UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021March 31, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 001-38654
QVC, 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)
1200 Wilson Drive
West Chester, Pennsylvania 19380
(Address of principal executive offices) (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 every Interactive Data File required to be submitted 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 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 ☐
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 ☐ 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 our equity, Qurate Retail Group, Inc., an indirect wholly-owned subsidiary of Qurate Retail, Inc.
QVC, Inc.
20212022 QUARTERLY REPORT ON FORM 10-Q
Table of Contents
| | | | | | | | |
| Part I | Page |
| | |
Item 1. | | |
| | |
| | |
| | |
| | |
| | |
| | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
| | |
| Part II | |
Item 6. | | |
| | |
Item 1. Financial Statements
QVC, Inc.
Condensed Consolidated Balance Sheets
(unaudited)
| | | September 30, | December 31, | | March 31, | December 31, |
(in millions, except share amounts) | (in millions, except share amounts) | 2021 | 2020 | (in millions, except share amounts) | 2022 | 2021 |
Assets | Assets | | Assets | |
Current assets: | Current assets: | | Current assets: | |
Cash and cash equivalents | Cash and cash equivalents | $ | 628 | | 682 | | Cash and cash equivalents | $ | 522 | | 510 | |
Restricted cash | Restricted cash | 9 | | 8 | | Restricted cash | 9 | | 9 | |
Accounts receivable, less allowance for credit losses of $93 at September 30, 2021 and $124 at December 31, 2020 | 1,142 | | 1,602 | | |
Accounts receivable, less allowance for credit losses of $94 at March 31, 2022 and $99 at December 31, 2021 | | Accounts receivable, less allowance for credit losses of $94 at March 31, 2022 and $99 at December 31, 2021 | 1,272 | | 1,645 | |
Inventories | Inventories | 1,482 | | 1,119 | | Inventories | 1,468 | | 1,355 | |
Prepaid expenses and other current assets | Prepaid expenses and other current assets | 333 | | 293 | | Prepaid expenses and other current assets | 182 | | 180 | |
Total current assets | Total current assets | 3,594 | | 3,704 | | Total current assets | 3,453 | | 3,699 | |
Property and equipment, net of accumulated depreciation of $1,457 at September 30, 2021 and $1,544 at December 31, 2020 | 1,086 | | 1,178 | | |
Property and equipment, net of accumulated depreciation of $1,359 at March 31, 2022 and $1,354 at December 31, 2021 | | Property and equipment, net of accumulated depreciation of $1,359 at March 31, 2022 and $1,354 at December 31, 2021 | 926 | | 966 | |
Operating lease right-of-use assets (note 6) | Operating lease right-of-use assets (note 6) | 206 | | 221 | | Operating lease right-of-use assets (note 6) | 195 | | 201 | |
Television distribution rights, net (note 2) | Television distribution rights, net (note 2) | 169 | | 63 | | Television distribution rights, net (note 2) | 116 | | 145 | |
Goodwill (note 3) | Goodwill (note 3) | 5,988 | | 6,034 | | Goodwill (note 3) | 5,941 | | 5,968 | |
Other intangible assets, net (note 3) | Other intangible assets, net (note 3) | 3,409 | | 3,454 | | Other intangible assets, net (note 3) | 3,391 | | 3,407 | |
Note receivable - related party (note 1) | Note receivable - related party (note 1) | 1,825 | | 1,825 | | Note receivable - related party (note 1) | 1,740 | | 1,740 | |
Other noncurrent assets | Other noncurrent assets | 63 | | 79 | | Other noncurrent assets | 61 | | 62 | |
Total assets | Total assets | $ | 16,340 | | 16,558 | | Total assets | $ | 15,823 | | 16,188 | |
Liabilities and equity | Liabilities and equity | | Liabilities and equity | |
Current liabilities: | Current liabilities: | | Current liabilities: | |
Current portion of debt and finance lease obligations (note 5) | Current portion of debt and finance lease obligations (note 5) | $ | 567 | | 410 | | Current portion of debt and finance lease obligations (note 5) | $ | 769 | | 20 | |
Accounts payable-trade | Accounts payable-trade | 1,049 | | 1,127 | | Accounts payable-trade | 1,087 | | 1,271 | |
Accrued liabilities (note 4) | Accrued liabilities (note 4) | 883 | | 1,302 | | Accrued liabilities (note 4) | 959 | | 1,179 | |
Total current liabilities | Total current liabilities | 2,499 | | 2,839 | | Total current liabilities | 2,815 | | 2,470 | |
Long-term portion of debt and finance lease obligations (note 5) | Long-term portion of debt and finance lease obligations (note 5) | 4,548 | | 4,549 | | Long-term portion of debt and finance lease obligations (note 5) | 4,514 | | 5,023 | |
Deferred income taxes (note 8) | Deferred income taxes (note 8) | 716 | | 711 | | Deferred income taxes (note 8) | 619 | | 636 | |
Other long-term liabilities | Other long-term liabilities | 309 | | 324 | | Other long-term liabilities | 284 | | 294 | |
Total liabilities | Total liabilities | 8,072 | | 8,423 | | Total liabilities | 8,232 | | 8,423 | |
Commitments and contingencies (note 9) | Commitments and contingencies (note 9) | | Commitments and contingencies (note 9) | |
Equity: | Equity: | | Equity: | |
QVC, Inc. stockholder's equity: | QVC, Inc. stockholder's equity: | | QVC, Inc. stockholder's equity: | |
Common stock, $0.01 par value, 1 authorized share | Common stock, $0.01 par value, 1 authorized share | — | | — | | Common stock, $0.01 par value, 1 authorized share | — | | — | |
Additional paid-in capital | Additional paid-in capital | 10,769 | | 10,741 | | Additional paid-in capital | 10,643 | | 10,687 | |
Accumulated deficit | Accumulated deficit | (2,508) | | (2,722) | | Accumulated deficit | (2,968) | | (2,898) | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | (118) | | (17) | | Accumulated other comprehensive loss | (200) | | (146) | |
Total QVC, Inc. stockholder's equity | Total QVC, Inc. stockholder's equity | 8,143 | | 8,002 | | Total QVC, Inc. stockholder's equity | 7,475 | | 7,643 | |
Noncontrolling interest | Noncontrolling interest | 125 | | 133 | | Noncontrolling interest | 116 | | 122 | |
Total equity | Total equity | 8,268 | | 8,135 | | Total equity | 7,591 | | 7,765 | |
Total liabilities and equity | Total liabilities and equity | $ | 16,340 | | 16,558 | | Total liabilities and equity | $ | 15,823 | | 16,188 | |
QVC, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
| | | Three months ended September 30, | Nine months ended September 30, | | Three months ended March 31, |
(in millions) | (in millions) | 2021 | 2020 | 2021 | 2020 | (in millions) | 2022 | 2021 |
Net revenue | Net revenue | $ | 2,512 | | 2,703 | | 8,002 | | 7,853 | | Net revenue | $ | 2,354 | | 2,710 | |
Operating costs and expenses: | Operating costs and expenses: | | Operating costs and expenses: | |
Cost of goods sold (exclusive of depreciation and amortization shown separately below) | Cost of goods sold (exclusive of depreciation and amortization shown separately below) | 1,617 | | 1,722 | | 5,130 | | 5,041 | | Cost of goods sold (exclusive of depreciation and amortization shown separately below) | 1,641 | | 1,758 | |
Operating | Operating | 183 | | 184 | | 565 | | 548 | | Operating | 178 | | 186 | |
Selling, general and administrative, including stock-based compensation | Selling, general and administrative, including stock-based compensation | 285 | | 295 | | 873 | | 881 | | Selling, general and administrative, including stock-based compensation | 294 | | 283 | |
Depreciation | Depreciation | 37 | | 45 | | 115 | | 131 | | Depreciation | 35 | | 40 | |
Amortization | Amortization | 74 | | 69 | | 200 | | 213 | | Amortization | 74 | | 62 | |
Fire related costs, net (note 13) | | Fire related costs, net (note 13) | 2 | | — | |
| | 2,196 | | 2,315 | | 6,883 | | 6,814 | | | 2,224 | | 2,329 | |
Operating income | Operating income | 316 | | 388 | | 1,119 | | 1,039 | | Operating income | 130 | | 381 | |
Other (expense) income: | Other (expense) income: | | Other (expense) income: | |
Equity in (losses) earnings of investee | (2) | | 1 | | (2) | | (1) | | |
(Losses) gains on financial instruments | (5) | | 1 | | (8) | | (3) | | |
Gains on financial instruments | | Gains on financial instruments | 1 | | 1 | |
Interest expense, net | Interest expense, net | (64) | | (65) | | (192) | | (194) | | Interest expense, net | (62) | | (63) | |
Foreign currency gain (loss) | Foreign currency gain (loss) | — | | 1 | | (4) | | 3 | | Foreign currency gain (loss) | 8 | | (2) | |
Loss on extinguishment of debt | — | | (42) | | — | | (42) | | |
Other income | Other income | — | | — | | 8 | | — | | Other income | 20 | | 6 | |
| | (71) | | (104) | | (198) | | (237) | | | (33) | | (58) | |
Income before income taxes | Income before income taxes | 245 | | 284 | | 921 | | 802 | | Income before income taxes | 97 | | 323 | |
Income tax expense | Income tax expense | (85) | | (80) | | (266) | | (232) | | Income tax expense | (41) | | (85) | |
Net income | Net income | 160 | | 204 | | 655 | | 570 | | Net income | 56 | | 238 | |
Less net income attributable to the noncontrolling interest | Less net income attributable to the noncontrolling interest | (15) | | (15) | | (48) | | (41) | | Less net income attributable to the noncontrolling interest | (14) | | (16) | |
Net income attributable to QVC, Inc. stockholder | Net income attributable to QVC, Inc. stockholder | $ | 145 | | 189 | | 607 | | 529 | | Net income attributable to QVC, Inc. stockholder | $ | 42 | | 222 | |
QVC, Inc.
Condensed Consolidated Statements of Comprehensive Income
(unaudited)
| | | Three months ended September 30, | Nine months ended September 30, | | Three months ended March 31, |
(in millions) | (in millions) | 2021 | 2020 | 2021 | 2020 | (in millions) | 2022 | 2021 |
Net income | Net income | $ | 160 | | 204 | | 655 | | 570 | | Net income | $ | 56 | | 238 | |
Foreign currency translation adjustments, net of tax | Foreign currency translation adjustments, net of tax | (28) | | 49 | | (92) | | 45 | | Foreign currency translation adjustments, net of tax | (60) | | (73) | |
Comprehensive loss attributable to debt credit risk adjustments | Comprehensive loss attributable to debt credit risk adjustments | (7) | | — | | (19) | | — | | Comprehensive loss attributable to debt credit risk adjustments | — | | (13) | |
Total comprehensive income | 125 | | 253 | | 544 | | 615 | | |
Total comprehensive (loss) income | | Total comprehensive (loss) income | (4) | | 152 | |
Comprehensive income attributable to noncontrolling interest | Comprehensive income attributable to noncontrolling interest | (14) | | (17) | | (38) | | (45) | | Comprehensive income attributable to noncontrolling interest | (8) | | (8) | |
Comprehensive income attributable to QVC, Inc. stockholder | $ | 111 | | 236 | | 506 | | 570 | | |
Comprehensive (loss) income attributable to QVC, Inc. stockholder | | Comprehensive (loss) income attributable to QVC, Inc. stockholder | $ | (12) | | 144 | |
QVC, Inc.
Condensed Consolidated Statements of Cash Flows
(unaudited)
| | | Nine months ended September 30, | | Three months ended March 31, |
(in millions) | (in millions) | 2021 | 2020 | (in millions) | 2022 | 2021 |
Operating activities: | Operating activities: | | Operating activities: | |
Net income | Net income | $ | 655 | | 570 | | Net income | $ | 56 | | 238 | |
Adjustments to reconcile net income to net cash provided by operating activities: | Adjustments to reconcile net income to net cash provided by operating activities: | | Adjustments to reconcile net income to net cash provided by operating activities: | |
Equity in losses of investee | 2 | | 1 | | |
Deferred income taxes | Deferred income taxes | (1) | | 8 | | Deferred income taxes | (14) | | 3 | |
Foreign currency loss (gain) | 4 | | (3) | | |
Foreign currency (gain) loss | | Foreign currency (gain) loss | (8) | | 2 | |
Depreciation | Depreciation | 115 | | 131 | | Depreciation | 35 | | 40 | |
Amortization | Amortization | 200 | | 213 | | Amortization | 74 | | 62 | |
Change in fair value of financial instruments and noncash interest | Change in fair value of financial instruments and noncash interest | 8 | | 9 | | Change in fair value of financial instruments and noncash interest | (1) | | (1) | |
Loss on extinguishment of debt | — | | 42 | | |
Stock-based compensation | Stock-based compensation | 33 | | 26 | | Stock-based compensation | 8 | | 9 | |
Change in other long-term liabilities | Change in other long-term liabilities | 5 | | 9 | | Change in other long-term liabilities | — | | (1) | |
Other income | (8) | | — | | |
Other non-cash charges, net | 30 | | 30 | | |
Other charges, net | | Other charges, net | (10) | | 4 | |
Change in operating assets and liabilities | Change in operating assets and liabilities | | Change in operating assets and liabilities | |
Decrease in accounts receivable | Decrease in accounts receivable | 443 | | 718 | | Decrease in accounts receivable | 367 | | 378 | |
Increase in inventories | Increase in inventories | (374) | | (49) | | Increase in inventories | (119) | | (60) | |
Decrease in prepaid expenses and other current assets | 47 | | 30 | | |
(Decrease) increase in accounts payable-trade | (70) | | 56 | | |
(Increase) decrease in prepaid expenses and other current assets | | (Increase) decrease in prepaid expenses and other current assets | (3) | | 29 | |
Decrease in accounts payable-trade | | Decrease in accounts payable-trade | (178) | | (151) | |
Decrease in accrued liabilities and other | Decrease in accrued liabilities and other | (411) | | (111) | | Decrease in accrued liabilities and other | (225) | | (305) | |
Net cash provided by operating activities | 678 | | 1,680 | | |
Net cash (used in) provided by operating activities | | Net cash (used in) provided by operating activities | (18) | | 247 | |
Investing activities: | Investing activities: | | Investing activities: | |
Capital expenditures | Capital expenditures | (145) | | (140) | | Capital expenditures | (34) | | (41) | |
Expenditures for television distribution rights | Expenditures for television distribution rights | (184) | | (41) | | Expenditures for television distribution rights | (2) | | (56) | |
Changes in other noncurrent assets | Changes in other noncurrent assets | (3) | | — | | Changes in other noncurrent assets | (2) | | (1) | |
Proceeds from sale of fixed assets | Proceeds from sale of fixed assets | 40 | | — | | Proceeds from sale of fixed assets | — | | 40 | |
Other investing activities | Other investing activities | 8 | | — | | Other investing activities | 20 | | — | |
Net cash used in investing activities | Net cash used in investing activities | (284) | | (181) | | Net cash used in investing activities | (18) | | (58) | |
Financing activities: | Financing activities: | | Financing activities: | |
Principal payments of debt and finance lease obligations | Principal payments of debt and finance lease obligations | (157) | | (1,230) | | Principal payments of debt and finance lease obligations | (176) | | (143) | |
Principal borrowings of debt from senior secured credit facility | Principal borrowings of debt from senior secured credit facility | 135 | | 112 | | Principal borrowings of debt from senior secured credit facility | 368 | | 135 | |
Principal repayment of senior secured notes | — | | (500) | | |
Payment of premium on redemption of senior secured notes | — | | (41) | | |
Proceeds from issuance of senior secured notes | — | | 1,075 | | |
Payment of debt origination fees | — | | (15) | | |
Dividends paid to Qurate Retail, Inc. | Dividends paid to Qurate Retail, Inc. | (393) | | (845) | | Dividends paid to Qurate Retail, Inc. | (112) | | (177) | |
Dividends paid to noncontrolling interest | Dividends paid to noncontrolling interest | (46) | | (46) | | Dividends paid to noncontrolling interest | (14) | | (16) | |
Withholding taxes on net share settlements of stock-based compensation | Withholding taxes on net share settlements of stock-based compensation | (18) | | (1) | | Withholding taxes on net share settlements of stock-based compensation | (5) | | (15) | |
Derivative payments to counterparties | (38) | | — | | |
Derivative proceeds from counterparties | 88 | | — | | |
Other financing activities | 2 | | — | | |
Net cash used in financing activities | (427) | | (1,491) | | |
Net cash provided by (used in) financing activities | | Net cash provided by (used in) financing activities | 61 | | (216) | |
Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | (20) | | 5 | | Effect of foreign exchange rate changes on cash, cash equivalents and restricted cash | (13) | | (17) | |
Net (decrease) increase in cash, cash equivalents and restricted cash | (53) | | 13 | | |
Net increase (decrease) in cash, cash equivalents and restricted cash | | Net increase (decrease) in cash, cash equivalents and restricted cash | 12 | | (44) | |
Cash, cash equivalents and restricted cash, beginning of period | Cash, cash equivalents and restricted cash, beginning of period | 690 | | 569 | | Cash, cash equivalents and restricted cash, beginning of period | 519 | | 690 | |
Cash, cash equivalents and restricted cash, end of period | Cash, cash equivalents and restricted cash, end of period | $ | 637 | | 582 | | Cash, cash equivalents and restricted cash, end of period | $ | 531 | | 646 | |
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, 2019 | 1 | | $ | — | | 9,208 | | (2,390) | | (144) | | 130 | | 6,804 | |
Net income | — | | — | | — | | 529 | | — | | 41 | | 570 | |
Foreign currency translation adjustments, net of tax | — | | — | | — | | — | | 41 | | 4 | | 45 | |
Dividends paid to Qurate Retail, Inc. and noncontrolling interest | — | | — | | — | | (845) | | — | | (46) | | (891) | |
Impact of tax liability allocation and indemnification agreement with Qurate Retail, Inc. | — | | — | | — | | (7) | | — | | — | | (7) | |
Stock-based compensation | — | | — | | 26 | | — | | — | | — | | 26 | |
Balance, September 30, 2020 | 1 | $ | — | | 9,234 | | (2,713) | | (103) | | 129 | | 6,547 | |
| | | Common stock | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive loss | Noncontrolling interest | Total equity | | Common stock | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive loss | Noncontrolling interest | Total equity |
(in millions, except share data) | (in millions, except share data) | Shares | Amount | (in millions, except share data) | Shares | Amount |
Balance, June 30, 2020 | 1 | | $ | — | | 9,224 | | (2,312) | | (150) | | 128 | | 6,890 | | |
Balance, December 31, 2020 | | Balance, December 31, 2020 | 1 | | $ | — | | 10,741 | | (2,722) | | (17) | | 133 | | 8,135 | |
Net income | Net income | — | | — | | — | | 189 | | — | | 15 | | 204 | | Net income | — | | — | | — | | 222 | | — | | 16 | | 238 | |
Foreign currency translation adjustments, net of tax | Foreign currency translation adjustments, net of tax | — | | — | | — | | — | | 47 | | 2 | | 49 | | Foreign currency translation adjustments, net of tax | — | | — | | — | | — | | (65) | | (8) | | (73) | |
Dividends paid to Qurate Retail, Inc. and noncontrolling interest | Dividends paid to Qurate Retail, Inc. and noncontrolling interest | — | | — | | — | | (583) | | — | | (16) | | (599) | | Dividends paid to Qurate Retail, Inc. and noncontrolling interest | — | | — | | — | | (177) | | — | | (16) | | (193) | |
Impact of tax liability allocation and indemnification agreement with Qurate Retail, Inc. | Impact of tax liability allocation and indemnification agreement with Qurate Retail, Inc. | — | | — | | — | | (7) | | — | | — | | (7) | | Impact of tax liability allocation and indemnification agreement with Qurate Retail, Inc. | — | | — | | 5 | | — | | — | | — | | 5 | |
Withholding taxes on net share settlements of stock-based compensation | | Withholding taxes on net share settlements of stock-based compensation | — | | — | | (15) | | — | | — | | — | | (15) | |
Stock-based compensation | Stock-based compensation | — | | — | | 10 | | — | | — | | — | | 10 | | Stock-based compensation | — | | — | | 9 | | — | | — | | — | | 9 | |
Balance, September 30, 2020 | 1 | $ | — | | 9,234 | | (2,713) | | (103) | | 129 | | 6,547 | | |
Debt credit risk adjustment | | Debt credit risk adjustment | — | | — | | — | | — | | (13) | | — | | (13) | |
Balance, March 31, 2021 | | Balance, March 31, 2021 | 1 | $ | — | | 10,740 | | (2,677) | | (95) | | 125 | | 8,093 | |
QVC, Inc.
Condensed Consolidated Statements of Equity | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | (2,898) | | (146) | | 122 | | 7,765 | |
Net income | — | | — | | — | | 42 | | — | | 14 | | 56 | |
Foreign currency translation adjustments, net of tax | — | | — | | — | | — | | (54) | | (6) | | (60) | |
Dividends paid to Qurate Retail, Inc. and noncontrolling interest | — | | — | | — | | (112) | | — | | (14) | | (126) | |
Impact of tax liability allocation and indemnification agreement with Qurate Retail, Inc. | — | | — | | 2 | | — | | — | | — | | 2 | |
Withholding taxes on net share settlements of stock-based compensation | — | — | | (5) | | — | | — | | — | | (5) | |
Stock-based compensation | — | — | | 8 | | — | | — | | — | | 8 | |
Common control transaction with Qurate Retail, Inc | — | — | | (49) | | — | | — | | — | | (49) | |
Balance, March 31, 2022 | 1 | $ | — | | 10,643 | | (2,968) | | (200) | | 116 | | 7,591 | |
(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, 2020 | 1 | | $ | — | | 10,741 | | (2,722) | | (17) | | 133 | | 8,135 | |
Net income | — | | — | | — | | 607 | | — | | 48 | | 655 | |
Foreign currency translation adjustments, net of tax | — | | — | | — | | — | | (82) | | (10) | | (92) | |
Dividends paid to Qurate Retail, Inc. and noncontrolling interest | — | | — | | — | | (393) | | — | | (46) | | (439) | |
Impact of tax liability allocation and indemnification agreement with Qurate Retail, Inc. | — | | — | | 13 | | — | | — | | — | | 13 | |
Withholding taxes on net share settlements of stock-based compensation | — | | — | | (18) | | — | | — | | — | | (18) | |
Stock-based compensation | — | | — | | 33 | | — | | — | | — | | 33 | |
Debt credit risk adjustment | — | — | | — | — | (19) | | — | | (19) | |
Balance, September 30, 2021 | 1 | | $ | — | | 10,769 | | (2,508) | | (118) | | 125 | | 8,268 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Common stock | Additional paid-in capital | Accumulated deficit | Accumulated other comprehensive loss | Noncontrolling interest | Total equity |
(in millions, except share data) | Shares | Amount |
Balance, June 30, 2021 | 1 | | $ | — | | 10,753 | | (2,561) | | (84) | | 126 | | 8,234 | |
Net income | — | | — | | — | | 145 | | — | | 15 | | 160 | |
Foreign currency translation adjustments, net of tax | — | | — | | — | | — | | (27) | | (1) | | (28) | |
Dividends paid to Qurate Retail, Inc. and noncontrolling interest | — | | — | | — | | (92) | | — | | (15) | | (107) | |
Impact of tax liability allocation and indemnification agreement with Qurate Retail, Inc. | — | | — | | 4 | | — | | — | | — | | 4 | |
Withholding taxes on net share settlements of stock-based compensation | — | | | (1) | | — | | — | | — | | (1) | |
Stock-based compensation | — | | — | | 13 | | — | | — | | — | | 13 | |
Debt credit risk adjustment | — | | — | | — | | — | | (7) | | — | | (7) | |
Balance, September 30, 2021 | 1 | | $ | — | | 10,769 | | (2,508) | | (118) | | 125 | | 8,268 | |
QVC, Inc.
Notes to Condensed Consolidated Financial Statements
(unaudited)
(1) Basis of Presentation
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 the United States ("U.S."), QVC's televised shopping programs, including live and recorded content, are distributed across multiple channels nationally on a full-time basis, including QVC, QVC2, QVC3, HSN and HSN2. The Company's U.S. programming is also available on QVC.com and HSN.com, which we refer to as our "U.S. websites"; virtual multichannel video programming distributors (including Hulu + Live TV, AT&T TV, and YouTube TV); applications via streaming video; Facebook Live, Roku, Apple TV, Amazon Fire, Xfinity Flex and Xfinity Flex;Samsung TV Plus; mobile applications; social pages and over-the-air broadcasters.
QVC's digital platforms enable consumers to purchase goods offered on our televised programming, along with a wide assortment of products that are available only on our U.S. websites. QVC.com, HSN.com and our other digital platforms (including our mobile applications, social 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 account.
Internationally, QVC's 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 and Italy. In some of the countries where QVC operates, QVC's televised shopping programs are distributed across multiple QVC channels: QVC Style and QVC2 in Germany and QVC Beauty, QVC Extra and QVC Style in the U.K. Similar to the U.S., our international businesses also engage customers via websites, mobile applications, and social 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"). 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 three months ended March 31, 2022 and 2021, QVC-Japan paid dividends to Mitsui of $46$14 million during each of the nine months ended September 30, 2021 and 2020.
Prior to September 2021, the Company had a joint venture with CNR Media Group, a limited liability company owned by China National Radio (''CNR''). The Company owned a 49% interest in a CNR subsidiary, CNR Home Shopping Co., Ltd. (''CNRS'') that was accounted for as an equity method investment. During the three months ended September 30, 2021, QVC sold its interest in CNRS which resulted in an immaterial loss for the three and nine months ended September 30, 2021 recorded in equity in (losses) earnings of investee in the condensed consolidated statements of operations.$16 million, respectively.
The Company is an indirect wholly-owned subsidiary of Qurate Retail, Inc. ("Qurate Retail") (Nasdaq: QRTEA, QRTEB and QRTEP), which owns interests in a broad range of digital commerce businesses, including Qurate Retail's other wholly-owned subsidiary Zulily, LLC ("Zulily"), as well as other minority investments. QVC is part of the Qurate Retail Group, formerly QVC Group, a portfolio of brands including QVC, Zulily and Cornerstone Brands, Inc. ("CBI").
On December 31, 2018, QVC entered into the Fourth Amended and Restated Credit Agreement that provides for a $2.95 billion revolving credit facility as explained further in note 5. The Fourth Amended and Restated Credit Agreement includes a $400 million tranche that may be borrowed by QVC or Zulily. Under the terms of the Fourth 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, 2021, there was $120 million borrowed by Zulily on the $400 million tranche of the Fourth Amended and Restated Credit Agreement, none of which the Company expects to repay on behalf of Zulily.
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
During each of the ninethree months ended September 30,March 31, 2022 and 2021, and 2020, QVC and Zulily engaged in multiple transactions relating to sales, sourcing of merchandise, marketing initiatives and business advisory services. QVC allocated expenses of $6$2 million to Zulily for each of the ninethree months ended September 30, 2021March 31, 2022 and 2020.2021. Zulily allocated expenses of $6 million and $8$2 million to QVC for each of the ninethree months ended September 30, 2021March 31, 2022 and 2020, respectively.2021.
In September 2020, QVC and Zulily executed a Master Promissory Note ("Promissory Note") whereby Zulily may borrow up to $100 million at a variable interest rate equal to the London Interbank Offered Rate ("LIBOR")LIBOR rate plus an applicable margin rate. The Promissory Note matures in September 2030. There were no borrowings on the Promissory Note as of September 30, 2021March 31, 2022 and December 31, 2020.2021.
During each of the ninethree months ended September 30,March 31, 2022 and 2021, and 2020, QVC and CBI engaged in multiple transactions relating to personnel and business advisory services. QVC allocated expenses of $16$8 million and $18$5 million to CBI for the ninethree months ended September 30,March 31, 2022 and 2021, and 2020, respectively. CBI allocated expenses of $1 million to QVC for each of the ninethree months ended September 30,March 31, 2022 and 2021.
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
On October 27, 2021, QVC entered into the Fifth Amended and 2020.Restated Credit Agreement which includes QVC Global Corporate Holdings, LLC (“QVC Global”), an indirect wholly owned subsidiary of QVC, Zulily and CBI as co-borrowers (see note 5). Under the terms of the Fifth Amended and Restated Credit Agreement, QVC, QVC Global, CBI and Zulily are jointly and severally liable for all amounts borrowed on the credit facility. 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 Zulily or CBI. QVC determined it was necessary to record a liability for Zulily's outstanding borrowings on the Fifth Amended and Restated Credit Agreement. As QVC and Zulily are both wholly-owned subsidiaries of Qurate Retail this was recorded as an equity transaction with an entity under common control. There was $200 million and $151 million borrowed by Zulily as of March 31, 2022, and December 31, 2021, respectively, which is included in the long-term portion of debt and finance lease obligations on the condensed consolidated balance sheet. QVC recorded a $49 million liability for Zulily's additional borrowings during the three months ended March 31, 2022, which was treated as a return of capital in the consolidated statement of equity. As of March 31, 2022, there was $20 million borrowed by CBI on the senior secured credit facility, none of which the Company expects to repay on behalf of CBI.
In December 2019, a new coronavirus disease ("COVID-19'") pandemic was reported to have surfaced in Wuhan, China and has subsequently spread across the globe, including all of the countries in which QVC operates. As a result ofSince that time, most local, state and federal governmental agencies imposed various restrictions to prevent the spread of COVID-19, certain local governmental agencies have imposedincluding travel restrictions, local quarantines or stay at home restrictions, to containand vaccine and testing requirements. The spread of COVID-19 and the spread, which has caused avarious containment measures put in place around the world have resulted in significant disruption to most sectors of the global economy.
Management is not presently aware of any events or circumstances arising from COVID-19 that would require the Company to update the estimates, judgments or revise the carrying value of our assets or liabilities. Management's estimates may change, however, as new events occur and additional information is obtained, and any such changes will be recognized in the consolidated financial statements. Actual results could differ from estimates, and any such differences may be material to our financial statements.
On December 30, 2020, the Company and Liberty Interactive LLC ("LIC") completed an internal realignment of the Company's global finance structure that resulted in a common control transaction with Qurate Retail. As part of the common control transaction, LIC issued a promissory note (“LIC Note”) to the Company with an initial face amount of $1.8 billion, a stated interest rate of 0.48% and a maturity of December 29, 2029. Interest on the LIC Note is to be paid annually beginning on December 29, 2021.annually. QVC recorded $2 million and $6 million of related party interest income for the three and nine months ended September 30, 2021, respectively,March 31, 2022 included in interest expense, net in the consolidated statement of 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, 2020,2021, 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, 2020.2021.
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, internally-developed software, valuation of acquired intangible assets and goodwill and income taxes.
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
(2) Television Distribution Rights, Net
Television distribution rights consisted of the following:
| (in millions) | (in millions) | September 30, 2021 | December 31, 2020 | (in millions) | March 31, 2022 | December 31, 2021 |
Television distribution rights | Television distribution rights | $ | 823 | | 814 | | Television distribution rights | $ | 810 | | 818 | |
Less accumulated amortization | Less accumulated amortization | (654) | | (751) | | Less accumulated amortization | (694) | | (673) | |
Television distribution rights, net | Television distribution rights, net | $ | 169 | | 63 | | Television distribution rights, net | $ | 116 | | 145 | |
The Company recorded amortization expense of $32$31 million and $33$25 million for the three months ended September 30,March 31, 2022 and 2021, and 2020, respectively, related to television distribution rights. For the nine months ended September 30, 2021 and 2020, amortization expense for television distribution rights was $80 million and $102 million, respectively.
As of September 30, 2021,March 31, 2022, related amortization expense for each of the next five years ended December 31 was as follows (in millions):
| Remainder of 2021 | $ | 30 | | |
2022 | 108 | | |
Remainder of 2022 | | Remainder of 2022 | $ | 82 | |
2023 | 2023 | 26 | | 2023 | 29 | |
2024 | 2024 | 4 | | 2024 | 4 | |
2025 | 2025 | 1 | | 2025 | 1 | |
2026 | | 2026 | — | |
(3) Goodwill and Other Intangible Assets, Net
The changes in the carrying amount of goodwill by operating segment for the ninethree months ended September 30, 2021March 31, 2022 were as follows:
| (in millions) | (in millions) | QxH | QVC-International | Total | (in millions) | QxH | QVC-International | Total |
Balance as of December 31, 2020 | $ | 5,112 | | 922 | | 6,034 | | |
Balance as of December 31, 2021 | | Balance as of December 31, 2021 | $ | 5,112 | | 856 | | 5,968 | |
Exchange rate fluctuations | Exchange rate fluctuations | — | | (46) | | (46) | | Exchange rate fluctuations | — | | (27) | | (27) | |
Balance as of September 30, 2021 | $ | 5,112 | | 876 | | 5,988 | | |
Balance as of March 31, 2022 | | Balance as of March 31, 2022 | $ | 5,112 | | 829 | | 5,941 | |
Other intangible assets consisted of the following:
| | | September 30, 2021 | December 31, 2020 | | March 31, 2022 | December 31, 2021 |
(in millions) | (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 | Purchased and internally developed software | $ | 1,002 | | (721) | | 281 | | 952 | | (663) | | 289 | | Purchased and internally developed software | $ | 967 | | (685) | | 282 | | 945 | | (659) | | 286 | |
Affiliate and customer relationships | Affiliate and customer relationships | 2,836 | | (2,590) | | 246 | | 2,845 | | (2,564) | | 281 | | Affiliate and customer relationships | 2,828 | | (2,605) | | 223 | | 2,832 | | (2,598) | | 234 | |
Debt origination fees | Debt origination fees | 10 | | (6) | | 4 | | 10 | | (4) | | 6 | | Debt origination fees | 9 | | (1) | | 8 | | 9 | | — | | 9 | |
Trademarks (indefinite life) | Trademarks (indefinite life) | 2,878 | | — | | 2,878 | | 2,878 | | — | | 2,878 | | Trademarks (indefinite life) | 2,878 | | — | | 2,878 | | 2,878 | | — | | 2,878 | |
| | $ | 6,726 | | (3,317) | | 3,409 | | 6,685 | | (3,231) | | 3,454 | | | $ | 6,682 | | (3,291) | | 3,391 | | 6,664 | | (3,257) | | 3,407 | |
The Company recorded amortization expense of $42$43 million and $36$37 million for the three months ended September 30,March 31, 2022 and 2021, and 2020, respectively, related to other intangible assets. For the nine months ended September 30, 2021 and 2020, amortization expense for other intangible assets was $120 million and $111 million, respectively.
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
As of September 30, 2021,March 31, 2022, the related amortization and interest expense for each of the next five years ended December 31 was as follows (in millions):
| Remainder of 2021 | $ | 47 | | |
2022 | 169 | | |
Remainder of 2022 | | Remainder of 2022 | $ | 140 | |
2023 | 2023 | 135 | | 2023 | 158 | |
2024 | 2024 | 86 | | 2024 | 112 | |
2025 | 2025 | 47 | | 2025 | 55 | |
2026 | | 2026 | 48 | |
(4) Accrued Liabilities
Accrued liabilities consisted of the following:
| (in millions) | (in millions) | September 30, 2021 | December 31, 2020 | (in millions) | March 31, 2022 | December 31, 2021 |
Accounts payable non-trade | Accounts payable non-trade | $ | 271 | | 408 | | Accounts payable non-trade | $ | 273 | | 364 | |
Allowance for sales returns | Allowance for sales returns | 186 | | 267 | | Allowance for sales returns | 203 | | 242 | |
Accrued compensation and benefits | Accrued compensation and benefits | 147 | | 214 | | Accrued compensation and benefits | 132 | | 151 | |
Income taxes | | Income taxes | 130 | | 132 | |
Other | Other | 279 | | 413 | | Other | 221 | | 290 | |
| | $ | 883 | | 1,302 | | | $ | 959 | | 1,179 | |
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
(5) Long-Term Debt and Finance Lease Obligations
Long-term debt and finance lease obligations consisted of the following:
| (in millions) | (in millions) | September 30, 2021 | December 31, 2020 | (in millions) | March 31, 2022 | December 31, 2021 |
3.5% Exchangeable Senior Debentures due 2031 | $ | 549 | | 393 | | |
4.375% Senior Secured Notes due 2023, net of original issue discount | 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 | $ | 750 | | 750 | |
4.85% Senior Secured Notes due 2024, net of original issue discount | 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 | 600 | | 600 | |
4.45% Senior Secured Notes due 2025, net of original issue discount | 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 | 599 | | 599 | |
4.75% Senior Secured Notes due 2027 | 4.75% Senior Secured Notes due 2027 | 575 | | 575 | | 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 | | 4.375% Senior Secured Notes due 2028 | 500 | | 500 | |
5.45% Senior Secured Notes due 2034, net of original issue discount | 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 | 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 | | 6.375% Senior Secured Notes due 2067 | 225 | | 225 | |
6.25% Senior Secured Notes due 2068 | 6.25% Senior Secured Notes due 2068 | 500 | | 500 | | 6.25% Senior Secured Notes due 2068 | 500 | | 500 | |
Senior secured credit facility (1) | | Senior secured credit facility (1) | 727 | | 481 | |
Finance lease obligations (note 6) | Finance lease obligations (note 6) | 163 | | 168 | | Finance lease obligations (note 6) | 149 | | 157 | |
Less debt issuance costs, net | Less debt issuance costs, net | (45) | | (50) | | Less debt issuance costs, net | (41) | | (43) | |
Total debt and finance lease obligations | Total debt and finance lease obligations | 5,115 | | 4,959 | | Total debt and finance lease obligations | 5,283 | | 5,043 | |
Less current portion | Less current portion | (567) | | (410) | | Less current portion | (769) | | (20) | |
Long-term portion of debt and finance lease obligations | Long-term portion of debt and finance lease obligations | $ | 4,548 | | 4,549 | | Long-term portion of debt and finance lease obligations | $ | 4,514 | | 5,023 | |
Exchangeable Senior Debentures
The Company has elected to account for its Motorola Solutions, Inc. 3.5% Exchangeable Senior Debentures Due 2031 (the “MSI Exchangeables”) using the fair value option. Accordingly, changes in the fair value(1) Includes $200 million and $151 million of these instruments are recognizedZulily's outstanding borrowings as (losses) gains on financial instruments in the statements of operationsMarch 31, 2022 and in other comprehensive income as it relates to instrument specific credit risk on the consolidated statements of comprehensive income. The Company has classified for financial reporting purposes the MSI Exchangeables as a current liability as the MSI Exchangeables are exchangeable at the option of the holder at any time. Although we do not own underlying shares, the Company has entered into certain derivative transactions in order to hedge against upward price fluctuations on certain shares.Such derivative instruments are recognized in the other current assets line item in the condensed consolidated balance sheets, and are marked to fair value each reporting period. The changes in fair value are recognized in (losses) gains on financial instruments in the condensed statement of operations.
December 31, 2021, respectively.
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 the senior secured credit facility. The interest on QVC's senior secured notes is payable 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. As of March 31, 2022, the 4.375% Senior Secured Notes due 2023 are classified within 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 December 31, 2018,October 27, 2021, QVC entered into the FourthFifth Amended and Restated Credit Agreement with QVC, Zulily, 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 $2.95$3.25 billion revolving credit facility, with a $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 FourthFifth 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 a $50 million sub-limit for standby letters of credit. The remaining $2.55 billion and any incremental loans may be borrowed only byLIBOR-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 (the “Combined Consolidated Leverage Ratio”“consolidated leverage ratio”). Borrowings that are LIBORTerm Benchmark/RFR Rate 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.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 Qurate Retail,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 December 31, 2023.October 27, 2026. Payment of loans may be accelerated following certain customary events of default.
In accordance with the accounting guidance for obligations resulting from joint and several liability arrangements, QVC had $2.81 billion availablewill record a liability for amounts it has borrowed under the termssenior secured credit facility plus any additional amount it expects to repay on behalf of Zulily or CBI. There was $200 million and $151 million borrowed by Zulily on the Fourthsenior secured credit facility as of March 31, 2022 and December 31, 2021, respectively; all of which QVC expects to repay on behalf of Zulily. QVC recorded a liability for Zulily's outstanding borrowings as part of a common control transaction with Qurate Retail. The liability for Zulily's outstanding borrowings is included in the long-term portion of debt and finance lease obligations on the condensed consolidated balance sheet.
Availability under the Fifth Amended and Restated Credit Agreement as of September 30, 2021, includingat March 31, 2022 was $2.48 billion. The interest rate on the portion available under the $400 million tranche that Zulily may also borrow on.senior secured credit facility was 1.8% at March 31, 2022.
The payment and performance of the Borrowers’ obligations under the FourthFifth Amended and Restated Credit Agreement are guaranteed by each of QVC’s, QVC Global’s, Zulily’s and CBI’s Material Domestic Subsidiaries (as defined in the FourthFifth 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 FourthFifth Amended and Restated Credit Agreement are secured, pari passu with QVC’s existing notes, by a pledge of all of QVC’s equity interests. In addition,The borrowings under the paymentFifth Amended and performance of the Borrowers’ obligations with respect to the $400 million tranche available to both QVC and ZulilyRestated Credit Agreement are also guaranteed by Zulily and secured by a pledge of all of Zulily’s and CBI’s equity interests.
The FourthFifth 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.ratio.
Interest Rate Swap Arrangements
In July 2019, the Company entered into a three-year interest swap arrangement with a notional amount of $125 million.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 and the fair value of the swap instrument was in a net liability position of $2less than $1 million and $3$1 million as of September 30, 2021March 31, 2022 and December 31, 2020, respectively. The swap arrangement2021, respectively, which was included in accrued liabilities and other long-term liabilities as of September 30, 2021 and December 31, 2020, respectively.liabilities.
Changes in the fair value of the swaps are reflected in gains (losses) gains on financial instruments in the condensed consolidated statements of operations.
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
Other Debt Related Information
QVC was in compliance with all of its debt covenants as of September 30, 2021.March 31, 2022.
The weighted average interest rate applicable to all of the outstanding debt (excluding finance leases) prior to amortization of bond discounts and related debt issuance costs was 4.9%4.6% as of September 30, 2021.March 31, 2022.
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
(6) Leases
The Company has finance lease agreements with transponder and transmitter network suppliers for the right to transmit its signals in the U.S. and Germany. The Company is also party to a finance lease agreement for a warehouse.
QVC also leases data processing equipment, facilities, office space and land. These leases are classified as operating leases. Operating lease right-of-use assets and operating lease liabilities are recognized based on the present value of the future lease payments using our incremental borrowing rate. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Our leases have remaining lease terms of less than 1 year to 13 years, some of which may include the option to extend or terminate the leases.
The components of lease cost for the three and nine months ended September 30,March 31, 2022 and 2021, and 2020, were as follows:
| | | Three months ended September 30, | Nine months ended September 30, | | Three months ended March 31, |
(in millions) | (in millions) | 2021 | 2020 | 2021 | 2020 | (in millions) | 2022 | 2021 |
Finance lease cost | Finance lease cost | | Finance lease cost | |
Depreciation of leased assets | Depreciation of leased assets | $ | 4 | | 5 | | 14 | | 15 | | Depreciation of leased assets | $ | 5 | | 5 | |
Interest on lease liabilities | Interest on lease liabilities | 2 | | 2 | | 6 | | 6 | | Interest on lease liabilities | 2 | | 2 | |
Total finance lease cost | Total finance lease cost | 6 | | 7 | | 20 | | 21 | | Total finance lease cost | 7 | | 7 | |
Operating lease cost | Operating lease cost | 10 | | 9 | | 30 | | 29 | | Operating lease cost | 10 | | 10 | |
Total lease cost | Total lease cost | $ | 16 | | 16 | | 50 | | 50 | | Total lease cost | $ | 17 | | 17 | |
The remaining weighted-average lease term and the weighted-average discount rate were as follows:
| | | | | |
| September 30, 2021March 31, 2022 |
Weighted-average remaining lease term (years): | |
Finance leases | 7.97.6 |
Operating leases | 10.710.4 |
Weighted-average discount rate: | |
Finance leases | 5.15.2 | % |
Operating leases | 6.0 | % |
Supplemental balance sheet information related to leases was as follows:
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
Supplemental balance sheet information related to leases was as follows:
| (in millions) | (in millions) | September 30, 2021 | December 31, 2020 | (in millions) | March 31, 2022 | December 31, 2021 |
Operating Leases: | Operating Leases: | | Operating Leases: | |
Operating lease right-of-use assets | Operating lease right-of-use assets | $ | 206 | | 221 | | Operating lease right-of-use assets | $ | 195 | | 201 | |
Accrued liabilities | Accrued liabilities | $ | 24 | | 25 | | Accrued liabilities | $ | 24 | | 26 | |
Other long-term liabilities | Other long-term liabilities | 181 | | 195 | | Other long-term liabilities | 171 | | 177 | |
Total operating lease liabilities | Total operating lease liabilities | $ | 205 | | 220 | | Total operating lease liabilities | $ | 195 | | 203 | |
Finance Leases: | Finance Leases: | | Finance Leases: | |
Property and equipment | Property and equipment | $ | 281 | | 278 | | Property and equipment | $ | 267 | | 277 | |
Accumulated depreciation | Accumulated depreciation | (149) | | (141) | | Accumulated depreciation | (148) | | (151) | |
Property and equipment, net | Property and equipment, net | $ | 132 | | 137 | | Property and equipment, net | $ | 119 | | 126 | |
Current portion of debt and finance lease obligations | Current portion of debt and finance lease obligations | $ | 18 | | 18 | | Current portion of debt and finance lease obligations | $ | 19 | | 20 | |
Long-term portion of debt and finance lease obligations | Long-term portion of debt and finance lease obligations | 145 | | 150 | | Long-term portion of debt and finance lease obligations | 130 | | 137 | |
Total finance lease liabilities | Total finance lease liabilities | $ | 163 | | 168 | | Total finance lease liabilities | $ | 149 | | 157 | |
Supplemental cash flow information related to leases was as follows:
| | | Nine months ended September 30, | | Three months ended March 31, |
(in millions) | (in millions) | 2021 | 2020 | (in millions) | 2022 | 2021 |
Cash paid for amounts included in the measurement of lease liabilities: | Cash paid for amounts included in the measurement of lease liabilities: | | Cash paid for amounts included in the measurement of lease liabilities: | |
Operating cash flows from operating leases | Operating cash flows from operating leases | $ | 29 | | 33 | | Operating cash flows from operating leases | $ | 11 | | 10 | |
Operating cash flows from finance leases | Operating cash flows from finance leases | 6 | | 6 | | Operating cash flows from finance leases | 2 | | 2 | |
Financing cash flows from finance leases | Financing cash flows from finance leases | 13 | | 14 | | Financing cash flows from finance leases | 5 | | 4 | |
Right-of-use assets obtained in exchange for lease obligations: | Right-of-use assets obtained in exchange for lease obligations: | | Right-of-use assets obtained in exchange for lease obligations: | |
Operating leases | Operating leases | 6 | | 22 | | Operating leases | 3 | | 1 | |
Finance leases | $ | 11 | | — | | |
Future payments under noncancelable operating leases and finance leases with initial terms of one year or more as of September 30, 2021March 31, 2022 consisted of the following:
| (in millions) | (in millions) | Finance leases | Operating leases | Total leases | (in millions) | Finance leases | Operating leases | Total leases |
Remainder of 2021 | $ | 6 | | 9 | | 15 | | |
2022 | 28 | | 35 | | 63 | | |
Remainder of 2022 | | Remainder of 2022 | $ | 20 | | 27 | | 47 | |
2023 | 2023 | 27 | | 28 | | 55 | | 2023 | 26 | | 31 | | 57 | |
2024 | 2024 | 26 | | 25 | | 51 | | 2024 | 25 | | 25 | | 50 | |
2025 | 2025 | 24 | | 21 | | 45 | | 2025 | 23 | | 21 | | 44 | |
2026 | | 2026 | 22 | | 19 | | 41 | |
Thereafter | Thereafter | 90 | | 167 | | 257 | | Thereafter | 67 | | 147 | | 214 | |
Total lease payments | Total lease payments | 201 | | 285 | | 486 | | Total lease payments | 183 | | 270 | | 453 | |
Less: imputed interest | Less: imputed interest | (38) | | (80) | | (118) | | Less: imputed interest | (34) | | (75) | | (109) | |
Total lease liabilities | Total lease liabilities | $ | 163 | | 205 | | 368 | | Total lease liabilities | $ | 149 | | 195 | | 344 | |
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
(7) Revenue
Disaggregated revenue by segment and product category consisted of the following:
| | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, 2021 | Nine months ended September 30, 2021 |
(in millions) | QxH | QVC-International | Total | QxH | QVC-International | Total |
Home | $ | 679 | | 272 | | 951 | | 2,229 | | 905 | | 3,134 | |
Beauty | 279 | | 164 | | 443 | | 859 | | 521 | | 1,380 | |
Apparel | 336 | | 119 | | 455 | | 985 | | 372 | | 1,357 | |
Accessories | 210 | | 62 | | 272 | | 720 | | 199 | | 919 | |
Electronics | 171 | | 24 | | 195 | | 539 | | 89 | | 628 | |
Jewelry | 95 | | 55 | | 150 | | 269 | | 169 | | 438 | |
Other revenue | 43 | | 3 | | 46 | | 137 | | 9 | | 146 | |
Total net revenue | $ | 1,813 | | 699 | | 2,512 | | 5,738 | | 2,264 | | 8,002 | |
| | | Three months ended September 30, 2020 | Nine months ended September 30, 2020 | | Three months ended March 31, 2022 | Three months ended March 31, 2021 |
(in millions) | (in millions) | QxH | QVC-International | Total | QxH | QVC-International | Total | (in millions) | QxH | QVC-International | Total | QxH | QVC-International | Total |
Home | Home | $ | 819 | | 286 | | 1,105 | | 2,303 | | 829 | | 3,132 | | Home | $ | 649 | | 273 | | 922 | | 775 | | 324 | | 1,099 | |
Apparel | | Apparel | 296 | | 117 | | 413 | | 290 | | 126 | | 416 | |
Beauty | Beauty | 297 | | 168 | | 465 | | 910 | | 499 | | 1,409 | | Beauty | 261 | | 145 | | 406 | | 286 | | 164 | | 450 | |
Apparel | 312 | | 115 | | 427 | | 913 | | 316 | | 1,229 | | |
Accessories | Accessories | 219 | | 67 | | 286 | | 676 | | 188 | | 864 | | Accessories | 202 | | 55 | | 257 | | 238 | | 66 | | 304 | |
Electronics | Electronics | 197 | | 25 | | 222 | | 588 | | 78 | | 666 | | Electronics | 147 | | 26 | | 173 | | 201 | | 33 | | 234 | |
Jewelry | Jewelry | 93 | | 59 | | 152 | | 273 | | 155 | | 428 | | Jewelry | 87 | | 52 | | 139 | | 98 | | 60 | | 158 | |
Other revenue | Other revenue | 43 | | 3 | | 46 | | 119 | | 6 | | 125 | | Other revenue | 42 | | 2 | | 44 | | 48 | | 1 | | 49 | |
Total net revenue | Total net revenue | $ | 1,980 | | 723 | | 2,703 | | 5,782 | | 2,071 | | 7,853 | | Total net revenue | $ | 1,684 | | 670 | | 2,354 | | 1,936 | | 774 | | 2,710 | |
Consumer Product Revenue and Other Revenue
QVC's revenue includes sales of consumer products in the following categories; home, beauty, apparel, accessories, electronics and jewelry, which are primarily sold through live merchandise-focused televised shopping programs and via our websites and other interactive media.
Other revenue consists primarily of income generated from our U.S. Private Label Credit Card ("PLCC") in which a large consumer financial services company provides revolving credit directly to QVC's customers for the sole purpose of purchasing merchandise or services with a PLCC. In return, the Company receives a portion of the net economics of the credit card program.
Revenue Recognition
Revenue is recognized when obligations with ourthe Company's customers are satisfied; generally this occurs at the time of shipment to our customers consistent with when control of the shipped product passes. The recognized revenue reflects the consideration we expectthe Company expects to receive in exchange for transferring goods, net of allowances for returns.
The Company generally recognizes revenue related to the PLCC program over time as the PLCC is used by QVC's customers.
Sales, value add, use and other taxes the Company collects concurrent with revenue-producing activities are excluded from revenue.
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
The Company elected to treat shipping and handling activities that occur after the customer obtains control of the goods as a fulfillment cost and not as a promised good or service. Accordingly, the Company accrues the related shipping costs and recognizes revenue upon delivery of the goods to the shipping carrier. In electing this accounting policy, all shipping and handling activities will be treated as fulfillment costs.
The Company generally extends payment terms with its customers of one year or less and does not consider the time value of money when recognizing revenue.
Significant Judgments
Our products are generally sold with a right of return and we may provide other credits or incentives, which are accounted for as variable consideration when estimating the amount of revenue to recognize. Returns and credits are estimated at contract inception and updated at the end of each reporting period as additional information becomes available. The Company has determined that it is generally the principal in vendor arrangements as the Company can establish control over the goods prior to shipment. Accordingly, the Company records revenue for these arrangements on a gross basis.
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
(8) 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 September 30,March 31, 2022 and 2021, and 2020, the Company recorded a tax provision of $85$41 million and $80$85 million, respectively, which represented an effective tax rate of 34.7%42.3% and 28.2%26.3%, respectively. For the nine months ended September 30, 2021 and 2020, the Company recorded a tax provision of $266 million and $232 million, respectively, which represented an effective tax rate of 28.9% for both periods. The 20212022 rate differs from the U.S. federal income tax rate of 21% due to state and foreign tax expenses, and increases in valuation allowances.permanent items. The 2021 effective tax rate has increased from the prior year for the three months ended September 30, 2021March 31, 2022 has increased from the corresponding period in the prior year primarily due to increasesstate and foreign taxes, discrete items and permanent differences. These drivers were impacted by the relative decrease in permanent differences and increases in valuation allowances.U.S. pretax income as compared to consolidated pretax income.
The Company participates in a consolidated federal return filing with Qurate Retail. As of September 30, 2021,March 31, 2022, the Company's tax years through 20162017 are closed for federal income tax purposes, and the Internal Revenue Service ("IRS") has completed its examination of the Company's 2017, 2018 and 2019 tax years. The Company's 2020 and 2021 tax years are being examined currently as part of the Qurate Retail consolidated return under the IRS's Compliance Assurance Process program. The Company, or one of its subsidiaries, files income tax returns in various states and foreign jurisdictions. As of September 30, 2021,March 31, 2022, the Company was under examination in Colorado, Florida, Minnesota, Pennsylvania, New York City, and the U.K. and Japan.
The Company is a party to a Tax Liability Allocation and Indemnification Agreement (the “Tax Agreement”) with 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 Qurate Retail for income tax purposes. Generally, the Tax Agreement provides that the Company will pay Qurate 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 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 amounts of the tax-related (receivable) payable (from) due to Qurate Retail as of September 30, 2021March 31, 2022 and December 31, 20202021 were $(9)$113 million and $47$85 million, respectively, and were included in accrued liabilities in the accompanying condensed consolidated balance sheets.
(9) 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 QVC's business activities. Substantially all of 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, the Company could face a significant disruption in fulfilling QVC's customer orders and shipment of QVC's products. The Company has active disaster recovery programs in place to help mitigate risks associated with these critical business activities.
(10) 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's assets and liabilities measured or disclosed atCompany measures the fair value wereof money market funds based on quoted prices in active markets for identical assets. Money market funds are included as follows:
| | | | | | | | | | | | | | |
| | Fair value measurements at September 30, 2021 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 | $ | 150 | | 150 | | — | | — | |
Financial instrument asset (note 5) | 92 | | — | | 92 | | — | |
Current liabilities: | | | | |
Debt (note 5) | 549 | | — | | 549 | | — | |
Interest rate swap arrangements (note 5) | 2 | | — | | 2 | | — | |
Long-term liabilities: | | | | |
Debt (note 5) | 4,699 | | 749 | | 3,950 | | — | |
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
| | | | | | | | | | | | | | |
| | Fair value measurements at December 31, 2020 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 | $ | 240 | | 240 | | — | | — | |
Financial instrument asset (note 5) | 23 | | | 23 | | — | |
Current liabilities: | | | | |
Debt (note 5) | 393 | | — | | 393 | | — | |
Long-term liabilities: | | | | |
Debt (note 5) | 4,705 | | 743 | | 3,962 | | — | |
Interest rate swap arrangements (note 5) | 3 | | — | | 3 | | — | |
cash equivalents Level 1 fair value instruments in the table below. The 2067 Notes (ticker: QVCD) and the 2068 Notes (ticker: QVCC) are considered Level 1 fair value instruments as reported in the foregoing tables as they 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 Level 2 financial liabilities are debt instruments and derivative instruments withare 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 foregoingbelow tables as Level 2 fair value instruments.
The Company's assets and liabilities measured or disclosed at fair value were as follows:
| | | | | | | | | | | | | | |
| | Fair value measurements at March 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 | $ | 185 | | 185 | | — | | — | |
Current liabilities: | | | | |
Debt (note 5) | 757 | | — | | 757 | | — | |
Interest rate swap arrangements (note 5) | — | | — | | — | | — | |
Long-term liabilities: | | | | |
Debt (note 5) | 4,195 | | 663 | | 3,532 | | — | |
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
| | | | | | | | | | | | | | |
| | Fair value measurements at December 31, 2021 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 | $ | 124 | | 124 | | — | | — | |
Current liabilities: | | | | |
Interest rate swap arrangements (note 5) | 1 | | — | | 1 | | — | |
Long-term liabilities: | | | | |
Debt (note 5) | 5,076 | | 745 | | 4,331 | | — | |
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
(11) Information about QVC's Operating Segments
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.revenue or sales per customer. For segment reporting purposes, the Company defines Adjusted OIBDA, as net revenue less cost of goods sold (excluding Fire related costs, net and Rocky Mount inventory losses, see note 13), operating expenses, and selling, general and administrative expenses (excluding stock-based compensation). The Company believes this measure is an important indicator of the operational strength and performance of its 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 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, Fire related costs, net and Rocky Mount inventory losses and stock-based compensation and impairment loss (if any) 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.
QVC'sThe Company's chief operating decision maker ("CODM") is QVC's Chief Executive Officer. QVC's CODM has ultimate responsibility for enterprise decisions. QVC's CODM determines, in particular, resource allocation for, and monitors performance of, the consolidated enterprise.enterprise, 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.
For the three and nine months ended September 30,March 31, 2022 and 2021, and 2020, 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
| | | Three months ended September 30, | Nine months ended September 30, | | Three months ended March 31, |
| | 2021 | 2020 | 2021 | 2020 | | 2022 | 2021 |
(in millions) | (in millions) | Net revenue | Adjusted OIBDA | Net revenue | Adjusted OIBDA | Net revenue | Adjusted OIBDA | Net revenue | Adjusted OIBDA | (in millions) | Net revenue | Adjusted OIBDA | Net revenue | Adjusted OIBDA |
QxH | QxH | $ | 1,813 | | 325 | | 1,980 | | 380 | | 5,738 | | 1,065 | | 5,782 | | 1,061 | | QxH | $ | 1,684 | | 225 | | 1,936 | | 349 | |
QVC-International | QVC-International | 699 | | 115 | | 723 | | 132 | | 2,264 | | 402 | | 2,071 | | 348 | | QVC-International | 670 | | 104 | | 774 | | 143 | |
Consolidated QVC | Consolidated QVC | $ | 2,512 | | 440 | | 2,703 | | 512 | | 8,002 | | 1,467 | | 7,853 | | 1,409 | | Consolidated QVC | $ | 2,354 | | 329 | | 2,710 | | 492 | |
Other information
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | Nine months ended September 30, |
| 2021 | 2020 | 2021 | 2020 |
(in millions) | Depreciation | Amortization | Depreciation | Amortization | Depreciation | Amortization | Depreciation | Amortization |
QxH | $ | 24 | | 70 | | 31 | | 66 | | 74 | | 190 | | 89 | | 204 | |
QVC-International | 13 | | 4 | | 14 | | 3 | | 41 | | 10 | | 42 | | 9 | |
Consolidated QVC | $ | 37 | | 74 | | 45 | | 69 | | 115 | | 200 | | 131 | | 213 | |
| | | | | | | | | | | | | | Three months ended March 31, |
| | September 30, 2021 | | 2022 | 2021 |
(in millions) | (in millions) | Total assets | Capital expenditures | Property and equipment, net | (in millions) | Depreciation | Amortization | Depreciation | Amortization |
QxH | QxH | $ | 14,073 | | 124 | | 720 | | QxH | $ | 23 | | 71 | | 26 | | 59 | |
QVC-International | QVC-International | 2,267 | | 21 | | 366 | | QVC-International | 12 | | 3 | | 14 | | 3 | |
Consolidated QVC | Consolidated QVC | $ | 16,340 | | 145 | | 1,086 | | Consolidated QVC | $ | 35 | | 74 | | 40 | | 62 | |
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
| | | | | | | | | | | |
| March 31, 2022 |
(in millions) | Total assets | Capital expenditures | Property and equipment, net |
QxH | $ | 13,697 | | 30 | | 591 | |
QVC-International | 2,126 | | 4 | | 335 | |
Consolidated QVC | $ | 15,823 | | 34 | | 926 | |
The following table provides a reconciliation of Adjusted OIBDA to operating income and income before income taxes:
| | | Three months ended September 30, | Nine months ended September 30, | | Three months ended March 31, |
(in millions) | (in millions) | 2021 | 2020 | 2021 | 2020 | (in millions) | 2022 | 2021 |
Adjusted OIBDA | Adjusted OIBDA | $ | 440 | | 512 | | 1,467 | | 1,409 | | Adjusted OIBDA | $ | 329 | | 492 | |
Fire related costs, net and Rocky Mount inventory losses (see note 13) | | Fire related costs, net and Rocky Mount inventory losses (see note 13) | (82) | | — | |
Stock-based compensation | Stock-based compensation | (13) | | (10) | | (33) | | (26) | | Stock-based compensation | (8) | | (9) | |
Depreciation and amortization | Depreciation and amortization | (111) | | (114) | | (315) | | (344) | | Depreciation and amortization | (109) | | (102) | |
Operating income | Operating income | 316 | | 388 | | 1,119 | | 1,039 | | Operating income | 130 | | 381 | |
Equity in (losses) earnings of investee | (2) | | 1 | | (2) | | (1) | | |
(Losses) gains on financial instruments | (5) | | 1 | | (8) | | (3) | | |
Gains on financial instruments | | Gains on financial instruments | 1 | | 1 | |
Interest expense, net | Interest expense, net | (64) | | (65) | | (192) | | (194) | | Interest expense, net | (62) | | (63) | |
Foreign currency gain (loss) | Foreign currency gain (loss) | — | | 1 | | (4) | | 3 | | Foreign currency gain (loss) | 8 | | (2) | |
Loss on extinguishment of debt | — | | (42) | | — | | (42) | | |
Other income | Other income | — | | — | | 8 | | — | | Other income | 20 | | 6 | |
Income before income taxes | Income before income taxes | $ | 245 | | 284 | | 921 | | 802 | | Income before income taxes | $ | 97 | | 323 | |
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
(12) Other Comprehensive Income
The change in the component of accumulated other comprehensive loss, net of taxes ("AOCL"), is summarized as follows:
| | | | | | | | | | | |
(in millions) | Comprehensive earnings attributable to debt credit risk adjustments | Foreign currency translation adjustments | AOCL |
Balance at January 1, 2021 | $ | 16 | | (33) | | (17) | |
Other comprehensive income attributable to QVC, Inc. stockholder | (19) | | (82) | | (101) | |
Balance at September 30, 2021 | (3) | | (115) | | (118) | |
| | | |
Balance at January 1, 2020 | $ | — | | (144) | | (144) | |
Other comprehensive loss attributable to QVC, Inc. stockholder | — | | 41 | | 41 | |
Balance at September 30, 2020 | — | | (103) | | (103) | |
| | | | | | | | | | | |
(in millions) | Comprehensive earnings attributable to debt credit risk adjustments | Foreign currency translation adjustments | AOCL |
Balance at January 1, 2022 | $ | — | | (146) | | (146) | |
Other comprehensive loss attributable to QVC, Inc. stockholder | — | | (54) | | (54) | |
Balance at March 31, 2022 | — | | (200) | | (200) | |
| | | |
Balance at January 1, 2021 | $ | 16 | | (33) | | (17) | |
Other comprehensive loss attributable to QVC, Inc. stockholder | (13) | | (65) | | (78) | |
Balance at March 31, 2021 | 3 | | (98) | | (95) | |
The component of other comprehensive income is reflected in QVC's condensed consolidated statements of comprehensive income, net of taxes. The following table summarizes the tax effects related to the component of other comprehensive loss:
| (in millions) | (in millions) | Before-tax amount | Tax benefit (expense) | Net-of-tax amount | (in millions) | Before-tax amount | Tax benefit (expense) | Net-of-tax amount |
Three months ended September 30, 2021 | | |
Three months ended March 31, 2022 | | Three months ended March 31, 2022 | |
Foreign currency translation adjustments | | Foreign currency translation adjustments | $ | (61) | | 1 | | (60) | |
Other comprehensive loss | | Other comprehensive loss | (61) | | 1 | | (60) | |
| Three months ended March 31, 2021 | | Three months ended March 31, 2021 | |
Foreign currency translation adjustments | Foreign currency translation adjustments | $ | (27) | | (1) | | (28) | | Foreign currency translation adjustments | $ | (72) | | (1) | | (73) | |
Debt credit risk adjustment | Debt credit risk adjustment | (7) | | — | | (7) | | Debt credit risk adjustment | (13) | | — | | (13) | |
Other comprehensive income | (34) | | (1) | | (35) | | |
| Three months ended September 30, 2020 | | |
Foreign currency translation adjustments | $ | 50 | | (1) | | 49 | | |
Other comprehensive income | 50 | | (1) | | 49 | | |
| Nine months ended September 30, 2021 | | |
Foreign currency translation adjustments | $ | (89) | | (3) | | (92) | | |
Debt credit risk adjustment | (19) | | — | | (19) | | |
Other comprehensive income | (108) | | (3) | | (111) | | |
| Nine months ended September 30, 2020 | | |
Foreign currency translation adjustments | $ | 48 | | (3) | | 45 | | |
Other comprehensive loss | Other comprehensive loss | 48 | | (3) | | 45 | | Other comprehensive loss | (85) | | (1) | | (86) | |
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
(13) Subsequent EventsFire at Rocky Mount Fulfillment Center
Senior Secured Credit Facility
On October 27,December 18, 2021, QVC amended and restatedexperienced a fire at its Rocky Mount, Inc. fulfillment center in North Carolina. Rocky Mount was the Fourth Amended and Restated Credit Agreement (as amended and restated, the “Fifth Amended and Restated Credit Agreement”) and refinanced QVC’s existing bank credit facility by entering into a fifth amended and restated agreement with QVC, Zulily, CBI, and QVC Global Corporate Holdings, LLC (“QVC Global”), each a direct or indirect wholly owned subsidiary of Qurate Retail, as borrowers (QVC, Zulily, CBI and QVC Global, collectively, the “New Borrowers”), JPMorgan Chase Bank, N.A., as administrative agent,Company’s second-largest fulfillment center for QxH and the other parties named therein.Company’s primary returns center for hard goods.
The Fifth AmendedCompany maintains property, general liability and Restated Credit Agreement isbusiness interruption insurance coverage. Based on provisions of QVC's insurance policies, the Company recorded insurance recoveries for certain fire related costs for which recovery was deemed probable. During the year ended December 31, 2021, the Company recorded $229 million of fire related costs for which recovery was deemed probable and received $100 million of insurance proceeds. During the three months ended March 31, 2022, the company incurred an additional $2 million in fire related costs, net that will not be reimbursed by QVC's insurance policies and $14 million of other fire related costs for which recovery was deemed probable based on the Company's insurance policies. As a multi-currency facility providing for a $3.25 billion revolving credit facility (the “New Credit Facility”), with a $450result, the insurance receivable balance was $143 million sub-limit for lettersas of creditMarch 31, 2022 and was recorded in accounts receivable in the Condensed Consolidated Balance Sheet.
We are still in the process of assessing the extent of damage to property and recoverability of inventory and submitting relevant insurance claims. During the three months ended March 31, 2022, the Company recorded an alternative currency revolving sub-limit equal$80 million write-down related to 50%Rocky Mount inventory which was included in Cost of goods sold. Due to the circumstances surrounding the write-down of the revolving commitments thereunder. As of October 27, 2021, $220 million was drawn under the New Credit Facility ($120 million drawn by Zulily and $100 million drawn by QVC Global) and $3.01 billion remained available for borrowing under the terms of the Fifth Amended and Restated Credit Agreement.
The New Credit Facility may be borrowed by any New Borrower, with each New Borrower jointly and severally liable for the outstanding borrowings. Borrowings under the Fifth Amended and Restated Credit Agreement bear interest at either the alternate base rate (such rate, the “ABR Rate”) or a LIBOR-based rate (or the applicable non-U.S. Dollar equivalent rate) (such rate, the “Term Benchmark/RFR Rate”) at the applicable New Borrower’s election in each case plus a margin. Borrowings that are ABR Rate loans will bear interest at a per annum rate equal to the base rate plus a margin that varies between 0.25% and 0.625% depending on the New Borrowers’ combined ratio of consolidated total debt to consolidated EBITDA (the “consolidated leverage ratio”). Borrowings that are Term Benchmark/RFR Rate loans will bear interest at a per annum rate equal to the applicable rate plus a margin that varies between 1.25% and 1.625% depending on the New Borrowers’ consolidated leverage ratio. Each loan may be prepaid at any time andinventory, this write-down has been excluded 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, CBI, QVC Global or any other borrower under the New Credit Facility (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 on the New Credit Facility may be reborrowed.
The loans under the New Credit Facility are scheduled to mature on October 27, 2026. Payment of the loans may be accelerated following certain customary events of default.
The payment and performance of the New Borrowers’ obligations under the Fifth Amended and Restated Credit Agreement are guaranteed by each of QVC’s, QVC Global’s, Zulily’s and CBI’s Material Domestic SubsidiariesAdjusted OIBDA (as defined in the Fifth Amended and Restated Credit Agreement), if any, and certain other subsidiaries of any New Borrower that such New Borrower has chosennote 11). These write-downs are expected to provide guarantees. Further, the borrowings under the Fifth 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 Fifth Amended and Restated Credit Agreement are also secured by a pledge of all of Zulily’s and CBI’s equity interests.
The Fifth Amended and Restated Credit Agreement contains certain affirmative and negative covenants, including certain restrictions on the New Borrowers 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 New Borrowers’ consolidated leverage ratio.
Borrowings under the Fifth Amended and Restated Credit Agreement may be used to repay outstanding indebtedness, pay certain fees and expenses, finance working capital needs and general purposes of the New Borrowers and their respective subsidiaries and make certain restricted payments and loans to the New Borrowers’ respective parents and affiliates.
Exchangeable Senior Debentures
In December 2020,submitted as part of our business interruption insurance claim; however, there can be no guarantee they will be recovered. We expect to continue to record additional costs and recoveries until the internal realignment ofproperty damage and inventory recoverability assessment is completed and the Company's global finance structure referred to above, QVC Global, a subsidiary of QVC, became the primary co-obligor of the MSI Exchangeables, exchangeable for common stock of Motorola Solutions, Inc. (“MSI common stock”), and acquired all of the rights and liabilities associated with certain relatedinsurance claim is fully settled.
QVC, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(unaudited)
hedges. On October 27, 2021, a notice was issued to all holders to redeem any and all outstanding MSI Exchangeables on December 13, 2021 that were not previously properly surrendered for exchange. QVC anticipates that the redemption or exchange of all outstanding MSI Exchangeables and unwinding of related hedges will result in taxable income to QVC. After giving effect to deductions and credits for tax purposes, QVC expects the associated income tax liability to be approximately $105 million, assuming the MSI Exchangeables are retired and the related hedges are unwound at the trading price of the MSI Exchangeables and the closing price per share of the MSI common stock, respectively, as of October 27, 2021. Pursuant to the terms of the Tax Agreement with Qurate Retail, QVC must pay Qurate Retail an amount equal to the tax liability that QVC and its subsidiaries would have if they were to file as a consolidated or combined group separate and apart from Qurate Retail, with exceptions for the treatment and timing of certain tax items. The amount QVC is required to pay Qurate Retail in respect of the 2021 tax year under this agreement will be increased by the income tax liability incurred by QVC in connection with the retirement of the MSI Exchangeables and unwinding of related hedges.
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; the novel coronavirus ("COVID-19"); the redemption or exchangeimpact of the MSI Exchangeables (as defined below), includingfire at the related tax liability;Rocky Mount fulfillment center; capital expenditures; revenue growth; the recoverability of our goodwill and other long-lived assets; our projected sources and uses of cash; 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 impact of the COVID-19 pandemic and local, state and federal governmental responses to COVID-19 on the economy, our customers, our vendors and our businesses generally;
•customer demand for our products and services and our ability to attract 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 effectively manage our installment sales plans and revolving credit card programs;
•the cost and 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;
•changes in tariffs, trade policy and trade relations and the United Kingdom's ("U.K.") 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 system and infrastructures of our business;
•changes in distribution and viewing of television programming, including the expanded deployment of video on demand technologies and Internet Protocol television and their impact on home shopping programming;
•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 COVID-19), political crises, and other catastrophic events or other events outside of our control; and
•Qurate Retail, Inc.'s ("Qurate Retail") dependence on our cash flow for servicing its debt and for other purposes.
For additional risk factors, please see Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 20202021 (the "2020"2021 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 the 20202021 10-K.
Overview
QVC, Inc. and its consolidated subsidiaries (unless otherwise indicated or required by the context, the terms "we," "our," "QVC" or"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. QVC is comprised of the reportable segments of QxH, which is comprised of QVC-U.S. and HSN, Inc. ("HSN"), and QVC-International. These segments reflect the way the Company evaluates its business performance and manages its operations.
In the United States ("U.S."), our televised shopping programs, including live and recorded content, are distributed across multiple channels nationally on a full-time basis, including QVC, QVC2, QVC3, HSN and HSN2. Our U.S. programming is also available on QVC.com and HSN.com, which we refer to as our "U.S. websites"; virtual multichannel video programming distributors (including Hulu + Live TV, AT&T TV, and YouTube TV); applications via streaming video; Facebook Live, Roku, Apple TV, Amazon Fire, Xfinity Flex and Xfinity Flex;Samsung TV Plus; mobile applications; social pages and over-the-air broadcasters.
QVC's digital platforms enable consumers to purchase goods offered on our televised programming, along with a wide assortment of products that are available only on our U.S. websites. QVC.com, HSN.com and our other digital platforms (including our mobile applications, social 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 account.
Internationally, QVC's televised shopping programs, including live and recorded content, are distributed to households outside of the U.S., primarily in Germany, Austria, Japan, the U.K., the Republic of Ireland and Italy. In some of the countries where QVC operates, QVC's televised shopping programs are distributed across multiple QVC channels: QVC Style and QVC2 in Germany and QVC Beauty, QVC Extra and QVC Style in the U.K. Similar to the U.S., our international businesses also engage customers via websites, mobile applications, and social pages. 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"). 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 three months ended March 31, 2022 and 2021, QVC-Japan paid dividends to Mitsui of $46$14 million during each of the nine months ended September 30, 2021 and 2020.
$16 million, respectively.
The Company is an indirect wholly-owned subsidiary of Qurate Retail (Nasdaq: QRTEA, QRTEB and QRTEP), which owns interests in a broad range of digital commerce businesses, including Qurate Retail's other wholly-owned subsidiary Zulily, LLC ("Zulily"), as well as other minority investments. QVC is part of the Qurate Retail Group, formerly QVC Group, a portfolio of brands including QVC, Zulily and Cornerstone Brands, Inc. ("CBI").
QVC has two reportable segments: QxH and QVC-International. These segments reflect the way the Company evaluates its business performance and manages its operations.
On December 31, 2018, QVC entered into the Fourth Amended and Restated Credit Agreement that provided for a $2.95 billion revolving credit facility as explained further in note 5 of the accompanying notes to the condensed consolidated financial statements. The Fourth Amended and Restated Credit Agreement included a $400 million tranche that could be borrowed by QVC or Zulily. Under the terms of the Fourth Amended and Restated Credit Agreement, QVC and Zulily were 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 would record a liability for amounts it had borrowed under the credit facility plus any additional amount it expected to repay on behalf of Zulily. As of September 30, 2021, there was $120 million borrowed by Zulily on the $400 million tranche of the Fourth Amended and Restated Credit Agreement, none of which the Company expected to repay on behalf of Zulily. On October 27, 2021, QVC entered into the Fifth Amended and Restated Credit Agreement (as defined and explained further below under Part I, Item 2 “Management's Discussion and Analysis of Financial Condition and Results of Operations -- "Financial Position, Liquidity and Capital Resources -- Senior Secured Credit Facility").
During each of the ninethree months ended September 30,March 31, 2022 and 2021, and 2020, QVC and Zulily engaged in multiple transactions relating to sales, sourcing of merchandise, marketing initiatives and business advisory services. QVC allocated expenses of $6$2 million to Zulily for each of the ninethree months ended September 30,March 31, 2022 and 2021, and 2020.respectively. Zulily allocated expenses of $6 million and $8$2 million to QVC for each of the ninethree months ended September 30, 2021March 31, 2022 and 2020, respectively.
2021.
In September 2020, QVC and Zulily executed a Master Promissory Note ("Promissory Note") whereby Zulily may borrow up to $100 million at a variable interest rate equal to the London Interbank Offered Rate ("LIBOR")LIBOR rate plus an applicable margin rate. The Promissory Note matures in September 2030. ThereAs of March 31, 2022, there were no borrowings on the Promissory Note as of September 30, 2021 and December 31, 2020.Note.
During each of the ninethree months ended September 30,March 31, 2022 and 2021, and 2020, QVC and CBI engaged in multiple transactions relating to personnel and business advisory services. QVC allocated expenses of $16$8 million and $18$5 million to CBI for the ninethree months ended September 30,March 31, 2022 and 2021, and 2020, respectively. CBI allocated expenses of $1 million to QVC for each of the ninethree months ended September 30, 2021March 31, 2022 and 2020.
2021.
On July 12,October 27, 2021, QVC entered into the compensation committee of the board of directors of Qurate Retail approved Qurate Retail’s entry into an employment agreement with David Rawlinson II, effective July 12, 2021. Effective August 1, 2021, Mr. Rawlinson began to serve as PresidentFifth Amended and Chief Executive Officer-Elect of Qurate Retail, with Mr. George continuing as Chief Executive Officer, and effective October 1, 2021, Mr. Rawlinson began to serve as President and Chief Executive Officer of Qurate Retail, with Mr. George assuming the role of Senior Advisor. Mr. Rawlinson concurrently assumed the same positions with QVC. Mr. George will resign from the board of directors effective January 1, 2022, atRestated Credit Agreement which time Mr. Rawlinson is expected to join Qurate Retail's board of directors. With respect to his roles at Qurate Retail and QVC, Mr. George stepped down as President effective August 1, 2021 and Chief Executive Officer effective October 1, 2021.
In December 2020,includes QVC Global Corporate Holdings, LLC (“QVC Global”), aan indirect wholly owned subsidiary of QVC, becameZulily and CBI as co-borrowers (see note 5). Under the primary co-obligorterms of the 3.5% Exchangeable Senior Debentures due 2031 (the “MSI Exchangeables”) exchangeableFifth Amended and Restated Credit Agreement, QVC, QVC Global, CBI and Zulily are jointly and severally liable for common stock of Motorola Solutions, Inc. (“MSI common stock”)all amounts borrowed on the credit facility. In accordance with the accounting guidance for obligations resulting from joint and acquired all ofseveral liability arrangements, QVC will record a liability for amounts it has borrowed under the rights and liabilities associated with certain related hedges. On October 27, 2021, a notice was issued to all holders to redeem any and all outstanding MSI Exchangeables on
December 13, 2021 that were not previously properly surrendered for exchange. The redemption in full of the MSI Exchangeables is expected to be funded with borrowings under our senior secured credit facility amounts received upon terminationplus any additional amount it expects to repay on behalf of certain related derivative transactionsZulily or CBI. QVC determined it was necessary to record a liability for Zulily's outstanding borrowings on the Fifth Amended and cash on hand. Any exchangesRestated Credit Agreement. As QVC and Zulily are both wholly-owned subsidiaries of the MSI Exchangeables will be settled using shares of MSIQurate Retail this was recorded as an equity transaction with an entity under common stock acquired in a forward purchase transactioncontrol. There was $200 million and cash in lieu of a fractional share. QVC anticipates that the redemption or exchange of all outstanding MSI Exchangeables and unwinding of related hedges will result in taxable income to QVC. After giving effect to deductions and credits for tax purposes, QVC expects the associated income tax liability to be approximately $105$151 million assuming the MSI Exchangeables are retired and the related hedges are unwound at the trading price of the MSI Exchangeables and the closing price per share of the MSI common stock, respectively,borrowed by Zulily as of October 27, 2021. Pursuant toMarch 31, 2022, and December 31, 2021, respectively, which included in the termslong-term portion of debt and finance lease obligations on the condensed consolidated balance sheet. QVC recorded a Tax Liability Allocation and Indemnification agreement with Qurate Retail, QVC must pay Qurate Retail an amount equal to$49 million liability for Zulily's additional borrowings during the tax liability that QVC and its subsidiaries would have if they were to filethree months ended March 31, 2022, which was treated as a return of capital in the consolidated or combined group separate and apart from Qurate Retail, with exceptions forstatement of equity. As of March 31, 2022, there was $20 million borrowed by CBI on the treatment and timingsenior secured credit facility, none of certain tax items. The amount QVC is requiredwhich the Company expects to pay Qurate Retail in respectrepay on behalf of the 2021 tax year under this agreement will be increased by the income tax liability incurred by QVC in connection with the retirement of the MSI Exchangeables and unwinding of related hedges.CBI.
Strategies and challenges of business units
The goal of QVC is to extend its leadership in video commerce, e-commerce, mobile commerce and social commerce by continuing to create the world’s most engaging shopping experiences, 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 millions of highly discerning shoppers, and we also curatereach large audiences, across our many platforms, for our thousands of brand partners.
QVC intends to employ several strategies to achieve these objectives. Among these strategies are to (i) Curate special products at compelling values; (ii) Extend video reach and relevance; (iii) Reimagine daily digital discovery; (iv) Expand and engage our passionate community; and (v) Deliver joyful customer service. In addition, we are exploring opportunities to evolve the International operating model to pursue growth opportunities in a more leveraged way across markets.
QVC's future net revenue growth will primarily depend on sales growth from e-commerce, mobile platforms, and applications via streaming video, additions of new customers from households already receiving QVC's televised 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 video-on-demand technologies and Internet video services; (iv) QVC's ability to source new and compelling products; and (v) general economic conditions.
The Brexit process and negotiations have created political andcurrent economic uncertainty particularlyin 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 may experience disruptions, including increased volatility and diminished liquidity and credit availability. If economic and financial market conditions in the U.K.U.S. or other key markets, including Japan and Europe, continue to be uncertain or deteriorate, 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 E.U.,extent that relevant economic environments decline. Such weak economic conditions may also inhibit our expansion into new European and this uncertainty may last for years. On June 23, 2016, the U.K. held a referendum in which voters approved, on an advisory basis, an exit from the E.U. The U.K. formally left the E.U. on January 31, 2020. This has resulted in a transition period that ran until December 31, 2020. On January 1, 2021, the U.K. leftthe E.U. Customs Union and Single Market, as well as all E.U. policies and international agreements. On December 24, 2020, the European Commission reached a trade agreement with the U.K. on the terms of its future cooperation with the E.U. (the “Trade Agreement”). The Trade Agreement offers U.K. and E.U. companies preferential accessother markets. We currently are unable to each other’s markets, ensuring imported goods that satisfy applicable point of origin rules (that is, that U.K. or E.U. goods arewholly produced or significantly worked in the U.K. or E.U., as applicable) will be free of tariffs and quotas; however, economic relations between the U.K. and the E.U. will now be on more restrictive terms than existed previously. For example, packages sent to and from the U.K., will need to satisfy new customs requirements and obtain applicable transit documents which may result in delays exporting items to customers outside of the U.K. and delays importing products into the U.K. that are shipped to us by our vendors. The Trade Agreement did not have a material impact to our business; however, we cannot predict the impact thatextent of any future agreements on economic relations between the U.K. and the E.U. will have on our businesses and our customers, and it is possible that new terms may adversely affect our operations and financial results.
these potential adverse effects.Early decisions by the Biden Administration confirm continuity of a bipartisan consensus in the U.S. government favoring increased confrontation of China in trade practices and economic matters, national security and human rights. The imposition of any new U.S. tariffs or other restrictions on Chinese imports or the taking of other actions against China in the future, and any responses by China, could impair our ability to meet customer demand and could result in lost sales or an increase in our cost of merchandise, which would have a material adverse impact on our business and results of operations.
In December 2019, the COVID-19 pandemic was reported to have surfaced in Wuhan, China and has subsequently spread across the globe, including all of the countries in which QVC operates. As a result ofSince that time, most local, state and federal governmental agencies imposed various restrictions to prevent the spread of the virus, certain local governmental agencies have imposedCOVID-19, including travel restrictions, and imposed local quarantines or stay at home restrictions, to containand vaccine and testing requirements. The spread of COVID-19 and the spread, which has caused avarious containment measures put in place around the world have resulted in significant disruption to most sectors of the global economy. In response to these stay at home restrictions,containment measures, QVC has mandated that non-essential employees work from home and has reduced the number of employees who are allowed on its production set and has implemented increased cleaning protocols, social distancing measures and temperature screenings for those employees who enter into certain facilities. In some cases, the movefacilities in locations with high levels of community transmission. The company transitioned most administrative employees to a hybrid work model and certain employees have moved to permanent work from home arrangement for our non-essential employees will be permanent,arrangements which has resulted in the reduction of office space. We have also mandated that all essential employees who do not feel comfortable comingDue to work will not be requiredongoing staffing issues and labor shortages, QVC has increased wages and offered incentives, resulting in additional costs to do so.the company. As a result of these resource constraints, QVC included fewer hours of live programming on some of its secondary channels and has experienced some delays in shipping at certain fulfillment centers. In certain markets, QVC temporarily increased the wages and salaries for those employees deemed essential who do not have the ability to work from home, including production and fulfillment center employees. The inability to control the spread of COVID-19, or the expansion or extension of thesecontainment measures, such as stay at home restrictions, could negatively impact our results in the future.
The stay at home restrictions imposed in response to COVID-19 required many traditional brick and mortar retailers to temporarily close their stores, but allowed distance retailers, including QVC, to continue operating. As a result, beginning atfrom the end of the first quarter of 2020 and continuing through the first quarter of 2021, we observed an increase in new customers and an increase in demand for certain categories, such as home. Beginning in the second quarter of 2021 through the first quarter of 2022, we observed a decline in new customers and a decline in demand for our home product category, while also seeing an increase in demand for our apparel product category.
As a result of COVID-19, for the three and nine months ended September 30, 2020, management had increased the amounts of certain estimated reserves including, but not limited to, uncollectible receivables in anticipation of higher defaults by customers billed through our installment payment option, inventory obsolescence due to decreased demand for certain categories, such as apparel, and sales returns due to our extended return policy. There were no remaining estimated reserves as of December 31, 2020 and September 30, 2021 as a direct result of COVID-19.
In addition, there are several potential adverse impacts of COVID-19 that could cause a material negative impact to the Company’s financial results, including its capital and liquidity. These include governmental restrictions on QVC’s ability to continue to operate under stay at home restrictions and produce content; reduced demand for products we sell; decreases in the disposable income of existing and potential new customers; the impacts of any recession and other uncertainties with respect to the continuity of government stimulus programs implemented in response to COVID-19; increased currency volatility resulting in adverse currency rate fluctuations; higher unemployment; labor shortages; and an adverse impact to our supply chain and shipping disruptions for both the products we import and purchase domestically and the products we sell, including essential products experiencing higher demand, due to factory closures, labor shortages and other resource constraints. While the future impact is currently uncertain, the inability to control the spread of COVID-19 could cause any one of these adverse impacts, or combination of adverse impacts, to have a material impact on our financial results.
Beginning in the second quarter of 2021, the Company saw increased product shortages as a result of high market demand in some product categories such as home and electronics. We also experienced escalating shipping disruptions due to challenges in the global supply chain and labor market.market causing extended lead time on inventory orders. As a result, the delayed receipt of inventory ordered in prior periods impacted our ability to have the right products at the right time and has contributed to higher inventory levels as of March 31, 2022. These factors also impacted our ability to offer certain goods and ship orders timely to our customers. In addition, the Company began to see increasedhas seen increasing inflationary pressures during the period.period including higher wages, freight, and merchandise costs. Russia’s invasion of Ukraine, as well as the related international response, is exacerbating inflationary pressures. If these pressures persist, itinflated costs may result in certain increased costs outpacingcontinue to outpace our pricing power in the near term.
On December 18, 2021, QVC experienced a fire at its Rocky Mount, Inc. fulfillment center in North Carolina. Rocky Mount was the Company’s second-largest fulfillment center, processing approximately 25% to 30% of volume for QVC-U.S., and also served as QVC-U.S.’s primary returns center for hard goods. The building was significantly damaged as a result of the fire and related smoke and will not reopen. QVC has made a decision not to rebuild the facility; however, we are still in the process of determining future plans for the property. The Company has taken 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. During the year ended December 31, 2021, the Company recorded $229 million of fire related costs for which recovery was deemed probable and received $100 million of insurance proceeds. During the three months ended March 31, 2022, the company incurred an additional $2 million in fire related costs, net that will not be reimbursed by QVC's insurance policies and $14 million of other fire related costs for which recovery was deemed probable based on the Company's insurance policies. While there can be no assurance, based on the provisions of QVC’s insurance policies and discussions with insurance carriers, the Company determined that recovery of certain fire related costs is probable, and recorded an insurance receivable. The insurance receivable balance was $143 million as of March 31, 2022, net of $100 million of insurance proceeds received in advance.
We are still in the process of assessing the extent of damage to property and recoverability of inventory and submitting relevant insurance claims. During the three months ended March 31, 2022, the Company recorded an $80 million write-down related to 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 11). These write-downs are expected to be submitted as part of our business interruption insurance claim; however, there can be no guarantee they will be recovered. We expect to continue to record additional costs and recoveries until the property damage and inventory recoverability assessment is completed and the insurance claim is fully settled. While the Company has taken steps to minimize the overall impact to the business, we experienced increased warehouse and logistics costs during the three months ended March 31, 2022 and anticipate these increased warehouse and logistics costs to continue during 2022.
Results of Operations
QVC's operating results were as follows:
| | | Three months ended September 30, | Nine months ended September 30, | | Three months ended March 31, |
(in millions) | (in millions) | 2021 | 2020 | 2021 | 2020 | (in millions) | 2022 | 2021 |
Net revenue | Net revenue | $ | 2,512 | | 2,703 | | 8,002 | | 7,853 | | Net revenue | $ | 2,354 | | 2,710 | |
Operating costs and expenses: | Operating costs and expenses: | | Operating costs and expenses: | |
Cost of goods sold (exclusive of depreciation and amortization shown separately below) | 1,617 | | 1,722 | | 5,130 | | 5,041 | | |
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) | 1,561 | | 1,758 | |
Operating | Operating | 183 | | 184 | | 565 | | 548 | | Operating | 178 | | 186 | |
Selling, general and administrative, excluding stock-based compensation | Selling, general and administrative, excluding stock-based compensation | 272 | | 285 | | 840 | | 855 | | Selling, general and administrative, excluding stock-based compensation | 286 | | 274 | |
Adjusted OIBDA (defined below) | Adjusted OIBDA (defined below) | 440 | | 512 | | 1,467 | | 1,409 | | Adjusted OIBDA (defined below) | 329 | | 492 | |
Fire related costs, net and Rocky Mount inventory losses (see note 13) | | Fire related costs, net and Rocky Mount inventory losses (see note 13) | 82 | | — | |
Stock-based compensation | Stock-based compensation | 13 | | 10 | | 33 | | 26 | | Stock-based compensation | 8 | | 9 | |
Depreciation | Depreciation | 37 | | 45 | | 115 | | 131 | | Depreciation | 35 | | 40 | |
Amortization | Amortization | 74 | | 69 | | 200 | | 213 | | Amortization | 74 | | 62 | |
Operating income | Operating income | 316 | | 388 | | 1,119 | | 1,039 | | Operating income | 130 | | 381 | |
Other (expense) income: | Other (expense) income: | | Other (expense) income: | |
Equity in (losses) earnings of investee | (2) | | 1 | | (2) | | (1) | | |
(Losses) gains on financial instruments | (5) | | 1 | | (8) | | (3) | | |
Gains on financial instruments | | Gains on financial instruments | 1 | | 1 | |
Interest expense, net | Interest expense, net | (64) | | (65) | | (192) | | (194) | | Interest expense, net | (62) | | (63) | |
Foreign currency gain (loss) | Foreign currency gain (loss) | — | | 1 | | (4) | | 3 | | Foreign currency gain (loss) | 8 | | (2) | |
Loss on extinguishment of debt | — | | (42) | | — | | (42) | | |
Other income | Other income | — | | — | | 8 | | — | | Other income | 20 | | 6 | |
| | (71) | | (104) | | (198) | | (237) | | | (33) | | (58) | |
Income before income taxes | Income before income taxes | 245 | | 284 | | 921 | | 802 | | Income before income taxes | 97 | | 323 | |
Income tax expense | Income tax expense | (85) | | (80) | | (266) | | (232) | | Income tax expense | (41) | | (85) | |
Net income | Net income | 160 | | 204 | | 655 | | 570 | | Net income | 56 | | 238 | |
Less net income attributable to the noncontrolling interest | Less net income attributable to the noncontrolling interest | (15) | | (15) | | (48) | | (41) | | Less net income attributable to the noncontrolling interest | (14) | | (16) | |
Net income attributable to QVC, Inc. stockholder | Net income attributable to QVC, Inc. stockholder | $ | 145 | | 189 | | 607 | | 529 | | Net income attributable to QVC, Inc. stockholder | $ | 42 | | 222 | |
Net revenue
Net revenue by segment was as follows:
| | | Three months ended September 30, | Nine months ended September 30, | | Three months ended March 31, |
(in millions) | (in millions) | 2021 | 2020 | 2021 | 2020 | (in millions) | 2022 | 2021 |
QxH | QxH | $ | 1,813 | | 1,980 | | 5,738 | | 5,782 | | QxH | $ | 1,684 | | 1,936 | |
QVC-International | QVC-International | 699 | | 723 | | 2,264 | | 2,071 | | QVC-International | 670 | | 774 | |
Consolidated QVC | Consolidated QVC | $ | 2,512 | | 2,703 | | 8,002 | | 7,853 | | Consolidated QVC | $ | 2,354 | | 2,710 | |
QVC's consolidated net revenue decreased 7.1% and increased 1.9%13.1% for the three and nine months ended September 30, 2021, respectively,March 31, 2022, as compared to the corresponding periodsperiod in the prior year. The three month decrease in net revenue is primarily due to an 8.2%a 10.6% decrease in units shipped, $50 million in unfavorable foreign exchange rates and a $29 million decrease in shipping and handling revenue, which wasrevenue. These declines were partially offset by a 1.5% increase in average selling price per unit ("ASP"), primarily driven by QxH and QVC-Japan, and a $34$25 million decrease in estimated product returns primarily drivenreturns.
During the three months ended March 31, 2022 and 2021, the changes in revenue and expenses were affected by QxH. The nine month increasechanges in net revenue is primarily due to a 0.8% increase in units shipped, a $74 million decrease in estimated product returns primarily driven by QxH and $92 million in favorable foreignthe exchange rates which was partially offset by a 1% declinefor the Japanese Yen, the Euro and the U.K. Pound Sterling. In the event the U.S. Dollar strengthens against these foreign currencies in ASP, primarily driven by QxH,the future, QVC's revenue and a $15 million decrease in shipping and handling revenue.operating cash flow will be negatively affected.
During the three and nine months ended September 30, 2021 and 2020, the changes in revenue and expenses were affected by changes in the exchange rates for the U.K. Pound Sterling, the Euro and the 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.
In discussing our operating results, the term currency exchange rates 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 change in net revenue for each of QVC's segments in U.S. Dollars and in constant currency was as follows:
| | | Three months ended September 30, 2021 | Nine months ended September 30, 2021 | | Three months ended March 31, 2022 |
| | 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 |
QxH | QxH | (8.4) | % | — | % | (8.4) | % | (0.8) | % | — | % | (0.8) | % | QxH | (13.0) | % | — | % | (13.0) | % |
QVC-International | QVC-International | (3.3) | % | 0.4 | % | (3.7) | % | 9.3 | % | 4.4 | % | 4.9 | % | QVC-International | (13.4) | % | (6.4) | % | (7.0) | % |
QxH net revenue decline for the three months ended September 30, 2021March 31, 2022 was primarily due to a 9.4%12.4% decrease in units shipped and a $25$23 million decrease in shipping and handling revenue, which was partially offset by a 1.3% increase in ASP and a $29$19 million decrease in estimated product returns. For the three months ended September 30, 2021, QxH experienced shipped sales declines in home, electronics, beauty and accessories with growth in all other categories. For the nine months ended September 30, 2021, QxH net revenue decreased due to a 2.5% decline in ASP and a $14 million decrease in shipping and handling revenue partially offset by a $68 million decrease in estimated product returns and a 0.7% increase in units shipped. For the nine months ended September 30, 2021,March 31, 2022, QxH experienced shipped sales growth in apparel and accessories with declines in all other categories. The decrease in estimated product returns for the three months ended September 30, 2021 was primarily due to a decrease in sales volume. The decrease in estimated product returns for the nine months ended September 30, 2021 was primarily driven by lower sales volume partially offset by a shift in product mix to higher return rates across allrate categories.
QVC-International net revenue decline in constant currency for the three months ended September 30, 2021March 31, 2022 was primarily due to a 5.3%6.4% decrease in units shipped driven by decreases in units shipped across all markets except Japan and a $5 million decrease in shipping and handling revenue. These declines were partially offset by a 2.1%$7 million decrease in estimated product returns and a slight increase in ASP, driven by ASP increases in Japan and the U.K.ASP. For the three months ended September 30, 2021,March 31, 2022, QVC-International experienced shipped sales decline in constant currency across all product categories except apparel. QVC-International net revenue growth in constant currency for the nine months ended September 30, 2021 was primarily due to a 3.0% increase in ASP, driven by ASP increases across all markets except Germany, and a 0.9% increase in units shipped, driven by increases in units shipped in Germany and Japan. For the nine months ended September 30, 2021, QVC-International experienced shipped sales growth in constant currency across all product categories.
Cost of goods sold (excluding depreciation, amortization and amortization)Rocky Mount inventory losses)
QVC's cost of goods sold as a percentage of net revenue was 64.4%66.3% and 64.1%64.9% for the three and nine months ended September 30,March 31, 2022 and 2021, respectively, compared to 63.7% and 64.2% for the three and nine months ended September 30, 2020, respectively. The increase in cost of goods sold as a percentage of revenue for the three months ended September 30, 2021March 31, 2022 is primarily due to increased warehouse expenseshigher fulfillment costs across both segments driven by increased freight and warehousing costs. Higher fulfillment costs at QxH were also impacted by strains on our fulfillment network due to the loss of the Rocky Mount fulfillment center and higher wages, partially offset by efficiencies from fulfillment centers closed in the prior year. The increase in cost of goods sold was also impacted by increased inventory obsolescence at QxH increased freight costs anddue to higher levels of inventory partially offset by lower shipping and handling revenueobsolescence at QxH.QVC-International. These increases were partially offset by decreased obsolescence as a result of less aged inventory at QxH. The decrease in cost of goods sold as a percentage of revenue for the nine months ended September 30, 2021 is primarily due to decreased obsolescence as a result of less aged inventoryhigher product margin at QxH driven by a mix shift into apparel and favorable estimated product returns at QxH. These decreases were partially offset by increased freight charges and warehouse expenses at QxH and lower shipping and handling revenue at QxH. Product margin for the three and nine months ended September 30, 2021 was flat due to margin favorability primarily in Japan offset by margin pressure at QxH.targeted pricing actions.
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 decreased $1 millionwere 7.6% and 6.9% of net revenue for the three months ended September 30,March 31, 2022 and 2021, and increased $17respectively. Operating expenses decreased $8 million or 4% for the ninethree months ended September 30, 2021, respectively,March 31, 2022 as compared to the three and nine months ended September 30, 2020.March 31, 2021. For the three months ended March 31, 2022, the decrease was primarily due to a $4 million decrease in commissions across both segments, and a $4 million decrease due to favorable exchange rates. The nine month increasedecrease in commissions is primarily due to a $9 million increase in customer service expenses primarily at QxH and a $5 million increase due to unfavorable exchange rates. As a percentage of net revenue, such expenses were 7.3% and 7.1% for the three and nine months ended September 30, 2021, respectively, and were 6.8% and 7.0% for the three and nine months ended September 30, 2020, respectively.
lower sales volume.
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, and marketing and advertising expenses. Such expenses decreased $13increased $12 million, and $15 millionas a percentage of net revenue, increased from 10.1% to 12.1% for the three and nine months ended September 30, 2021,March 31, 2022 as compared to the three and nine months ended September 30, 2020, respectively. As a percentage of net revenue, such expenses were 10.8% and 10.5% for the three and nine months ended September 30, 2021, respectively, and were 10.5% and 10.9% for the three and nine months ended September 30, 2020, respectively.
For the three months ended September 30, 2021, there was a $29 million decrease in personnel costs, primarily at QxH. This decrease was partially offset by an $11 million increase in online marketing, primarily at QxH, and a $3 million increase in credit losses due to favorable adjustments in the prior year based on actual collections and the release of the credit loss reserve that was recorded as a result of the additional risk due to COVID-19. For the nine months ended September 30, 2021, the decrease was primarily due to a $43 million decrease in credit losses and a $34 million decrease in personnel costs both primarily at QxH. These decreases were partially offset by a $48 million increase in online marketing primarily at QxH and a $13 million increase due to unfavorable exchange rates. The decrease to estimated credit losses for the nine months ended September 30, 2021 was due to favorable adjustments based on actual collections and enhanced risk screening. The decrease related to personnel costs for the three and nine months ended September 30, 2021 was primarily due to a decrease in incentive pay for 2021 in addition to severance and a work from home allowance as a result of COVID-19, which were both recorded in the second quarter of 2020.
Stock-based compensation
Stock-based compensation includes compensation related to options and restricted stock units granted to certain officers and employees. QVC recorded $13 million and $33 million of stock-based compensation expense for the three and nine months ended September 30, 2021, respectively, and recorded $10 million and $26 million of stock-based compensation expense for the three and nine months ended September 30, 2020, respectively. The increase in stock compensation expense for the nine months ended September 30, 2021 is primarily related to certain officers not reaching performance targets for restricted stock units for the nine months ended September 30, 2020.March 31, 2021.
For the three months ended March 31, 2022, the increase was primarily due to a $10 million increase in estimated credit losses primarily at QxH and a $4 million increase in personnel costs primarily at QxH and a $2 million increase in IT expenses. These increases were partially offset by $6 million in favorable exchange rates. The increase to estimated credit losses was due to lower expected collections in the current year compared to favorable adjustments recognized in the prior year based on actual collections experience.
Fire related costs, net and Rocky Mount inventory losses
QVC recorded $82 million of fire related costs, net and Rocky Mount inventory losses for the three months ended March 31, 2022 primarily due to a write-down on Rocky Mount inventory. Fire related costs, net includes expenses directly related to the Rocky Mount fulfillment center fire net of expected and received insurance recoveries. Expenses indirectly related to the Rocky Mount fulfillment center fire, including operational inefficiencies, are primarily included in Cost of goods sold. These indirect expenses will be submitted as part of our insurance claim; however, there can be no guarantee they will be recovered.
Stock-based compensation
Stock-based compensation includes compensation related to options and restricted stock units granted to certain officers and employees. QVC recorded $8 million and $9 million of stock-based compensation expense for the three months ended March 31, 2022 and 2021, respectively.
Depreciation and amortization
Depreciation and amortization consisted of the following:
| | | Three months ended September 30, | Nine months ended September 30, | | Three months ended March 31, |
(in millions) | (in millions) | 2021 | 2020 | 2021 | 2020 | (in millions) | 2022 | 2021 |
Affiliate agreements | $ | — | | 1 | | — | | 2 | | |
Customer relationships | Customer relationships | 12 | | 13 | | 35 | | 38 | | Customer relationships | 12 | | 12 | |
Other technology | Other technology | 3 | | 3 | | 11 | | 10 | | Other technology | 4 | | 4 | |
Acquisition related amortization | Acquisition related amortization | 15 | | 17 | | 46 | | 50 | | Acquisition related amortization | 16 | | 16 | |
Property and equipment | Property and equipment | 37 | | 45 | | 115 | | 131 | | Property and equipment | 35 | | 40 | |
Software amortization | Software amortization | 27 | | 20 | | 74 | | 63 | | Software amortization | 27 | | 21 | |
Channel placement amortization and related expenses | Channel placement amortization and related expenses | 32 | | 32 | | 80 | | 100 | | Channel placement amortization and related expenses | 31 | | 25 | |
Total depreciation and amortization | Total depreciation and amortization | $ | 111 | | 114 | | 315 | | 344 | | Total depreciation and amortization | $ | 109 | | 102 | |
The decrease inFor the three months ended March 31, 2022, property and equipment depreciation for the three and nine months ended September 30, 2021 isdecreased primarily due to assets disposed of related to the sale of fixed assets.Rocky Mount fulfillment center fire. The increase in software amortization for the three and nine months ended September, 30 2021March 31, 2022 is due to software additions.additions including QVC's new Enterprise Resource Planning (“ERP”) system. The decreaseincrease in channel placement amortization and related expenses for the ninethree months ended September 30, 2021March 31, 2022 was due to certain channel placement agreements becoming fully amortized.
Equity in (losses) earnings of investee
Prior to September 2021, the Company had a joint venture with CNR Media Group, a limited liability company owned by China National Radio (''CNR''). The Company owned a 49% interest in a CNR subsidiary, CNR Home Shopping Co., Ltd. (''CNRS'') that was accounted for as an equity method investment. During the three months ended September 30, 2021, QVC sold its interest in CNRS which resulted in an immaterial loss for the three and nine months ended September 30, 2021 recorded in equity in (losses) earnings of investeeadjustments recognized in the accompanying condensed consolidated statements of operations.prior year related to lower subscriber counts.
Interest expense, net
For the three and nine months ended September 30, 2021,March 31, 2022, consolidated interest expense, net decreased $1 million and $2 million, respectively,or 2% as compared to the corresponding periodsperiod in the prior year.
Foreign currency 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 condensed consolidated statements of operations. For the three and nine months ended September 30, 2021,March 31, 2022, the change in foreign currency 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.
Income taxes
Our effective tax rate was 34.7% and 28.9% for the three and nine months ended September 30, 2021, respectively, compared to an effective tax rate of 28.2% and 28.9% for the three and nine months ended September 30, 2020, respectively. The 2021 rate differs from the U.S. federal income tax rate of 21% due to state and foreign tax expenses and increases in valuation allowances. The 2021 effective tax rate has increased from the prior year for the three months ended September 30, 2021 primarily due to increases in permanent differences and increases in valuation allowances.
Income taxes
Our effective tax rate was 42.3% and 26.3% for three months ended March 31, 2022 and 2021, respectively. The 2022 rate differs from the U.S. federal income tax rate of 21% due primarily to state and foreign tax expenses. The effective tax rate for the three months ended March 31, 2022 has increased from the corresponding period in the prior year primarily due to state and foreign taxes, discrete items and permanent differences. These drivers were impacted by the relative decrease in U.S. pretax income as compared to consolidated pretax income.
Adjusted Operating Income before Depreciation and Amortization (Adjusted OIBDA)
To provide investors with additional information regarding our financial statements, we disclose Adjusted OIBDA, (defined below), which is a non-GAAP measure. QVC defines Adjusted OIBDA as operating income plus depreciation and amortization, stock-based compensation, fire related costs, net and stock-based compensation.Rocky Mount inventory losses). 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 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. 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 generally accepted accounting principles ("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. The following table provides a reconciliation of operating income to Adjusted OIBDA.
| | | | | | | | | | | | | | |
| Three months ended September 30, | Nine months ended September 30, |
(in millions) | 2021 | 2020 | 2021 | 2020 |
Operating income | $ | 316 | | 388 | | 1,119 | | 1,039 | |
Depreciation and amortization | 111 | | 114 | | 315 | | 344 | |
Stock-based compensation | 13 | | 10 | | 33 | | 26 | |
Adjusted OIBDA | $ | 440 | | 512 | | 1,467 | | 1,409 | |
| | | | | | | | |
| Three months ended March 31, |
(in millions) | 2022 | 2021 |
Operating income | $ | 130 | | 381 | |
Depreciation and amortization | 109 | | 102 | |
Stock-based compensation | 8 | | 9 | |
Fire related costs, net and Rocky Mount inventory losses (see note 13) | 82 | | — | |
Adjusted OIBDA | $ | 329 | | 492 | |
QVC Adjusted OIBDA decreased by $72$163 million for the three months ended September 30, 2021March 31, 2022 compared to the three months ended September 30, 2020.March 31, 2021. The decrease is comprised of a $17$124 million decrease in QVC-Internationalat QxH and a $55$39 million decrease in QxH.
QVC Adjusted OIBDA increased by $58 million for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020. The increase is comprised of a $54 million increase in QVC-International and a $4 million increase in QxH.at 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 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 payments to Qurate Retail, make interest payments and minimize QVC's outstanding senior secured credit facility balance.
As of September 30, 2021,March 31, 2022, 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.
Exchangeable Senior Debentures
The Company has elected to account for the MSI Exchangeables using the fair value option. Accordingly, changes in the fair value of these instruments are recognized as (losses) gains on financial instruments in the accompanying statements of operations and in other comprehensive income as it relates to instrument specific credit risk on the accompanying consolidated statements of comprehensive income. The Company has classified for financial reporting purposes the MSI Exchangeables as a current liability as the MSI Exchangeables are exchangeable at the option of the holder at any time. Prior to September 30, 2021, the Company had entered into certain derivative transactions in order to hedge against upward price fluctuations on certain shares.Such derivative instruments have been recognized in the other current assets line item in the condensed consolidated balance sheets, and are marked to fair value each reporting period. The changes in fair value are recognized in (losses) gains on financial instruments in the condensed statement of operations. On October 27, 2021, a notice was issued to all holders to redeem any and all outstanding MSI Exchangeables on December 13, 2021 that were not previously properly surrendered for exchange. Please see Part I, Item 2 “Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview.” The Company terminated such derivative transactions in October 2021 and entered into a forward purchase transaction to acquire shares that will be used to settle any exchanges of the MSI Exchangeables.
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 the senior secured credit facility. With the exception of the 6.375% Senior Secured Notes due 2067 and the 6.25% Senior Secured Notes due 2068, for which interest is payable quarterly, the interest on QVC's senior secured notes is payable semi-annually. As of March 31, 2022, the 4.375% Senior Secured Notes due 2023 are classified within current portion of long term debt as they mature in less than one year.
Senior Secured Credit Facility
On October 27, 2021, QVC amended and restatedentered into the FourthFifth Amended and Restated Credit Agreement (as amended and restated, the “Fifth Amended and Restated Credit Agreement”) and refinanced QVC’s existing bank credit facility by entering into a fifth amended and restated agreement with QVC, Zulily, CBI, and QVC Global, each a direct or indirect wholly owned subsidiary of Qurate Retail, as borrowers (QVC, Zulily, CBI and QVC Global, collectively,(collectively, the “New Borrowers”“Borrowers”), JPMorgan Chase Bank, N.A., as administrative agent, and the other parties named therein.
. The Fifth Amended and Restated Credit Agreement is a multi-currency facility providing for a $3.25 billion revolving credit facility, (the “New Credit Facility”), with a $450 million sub-limit for letters of credit and an alternative currency revolving sub-limit equal to 50% of the revolving commitments thereunder. As of October 27, 2021, $220 million was drawn under the New Credit Facility ($120 million drawn by Zulily and $100 million drawn by QVC Global) and $3.01 billion remained available for borrowing under the terms of theThe Fifth Amended and Restated Credit Agreement.
The New Credit FacilityAgreement may be borrowed by any New Borrower, with each New Borrower jointly and severally liable for the outstanding borrowings. Borrowings under the Fifth Amended and Restated Credit Agreement bear interest at either the alternate base rate (such rate, the “ABR(“ABR Rate”) or a LIBOR-based rate (or the applicable non-U.S. Dollar equivalent rate) (such rate, the “Term(“Term Benchmark/RFR Rate”) at the applicable New Borrower’s election in each case plus a margin. Borrowings that are ABR Rate loans will bear interest at a per annum rate equal to the base rate plus a margin that varies between 0.25% and 0.625% depending on the New Borrowers’ combined ratio of consolidated total debt to consolidated EBITDA (the “consolidated leverage ratio”). Borrowings that are Term Benchmark/RFR Rate loans will bear interest at a per annum rate equal to the applicable rate plus a margin that varies between 1.25% and 1.625% depending on the New Borrowers’ 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, CBI, QVC Global or any other borrower under the New Credit Facility (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 on the New Credit Facility may be reborrowed.
The loans under the New Credit Facility are scheduled to maturefacility matures on October 27, 2026. Payment of the loans may be accelerated following certain customary events of default.
Availability under the Fifth Amended and Restated Credit Agreement at March 31, 2022 was $2.48 billion. The interest rate on the senior secured credit facility was 1.8% at March 31, 2022.
The payment and performance of the New Borrowers’ obligations under the Fifth Amended and Restated Credit Agreement are guaranteed by each of QVC’s, QVC Global’s, Zulily’s and CBI’s Material Domestic Subsidiaries (as defined in the Fifth Amended and Restated Credit Agreement), if any, and certain other subsidiaries of any New Borrower that such New
Borrower has chosen to provide guarantees. Further, the borrowings under the Fifth 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 Fifth Amended and Restated Credit Agreement are also secured by a pledge of all of Zulily’s and CBI’s equity interests.
The Fifth Amended and Restated Credit Agreement contains certain affirmative and negative covenants, including certain restrictions on the New Borrowers 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 New Borrowers’ consolidated leverage ratio.
Borrowings under the Fifth Amended and Restated Credit Agreement may be used to repay outstanding indebtedness, pay certain fees and expenses, finance working capital needs and general purposes of the New Borrowers and their respective subsidiaries and make certain restricted payments and loans to the New Borrowers’ respective parents and affiliates.
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 most recent annual period was as follows:
| | | | | |
| Combined Parent-QVC, Inc. and Subsidiary Guarantors |
| September 30,March 31, 2022 |
Current assets | $ | 2,516 | |
Intercompany payable to non-guarantor subsidiaries | (2,866) | |
Note receivable - related party | 1,740 | |
Noncurrent assets | 8,972 | |
Current liabilities | 2,242 | |
Noncurrent liabilities | 5,151 | |
| | | | | |
| Combined Parent-QVC, Inc. and Subsidiary Guarantors |
| December 31, 2021 |
Current assets | $ | 2,6162,734 | |
Intercompany receivable from non-guarantor subsidiaries | (2,963)(3,040) | |
Note receivable - related party | 1,8251,740 | |
Noncurrent assets | 9,1639,027 | |
Current liabilities | 1,8381,840 | |
Noncurrent liabilities | 5,2845,678 | |
| | | | | |
| Combined Parent-QVC, Inc. and Subsidiary Guarantors |
| Three months ended March 31, 2022 |
Net revenue | $ | 1,839 | |
Net revenue less cost of goods sold | 673 | |
Income before taxes | 56 | |
Net income | 56 | |
Net income attributable to QVC, Inc. Stockholder | 42 | |
| | | | | |
| Combined Parent-QVC, Inc. and Subsidiary Guarantors |
| December 31, 2020 |
Current assets | $ | 2,394 | |
Intercompany receivable from non-guarantor subsidiaries | (2,501) | |
Note receivable - related party | 1,825 | |
Noncurrent assets | 11,118 | |
Current liabilities | 2,152 | |
Noncurrent liabilities | 5,286 | |
| | | | | |
| Combined Parent-QVC, Inc. and Subsidiary Guarantors |
| Nine months ended September 30, 2021 |
Net revenue | $ | 6,442 | |
Net revenue less cost of goods sold | 2,907 | |
Income before taxes | 549 | |
Net income | 655 | |
Net income attributable to QVC, Inc. Stockholder | 607 | |
| | | | | |
| Combined Parent-QVC, Inc. and Subsidiary Guarantors |
| Year ended December 31, 20202021 |
Net revenue | $ | 9,6319,292 | |
Net revenue less cost of goods sold | 4,0664,090 | |
Income before taxes | 945836 | |
Net income | 910851 | |
Net income attributable to QVC, Inc. Stockholder | 852787 | |
Other Debt Related Information
QVC was in compliance with all of its debt covenants as of September 30, 2021.March 31, 2022.
There are no restrictions under the 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 and (ii) with respect to the Fifth Amended and Restated Credit Agreement, the consolidated leverage ratio for QVC, QVC Global, Zulily and CBI, would be no greater than 4.54.0 to 1.0. As a result, Qurate Retail will, in many instances, be permitted to rely on QVC's cash flow for servicing Qurate Retail's debt and for other purposes, including repurchases of Qurate Retail's common stock, paying dividends to Qurate Retail's shareholders, including quarterly cash dividends to holders of Qurate Retail's Series A Cumulative Redeemable Preferred Stock (Nasdaq: QRTEP), or to fund acquisitions or other operational requirements of Qurate Retail and its subsidiaries. These events may increase accumulated deficit or require QVC to borrow under the Fifth Amended and Restated Credit Agreement, increasing QVC's leverage and decreasing liquidity. QVC has made significant distributions to Qurate Retail in the past.
Interest Rate Swap Arrangements
In July 2019, the Company entered into a three-year interest 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 and the fair value of the swap instrument was in a net liability position of less than $1 million and $1 million as of March 31, 2022 and December 31, 2021, respectively, which was included in accrued liabilities.
Additional Cash Flow Information
During the three months ended March 31, 2022, QVC's primary uses of cash were $176 million of principal payments of the senior secured credit facility and finance lease obligations, $112 million of dividends to Qurate Retail, $36 million of capital and television distribution rights expenditures, $18 million of cash used in operating activities and $14 million in dividend payments from QVC-Japan to Mitsui. These uses of cash were funded primarily with $368 million of principal borrowings from the senior secured credit facility. As of March 31, 2022, QVC's cash, cash equivalents and restricted cash balance was $531 million.
During the three months ended March 31, 2021, QVC's primary uses of cash were $177 million of dividends to Qurate Retail, $143 million of principal payments on debt and finance lease obligations, $97 million of capital and television distribution rights expenditures and $16 million in dividend payments from QVC-Japan to Mitsui. These uses of cash were funded primarily with $247 million of cash provided by operating activities and $135 million of principal borrowings from the senior secured credit facility and $40 million in proceeds from sale of fixed assets. As of March 31, 2021, QVC's cash, cash equivalents balance and restricted cash was $646 million.
Interest Rate Swap Arrangements
In July 2019, the Company entered into a three-year interest swap arrangement with a notional amount of $125 million. The swap arrangement did not qualify as a cash flow hedge under U.S. GAAP and the fair value of the swap instrument was in a net liability position of $2 million and $3 million as of September 30, 2021 and December 31, 2020, respectively. The swap arrangement was included in accrued liabilities and other long-term liabilities as of September 30, 2021 and December 31, 2020, respectively.
Additional Cash Flow Information
During the nine months ended September 30, 2021, QVC's primary uses of cash were $393 million of dividends to Qurate Retail, $329 million of capital and television distribution rights expenditures, $157 million of principal payments of the senior secured credit facility and finance lease obligations, $46 million in dividend payments from QVC-Japan to Mitsui and $38 million of derivative payments to counterparties. These uses of cash were funded primarily with $678 million of cash provided by operating activities, $135 million of principal borrowings from the senior secured credit facility, $88 million of derivative proceeds from counterparties and $40 million in proceeds from sale of fixed assets. As of September 30, 2021, QVC's cash, cash equivalents and restricted cash balance was $637 million.
During the nine months ended September 30, 2020, QVC's primary uses of cash were $1,230 million of principal payments of the senior secured credit facility and finance lease obligations, $845 million of dividends to Qurate Retail, $541 million of principal payment and premium of senior secured notes, $181 million of capital and television distribution rights expenditures and $46 million in dividend payments from QVC-Japan to Mitsui. These uses of cash were funded primarily with $1,680 million of cash provided by operating activities, $1,075 million of proceeds from issuance of senior secured notes and $112 million of principal borrowings from the senior secured credit facility. As of September 30, 2020, QVC's cash, cash equivalents balance and restricted cash was $582 million.
The change in cash provided by operating activities for the ninethree months ended September 30, 2021March 31, 2022 compared to the previous year was primarily due to changes in working capital. Working capital at any specific point in time is subject to many variables, including seasonality, inventory management, the timing of cash receipts and payments, vendor payment terms, and fluctuations in foreign exchange rates. Inventory growth during the three months ended March 31, 2022 compared to the previous year was in part due to the delayed receipt of inventory driven by supply chain disruptions.
As of September 30, 2021, $279March 31, 2022, $233 million of the $637$531 million in cash, 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 73%84% 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 efficiently as possible and meet the business needs of QVC.
Other
CapitalQVC’s material cash requirements for 2022, outside of normal operating expenses, include the costs to service outstanding debt, expenditures in 2021 arefor affiliation agreements with television providers, and capital expenditures expected to be between $210 and $240 million, including $145$34 million already expended for the ninethree months ended September 30, 2021.
March 31, 2022. 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 amount and timinga summary of expected future payments under QVC's contractual obligationsother material cash requirements as of September 30, 2021.March 31, 2022. The Company expects that cash on hand and cash provided by operating activities in future periods and outstanding borrowing capacity will be sufficient to fund projected uses of cash.
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 as of September 30, 2021March 31, 2022 is summarized below:
| | | Payments due by period | | Payments due by period |
(in millions) | (in millions) | Remainder of 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | (in millions) | Remainder of 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | Total |
Long-term debt (1) | Long-term debt (1) | $ | — | | 8 | | 758 | | 609 | | 609 | | 2,676 | | 4,660 | | Long-term debt (1) | $ | — | | 750 | | 600 | | 600 | | 727 | | 2,500 | | 5,177 | |
Interest payments (2) | Interest payments (2) | 28 | | 238 | | 222 | | 182 | | 154 | | 2,587 | | 3,411 | | Interest payments (2) | 151 | | 224 | | 193 | | 166 | | 149 | | 2,423 | | 3,306 | |
Finance lease obligations (including imputed interest) | Finance lease obligations (including imputed interest) | 6 | | 28 | | 27 | | 26 | | 24 | | 90 | | 201 | | Finance lease obligations (including imputed interest) | 20 | | 26 | | 25 | | 23 | | 22 | | 67 | | 183 | |
Operating lease obligations | Operating lease obligations | $ | 9 | | 35 | | 28 | | 25 | | 21 | | 167 | | 285 | | Operating lease obligations | 27 | | 31 | | 25 | | 21 | | 19 | | 147 | | 270 | |
(1) Amounts exclude Finance lease obligations and the issue discounts on the 4.375%, 4.45%, 4.85%, 5.45% and 5.95% Senior Secured Notes.
(2) Amounts (i) are based on the terms of our senior secured notes and exchangeable senior debentures, (ii) assumes that our existing debt is repaid at maturity and (iii) excludes finance lease obligations.
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 September 30, 2021:March 31, 2022:
| (in millions, except percentages) | (in millions, except percentages) | Remainder of 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | Fair Value | (in millions, except percentages) | Remainder of 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | Total | Fair Value |
Fixed rate debt (1) (2) | Fixed rate debt (1) (2) | $ | — | | 8 | | 758 | | 609 | | 609 | | 2,676 | | 4,660 | | 5,248 | | Fixed rate debt (1) (2) | $ | — | | 750 | | 600 | | 600 | | — | | 2,500 | | 4,450 | | 4,225 | |
Weighted average interest rate on fixed rate debt | Weighted average interest rate on fixed rate debt | — | % | 3.5 | % | 4.4 | % | 4.8 | % | 4.4 | % | 5.3 | % | 4.9 | % | N/A | Weighted average interest rate on fixed rate debt | — | % | 4.4 | % | 4.9 | % | 4.5 | % | — | % | 5.4 | % | 5.0 | % | N/A |
Variable rate debt | Variable rate debt | $ | — | | — | | — | | — | | — | | — | | — | | — | | Variable rate debt | $ | — | | — | | — | | — | | 727 | | — | | 727 | | 727 | |
Average interest rate on variable rate debt | Average interest rate on variable rate debt | — | % | — | % | — | % | — | % | — | % | — | % | — | % | N/A | Average interest rate on variable rate debt | — | % | — | % | — | % | — | % | 1.8 | % | — | % | 1.8 | % | N/A |
(1) Amounts exclude finance lease obligations and the issue discounts on the 4.375%, 4.45%, 4.85%, 5.45% and 5.95% Senior Secured Notes.
(2) Amounts exclude impact related to interest rate swaps, which we have discussed further below.
N/A - Not applicable.
In July 2019, the Company entered into a three-year interest swap arrangement with a notional amount of $125 million.million to mitigate the interest rate risk associated with interest payments related to its variable rate debt. The new swap arrangement did not qualify as a cash flow hedge under U.S. GAAP and the fair value of the swap instrument was in a net liability position of approximately $2less than $1 million and $1 million as of September 30,March 31, 2022 and December 31, 2021, respectively, which was included in accrued liabilities.
Changes in the fair value of the swaps are reflected in gains (losses) gains on financial instruments in the condensed consolidated
statements of operations.
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 nine months ended September 30, 2021March 31, 2022 would have been impacted by approximately $1 million and $4 million, respectively, for every 1% change in foreign currency exchange rates relative to the U.S. Dollar.
The Fifth 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 October 27, 2021,March 31, 2022, no borrowings in foreign currencies were outstanding.
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”), 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 effective as of September 30, 2021March 31, 2022 to provide reasonable assurance that information required to be disclosed in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
Changes in Internal Control Over Financial Reporting
In May 2021, QVC completed the implementation of the initial phase of its new Enterprise Resource Planning (“ERP”) system, which has enabled standardization, modernization and best practice in QVC’s financial processes across its global markets and most brands. As a result of the implementation of phase one of a new ERP system, QVC has continued to refine certain related process-level and information technology general controls.
Except as described above, thereThere has been no change in the Company’s internal control over financial reporting that occurred during the three monthsCompany’s quarter ended September 30, 2021March 31, 2022, that has materially affected, or is reasonably likely to materially affect, itsthe Company’s internal control over financial reporting.
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):
| | | | | |
4.1 | | Fifth Amended and Restated Credit Agreement, dated as of October 27, 2021, among QVC, Inc., Zulily, LLC, QVC Global Corporate Holdings, LLC and Cornerstone Brands, Inc., as Borrowers, JPMorgan Chase Bank, N.A., as Lead Arranger, Lead Bookrunner and Administrative Agent and the parties named therein as Lenders, Co-Bookrunners, Co-Syndication Agents and Co-Documentation Agents (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 001-38654) as filed on October 28, 2021). |
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.
QVC, Inc.
| | | | | |
Date: November 4, 2021May 6, 2022 | By:/s/ DAVID L. RAWLINSON II |
| David L. Rawlinson II |
| President and Chief Executive Officer (Principal Executive Officer) |
| |
Date: November 4, 2021May 6, 2022 | By:/s/ JEFFREY A. DAVIS |
| Jeffrey A. Davis |
| Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |