLG Merger Corp.; Ventana Television, Inc.; and Ventana Television Holdings, Inc.) pursuant to Rules 3-10, 13-01 and 13-02 of Regulation S-X.
This consolidated summarized financial information has been prepared from the Company's financial information on the same basis of accounting as the Company's consolidated financial statements. Transactions between the parent and subsidiary guarantors presented on a combined basis have been eliminated. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions, such as management fees, royalty revenue and expense, interest income and expense and gains on intercompany asset transfers. Goodwill and other intangible assets have been allocated to the subsidiaries based on management’s estimates. Certain costs have been partially allocated to all of the subsidiaries of the Company.
The subsidiary guarantors are 100% owned by the Company. All guarantees are full and unconditional and are joint and several. There are no significant restrictions on the ability of the Company to obtain funds from its U.S. subsidiaries, including the guarantors, by dividend or loan.
Summarized financial information for the year-to-date interim period and the Borrowers’ Combined Consolidated Leverage Ratio.most recent annual period was as follows:
| | | | | |
| Combined Parent-QVC, Inc. and Subsidiary Guarantors |
| June 30, 2023 |
Current assets | $ | 1,852 | |
Intercompany payable to non-guarantor subsidiaries | (2,753) | |
Note receivable - related party | 1,740 | |
Noncurrent assets | 6,303 | |
Current liabilities | 1,324 | |
Noncurrent liabilities | 5,359 | |
| | | | | |
| Combined Parent-QVC, Inc. and Subsidiary Guarantors |
| December 31, 2022 |
Current assets | $ | 2,086 | |
Intercompany payable to non-guarantor subsidiaries | (2,746) | |
Note receivable - related party | 1,740 | |
Noncurrent assets | 6,316 | |
Current liabilities | 1,495 | |
Noncurrent liabilities | 5,612 | |
| | | | | |
| Combined Parent-QVC, Inc. and Subsidiary Guarantors |
| Six months ended June 30, 2023 |
Net revenue | $ | 3,520 | |
Net revenue less cost of goods sold | 1,446 | |
Income before taxes | 348 | |
Net income | 361 | |
Net income attributable to QVC, Inc. Stockholder | 335 | |
| | | | | |
| Combined Parent-QVC, Inc. and Subsidiary Guarantors |
| Year ended December 31, 2022 |
Net revenue | $ | 8,043 | |
Net revenue less cost of goods sold | 3,030 | |
Loss before taxes | (2,018) | |
Net loss | (1,810) | |
Net loss attributable to QVC, Inc. Stockholder | (1,867) | |
Other Debt Related Information
QVC was in compliance with all of its debt covenants at Septemberas of June 30, 2017.2023.
During the quarter, there were no significant changes to QVC's debt credit ratings.
There are no restrictions under QVC'sthe debt agreements on QVC'sQVC’s ability to pay dividends or make other restricted payments if QVC is not in default on its senior secured notes or the Fifth Amended and Restated Credit Agreement and (i) with respect to QVC’s senior secured credit facility, and as long as both QVC'snotes, QVC’s consolidated leverage ratio and a Combined Consolidated Leverage Ratio for both QVC and zulily, would be no greater than 3.5 to 1.0 and (ii) with respect to the Fifth Amended and Restated Credit Agreement, the consolidated net leverage basket for QVC, QVC Global and CBI, would be no greater than 4.0 to 1.0. As of June 30, 2023, QVC’s consolidated leverage ratio (as calculated under QVC’s senior secured notes) was greater than 3.5 to 1.0 and as a result Liberty will,QVC is restricted in many instances, be permittedits ability to rely on QVC's cash flow for servicing Liberty's debt and for other purposes, including repurchases of Liberty's common stock, or to fund acquisitionsmake dividends or other operational requirements of Liberty and its subsidiaries. These events may deplete QVC's equity or require QVC to borrowrestricted payments under the senior secured notes.Although QVC will not be able to make unlimited dividends or other restricted payments under the senior secured notes leverage basket, QVC will continue to be permitted to make unlimited dividends under the senior secured notes to parent entities of QVC to service the principal and interest when due in respect of indebtedness of such parent entities (so long as there is no default under the indentures governing QVC’s senior secured notes) and permitted to make certain restricted payments to Qurate Retail under an intercompany tax sharing agreement in respect of certain tax obligations of QVC and its subsidiaries.
QVC’s debt credit facility, increasing QVC's leverageratings were downgraded during the six months ended June 30, 2023 as follows: (i) Fitch Ratings downgraded QVC’s long-term issuer default ratings from “BB-” to “B” and decreasing liquidity. QVC has made significant distributionsQVC’s senior secured rating from “BB+” to Liberty in the past.“B+”; (ii) S&P Global downgraded QVC’s senior secured rating from “B+” to “B-”; and (iii) Moody’s downgraded QVC’s senior secured debt ratings from “Ba3” to “B2”.
Interest Rate Swap Arrangements
During the year ended December 31, 2016, QVC entered into a three-year interest rate swap arrangement with a notional amount of $125 million to mitigate the interest rate risk associated with interest payments related to its variable rate debt. The swap arrangement does not qualify as a cash flow hedge under U.S. GAAP. Accordingly, changes in the fair value of the swap are reflected in gain on financial instruments in the accompanying condensed consolidated statements of operations. At September 30, 2017, the fair value of the swap instrument was in a net asset position of approximately $2 million which was included in other noncurrent assets.
Additional Cash Flow Information
During the ninesix months ended SeptemberJune 30, 2017,2023, QVC's primary uses of cash were $1,791$515 million of principal payments on debtof the senior secured credit facility and capitalfinance lease obligations, $491$396 million of dividend paymentsprincipal repayment of senior secured notes, $300 million of dividends to Liberty, $118Qurate Retail, $186 million of capital and television distribution rights expenditures and $22$24 million in dividend payments from QVC-Japan to Mitsui. These uses of cash were funded primarily with $1,574$887 million of principal borrowings from the senior secured credit facility, $200 million in proceeds from sale of fixed assets, $54 million of insurance proceeds for fixed asset loss, and $907$591 million of cash provided by operating activities. As of SeptemberJune 30, 2017,2023, QVC's cash, and cash equivalents and restricted cash balance (excluding restricted cash) was $343$658 million.
During the ninesix months ended SeptemberJune 30, 2016,2022, QVC's primary uses of cash were $1,300$876 million of principal payments on debtof the senior secured credit facility and capitalfinance lease obligations, $427$536 million of principal repayment of senior secured notes, $121 million of dividends to Liberty, $148Qurate Retail, $96 million of capital and television distribution rights expenditures, and $21$27 million in dividend payments from QVC-Japan to Mitsui. These uses of cash were funded primarily with $1,048$1,223 million of principal borrowings from the senior secured credit facility, $256 million in proceeds from sale of fixed assets, $70 million of insurance proceeds for fixed asset loss, and $849$44 million of cash provided by operating activities. As of SeptemberJune 30, 2016,2022, QVC's cash, and cash equivalents and restricted cash balance (excluding restricted cash) was $319$422 million.
The change in cash provided by operating activities for the ninesix months ended SeptemberJune 30, 20172023 compared to the previous year was primarily due to insurance proceeds received for operating expenses and business interruption losses related to the increase in net income, excluding non-cash charges such as depreciation, amortization,Rocky Mount insurance settlement and stock-based compensation. Cash provided by operating activities is also subject to changes in working capital. Working capital at any specific point in time is subject to many variables, including seasonality, inventory management, and category expansion, the timing of cash receipts and payments, vendor payment terms and fluctuations in foreign exchange rates.
As of SeptemberJune 30, 2017, $2632023, $226 million of the $343$658 million in cash, and cash equivalents and restricted cash was held by foreign subsidiaries. Cash in foreign subsidiaries is available for domestic purposes with no significant tax consequences upon repatriation to the U.S. QVC accrues taxes on the unremitted earnings of its international subsidiaries. Approximately 60%61% of this foreign cash balance was that of QVC-Japan. QVC owns 60% of QVC-Japan and shares all profits and losses with the 40% minority interest holder, Mitsui. We believe that we currently have appropriate legal structures in place to repatriate foreign cash as tax-efficientlytax efficiently as possible and meet the business needs of QVC.
Other
QVC’s material cash requirements for 2023, outside of normal operating expenses, include the costs to service outstanding debt, expenditures for affiliation agreements with television providers, and capital expenditures. Capital expenditures spending in 2017 isare expected to be between $150$200 and $160$245 million, including $83$79 million already expended.
expended for the six months ended June 30, 2023. The Company also may make dividend payments to Qurate Retail. Refer to the chart under the "Off-balance Sheet Arrangementsoff-balance sheet arrangements and Aggregate Contractual Obligations" sectionaggregate contractual obligations table below for additional information concerning the amounta summary of other material cash requirements as of June 30, 2023. The Company expects that cash on hand and timingcash provided by operating activities in future periods and outstanding borrowing capacity will be sufficient to fund projected uses of expected future payments under QVC'scash.
The Company may from time to time repurchase any level of its outstanding debt through open market purchases, privately negotiated transactions, redemptions, tender offers or otherwise. Repurchases or retirement of debt, if any, will depend on prevailing market conditions, liquidity requirements, contractual obligations at September 30, 2017.restrictions and other factors. The amounts involved may be material.
QVC has contingent liabilities related to legal and tax proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible QVC may incur losses upon the conclusion of such matters, an estimate of any loss or range of loss cannot be made. In the opinion of management, it is expected that amounts, if any, that may be required to satisfy such contingencies will not be material in relation to the accompanying condensed consolidated financial statements.
Off-balance Sheet Arrangements and Aggregate Contractual Obligations
Information concerning the amount and timing of required payments,cash requirements, both accrued and off-balance sheet, under our contractual obligations at Septemberas of June 30, 20172023 is summarized below: | |
| Payments due by period | | | Payments due by period |
(in millions) | Remainder of 2017 |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| Thereafter |
| Total |
| (in millions) | Remainder of 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | Total |
Long-term debt (1) | $ | — |
| — |
| 400 |
| — |
| 1,390 |
| 3,150 |
| 4,940 |
| Long-term debt (1) | $ | — | | 423 | | 586 | | 1,430 | | 575 | | 1,925 | | 4,939 | |
Interest payments (2) | 31 |
| 207 |
| 200 |
| 195 |
| 173 |
| 908 |
| 1,714 |
| Interest payments (2) | 141 | | 271 | | 248 | | 218 | | 121 | | 2,302 | | 3,301 | |
Capital lease obligations (including imputed interest) | 4 |
| 16 |
| 16 |
| 13 |
| 12 |
| 18 |
| 79 |
| |
Finance lease obligations (including imputed interest) | | Finance lease obligations (including imputed interest) | 2 | | 1 | | — | | — | | — | | — | | 3 | |
Operating lease obligations | 5 |
| 18 |
| 14 |
| 11 |
| 9 |
| 71 |
| 128 |
| Operating lease obligations | $ | 43 | | 81 | | 70 | | 63 | | 64 | | 812 | | 1,133 | |
Build to suit lease | 1 |
| 6 |
| 6 |
| 6 |
| 6 |
| 67 |
| 92 |
| |
(1) Amounts exclude capitalFinance lease obligations and the issue discounts on our 3.125%, 4.375%the 4.45%, 4.85%, 4.45%, 5.45% and 5.95% Senior Secured Notes. Additionally, the presentation assumes there is no amount outstanding on the $140 million commitment under our senior secured credit facility that matures on March 9, 2020.
(2) Amounts (i) are based on the terms of QVC's senior secured credit facility andour senior secured notes, (ii) assumes the interest rates on the floating rate debt remain constant at the rates in effect as of September 30, 2017, (iii) assumes that our existing debt is repaid at maturity and (iv)(iii) excludes capitalfinance lease obligations.
Our purchase obligations did not materially change as of September 30, 2017.
Recent Accounting Pronouncements32
On May 28, 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments, changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In March 2016, the FASB issued ASU No. 2016-08, Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which clarifies principal versus agent considerations, in April 2016, the FASB issued ASU No. 2016-10, Identifying Performance Obligations and Licensing, which clarifies the identification of performance obligations and the implementation guidance for licensing, and in May 2016, the FASB issued ASU No. 2016-12, Narrow-Scope Improvements and Practical Expedients, which clarifies assessing collectibility, presentation of sales taxes, noncash consideration, and completed contracts and contract modifications at transition. The updated guidance will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective and permits the use of either a full retrospective or modified retrospective transition method. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and early adoption is permitted only for fiscal years beginning after December 15, 2016. The Company has reviewed the applicable ASU and has selected the modified retrospective transition method. In addition, the Company expects to elect the practical expedient to not adjust the promised amount of consideration for the effects of a significant financing component when its payment terms are less than one year, as well as the practical expedient to exclude from the measurement of the transaction price sales and similar taxes collected from customers. To date, the Company has concluded it will recognize revenue at the time of shipment to its customers consistent with when title passes. This is a change from the current practice whereby the Company recognizes revenue at the time of delivery to the customers and deferred revenue is recorded to account for the shipments in-transit. At the current time, the Company is continuing to evaluate the impact of the standard including its determination of whether the Company acts as principal or agent in certain vendor arrangements. The Company is also evaluating the impact of the standard on the presentation and timing of credit card income for its QVC-branded credit card and its financial statement disclosures, among other areas. The Company has not quantified the effects of this pronouncement, but it is working through the relevant aspects to evaluate the quantitative effects of the new guidance. The Company plans to be able to quantify the effects of these ASU's no later than the fourth quarter of 2017 in its annual report for the year ending December 31, 2017.
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory, which changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. The new principle is part of the FASB’s simplification initiative and applies to entities that measure inventory using a method other than last-in, first-out (LIFO) or the retail inventory method. The Company adopted this guidance as of January 1, 2017, and there was no significant effect of the standard on its financial reporting.
In January 2016, the FASB issued ASU No. 2016-01, Financial Statements - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which requires equity investments with readily determinable fair values (except those accounted for under the equity method of accounting or those that result in consolidation) to be measured at fair value with changes in fair value recognized in net income and simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2017. The adoption of this standard is not expected to have a material impact on the Company’s ongoing financial reporting.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which revises the accounting treatment related to lessee accounting. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new lease guidance also simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. The amendments in this ASU are effective for the Company beginning on January 1, 2019 and should be applied through a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. The Company is currently evaluating the effect that the updated standard will have on its ongoing financial reporting.
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The Company adopted this guidance in the third quarter of 2016. In accordance with the new guidance, excess tax benefits and tax deficiencies are recognized as income tax benefit or expense rather than as additional paid-in capital. The Company has elected to recognize forfeitures as they occur rather than continue to estimate expected forfeitures. In addition, pursuant to the new guidance, excess tax benefits are classified as an operating activity on the condensed consolidated statements of cash flows. The recognition of excess tax benefits and deficiencies are applied prospectively from January 1, 2016.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which addresses eight specific cash flow issues to reduce the diversity in practice for appropriate classification on the statement of cash flows. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted. The Company does not expect the adoption will have a material effect on its condensed consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which requires an entity to recognize at the transaction date the income tax consequences of intercompany asset transfers other than inventory. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company is currently evaluating the effect that the updated standard will have on its condensed consolidated financial statements and related disclosures.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The Company does not expect the adoption will have a material effect on its condensed consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the measurement for impairment by calculating the difference between the carrying amount and the fair value of the reporting unit. The guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company does not expect the adoption will have a material effect on its condensed consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, to provide clarity to which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The amendments in this update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted. The Company does not expect the adoption will have a material effect on its condensed consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
QVC is exposed to market risk in the normal course of business due to ongoing investing and financial activities and the conduct of operations by subsidiaries in different foreign countries. Market risk refers to the risk of loss arising from adverse changes in stock prices, interest rates and foreign currency exchange rates. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. QVC has established procedures and internal processes governing the management of market risks and the use of financial instruments to manage exposure to such risks.
Interest rate risk
QVC is exposed to changes in interest rates primarily as a result of borrowing activities. Over the long-term, QVC manages the exposure to interest rates by maintaining what QVC believes is an appropriate mix of fixed and variable rate debt.
The table below summarizes the Company’s debt obligations, related interest rates and fair value of debt at SeptemberJune 30, 2017:2023: | | (in millions, except percentages) | Remainder of 2017 |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| Thereafter |
| Total |
| Fair Value |
| (in millions, except percentages) | Remainder of 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | Total | Fair Value |
Fixed rate debt (1) | $ | — |
| — |
| 400 |
| — |
| — |
| 3,150 |
| 3,550 |
| 3,654 |
| Fixed rate debt (1) | $ | — | | 423 | | 586 | | — | | 575 | | 1,925 | | 3,509 | | 2,235 | |
Weighted average interest rate on fixed rate debt | — | % | — | % | 3.1 | % | — | % | — | % | 4.9 | % | 4.7 | % | N/A |
| Weighted average interest rate on fixed rate debt | — | % | 4.9 | % | 4.5 | % | — | % | 4.8 | % | 5.6 | % | 5.2 | % | N/A |
Variable rate debt | $ | — |
| — |
| — |
| — |
| 1,390 |
| — |
| 1,390 |
| 1,390 |
| Variable rate debt | $ | — | | — | | — | | 1,430 | | — | | — | | 1,430 | | 1,430 | |
Average interest rate on variable rate debt | — | % | — | % | — | % | — | % | 2.7 | % | — | % | 2.7 | % | N/A |
| Average interest rate on variable rate debt | — | % | — | % | — | % | 6.6 | % | — | % | — | % | 6.6 | % | N/A |
(1) Amounts exclude capital lease and build to suitfinance lease obligations and the issue discounts on our 3.125%, 4.375%the 4.45%, 4.85%, 4.45%, 5.45% and 5.95% Senior Secured Notes. Additionally, the presentation assumes there is no amount outstanding on the $140 million commitment under our senior secured credit facility that matures on March 9, 2020.
N/A - Not applicable.
During the year ended December 31, 2016, QVC entered into a three-year interest rate swap arrangement with a notional amount of $125 million to mitigate the interest rate risk associated with interest payments related to its variable rate debt. The swap arrangement does not qualify as a cash flow hedge under U.S. GAAP. Accordingly, changes in the fair value of the swap are reflected in gain on financial instruments in the accompanying condensed consolidated statements of operations. At September 30, 2017, the fair value of the swap instrument was in a net asset position of approximately $2 million which was included in other noncurrent assets. A 1% change in the one-month U.S. LIBOR rate (floating portion of the interest rate swap) would result in a change in the value of the swap instrument of less than $1 million.
Foreign currency exchange rate risk
QVC is exposed to foreign exchange rate fluctuations related to the monetary assets and liabilities and the financial results of its foreign subsidiaries. Assets and liabilities of foreign subsidiaries for which the functional currency is the local currency are translated into U.S. Dollars at period-end exchange rates, and the statements of operations are translated at the average exchange rate for the period. Exchange rate fluctuations on translating foreign currency financial statements into U.S. Dollars that result in unrealized gains or losses are referred to as translation adjustments. Cumulative translation adjustments are recorded in other comprehensive income as a separate component of stockholder's equity. Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in transaction gains and losses, which are reflected in income as unrealized (based on period-end transactions) or realized upon settlement of the transactions. Cash flows from operations in foreign countries are translated at the average rate for the period. Accordingly, QVC may experience economic loss and a negative impact on earnings and equity with respect to its holdings solely as a result of foreign currency exchange rate fluctuations. QVC's reported Adjusted OIBDA for the three and ninesix months ended SeptemberJune 30, 20172023 would have been impacted by approximately $1 million and $3$2 million, respectively, for every 1% change in foreign currency exchange rates relative to the U.S. Dollar.
The ThirdFifth Amended and Restated Credit Agreement provides QVC with the ability to borrow in multiple currencies. This allows QVC to somewhat mitigate foreign currency exchange rate risks. As of SeptemberJune 30, 2017,2023, no borrowings in foreign currencies were outstanding.
On October 31, 2022, the Company entered into foreign currency forward contracts with an aggregate notional amount of $167 million to mitigate the foreign currency risk associated with the sale and leaseback of Germany and U.K. properties. The forwards did not qualify as a cash flow hedge under U.S. GAAP. Changes in the fair value of the forwards are reflected in (losses) gains on financial instruments in the consolidated statements of operations. The contracts expired in January 2023 which resulted in a net cash settlement of $12 million.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
In accordance with Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company carried out an evaluation, under the supervision and with the participation of management, including its chief executive officer and its principal accounting and financial officer (the "Executives"“Executives”), of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Executives concluded that the Company's disclosure controls and procedures were not effective as of SeptemberJune 30, 2017 to provide reasonable assurance that information required to be disclosed2023 because of the material weakness in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specifiedinternal control over financial reporting as discussed in the Securities and Exchange Commission's rules and forms.2022 10-K. Management is monitoring the implementation of the remediation plan described in the 2022 10-K, as described below.
Changes in Internal Control Over Financial Reporting
There has beenwas no change in the Company'sCompany’s internal control over financial reporting that occurred during the three monthsCompany’s quarter ended SeptemberJune 30, 20172023, that has materially affected, or is reasonably likely to materially affect, itsthe Company’s internal control over financial reporting.
Remediation Plan for Material Weakness in Internal Control over Financial Reporting
In response to the material weakness described in the 2022 10-K, the Company developed a plan with oversight from the audit committee of the board of directors to remediate the material weakness. The remediation activities include:
•Enhancing the ITGC risk assessment process;
•Evaluating talent and addressing identified gaps;
•Delivering training on internal control over financial reporting;
•Improving change management and logical access control activities that contributed to the ITGC material weakness including removing all inappropriate IT system access associated with the ITGC material weakness;
•Implementing user activity monitoring for control activities contributing to the ITGC material weakness; and
•Implementing additional compensating control activities over the completeness and accuracy of data provided by the affected systems.
In addition, considering the divestiture of Zulily by Qurate Retail, the Company is transitioning administration of the inventory management system and associated IT controls impacted by the material weakness described in the 2022 10-K from Zulily to QVC.
The Company believes the foregoing efforts will remediate the material weakness described in the 2022 10-K. Because the reliability of the internal control process requires repeatable execution, the successful on-going remediation of the material weakness will require on-going review and evidence of effectiveness prior to concluding that the controls are effective
Item 5. Other Information
None.
PART II
Item 6. Exhibits
(a) Exhibits
Listed below are the exhibits which are filed as a part of this Report (according to the number assigned to them in Item 601 of Regulation S-K):
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| | | | |
31.110.1 |
| SOFR Transition and Other Agreements, dated as of June 20, 2023, among QVC, Inc., QVC Global Corporate Holdings, LLC and Cornerstone Brands, Inc., as Borrowers, and the parties thereto, related to the Fifth Amended and Restated Credit Agreement (incorporated by reference to Exhibit 10.1 to Qurate Retail's Quarterly Report on Form 10-Q (File No. 001-33982) as filed on August 4, 2023). |
31.1 | | |
31.2 |
| |
32.1 |
| |
101.INS |
| Inline XBRL Instance Document* - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. |
101.SCH |
| Inline XBRL Taxonomy Extension Schema Document* |
101.CAL |
| Inline XBRL Taxonomy Calculation Linkbase Document* |
101.LAB |
| Inline XBRL Taxonomy Label Linkbase Document* |
101.PRE |
| Inline XBRL Taxonomy Presentation Linkbase Document* |
101.DEF |
| Inline XBRL Taxonomy Definition Document* |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)* |
*Filed herewith.
**Furnished herewith.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | | | |
Date: November 9, 2017August 4, 2023 | By:/s/ MICHAEL A. GEORGEDAVID L. RAWLINSON II |
| Michael A. GeorgeDavid L. Rawlinson II |
| President and Chief Executive Officer (Principal Executive Officer) |
| |
Date: November 9, 2017August 4, 2023 | By:/s/ THADDEUS J. JASTRZEBSKIBILL WAFFORD |
| Thaddeus J. JastrzebskiBill Wafford |
| Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |