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, 20192020
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 001-33982
QURATE RETAIL, INC.
(Exact name of Registrant as specified in its charter)
| |
State of Delaware (State or other jurisdiction of | 84-1288730 (I.R.S. Employer |
| |
12300 Liberty Boulevard (Address of principal executive offices) | 80112 (Zip Code) |
Registrant's telephone number, including area code: (720) 875-5300
Securities registered pursuant to Section 12(b) of the Act:
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Series A common stock | QRTEA | The Nasdaq Stock Market LLC |
Series B common stock | QRTEB | The Nasdaq Stock Market LLC |
8.0% Series A Cumulative Redeemable Preferred Stock | QRTEP | The Nasdaq Stock Market LLC |
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 ⌧ No ◻
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 ⌧ No ◻
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 ☒ | Accelerated Filer ☐ | 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. ☐
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes ☐ No ☒
The number of outstanding shares of Qurate Retail, Inc.'s common stock as of October 31, 20192020 was:
| | | |
Series A common stock | |
| |
Series B common stock | |
| |
Table of Contents
I-2
QURATE RETAIL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited)
| | | | | | | | | | | ||
|
| September 30, |
| December 31, |
|
| September 30, |
| December 31, |
| ||
| | 2019 | | 2018 | | | 2020 | | 2019 | | ||
| | amounts in millions | | | amounts in millions | | ||||||
Assets | | | | | | | | | | | ||
Current assets: | | | | | | | | | | | ||
Cash and cash equivalents | | $ | 605 |
| 653 | | | $ | 1,044 |
| 673 | |
Trade and other receivables, net of allowance for doubtful accounts of $117 million and $117 million, respectively | |
| 1,260 |
| 1,835 | | ||||||
Trade and other receivables, net of allowance for doubtful accounts of $147 million and $129 million, respectively | |
| 1,142 |
| 1,854 | | ||||||
Inventory, net | |
| 1,674 |
| 1,474 | | |
| 1,481 |
| 1,413 | |
Other current assets | |
| 290 |
| 224 | | |
| 702 |
| 636 | |
Total current assets | |
| 3,829 |
| 4,186 | | |
| 4,369 |
| 4,576 | |
Investments in equity securities | |
| 101 |
| 96 | | ||||||
Property and equipment, net | |
| 1,321 |
| 1,322 | | |
| 1,282 |
| 1,351 | |
Intangible assets not subject to amortization (note 6): | | | | | | |||||||
Intangible assets not subject to amortization (note 5): | | | | | | |||||||
Goodwill | |
| 6,559 |
| 7,017 | | |
| 6,601 |
| 6,576 | |
Trademarks | |
| 3,315 |
| 3,895 | | |
| 3,168 |
| 3,168 | |
| |
| 9,874 |
| 10,912 | | |
| 9,769 |
| 9,744 | |
Intangible assets subject to amortization, net (note 6) | |
| 1,009 |
| 1,058 | | ||||||
Intangible assets subject to amortization, net (note 5) | |
| 799 |
| 955 | | ||||||
Other assets, at cost, net of accumulated amortization | |
| 845 |
| 267 | | |
| 573 |
| 679 | |
Total assets | | $ | 16,979 |
| 17,841 | | | $ | 16,792 |
| 17,305 | |
(continued)
See accompanying notes to condensed consolidated financial statements.
I-3
QURATE RETAIL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Continued)
(unaudited)
| | | | | | | | | | | | |
| | September 30, | | December 31, |
| | September 30, | | December 31, |
| ||
| | 2019 | | 2018 |
| | 2020 | | 2019 |
| ||
| | amounts in millions, |
| | amounts in millions, |
| ||||||
| | except share amounts |
| | except share amounts |
| ||||||
Liabilities and Equity |
| |
|
|
| |
| |
|
|
| |
Current liabilities: | | | | | | | | | | | | |
Accounts payable | | $ | 1,013 |
| 1,204 | | | $ | 1,147 |
| 1,091 | |
Accrued liabilities | |
| 927 |
| 1,182 | | |
| 1,101 |
| 1,173 | |
Current portion of debt, including $1,202 million and $990 million measured at fair value (note 7) | |
| 1,202 |
| 1,410 | | ||||||
Current portion of debt, including $1,682 million and $1,557 million measured at fair value (note 6) | |
| 1,682 |
| 1,557 | | ||||||
Other current liabilities | |
| 209 |
| 155 | | |
| 226 |
| 180 | |
Total current liabilities | |
| 3,351 |
| 3,951 | | |
| 4,156 |
| 4,001 | |
Long-term debt, including $425 million and $344 million measured at fair value (note 7) | |
| 6,338 |
| 5,963 | | ||||||
Long-term debt (note 6) | |
| 5,184 |
| 5,855 | | ||||||
Deferred income tax liabilities | |
| 1,757 |
| 1,925 | | |
| 1,744 |
| 1,716 | |
Preferred stock (note 7) | | | 1,248 | | — | | ||||||
Other liabilities | |
| 764 |
| 258 | | |
| 753 |
| 761 | |
Total liabilities | |
| 12,210 |
| 12,097 | | |
| 13,085 |
| 12,333 | |
Equity | | | | | | | | | | | | |
Stockholders' equity: | | | | | | | | | | | | |
Preferred stock, $.01 par value. Authorized 50,000,000 shares; 0 shares issued | |
| — |
| — | | ||||||
Series A Qurate Retail common stock, $.01 par value. Authorized 4,000,000,000 shares; issued and outstanding 386,487,999 shares at September 30, 2019 and 409,901,058 shares at December 31, 2018 | |
| 4 |
| 4 | | ||||||
Series B Qurate Retail common stock, $.01 par value. Authorized 150,000,000 shares; issued and outstanding 29,328,431 shares at September 30, 2019 and 29,248,343 shares at December 31, 2018 | |
| — |
| — | | ||||||
Series C Qurate Retail common stock, $.01 par value. Authorized 400,000,000 shares; 0 shares issued | | | — | | — | | ||||||
Series A common stock, $.01 par value. Authorized 4,000,000,000 shares; issued and outstanding 387,810,463 shares at September 30, 2020 and 386,691,461 shares at December 31, 2019 | |
| 4 |
| 4 | | ||||||
Series B common stock, $.01 par value. Authorized 150,000,000 shares; issued and outstanding 29,376,619 shares at September 30, 2020 and 29,278,424 shares at December 31, 2019 | |
| — |
| — | | ||||||
Series C common stock, $.01 par value. Authorized 400,000,000 shares; 0 shares issued | | | — | | — | | ||||||
Additional paid-in capital | |
| — |
| — | | |
| 27 |
| — | |
Accumulated other comprehensive earnings (loss), net of taxes | |
| (95) |
| (55) | | |
| 16 |
| (55) | |
Retained earnings | |
| 4,734 |
| 5,675 | | |
| 3,531 |
| 4,891 | |
Total stockholders' equity | |
| 4,643 |
| 5,624 | | |
| 3,578 |
| 4,840 | |
Noncontrolling interests in equity of subsidiaries | |
| 126 |
| 120 | | |
| 129 |
| 132 | |
Total equity | |
| 4,769 |
| 5,744 | | |
| 3,707 |
| 4,972 | |
Commitments and contingencies (note 9) | | | | | | | ||||||
Commitments and contingencies (note 8) | | | | | | | ||||||
Total liabilities and equity | | $ | 16,979 |
| 17,841 | | | $ | 16,792 |
| 17,305 | |
See accompanying notes to condensed consolidated financial statements.
I-4
QURATE RETAIL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | Three months ended | | Nine months ended |
| ||||||||||||
| | September 30, | | September 30, |
| | September 30, | | September 30, |
| ||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
| | amounts in millions |
| | amounts in millions |
| ||||||||||||||||
Total revenue, net | | $ | 3,089 |
| 3,231 |
| | 9,285 |
| 9,694 | | | $ | 3,383 |
| 3,089 |
| | 9,725 |
| 9,285 | |
Operating costs and expenses: | | | | | | | | | | | | | | | | | | | | | | |
Cost of retail sales (exclusive of depreciation shown separately below) | |
| 2,026 |
| 2,109 |
| | 6,045 |
| 6,252 | | |
| 2,178 |
| 2,026 |
| | 6,328 |
| 6,045 | |
Operating expense | |
| 200 |
| 241 |
| | 593 |
| 707 | | |
| 203 |
| 200 |
| | 605 |
| 593 | |
Selling, general and administrative, including stock-based compensation and transaction related costs (note 3) | |
| 424 |
| 477 |
| | 1,273 |
| 1,357 | | |||||||||||
Selling, general and administrative, including stock-based compensation (note 2) | |
| 455 |
| 424 |
| | 1,323 |
| 1,273 | | |||||||||||
Depreciation and amortization | |
| 146 |
| 167 |
| | 457 |
| 489 | | |
| 141 |
| 146 |
| | 427 |
| 457 | |
Impairment of intangible assets (note 6) | | | 1,020 | | — | | | 1,020 | | — | | |||||||||||
Impairment of intangible assets | | | — | | 1,020 | | | — | | 1,020 | | |||||||||||
| |
| 3,816 |
| 2,994 |
| | 9,388 |
| 8,805 | | |
| 2,977 |
| 3,816 |
| | 8,683 |
| 9,388 | |
Operating income (loss) | |
| (727) |
| 237 |
| | (103) |
| 889 | | |
| 406 |
| (727) |
| | 1,042 |
| (103) | |
Other income (expense): | | | | | | | | | | | | | | | | | | | | | | |
Interest expense | |
| (93) |
| (94) |
| | (282) |
| (288) | | |
| (98) |
| (93) |
| | (290) |
| (282) | |
Share of earnings (losses) of affiliates, net | |
| (36) |
| (29) |
| | (104) |
| (89) | | |
| (32) |
| (36) |
| | (96) |
| (104) | |
Realized and unrealized gains (losses) on financial instruments, net (note 5) | |
| (45) |
| (27) |
| | (239) |
| 92 | | |||||||||||
Realized and unrealized gains (losses) on financial instruments, net (note 4) | |
| (12) |
| (45) |
| | (127) |
| (239) | | |||||||||||
Gains (losses) on transactions, net | | | 223 | | — | | | 224 | | (1) | | |||||||||||
Other, net | |
| (4) |
| (2) |
| | (19) |
| 17 | | |
| (65) |
| (4) |
| | (65) |
| (18) | |
| |
| (178) |
| (152) |
| | (644) |
| (268) | | |
| 16 |
| (178) |
| | (354) |
| (644) | |
Earnings (loss) from continuing operations before income taxes | |
| (905) |
| 85 |
| | (747) |
| 621 | | |||||||||||
Earnings (loss) before income taxes | |
| 422 |
| (905) |
| | 688 |
| (747) | | |||||||||||
Income tax (expense) benefit | |
| 150 |
| (3) |
| | 188 |
| (85) | | |
| (70) |
| 150 |
| | (111) |
| 188 | |
Earnings (loss) from continuing operations | | | (755) | | 82 | | | (559) | | 536 | | |||||||||||
Earnings (loss) from discontinued operations, net of taxes | | | — | | — | | | — | | 141 | | |||||||||||
Net earnings (loss) | | | (755) | | 82 | | | (559) | | 677 | | | | 352 | | (755) | | | 577 | | (559) | |
Less net earnings (loss) attributable to the noncontrolling interests | |
| 15 |
| 10 |
| | 38 |
| 34 | | |
| 14 |
| 15 |
| | 39 |
| 38 | |
Net earnings (loss) attributable to Qurate Retail, Inc. shareholders | | $ | (770) |
| 72 | | | (597) |
| 643 | | | $ | 338 |
| (770) | | | 538 |
| (597) | |
| | | | | | | | | | | | | | | | | | | | | | |
Net earnings (loss) attributable to Qurate Retail, Inc. shareholders: | | | | | | | | | | | | |||||||||||
Qurate Retail common stock (note 1) | | $ | (770) |
| 72 | |
| (597) |
| 401 | | |||||||||||
Liberty Ventures common stock (note 1) | |
| — |
| — | |
| — |
| 242 | | |||||||||||
| | $ | (770) |
| 72 | |
| (597) |
| 643 | | |||||||||||
Basic net earnings (loss) attributable to Series A and Series B Qurate Retail, Inc. shareholders per common share (note 3): | | $ | 0.81 |
| (1.85) | | | 1.29 | | (1.40) | | |||||||||||
Diluted net earnings (loss) attributable to Series A and Series B Qurate Retail, Inc. shareholders per common share (note 3): | | $ | 0.80 |
| (1.85) | | | 1.28 | | (1.40) | |
See accompanying notes to condensed consolidated financial statements.
I-5
QURATE RETAIL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Continued)
(unaudited)
| | | | | | | | | | | |
| | Three months ended | | Nine months ended | | ||||||
| | September 30, | | September 30, | | ||||||
| | 2019 |
| 2018 |
| 2019 |
| 2018 | | ||
Basic net earnings (losses) from continuing operations attributable to Qurate Retail, Inc. shareholders per common share (note 4): | | | | | | | | | | | |
Series A and Series B Qurate Retail common stock | | $ | (1.85) |
| 0.16 | |
| (1.40) |
| 0.86 | |
Series A and Series B Liberty Ventures common stock | | $ | NA |
| NA | |
| NA |
| 1.17 | |
Diluted net earnings (losses) from continuing operations attributable to Qurate Retail, Inc. shareholders per common share (note 4): | | | | | | | | | | | |
Series A and Series B Qurate Retail common stock | | $ | (1.85) |
| 0.16 | |
| (1.40) |
| 0.85 | |
Series A and Series B Liberty Ventures common stock | | $ | NA |
| NA | |
| NA |
| 1.16 | |
| | | | | | | | | | | |
Basic net earnings (losses) attributable to Qurate Retail, Inc. shareholders per common share (note 4): | | | | | | | | | | | |
Series A and Series B Qurate Retail common stock | | $ | (1.85) |
| 0.16 | |
| (1.40) |
| 0.86 | |
Series A and Series B Liberty Ventures common stock | | $ | NA |
| NA | |
| NA |
| 2.81 | |
Diluted net earnings (losses) attributable to Qurate Retail, Inc. shareholders per common share (note 4): | | | | | | | | | | | |
Series A and Series B Qurate Retail common stock | | $ | (1.85) |
| 0.16 | |
| (1.40) |
| 0.85 | |
Series A and Series B Liberty Ventures common stock | | $ | NA |
| NA | |
| NA |
| 2.78 | |
See accompanying notes to condensed consolidated financial statements.
I-6
QURATE RETAIL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Earnings (Loss)
(unaudited)
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | Three months ended | | Nine months ended |
| ||||||||||
| | September 30, | | September 30, |
| | September 30, | | September 30, |
| ||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||
| | amounts in millions |
| | amounts in millions |
| ||||||||||||||
Net earnings (loss) | | $ | (755) |
| 82 |
| (559) |
| 677 | | | $ | 352 |
| (755) |
| 577 |
| (559) | |
Other comprehensive earnings (loss), net of taxes: | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | |
| (37) |
| (21) |
| (29) |
| (46) | | |
| 49 |
| (37) |
| 45 |
| (29) | |
Recognition of previously unrealized losses (gains) on debt, net | |
| — |
| — |
| — |
| 16 | | |
| — |
| — |
| (1) |
| — | |
Share of other comprehensive earnings (losses) of equity affiliates | | | — | | — | | — | | (1) | | ||||||||||
Comprehensive earnings (loss) attributable to debt credit risk adjustments | | | 5 | | 4 | | (9) | | (28) | | | | (68) | | 5 | | 31 | | (9) | |
Other comprehensive earnings (loss) | |
| (32) |
| (17) |
| (38) |
| (59) | | |
| (19) |
| (32) |
| 75 |
| (38) | |
Comprehensive earnings (loss) | |
| (787) |
| 65 |
| (597) |
| 618 | | |
| 333 |
| (787) |
| 652 |
| (597) | |
Less comprehensive earnings (loss) attributable to the noncontrolling interests | |
| 14 |
| 7 |
| 40 |
| 34 | | |
| 16 |
| 14 |
| 43 |
| 40 | |
Comprehensive earnings (loss) attributable to Qurate Retail, Inc. shareholders | | $ | (801) |
| 58 |
| (637) |
| 584 | | | $ | 317 |
| (801) |
| 609 |
| (637) | |
See accompanying notes to condensed consolidated financial statements.
I-7I-6
QURATE RETAIL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
| | | | | | |
| | Nine months ended |
| |||
| | September 30, |
| |||
|
| 2019 |
| 2018 |
| |
| | amounts in millions |
| |||
Cash flows from operating activities: | | | | | | |
Net earnings (loss) | | $ | (559) |
| 677 | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | |
(Earnings) loss from discontinued operations | | | — | | (141) | |
Depreciation and amortization | |
| 457 |
| 489 | |
Impairment of intangible assets (note 6) | | | 1,020 | | — | |
Stock-based compensation | |
| 54 |
| 67 | |
Share of (earnings) losses of affiliates, net | |
| 104 |
| 89 | |
Realized and unrealized (gains) losses on financial instruments, net | |
| 239 |
| (92) | |
Deferred income tax expense (benefit) | |
| (165) |
| (84) | |
Other, net | |
| 11 |
| 29 | |
Changes in operating assets and liabilities | | | | | | |
Current and other assets | |
| 419 |
| 163 | |
Payables and other liabilities | |
| (670) |
| (201) | |
Net cash provided (used) by operating activities | |
| 910 |
| 996 | |
Cash flows from investing activities: | | | | | | |
Cash proceeds from dispositions of investments | |
| — |
| 281 | |
Investments in and loans to cost and equity investees | |
| (109) |
| (73) | |
Capital expenditures | |
| (249) |
| (172) | |
Payments for television distribution rights | | | (128) | | (120) | |
Net cash provided (used) by investing activities | |
| (486) |
| (84) | |
Cash flows from financing activities: | | | | | | |
Borrowings of debt | |
| 2,215 |
| 3,142 | |
Repayments of debt | |
| (2,179) |
| (3,415) | |
GCI Liberty Split-Off | | | — | | (475) | |
Repurchases of Qurate Retail common stock | |
| (392) |
| (623) | |
Indemnification payment from GCI Liberty, Inc. | | | — | | 133 | |
Other financing activities, net | |
| (112) |
| (45) | |
Net cash provided (used) by financing activities | |
| (468) |
| (1,283) | |
Effect of foreign currency exchange rates on cash, cash equivalents and restricted cash | |
| (3) |
| (2) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | |
| (47) |
| (373) | |
Cash, cash equivalents and restricted cash at beginning of period | |
| 660 |
| 912 | |
Cash, cash equivalents and restricted cash at end of period | | $ | 613 |
| 539 | |
| | | | | | |
| | Nine months ended |
| |||
| | September 30, |
| |||
|
| 2020 |
| 2019 |
| |
| | amounts in millions |
| |||
Cash flows from operating activities: | | | | | | |
Net earnings (loss) | | $ | 577 |
| (559) | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | |
| 427 |
| 457 | |
Impairment of intangible assets | | | — | | 1,020 | |
Stock-based compensation | |
| 46 |
| 54 | |
Share of (earnings) losses of affiliates, net | |
| 96 |
| 104 | |
Realized and unrealized (gains) losses on financial instruments, net | |
| 127 |
| 239 | |
(Gains) losses on transactions, net | | | (224) | | 1 | |
Deferred income tax expense (benefit) | |
| 19 |
| (165) | |
Other, net | |
| 52 |
| 10 | |
Changes in operating assets and liabilities | | | | | | |
Decrease (increase) in accounts receivable | |
| 720 |
| 575 | |
Decrease (increase) in inventory | | | (63) | | (209) | |
Decrease (increase) in prepaid expenses and other assets | | | 69 | | 53 | |
(Decrease) increase in trade accounts payable | | | 52 | | (192) | |
(Decrease) increase in accrued and other liabilities | | | (43) | | (478) | |
Net cash provided (used) by operating activities | |
| 1,855 |
| 910 | |
Cash flows from investing activities: | | | | | | |
Investments in and loans to cost and equity investees | |
| (88) |
| (109) | |
Capital expenditures | |
| (165) |
| (249) | |
Expenditures for television distribution rights | | | (41) | | (128) | |
Cash proceeds from dispositions of investments | | | 269 | | — | |
Net cash provided (used) by investing activities | |
| (25) |
| (486) | |
Cash flows from financing activities: | | | | | | |
Borrowings of debt | |
| 1,300 |
| 2,215 | |
Repayments of debt | |
| (2,077) |
| (2,179) | |
Repurchases of Qurate Retail common stock | |
| — |
| (392) | |
Withholding taxes on net settlements of stock-based compensation | |
| (3) |
| (6) | |
Dividends paid to noncontrolling interest | | | (46) | | (34) | |
Dividends paid to common shareholders | | | (626) | | — | |
Other financing activities, net | |
| (12) |
| (72) | |
Net cash provided (used) by financing activities | |
| (1,464) |
| (468) | |
Effect of foreign currency exchange rates on cash, cash equivalents and restricted cash | |
| 5 |
| (3) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | |
| 371 |
| (47) | |
Cash, cash equivalents and restricted cash at beginning of period | |
| 681 |
| 660 | |
Cash, cash equivalents and restricted cash at end of period | | $ | 1,052 |
| 613 | |
The following table reconciles cash, cash equivalents and restricted cash reported in our condensed consolidated balance sheets to the total amount presented in our condensed consolidated statements of cash flows:
| | | | | | | | | | |
| | | September 30, | | December 31, | | | September 30, | | December 31, |
| | | 2019 | | 2018 | | | 2020 | | 2019 |
| | in millions | | in millions | ||||||
Cash and cash equivalents | | $ | 605 | | 653 | | $ | 1,044 | | 673 |
Restricted cash included in other current assets | | | 8 | | 7 | | | 8 | | 8 |
Total cash, cash equivalents and restricted cash in the condensed consolidated statement of cash flows | | $ | 613 | | 660 | | $ | 1,052 | | 681 |
See accompanying notes to condensed consolidated financial statements.
I-8I-7
QURATE RETAIL, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Equity
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Stockholders' Equity | | | | | | | Stockholders' Equity | | | | | | ||||||||||||||||||||||
| | | | Common stock | | | | Accumulated | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | ||||
| | | | Qurate | | Additional | | other | | | | Noncontrolling | | |
| | | | | | | | Additional | | other | | | | Noncontrolling | | |
| ||||
| | Preferred | | Retail | | paid-in | | comprehensive | | Retained | | interest in equity | | Total |
| | Preferred | | Common stock | | paid-in | | comprehensive | | Retained | | interest in equity | | Total |
| ||||||
|
| stock |
| Series A |
| Series B |
| capital |
| earnings (loss) |
| earnings |
| of subsidiaries |
| equity |
|
| stock |
| Series A |
| Series B |
| capital |
| earnings (loss) |
| earnings |
| of subsidiaries |
| equity |
| ||
| | amounts in millions |
| | amounts in millions |
| ||||||||||||||||||||||||||||||
Balance at January 1, 2019 | | $ | — | | 4 | | — | | — | | (55) | | 5,675 | | 120 | | 5,744 | | ||||||||||||||||||
Balance at January 1, 2020 | | $ | — | | 4 | | — | | — | | (55) | | 4,891 | | 132 | | 4,972 | | ||||||||||||||||||
Net earnings (loss) | |
| — | | — | | — | | — | | — | | (597) | | 38 | | (559) | | |
| — | | — | | — | | — | | — | | 538 | | 39 | | 577 | |
Other comprehensive income (loss) | |
| — | | — | | — | | — | | (40) | | — | | 2 | | (38) | | ||||||||||||||||||
Other comprehensive earnings (loss) | |
| — | | — | | — | | — | | 71 | | — | | 4 | | 75 | | ||||||||||||||||||
Stock compensation | | — | | — | | — | | 54 | | — | | — | | — | | 54 | | | — | | — | | — | | 44 | | — | | — | | — | | 44 | | ||
Series A Qurate Retail stock repurchases | |
| — | | — | | — | | (392) | | — | | — | | — | | (392) | | ||||||||||||||||||
Distribution to noncontrolling interest | | — | | — | | — | | — | | — | | — | | (34) | | (34) | | | — | | — | | — | | — | | — | | — | | (46) | | (46) | | ||
Distribution of dividends to common shareholders | | — | | — | | — | | — | | — | | (1,898) | | — | | (1,898) | | |||||||||||||||||||
Other | | — | | — | | — | | (6) | | — | | — | | — | | (6) | | | | — | | — | | — | | (17) | | — | | — | | — | | (17) | | |
Reclassification | | | — | | — | | — | | 344 | | — | | (344) | | — | | — | | ||||||||||||||||||
Balance at September 30, 2019 | | $ | — | | 4 | | — | | — | | (95) | | 4,734 | | 126 | | 4,769 | | ||||||||||||||||||
Balance at September 30, 2020 | | $ | — | | 4 | | — | | 27 | | 16 | | 3,531 | | 129 | | 3,707 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Stockholders' Equity | | | | | | |||||||||||
| | | | | Common stock | | | | Accumulated | | | | | | | | ||
| | | | | Qurate | | Additional | | other | | | | Noncontrolling | | | | ||
| | Preferred | | Retail | | paid-in | | comprehensive | | Retained | | interest in equity | | Total | | |||
|
| stock |
| Series A |
| Series B |
| capital |
| earnings (loss) |
| earnings |
| of subsidiaries |
| equity | | |
| | amounts in millions | | |||||||||||||||
Balance at June 30, 2019 | | $ | — | | 4 | | — | | — | | (64) | | 5,583 | | 118 | | 5,641 | |
Net earnings (loss) | |
| — | | — | | — | | — | | — | | (770) | | 15 | | (755) | |
Other comprehensive income (loss) | |
| — | | — | | — | | — | | (31) | | — | | (1) | | (32) | |
Stock compensation | | | — | | — | | — | | 17 | | — | | — | | — | | 17 | |
Series A Qurate Retail stock repurchases | |
| — | | — | | — | | (96) | | — | | — | | — | | (96) | |
Distribution to noncontrolling interest | | | — | | — | | — | | — | | — | | — | | (6) | | (6) | |
Reclassification | | | — | | — | | — | | 79 | | — | | (79) | | — | | — | |
Balance at September 30, 2019 | | $ | — | | 4 | | — | | — | | (95) | | 4,734 | | 126 | | 4,769 | |
See accompanying notes to condensed consolidated financial statements.
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Stockholders' Equity | | | | | | |||||||||||
| | | | | | | | | | | Accumulated | | | | | | | |
| | | | | | | Additional | | other | | | | Noncontrolling | | | | ||
| | Preferred | | Common stock | | paid-in | | comprehensive | | Retained | | interest in equity | | Total | | |||
|
| stock |
| Series A |
| Series B |
| capital |
| earnings (loss) |
| earnings |
| of subsidiaries |
| equity | | |
| | amounts in millions | | |||||||||||||||
Balance at June 30, 2020 | | $ | — | | 4 | | — | | 25 | | 37 | | 5,091 | | 129 | | 5,286 | |
Net earnings (loss) | |
| — | | — | | — | | — | | — | | 338 | | 14 | | 352 | |
Other comprehensive earnings (loss) | |
| — | | — | | — | | — | | (21) | | — | | 2 | | (19) | |
Stock compensation | | | — | | — | | — | | 17 | | — | | — | | — | | 17 | |
Distribution to noncontrolling interest | | | — | | — | | — | | — | | — | | — | | (16) | | (16) | |
Distribution of dividends to common shareholders | | | — | | — | | — | | — | | — | | (1,898) | | — | | (1,898) | |
Other | | | — | | — | | — | | (15) | | — | | — | | — | | (15) | |
Balance at September 30, 2020 | | $ | — | | 4 | | — | | 27 | | 16 | | 3,531 | | 129 | | 3,707 | |
I-9I-8
QURATE RETAIL, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Equity
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | Stockholders' Equity | | | | | | |||||||||||||||
| | | | | Common stock | | | | Accumulated | | | | | | | | ||||||
| | | | | Qurate | | Liberty | | Additional | | other | | | | Noncontrolling | | | | ||||
| | Preferred | | Retail | | Ventures | | paid-in | | comprehensive | | Retained | | interest in equity | | Total | | |||||
|
| stock |
| Series A |
| Series B |
| Series A |
| Series B |
| capital |
| earnings (loss) |
| earnings |
| of subsidiaries |
| equity | | |
| | amounts in millions | | |||||||||||||||||||
Balance at January 1, 2018 | | $ | — | | 5 | | — | | 1 | | — | | 1,043 | | (133) | | 9,068 | | 99 | | 10,083 | |
Net earnings (loss) | |
| — | | — | | — | | — | | — | | — | | — | | 643 | | 34 | | 677 | |
Other comprehensive income (loss) | |
| — | | — | | — | | — | | — | | — | | (59) | | — | | — | | (59) | |
Stock compensation | | | — | | — | | — | | — | | — | | 67 | | — | | — | | — | | 67 | |
Series A Qurate Retail stock repurchases | |
| — | | — | | — | | — | | — | | (623) | | — | | — | | — | | (623) | |
Distribution to noncontrolling interest | | | — | | — | | — | | — | | — | | — | | — | | — | | (23) | | (23) | |
Cumulative effect of accounting change | | | — | | — | | — | | — | | — | | — | | 76 | | (70) | | — | | 6 | |
GCI Liberty Split-Off | | | — | | — | | — | | — | | — | | (4,360) | | — | | — | | 11 | | (4,349) | |
Other | | | — | | — | | — | | (1) | | — | | (21) | | — | | — | | — | | (22) | |
Reclassification | | | — | | — | | — | | — | | — | | 3,894 | | — | | (3,894) | | — | | — | |
Balance at September 30, 2018 | | $ | — |
| 5 |
| — |
| — |
| — |
| — |
| (116) |
| 5,747 |
| 121 |
| 5,757 |
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Stockholders' Equity | | |||||||||||||||
| | | | | | | | | | | Accumulated | | | | | | | |
| | | | | | | Additional | | other | | | | Noncontrolling | | | | ||
| | Preferred | | Common stock | | paid-in | | comprehensive | | Retained | | interest in equity | | Total | | |||
|
| stock |
| Series A |
| Series B |
| capital |
| earnings (loss) |
| earnings |
| of subsidiaries |
| equity | | |
| | amounts in millions | | |||||||||||||||
Balance at January 1, 2019 | | $ | — | | 4 | | — | | — | | (55) | | 5,675 | | 120 | | 5,744 | |
Net earnings (loss) | |
| — | | — | | — | | — | | — | | (597) | | 38 | | (559) | |
Other comprehensive earnings (loss) | |
| — | | — | | — | | — | | (40) | | — | | 2 | | (38) | |
Stock compensation | | | — | | — | | — | | 54 | | — | | — | | — | | 54 | |
Series A Qurate Retail stock repurchases | |
| — | | — | | — | | (392) | | — | | — | | — | | (392) | |
Distribution to noncontrolling interest | | | — | | — | | — | | — | | — | | — | | (34) | | (34) | |
Withholding taxes on net share settlements of stock-based compensation | | | — | | — | | — | | (6) | | — | | — | | — | | (6) | |
Reclassification | | | — | | — | | — | | 344 | | — | | (344) | | — | | — | |
Balance at September 30, 2019 | | $ | — |
| 4 |
| — |
| — |
| (95) |
| 4,734 |
| 126 |
| 4,769 | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | Stockholders' Equity | | | | | | |||||||||||||||
| | | | | Common stock | | | | Accumulated | | | | | | | | ||||||
| | | | | Qurate | | Liberty | | Additional | | other | | | | Noncontrolling | | | | ||||
| | Preferred | | Retail | | Ventures | | paid-in | | comprehensive | | Retained | | interest in equity | | Total | | |||||
|
| stock |
| Series A |
| Series B |
| Series A |
| Series B |
| capital |
| earnings (loss) |
| earnings |
| of subsidiaries |
| equity | | |
| | amounts in millions | | |||||||||||||||||||
Balance at June 30, 2018 | | $ | — | | 5 | | — | | — | | — | | — | | (102) | | 5,784 | | 114 | | 5,801 | |
Net earnings (loss) | |
| — | | — | | — | | — | | — | | — | | — | | 72 | | 10 | | 82 | |
Other comprehensive income (loss) | |
| — | | — | | — | | — | | — | | — | | (14) | | — | | (3) | | (17) | |
Stock compensation | | | — | | — | | — | | — | | — | | 21 | | — | | — | | — | | 21 | |
Series A Qurate Retail stock repurchases | |
| — | | — | | — | | — | | — | | (130) | | — | | — | | — | | (130) | |
Reclassification | | | — | | — | | — | | — | | — | | 109 | | — | | (109) | | — | | — | |
Balance at September 30, 2018 | | $ | — | | 5 | | — | | — | | — | | — | | (116) | | 5,747 | | 121 | | 5,757 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Stockholders' Equity | | |||||||||||||||
| | | | | Common stock | | | | | | | | Accumulated | | | | ||
| | | | | Qurate | | Additional | | other | | | | Noncontrolling | | | | ||
| | Preferred | | Retail | | paid-in | | comprehensive | | Retained | | interest in equity | | Total | | |||
|
| stock |
| Series A |
| Series B |
| capital |
| earnings (loss) |
| earnings |
| of subsidiaries |
| equity | | |
| | amounts in millions | | |||||||||||||||
Balance at June 30, 2019 | | $ | — | | 4 | | — | | — | | (64) | | 5,583 | | 118 | | 5,641 | |
Net earnings (loss) | |
| — | | — | | — | | — | | — | | (770) | | 15 | | (755) | |
Other comprehensive income (loss) | |
| — | | — | | — | | — | | (31) | | — | | (1) | | (32) | |
Stock compensation | | | — | | — | | — | | 17 | | — | | — | | — | | 17 | |
Series A Qurate Retail stock repurchases | |
| — | | — | | — | | (96) | | — | | — | | — | | (96) | |
Distribution to noncontrolling interest | | | — | | — | | — | | — | | — | | — | | (6) | | (6) | |
Reclassification | | | — | | — | | — | | 79 | | — | | (79) | | — | | — | |
Balance at September 30, 2019 | | $ | — | | 4 | | — | | — | | (95) | | 4,734 | | 126 | | 4,769 | |
See accompanying notes to condensed consolidated financial statements.
I-10I-9
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(1) Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of Qurate Retail, Inc. (formerly named Liberty Interactive Corporation, prior to the TransactionsGCI Liberty Split-Off defined and described below, or “Liberty”)below) and its controlled subsidiaries (collectively, "Qurate Retail," the "Company," “Consolidated Qurate Retail,” “us,” “we,” or “our” unless the context otherwise requires). All significant intercompany accounts and transactions have been eliminated in consolidation. Qurate Retail is made up of wholly-owned subsidiaries QVC, Inc. (“QVC”), which includes HSN, Inc. (“HSN”) following the transfer of ownership of HSN to QVC (described below), Cornerstone Brands, Inc. (former subsidiary of HSN prior to the transfer of ownership of HSN to QVC, “Cornerstone”(“Cornerstone”), Zulily, LLC (“Zulily”), and other cost and equity method investments.
Qurate Retail is primarily engaged in the video and online commerce industries in North America, Europe and Asia. The businesses of the Company’s wholly-owned subsidiaries, QVC, Cornerstone and Zulily, are seasonal due to a higher volume of sales in the fourth calendar quarter related to year-end holiday shopping.
The accompanying (a) condensed consolidated balance sheet as of December 31, 2018,2019, 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 ("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 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. Additionally, certain prior period amounts have been reclassified for comparability with current period presentation. In the current year, the Company corrected a prior year immaterial error of $281 million which resulted in a reclassification within the working capital categories in the operating activities section of the condensed consolidated statement of cash flows which did not change net working capital. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in Qurate Retail's Annual Report on Form 10-K for the year ended December 31, 2018.2019 (the “2019 10-K”).
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of 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. Qurate Retail considers (i) fair value measurements, (ii) accounting for income taxes, and (iii) estimates of retail-related adjustments and allowances to be its most significant estimates.
PriorIn December 2019, a new coronavirus (“COVID-19”) was reported to have surfaced in Wuhan, China and has subsequently spread across the Transactions (described and defined below), the Company utilized tracking stocks in its capital structure. A tracking stock isglobe causing a type of common stock that the issuing company intends to reflect or "track" the economic performance of a particular business or "group," rather than the economic performance of the company as a whole.global pandemic, impacting all countries where Qurate Retail had 2 tracking stocks—QVC Group common stock and Liberty Ventures common stock, which were intended to track and reflect the economic performance of the businesses, assets and liabilities attributed to the QVC Group and the Ventures Group, respectively. The QVC Group was comprised of the Company’s wholly-owned subsidiaries QVC, Zulily, HSN and Cornerstone, among other assets and liabilities. The Ventures Group was comprised of businesses not included in the QVC Group including Evite, Inc. (“Evite”) and our interests in Liberty Broadband Corporation (“Liberty Broadband”), LendingTree, Inc. (“LendingTree”), investments in Charter Communications, Inc. (“Charter”) and ILG, Inc. (“ILG”), among other assets and liabilities. The Company’s results are attributed to the QVC Group and the Ventures Group through March 9, 2018.
On December 31, 2018, Qurate Retail transferred its 100% ownership interest in HSN to QVC, Inc. through a transaction among entities under common control. References throughout this quarterly report to “QVC” refer to QVC, Inc., which includes HSN, QVC U.S. and QVC International. Cornerstone remains a subsidiary of Qurate Retail.
On March 9, 2018, Qurate Retail completed the transactions contemplated by the Agreement and Plan of Reorganization (as amended, the “Reorganization Agreement,” and the transactions contemplated thereby, the
I-11
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
“Transactions”) among General Communication, Inc. (“GCI”), an Alaska corporation, and Liberty Interactive LLC, a Delaware limited liability company and a direct wholly-owned subsidiary of Liberty (“LI LLC”). Pursuant to the Reorganization Agreement, GCI amended and restated its articles of incorporation (which resulted in GCI being renamed GCI Liberty, Inc. (“GCI Liberty”)) and effected a reclassification and auto conversion of its common stock. After market close on March 8, 2018, Qurate Retail’s board of directors approved the reattribution of certain assets and liabilities from Qurate Retail’s Ventures Group to its QVC Group, which was effective immediately. The reattributed assets and liabilities included cash, Qurate Retail’s interest in ILG, certain green energy investments, LI LLC’s exchangeable debentures, and certain tax benefits.
Following these events, Qurate Retail acquired GCI (renamed “GCI Liberty, Inc.”) through a reorganization in which certain Qurate Retail interests, assets and liabilities attributed to the Ventures Group were contributed (the “contribution”) to GCI Liberty in exchange for a controlling interest in GCI Liberty. Qurate Retail and LI LLC contributed to GCI Liberty their entire equity interest in Liberty Broadband, Charter, and LendingTree, the Evite operating business and other assets and liabilities attributed to Qurate Retail’s Venture Group (following the reattribution), in exchange for (a) the issuance to LI LLC of a number of shares of GCI Liberty Class A Common Stock and a number of shares of GCI Liberty Class B Common Stock equal to the number of outstanding shares of Series A Liberty Ventures common stock and Series B Liberty Ventures common stock on March 9, 2018, respectively, (b) cash and (c) the assumption of certain liabilities by GCI Liberty. The following is a reconciliation of the assets and liabilities that were derecognized by the Company (in millions) at the date of the GCI Liberty Split-Off (as defined below):
| | |
Investment in Liberty Broadband | $ | 3,822 |
Investment in Charter | | 1,866 |
Corporate Cash | | 475 |
Margin Loan | | (996) |
Deferred Income Tax Liabilities | | (550) |
Other, net | | (270) |
| $ | 4,347 |
Following the contribution, Qurate Retail effected a tax-free separation of its controlling interest in the combined company (the “GCI Liberty Split-Off”), GCI Liberty, to the holders of Liberty Ventures common stock in full redemption of all outstanding shares of such stock, in which each outstanding share of Series A Liberty Ventures common stock was redeemed for 1 share of GCI Liberty Class A common stock and each outstanding share of Series B Liberty Ventures common stock was redeemed for 1 share of GCI Liberty Class B common stock. Simultaneous with the closing of the Transactions, QVC Group common stock became the only outstanding common stock of Qurate Retail, and thus QVC Group common stock ceased to function as a tracking stock. On April 9, 2018, Liberty Interactive Corporation was renamed Qurate Retail, Inc. On May 23, 2018, Qurate Retail amended its charter to eliminate the tracking stock capitalization structure and reclassify each share of QVC Group common stock into one share of the corresponding series of new common stock of Qurate Retail. With respect to events on or after May 23, 2018, we refer to our Series A and Series B common stock as “Qurate Retail common stock.” In July 2018, the Internal Revenue Service (“IRS”) completed its review of the GCI Liberty Split-Off and informed Qurate Retail that it agreed with the nontaxable characterization of the transactions. Qurate Retail received an Issue Resolution Agreement from the IRS documenting this conclusion.
On October 17, 2018, Qurate Retail announced a series of initiatives designed to better position its HSN and QVC- U.S. businesses (“QRG Initiatives”).operates. As part of the QRG Initiatives, QVC will close its fulfillment centers in Lancaster, Pennsylvania and Roanoke, Virginia and has entered into an agreement to lease a new fulfillment center in Bethlehem, Pennsylvania (see note 8 of the accompanying condensed consolidated financial statements). Qurate Retail recorded transaction related costs of $43 million during the third quarter of 2018, which primarily related to severance as a result of the QRG Initiatives. Also, asspread of the virus, certain local governmental agencies have imposed travel restrictions, local quarantines or stay at home restrictions to contain the spread, which has caused a resultsignificant disruption to most sectors of changes in internal reporting from the QRG Initiatives, during the first quarter of 2019 the Company changed its reportable segments to combine HSN and QVC U.S. into one reportable segment called “QxH.”economy.
I-12
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
As a result of repurchasesCOVID-19, management increased the amounts of Series A Qurate Retail common stock,certain estimated reserves, including but not limited to, uncollectible receivables and inventory obsolescence for the Company’s additional paid-in capital balance was in a deficit position as ofthree and nine months ended September 30, 2019. In order to ensure that the additional paid-in capital account2020. Other than these changes, management is not negative, we reclassifiedpresently aware of any events or circumstances arising from the amountCOVID-19 pandemic that would require the Company to update our estimates or 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 deficit ($344 million) at September 30, 2019financial statements. Actual results could differ from estimates, and any such differences may be material to retained earnings.our financial statements.
Qurate Retail has entered into certain agreements with Liberty Media Corporation ("LMC") (for accounting purposes, a related party of the Company), a separate publicly traded company. These agreements include a reorganization agreement, services agreement and facilities sharing agreement. As a result of certain corporate transactions, LMC and Qurate Retail may have obligations to each other for certain tax related matters. Neither Qurate Retail nor LMC has any stock ownership, beneficial or otherwise, in the other. In connection with a split-off transaction that occurred in the GCIfirst quarter of 2018 (the “GCI Liberty Split-Off,Split-Off”), Qurate Retail and GCI Liberty, Inc. (“GCI Liberty”) (for accounting purposes, a related party of the Company) entered into a tax sharing agreement. Pursuant to the tax sharing agreement, GCI Liberty has agreed to indemnify Qurate Retail for taxes and tax-related losses resulting from the HoldcoGCI Liberty Split-Off to the extent such taxes or tax-related losses (i) result primarily from, individually or in the aggregate, the breach of certain restrictive covenants
I-10
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
made by GCI Liberty (applicable to actions or failures to act by GCI Liberty and its subsidiaries following the completion of the HoldcoGCI Liberty Split-Off), or (ii) result from Section 355(e) of the Internal Revenue Code applying to the HoldcoGCI Liberty Split-Off as a result of the HoldcoGCI Liberty Split-Off being part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, a 50-percent or greater interest (measured by vote or value) in the stock of GCI Liberty (or any successor corporation).
In December 2019, the Company entered into an amendment to the services agreement in connection with LMC’s entry into a new employment arrangement with Gregory B. Maffei, the Company’s Chairman of the Board (the “Chairman”). Under the amended services agreement, components of his compensation will either be paid directly to him by each of the Company, Liberty TripAdvisor Holdings, Inc., GCI Liberty, and Liberty Broadband Corporation (collectively, the “Service Companies”) or reimbursed to LMC, in each case, based on allocations among LMC and the Service Companies set forth in the amended services agreement, currently set at 19% for the Company.
The reorganization agreement with LMC provides for, among other things, provisions governing the relationship between Qurate Retail and LMC, including certain cross-indemnities. Pursuant to the services agreement, LMC provides Qurate Retail with certain general and administrative services including legal, tax, accounting, treasury and investor relations support. Qurate Retail reimburses LMC for direct, out-of-pocket expenses incurred by LMC in providing these services and for Qurate Retail's allocable portion of costs associated with any shared services or personnel based on an estimated percentage of time spent providing services to Qurate Retail. Under the facilities sharing agreement, LMC shares office space and related amenities at its corporate headquarters with Qurate Retail. Under these various agreements, approximately $2 million was reimbursable to LMC for both the three months ended September 30, 2020 and 2019, and 2018, respectively,$7 million and $5 million and $6 million was reimbursable to LMC for the nine months ended September 30, 20192020 and 2018,2019, respectively. Qurate Retail had a tax sharing payable towith LMC and GCI Liberty in the amount of approximately $85$125 million and $103$95 million as of September 30, 20192020 and December 31, 2018,2019, respectively, included in Other liabilities in the condensed consolidated balancesbalance sheets.
Accounting Pronouncements Not Yet AdoptedOn August 21, 2020, Qurate Retail announced that an authorized committee of its Board of Directors had declared a special dividend (the “Special Dividend”) on each outstanding share of its Series A and Series B common stock consisting of (i) cash in the amount of $1.50 per common share, for an aggregate cash dividend of approximately $633 million, and (ii) 0.03 shares of newly issued 8.0% Series A Cumulative Redeemable Preferred Stock, par value $0.01 per share (the “Preferred Stock”), having an initial liquidation price of $100 per share of Preferred Stock, with cash paid in lieu of fractional shares. The distribution ratio for the Preferred Stock portion of the Special Dividend was equivalent to $3.00 in initial liquidation preference per common share, for an aggregate issuance of approximately $1.3 billion aggregate liquidation preference. The dividend was distributed on September 14, 2020 to holders of record of Qurate Retail’s Series A and Series B common stock. Holders of the Preferred Stock are entitled to receive quarterly cash dividends at a fixed rate of 8.0% per year on a cumulative basis, beginning December 15, 2020 and thereafter on each of March 15, June 15, September 15 and December 15 during the term. The Preferred Stock is non-voting, except in limited circumstances as required by law, and subject to a mandatory redemption on March 15, 2031.
Internal-Use Software. In August 2018,During the Financial Accounting Standards Board (“FASB”) issued new guidance which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance will be effective for the Company in the first quarter of 2020 with early adoption permitted. The Company is currently assessing the impact that adopting this new accounting standard will have on its consolidated financial statements.
(2) Disposals
On March 9, 2018, Qurate Retail completed the GCI Liberty Split-Off. At the time of the GCI Liberty Split-Off, GCI Liberty was comprised of, among other things, GCI Liberty’s legacy business, Qurate Retail’s former interest in Liberty Broadband, Charterthree and LendingTree, and Qurate Retail’s former wholly-owned subsidiary Evite. Qurate Retail viewed Liberty Broadband, LendingTree and Evite as separate components and evaluated them separately for discontinued operations presentation. As Qurate Retail’s former interest in Charter was accounted for as a cost method investment it did not meet the definition of a component for discontinued operation presentation. The disposition of Liberty Broadband was considered significant to the overall financials. Accordingly, the accompanying condensed consolidated financial statements of Qurate Retail have been prepared to reflect Qurate Retail’s interest in Liberty Broadband as a discontinued operation. The disposition of LendingTree and Evite as part of the GCI Liberty Split-Off does not have a major effect on Qurate Retail’s historical or future results. Accordingly, LendingTree and Evite are not presented as discontinued
I-13
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
operations in the accompanying condensed consolidated financial statements of Qurate Retail. LendingTree and Evite are included in the Corporate and other segment through March 8, 2018.
Included in revenue in the accompanying condensed consolidated statements of operations is $3 million for the nine months ended September 30, 2018, related to Evite. Included in net earnings (loss) in2020 the accompanying condensed consolidated statementsCompany recognized a gain as a result of operations are lossesthe sale of $2one of its alternative energy investments. The Company received total cash consideration of $272 million forand recorded a gain of $224 million on the nine months ended September 30, 2018, related to Evite. Included in net earnings (loss) in the accompanying condensed consolidated statements of operations are earnings of less than a million dollars for the nine months ended September 30, 2018, related to LendingTree.
Certain financial information for the Company’s investment in Liberty Broadband, which is included in earnings (loss) from discontinued operations is as follows:
| | | | | | | | | | |
| | | Three months ended | | Nine months ended | | ||||
| | | September 30, | | September 30, | | ||||
| | | 2019 | | 2018 | | 2019 |
| 2018 | |
| | | amounts in millions | | ||||||
Earnings (loss) before income taxes | | $ | NA | | NA | | NA | | 187 | |
Income tax (expense) benefit | | $ | NA | | NA | | NA | | (46) | |
The impact from discontinued operations on basic and diluted earnings (loss) per share is as follows:
| | | | | | | | | | |
| | | Three months ended | | Nine months ended | | ||||
| | | September 30, | | September 30, | | ||||
| | | 2019 | | 2018 | | 2019 |
| 2018 | |
Basic earnings (loss) from discontinued operations attributable to Qurate Retail shareholders per common share: | | | | | | | | | | |
Series A and Series B Qurate Retail common stock | | $ | NA | | NA | | NA | | NA | |
Series A and Series B Liberty Ventures common stock | | $ | NA | | NA | | NA | | 1.64 | |
Diluted earnings (loss) from discontinued operations attributable to Qurate Retail shareholders per common share: | | | | | | | | | | |
Series A and Series B Qurate Retail common stock | | $ | NA | | NA | | NA | | NA | |
Series A and Series B Liberty Ventures common stock | | $ | NA | | NA | | NA | | 1.62 | |
sale.
(3)(2) Stock-Based Compensation
The Company has granted to certain of its directors, employees and employees of its subsidiaries, restricted stock (“RSAs”), restricted stock units (“RSUs”) and options to purchase shares of the Company’s common stock (collectively, "Awards"). The Company measures the cost of employee services received in exchange for an equity classified Award (such as stock options and restricted stock) based on the grant-date fair value (“GDFV”) of the Award, and recognizes that cost over the period during which the employee is required to provide service (usually the vesting period of the Award). The Company measures the cost of employee services received in exchange for a liability classified Award based on the current fair value of the Award, and remeasures the fair value of the Award at each reporting date.
I-11
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
In connection with the Special Dividend, holders of RSAs and RSUs of Series A Qurate Retail common stock (“QRTEA”) outstanding at the close of business on the record date received:
i. | a special cash dividend in the amount of $1.50 per share for each QRTEA RSA and RSU so held (“Cash Dividend”), and |
ii. | a special dividend of 0.03 shares of newly issued Preferred Stock for each QRTEA RSA and RSU so held, with cash distributed in lieu of fractional shares. The Preferred Stock dividend related to QRTEA RSAs and RSUs was issued in the form of Preferred Stock RSAs and RSUs, corresponding to the original grant of either RSAs or RSUs. |
The Cash Dividend for RSA holders was paid upon distribution. The Cash Dividend for RSU holders along with the Preferred Stock RSAs and RSUs are subject to the same vesting schedules as those applicable to the corresponding original QRTEA RSAs and RSUs.
Also in connection with the Special Dividend, holders of outstanding stock options and stock appreciation rights (“SARs”) to purchase shares of QRTEA or Series B Qurate Retail common stock (“QRTEB” and together with QRTEA, “QRTEA/B”) on the record date were adjusted pursuant to the anti-dilution provisions of the incentive plans under which the stock options and SARs were granted. The adjustment to the exercise price and the number of shares subject to the original stock option or SAR award preserved:
i. | the pre-Special Dividend intrinsic value of the original QRTEA/B stock option or SAR, and |
ii. | the pre-Special Dividend ratio of the exercise price to the market price of the corresponding original QRTEA/B stock option or SAR. |
Included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations are $17$19 million and $21$17 million of stock-based compensation during the three months ended September 30, 20192020 and 2018,2019, respectively, and $54$46 million and $67$54 million of stock-based compensation during the nine months ended September 30, 20192020 and 2018,2019, respectively.
The following table presents the number and weighted average GDFV of options granted by the Company during the nine months ended September 30, 2020:
| | | | | | |
| | Nine months ended | | |||
| | September 30, 2020 | | |||
| | Options Granted (000's) | | Weighted Average GDFV | | |
| | | | | | |
Series A Qurate Retail common stock, QVC and HSN employees (1) | | 4,166 | | $ | 1.94 | |
Series A Qurate Retail common stock, Zulily employees (1) | | 618 | | $ | 1.94 | |
Series A Qurate Retail common stock, Qurate Retail employees (2) | | 84 | | $ | 4.65 | |
(1) | Grants vest semi-annually over four years. |
(2) | Grants vest between three and four years. |
During the nine months ended September 30, 2020, Qurate Retail granted to employees 9.8 million RSUs of QRTEA. The Series A RSUs had a GDFV of $4.66 per share and generally vest annually over four years. In connection with our Chairman’s employment agreement, during the nine months ended September 30, 2020, Qurate Retail granted 584 thousand performance-based RSUs of QRTEA to the Chairman. The Series A RSUs had a GDFV of $4.44 per share at the time they were granted and will cliff vest one year from the month of grant, subject to the satisfaction of certain performance objectives. During the nine months ended September 30, 2020, Qurate Retail also granted 725 thousand performance-based RSUs of QRTEA to its CEO. The Series A RSUs had a GDFV of $4.44 per share at the time they were granted and will cliff vest one year from the month of grant, subject to the satisfaction of certain performance objectives. Performance objectives, which are subjective, are considered in determining the timing and amount of compensation
I-14I-12
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
The following table presents the number and weighted average GDFV of options granted by the Company during the nine months ended September 30, 2019:
| | | | | | |
| | Nine months ended | | |||
| | September 30, 2019 | | |||
| | Options Granted (000's) | | Weighted Average GDFV | | |
| | | | | | |
Series A Qurate Retail common stock, QVC employees (1) | | 2,503 | | $ | 4.07 | |
Series A Qurate Retail common stock, Zulily employees (1) | | 328 | | $ | 4.08 | |
Series B Qurate Retail common stock, Qurate Retail Chairman of the Board (2) | | 26 | | $ | 5.84 | |
In addition to the stock option grant to the Qurate Retail Chairman of the Board and in connection with our Chairman’s employment agreement, during the nine months ended September 30, 2019, Qurate Retail granted 213 thousand RSUs of Series B Qurate Retail common stock of which 194 thousand were performance-based. The Series B RSUs had a GDFV of $17.90 per share at the time they were granted. The time-based RSUs cliff vested on March 11, 2019, and the performance-based RSUs cliff vest one year from the month of grant, subject to the satisfaction of certain performance objectives. During the nine months ended September 30, 2019, Qurate Retail also granted approximately 191 thousand performance-based RSUs of Series A Qurate Retail common stock to its CEO. The Series A RSUs had a GDFV of $17.90 per share at the time they were granted and will cliff vest one year from the month of grant, subject to satisfaction of certain performance objectives. Performance objectives, which are subjective, are considered in determining the timing and amount of compensation expense recognized. When the satisfaction of the performance objectives becomes probable, the Company records compensation expense. The probability of satisfying the performance objectives is assessed at the end of each reporting period.
Also during the nine months ended September 30, 2020, Qurate Retail granted 38 thousand time-based RSUs of QRTEA to our Chairman. The RSUs had a GDFV of $7.44 per share and cliff vest on December 10, 2020. This RSU grant was issued in lieu of our Chairman receiving 50% of his remaining base salary for the last three quarters of calendar year 2020, and he has waived his right to receive the other 50%, in each case, in light of the ongoing financial impact of COVID-19.
The Company has calculated the GDFV for all of its equity classified Awards and any subsequent remeasurement of its liability classified Awards and certain performance-based Awards using the Black-Scholes-Merton Model. The Company estimates the expected term of the Awards based on historical exercise and forfeiture data. The volatility used in the calculation for Awards is based on the historical volatility of Qurate Retail's stock and the implied volatility of publicly traded Qurate Retail options. The Company uses a 0 dividend rate and the risk-free rate for Treasury Bonds with a term similar to that of the subject options.
Qurate Retail—Outstanding Awards
The following tables present the number and weighted average exercise price ("WAEP") of the Awards to purchase Qurate Retail common stock granted to certain officers, employees and directors of the Company, as well as the weighted average remaining life and aggregate intrinsic value of the Awards.
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| | Qurate Retail | | | | | ||||||||||||||||||
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| Weighted |
| Aggregate |
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| Weighted |
| Aggregate |
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| | | | | | | average | | intrinsic | | | | | | | | average | | intrinsic | | ||||
| | Series A | | | | | remaining | | value | | | Series A | | | | | remaining | | value | | ||||
| | (000's) | | WAEP | | life | | (millions) | | | (000's) | | WAEP | | life | | (millions) | | ||||||
Outstanding at January 1, 2019 |
| 28,438 | | $ | 24.47 | | | | | | | | ||||||||||||
Outstanding at January 1, 2020 |
| 23,248 | | $ | 21.28 | | | | | | | | ||||||||||||
Granted |
| 2,831 | | $ | 12.51 | | | | | | | |
| 4,868 | | $ | 4.53 | | | | | | | |
Exercised |
| (449) | | $ | 15.43 | | | | | | | |
| (212) | | $ | 0.50 | | | | | | | |
Forfeited/Cancelled |
| (3,077) | | $ | 25.63 | | | | | | | |
| (4,447) | | $ | 18.74 | | | | | | | |
Outstanding at September 30, 2019 |
| 27,743 | | $ | 23.27 |
| 3.1 | years | | $ | 5 | | ||||||||||||
Exercisable at September 30, 2019 |
| 18,177 | | $ | 23.58 |
| 2.2 | years | | $ | 5 | | ||||||||||||
Special Dividend adjustment | | 15,145 | | $ | 11.19 | | | | | | | | ||||||||||||
Outstanding at September 30, 2020 |
| 38,602 | | $ | 11.22 |
| 4.3 | years | | $ | 45 | | ||||||||||||
Exercisable at September 30, 2020 |
| 20,002 | | $ | 14.59 |
| 3.2 | years | | $ | 7 | |
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| Weighted |
| Aggregate |
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| | | | | | | average | | intrinsic | | ||
| | Series B | | | | | remaining | | value | | ||
| | (000's) | | WAEP | | life | | (millions) | | |||
Outstanding at January 1, 2020 |
| 1,844 | | $ | 27.09 | | | | | | | |
Granted |
| — | | $ | — | | | | | | | |
Exercised |
| — | | $ | — | | | | | | | |
Forfeited/Cancelled | | — | | $ | — | | | | | | | |
Special Dividend adjustment | | 1,182 | | $ | 16.51 | | | | | | | |
Outstanding at September 30, 2020 |
| 3,026 | | $ | 16.51 |
| 2.3 | years | | $ | — | |
Exercisable at September 30, 2020 |
| 3,026 | | $ | 16.51 |
| 2.3 | years | | $ | — | |
There were 0 options to purchase shares of QRTEB granted during the nine months ended September 30, 2020.
As of September 30, 2020, the total unrecognized compensation cost related to unvested Awards was approximately $45 million. Such amount will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 2.4 years.
I-15I-13
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
| | | | | | | | | | | | |
| | Qurate Retail | | |||||||||
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| Weighted |
| Aggregate |
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| | | | | | | average | | intrinsic | | ||
| | Series B | | | | | remaining | | value | | ||
| | (000's) | | WAEP | | life | | (millions) | | |||
Outstanding at January 1, 2019 |
| 1,818 | | $ | 27.22 | | | | | | | |
Granted |
| 26 | | $ | 18.03 | | | | | | | |
Exercised |
| — | | $ | — | | | | | | | |
Forfeited/Cancelled | | — | | $ | — | | | | | | | |
Outstanding at September 30, 2019 |
| 1,844 | | $ | 27.09 |
| 3.3 | years | | $ | — | |
Exercisable at September 30, 2019 |
| 1,521 | | $ | 26.50 |
| 3.5 | years | | $ | — | |
As of September 30, 2019, the total unrecognized compensation cost related to unvested Awards was approximately $46 million. Such amount will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 2.3 years.
As of September 30, 2019,2020, Qurate Retail reserved for issuance upon exercise of outstanding stock options approximately 27.738.6 million shares of Series A Qurate Retail common stockQRTEA and 1.83.0 million shares of Series B Qurate Retail common stock.QRTEB.
(4)(3) Earnings (Loss) Per Common Share
Basic earnings (loss) per common share ("EPS") is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding ("WASO") for the period. Diluted EPS presents the dilutive effect on a per share basis of potential common shares as if they had been converted at the beginning of the periods presented. Potentially dilutive shares are excluded from the computation of diluted EPS during periods in which losses are reported since the result would be antidilutive.
Series A and Series B Qurate Retail Common Stock
Excluded from diluted EPS for both of the three months ended September 30, 2019 and 2018 are 29 million and 28 million potential common shares, respectively, because their inclusion would have been antidilutive. Excluded from diluted EPS for the nine months ended September 30, 20192020 and 20182019 are 29 million and 28 million potential common shares, respectively, because their inclusion would have been antidilutive.
| | | | | | | | | |
| | Qurate Retail Common Stock | | ||||||
|
| Three months ended |
| Nine months ended | | ||||
| | September 30, | | September 30, | | ||||
| | 2019 | | 2018 | | 2019 | | 2018 | |
| | number of shares in millions | | ||||||
Basic WASO |
| 417 | | 459 |
| 426 |
| 467 | |
Potentially dilutive shares |
| 1 | | 2 |
| 1 |
| 4 | |
Diluted WASO |
| 418 | | 461 |
| 427 |
| 471 | |
I-16
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Series A and Series B Liberty Ventures Common Stock
Excluded from diluted EPS for the nine months ended September 30, 2018 were 2 million potential common shares, because their inclusion would have been antidilutive. NaN potential common shares were excluded from diluted EPS for the three months ended September 30, 2018.
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(5)(4) Assets and Liabilities Measured at Fair Value
For assets and liabilities required to be reported at fair value, 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 are inputs, other than quoted market prices included within Level 1, that 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 at fair value are as follows:
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| | Fair Value Measurements at | | Fair Value Measurements at |
| | Fair Value Measurements at | | Fair Value Measurements at |
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| | September 30, 2019 | | December 31, 2018 |
| | September 30, 2020 | | December 31, 2019 |
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Description | | Total | | (Level 1) | | (Level 2) | | Total | | (Level 1) | | (Level 2) |
| | Total | | (Level 1) | | (Level 2) | | Total | | (Level 1) | | (Level 2) |
| ||
| | amounts in millions |
| | amounts in millions |
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Cash equivalents | | $ | 319 |
| 319 |
| — |
| 310 |
| 310 |
| — | | | $ | 524 |
| 524 |
| — |
| 339 |
| 339 |
| — | |
Indemnification asset | | $ | 137 | | — | | 137 | | 79 | | — | | 79 | | | $ | 310 | | — | | 310 | | 202 | | — | | 202 | |
Debt | | $ | 1,627 |
| — |
| 1,627 |
| 1,334 |
| — |
| 1,334 | | | $ | 1,682 |
| — |
| 1,682 |
| 1,557 |
| — |
| 1,557 | |
The majority of the Company's Level 2 financial assets and liabilities are primarily debt instruments with quoted market prices that are not considered to be traded on "active markets," as defined in GAAP. The fair values for such instruments are derived from a typical model using observable market data as the significant inputs.
PursuantThe indemnification asset relates to an indemnificationGCI Liberty’s agreement GCI Liberty has agreed to indemnify Liberty Interactive LLC (“LI LLC for certain payments madeLLC”) and pertains to a holderthe ability of holders of LI LLC’s 1.75% Exchangeable Debenturesexchangeable debentures due 2046 (the “1.75% Exchangeable Debentures”). An indemnity asset in the amount of $281 million was recorded upon completion of the GCI Liberty Split-Off. Within six months of the GCI Liberty Split-Off, Qurate Retail, LI LLC and GCI Liberty agreed to cooperate, and reasonably assist each other, with respect to the commencement and consummation of one or more privately negotiated transactions, a tender offer or other purchase transactions (each, a “Purchase Offer”) whereby LI LLC would offer to purchase the 1.75% Exchangeable Debentures on terms and conditions (including maximum offer price) reasonably acceptable to GCI Liberty. GCI Liberty would indemnify LI LLC for each 1.75% Exchangeable Debenture repurchased by LI LLC in a Purchase Offer for an amount by which the purchase price for such debenture exceeds the amount of cash reattributed with respect to such
I-17I-14
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
purchased 1.75% Exchangeable Debenture net of certain tax benefits, if any, attributable to such 1.75% Exchangeable Debenture. In June 2018, Qurate Retail repurchased 417,759 of the 1.75% Exchangeable Debentures for approximately $457 million, including accrued interest, and GCI Liberty made a payment under the indemnification agreement to Qurate Retail in the amount of $133 million.
Following the initial six month period, the remaining indemnification to LI LLC for certain payments made to a holder of the 1.75% Exchangeable Debentures pertains to the holder’s abilityDebentures”) to exercise itstheir exchange right according to the terms of the debentures on or before October 5, 2023. Such amount will equal the difference between the exchange value and par value of the 1.75% Exchangeable Debentures at the time the exchange occurs. The indemnification asset recorded in the condensed consolidated balance sheets as of September 30, 20192020 represents the fair value of the estimated exchange feature included in the 1.75% Exchangeable Debentures primarily based on market observable inputs (Level 2). As of September 30, 2019,2020, a holder of the 1.75% Exchangeable Debentures does not havehas the ability to exchange and, accordingly, such indemnification asset is included as a long-termcurrent asset in our condensed consolidated balance sheets. Additionally,sheet as of September 30, 2019, 332,241 bonds of the 1.75% Exchangeable Debentures remain outstanding.that date.
Realized and Unrealized Gains (Losses) on Financial Instruments
Realized and unrealized gains (losses) on financial instruments are comprised of changes in the fair value of the following:
| | | | | | | | | | | | | | | | | | | ||
| | Three months ended | | Nine months ended |
| | Three months ended | | Nine months ended |
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| | September 30, | | September 30, |
| | September 30, | | September 30, |
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| 2018 |
| 2019 |
| 2018 |
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| 2020 |
| 2019 |
| 2020 |
| 2019 |
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| | amounts in millions |
| | amounts in millions |
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Equity securities | | $ | 1 |
| 10 |
| 3 |
| 154 | | ||||||||||
Exchangeable senior debentures | |
| (49) |
| (52) |
| (304) |
| (9) | | |
| (145) |
| (49) |
| (225) |
| (304) | |
Indemnification asset | | 3 | | 15 | | 58 | | (49) | | | 94 | | 3 | | 107 | | 58 | | ||
Other financial instruments | | | — | | — | | 4 | | (4) | | | | 39 | | 1 | | (9) | | 7 | |
| | $ | (45) |
| (27) |
| (239) |
| 92 | | | $ | (12) |
| (45) |
| (127) |
| (239) | |
The Company has elected to account for its exchangeable debt using the fair value option. Changes in the fair value of the exchangeable senior debentures recognized in the condensed consolidated statement of operations are primarily due to market factors primarily driven by changes in the fair value of the underlying shares into which the debt is exchangeable. The Company isolates the portion of the unrealized gain (loss) attributable to the change in the instrument specific credit risk and recognizes such amount in other comprehensive earnings (loss). The change in the fair value of the exchangeable senior debentures attributable to changes in the instrument specific credit risk was a loss of $90 million and a gain of $7 million for the three months ended September 30, 2020 and 2019, respectively, and a gain of $39 million and a loss of $12 million for the nine months ended September 30, 2020 and 2019, respectively. The cumulative change was a gain of $210 million as of September 30, 2020.
(6)(5) Intangible Assets
Goodwill
Changes in the carrying amount of goodwill are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Corporate and | | | | | | | | | | | | Corporate and | | | |
|
| QxH | | QVC Int'l | | Zulily |
| Other |
| Total |
|
| QxH | | QVC Int'l | | Zulily |
| Other |
| Total |
| ||
| | amounts in millions |
| | amounts in millions |
| ||||||||||||||||||
Balance at January 1, 2019 | | $ | 5,228 | | 860 | | 917 |
| 12 |
| 7,017 | | ||||||||||||
Impairment (1) | | | — | | — | | (440) | | — | | (440) | | ||||||||||||
Balance at January 1, 2020 | | $ | 5,228 | | 859 | | 477 |
| 12 |
| 6,576 | | ||||||||||||
Foreign currency translation adjustments | |
| — | | (18) | | — |
| — |
| (18) | | |
| — | | 25 | | — |
| — |
| 25 | |
Balance at September 30, 2019 | | $ | 5,228 | | 842 | | 477 |
| 12 |
| 6,559 | | ||||||||||||
Balance at September 30, 2020 | | $ | 5,228 | | 884 | | 477 |
| 12 |
| 6,601 | |
I-18I-15
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Intangible Assets Subject to Amortization
Amortization expense for intangible assets with finite useful lives was $95$89 million and $117$95 million for the three months ended September 30, 20192020 and 2018,2019, respectively, and $289$274 million and $332$289 million for the nine months ended September 30, 20192020 and 2018,2019, respectively. Based on its amortizable intangible assets as of September 30, 2019,2020, Qurate Retail expects that amortization expense will be as follows for the next five years (amounts in millions):
| | | | |
Remainder of 2019 |
| $ | 102 | |
2020 | | $ | 341 | |
2021 | | $ | 209 | |
2022 | | $ | 106 | |
2023 | | $ | 77 | |
Impairments
As a result of Zulily’s recent deteriorating financial performance, Zulily initiated a process to evaluate its current business model and long-term business strategy in light of the challenging retail environment. Upon completing the evaluation of Zulily’s model and long-term strategy, it was determined that an indication of impairment existed for the Zulily reporting unit related to its tradename and goodwill. With the assistance of a third party specialist, the fair value of the tradename was determined using the relief from royalty method (Level 3), and an impairment in the amount of $580 million was recorded as of September 30, 2019, in the Impairment of intangible assets line item in the condensed consolidated statements of operations. With the assistance of a third party specialist, the fair value of the Zulily reporting unit was determined using a discounted cash flow method (Level 3), and an impairment in the amount of $440 million was recorded as of September 30, 2019, in the Impairment of intangible assets line item in the condensed consolidated statements of operations. As of September 30, 2019, the Zulily reporting unit has accumulated goodwill impairment losses of $440 million.
Based on the quantitative assessment performed during the third quarter and the resulting impairment losses recorded, the estimated fair values of the tradename and the Zulily reporting unit do not significantly exceed their carrying values as of September 30, 2019.
| | | | |
Remainder of 2020 |
| $ | 92 | |
2021 | | $ | 267 | |
2022 | | $ | 157 | |
2023 | | $ | 103 | |
2024 | | $ | 75 | |
I-19
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
(7)(6) Long-Term Debt
Debt is summarized as follows:
| | | | | | | | | | | | | | | | | | |
| | Outstanding | | | | | |
| | Outstanding | | | | | |
| ||
| | principal at | | Carrying value |
| | principal at | | Carrying value |
| ||||||||
|
| September 30, 2019 |
| September 30, 2019 |
| December 31, 2018 |
|
| September 30, 2020 |
| September 30, 2020 |
| December 31, 2019 |
| ||||
| | amounts in millions |
| | amounts in millions |
| ||||||||||||
Corporate level debentures | | | | | | | | | | | | | | | | | | |
8.5% Senior Debentures due 2029 | | $ | 287 |
| | 285 |
| 286 | | | $ | 287 |
| | 285 |
| 285 | |
8.25% Senior Debentures due 2030 | |
| 504 |
| | 502 |
| 502 | | |
| 504 |
| | 502 |
| 502 | |
4% Exchangeable Senior Debentures due 2029 | | | 432 | | | 342 | | 304 | | | | 431 | | | 355 | | 327 | |
3.75% Exchangeable Senior Debentures due 2030 | | | 433 | | | 322 | | 307 | | | | 432 | | | 342 | | 318 | |
3.5% Exchangeable Senior Debentures due 2031 | | | 302 | | | 536 | | 377 | | | | 218 | | | 371 | | 422 | |
0.75% Exchangeable Senior Debentures due 2043 | | | — | | | 2 | | 2 | | | | — | | | — | | 2 | |
1.75% Exchangeable Senior Debentures due 2046 | | | 332 | | | 425 | | 344 | | | | 332 | | | 614 | | 488 | |
Subsidiary level notes and facilities | | | | | | | | | | | | | | | | | | |
QVC 3.125% Senior Secured Notes due 2019 | |
| — |
| | — |
| 399 | | |||||||||
QVC 5.125% Senior Secured Notes due 2022 | |
| 500 |
| | 500 |
| 500 | | |
| — |
| | — |
| 500 | |
QVC 4.375% Senior Secured Notes due 2023 | |
| 750 |
| | 750 |
| 750 | | |
| 750 |
| | 750 |
| 750 | |
QVC 4.85% Senior Secured Notes due 2024 | |
| 600 |
| | 600 |
| 600 | | |
| 600 |
| | 600 |
| 600 | |
QVC 4.45% Senior Secured Notes due 2025 | | | 600 | | | 599 | | 599 | | | | 600 | | | 599 | | 599 | |
QVC 4.75% Senior Secured Notes due 2027 | | | 575 | | | 575 | | — | | |||||||||
QVC 4.375% Senior Secured Notes due 2028 | | | 500 | | | 500 | | — | | |||||||||
QVC 5.45% Senior Secured Notes due 2034 | | | 400 | | | 399 | | 399 | | | | 400 | | | 399 | | 399 | |
QVC 5.95% Senior Secured Notes due 2043 | |
| 300 |
| | 300 |
| 300 | | |
| 300 |
| | 300 |
| 300 | |
QVC 6.375% Senior Secured Notes due 2067 | | | 225 | | | 225 | | 225 | | | | 225 | | | 225 | | 225 | |
QVC 6.25% Senior Secured Notes due 2068 | | | 500 | | | 500 | | 500 | | |||||||||
QVC Bank Credit Facilities | |
| 1,777 |
| | 1,777 |
| 1,320 | | |
| — |
| | — |
| 1,235 | |
Other subsidiary debt | |
| — |
| | — |
| 188 | | |||||||||
Deferred loan costs | | | — | | | (24) | | (29) | | | | — | | | (51) | | (40) | |
Total consolidated Qurate Retail debt | | $ | 7,442 |
| | 7,540 |
| 7,373 | | | $ | 6,654 |
| | 6,866 |
| 7,412 | |
Less current classification | | | |
| | (1,202) |
| (1,410) | | | | |
| | (1,682) |
| (1,557) | |
Total long-term debt | | | | | $ | 6,338 |
| 5,963 | | | | | | $ | 5,184 |
| 5,855 | |
QVC Bank Credit Facilities
On December 31, 2018, QVC entered into the Fourth Amended and Restated Credit Agreement with Zulily as co-borrower (collectively, the “Borrowers”) which is a multi-currency facility that provides for a $3.65$2.95 billion revolving credit facility, with a $450 million sub-limit for standby letters of credit and up to $1.5 billion of uncommitted incremental revolving
I-16
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
loan commitments or incremental term loans. The Fourth Amended and Restated Credit Agreement includes a $400 million tranche that may be borrowed by QVC or Zulily, with a $50 million sub-limit for standby letters of credit. The remaining $3.25$2.55 billion and any incremental loans may be borrowed only by QVC. Borrowings that are alternate base rate loans will bear interest at a per annum rate equal to the base rate plus a margin that varies between 0.25% to 0.75% depending on the Borrowers combined ratio of Consolidated Total Debt to Consolidated EBITDA for the most recent 4 fiscal quarter period (the “Combined Consolidated Leverage Ratio”). Borrowings that are LIBOR loans will bear interest at a per annum rate equal to the applicable LIBOR rate plus a margin that varies between 1.25% and 1.75% depending on the Borrowers’ Combined 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, all of its loans must be repaid and its letters of credit cash collateralized. The facility matures on December 31, 2023. Payment of loans may be accelerated following certain customary events of default.
The payment and performance of the Borrowers’ obligations (including Zulily’s obligations) under the Fourth Amended and Restated Credit Agreement are guaranteed by each of QVC’s Material Domestic Subsidiaries (as defined in
I-20
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
the Fourth Amended and Restated Credit Agreement). Further, the borrowings under the Fourth 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 payment and performance of the Borrowers’ obligations with respect to the $400 million tranche available to both QVC and Zulily are also guaranteed by Zulilyeach of Zulily’s Material Domestic Subsidiaries (as defined in the Fourth Amended and Restated Credit Agreement), if any, and are secured by a pledge of all of Zulily’s equity interests.
The Fourth Amended and Restated Credit Agreement contains certain affirmative and negative covenants, including certain restrictions on QVC and Zulily 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 QVC’s consolidated leverage ratio, and the Borrowers’ Combined Consolidated Leverage Ratio.
The interest rate on borrowings outstanding under the Fourth Amended and Restated Credit Agreement was 3.4% at September 30, 2019. Availability under the Fourth Amended and Restated Credit Agreement at September 30, 20192020 was $1.9$2.9 billion, including the remaining portion ofavailable under the $400 million tranche available tothat Zulily and outstanding letters of credit.may also borrow on.
4.75% Senior Secured Notes due 2027
On February 4, 2020, QVC completed a registered debt offering for $575 million of the 4.75% Senior Secured Notes due 2027 (the "2027 Notes") at par. Interest on the 2027 Notes will be paid semi-annually in February and August, with payments commencing on August 15, 2020. The proceeds were used to partially prepay existing indebtedness under QVC's bank credit facilities.
4.375% Senior Secured Notes due 2028
On August 20, 2020, QVC completed a registered debt offering for $500 million of the 4.375% Senior Secured Notes due 2028 (the "2028 Notes") at par. Interest on the 2028 Notes will be paid semi-annually in March and September, with payments commencing on March 1, 2021. The proceeds were used in a cash tender offer (the “Tender Offer”) to purchase the outstanding $500 million of 5.125% Senior Secured Notes due 2022 (the “2022 Notes”). QVC also issued a notice of redemption exercising its right to optionally redeem any of the 2022 Notes that remained outstanding following the Tender Offer. As a result of the Tender Offer and the redemption, the Company recorded a loss on extinguishment of debt in the condensed consolidated statements of operations of $42 million for both the three and nine months ended September 30, 2020.
I-17
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Exchangeable Senior Debentures
The Company has elected to account for its exchangeable senior debentures using the fair value option. Accordingly, changes in the fair value of these instruments are recognized as unrealized gains (losses) in the statements of operations. See note 4 for information related to unrealized gains (losses) on debt measured at fair value. As of September 30, 20192020 the balance of the 4% Exchangeable Senior Debentures due 2029, the 3.75% Exchangeable Senior Debentures due 2030, and the 3.5% Exchangeable Senior Debentures due 2031Company’s exchangeable debentures have been classified as current because the Company does not own shares to redeem the debentures. The 0.75% Exchangeable Senior Debentures due 2043 are classified as current as of September 30, 2019 asdebentures or they are currently redeemable. For the remaining exchangeables, theThe Company reviews the terms of the debentures on a quarterly basis to determine whether a triggering event has occurred to require current classification of the exchangeables upon a call event.
3.125%On April 1, 2020, T-Mobile US, Inc. completed its acquisition of Sprint Corporation (“TMUS/S Acquisition”) for 0.10256 shares of T-Mobile US, Inc. for every share of Sprint Corporation. Following the TMUS/S Acquisition, the reference shares attributable to each $1,000 original principal amount of the 4.0% Senior Secured NotesExchangeable Debentures due 2019
In April 2019, QVC repaid2029 and the outstanding balance on its 3.125%3.75% Senior Secured NotesExchangeable Debentures due 2019.2030 consist of 0.3309 shares and 0.2419 shares of common stock of T-Mobile US, Inc., respectively, and 0.7860 shares and 0.5746 shares of common stock of CenturyLink, Inc., respectively.
Debt Covenants
Qurate Retail and its subsidiaries are in compliance with all debt covenants at September 30, 2019.
Other Subsidiary Debt
Other subsidiary debt at December 31, 2018 is comprised primarily of capitalized satellite transponder lease obligations.2020.
Fair Value of Debt
Qurate Retail estimates the fair value of its debt based on the quoted market prices for the same or similar issues or on the current rate offered to Qurate Retail for debt of the same remaining maturities (Level 2). The QVC 6.375% Senior Secured Notes due 2067 (“2067 Notes”) and the QVC 6.25% Senior Secured Notes Due 2068 (“2068 Notes”) are traded on the New York Stock Exchange, and the Company considers them to be actively traded. As such, the 2067 Notes and 2068 Notes are valued based on their trading price (Level 1). The fair value of Qurate Retail's publicly traded debt securities that are not reported at fair value in the accompanying condensed consolidated balance sheet at September 30, 20192020 are as follows (amounts in millions):
| | | | | | | | |
Senior debentures | | $ | 838 | | | $ | 846 | |
QVC senior secured notes |
| $ | 3,505 | |
| $ | 4,481 | |
Due to the variable rate nature, Qurate Retail believes that the carrying amount of its other debt, not discussed above, approximated fair value at September 30, 2020.
(7) Preferred Stock
On September 14, 2020, Qurate Retail issued the Preferred Stock. There were 13,500,000 shares of Preferred Stock authorized and 12,500,216 shares issued and outstanding at September 30, 2020.
Priority. The Preferred Stock ranks senior to the shares of common stock of Qurate Retail, with respect to dividend rights, rights of redemption and rights on the distribution of assets on any voluntary or involuntary liquidation, dissolution or winding up of Qurate Retail’s affairs. Shares of Preferred Stock are not convertible into shares of common stock of Qurate Retail.
Dividends. Holders of the Preferred Stock are entitled to receive quarterly cash dividends at a rate of 8.0% per annum of the liquidation price (as described below) on a cumulative basis, during the term. If declared, accrued dividends will be payable quarterly on each dividend payment date, beginning December 15, 2020 and thereafter on each March 15, June 15, September 15, and December 15 during the term (or, if such date is not a business day, the next business day after such date). If Qurate Retail fails to pay dividends or the applicable redemption price with respect to any redemption within
I-21I-18
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Due30 days after the applicable dividend payment or redemption date, the dividend rate will increase as provided by the Certificate of Designations for the Preferred Stock (the “Certificate of Designations”). Accrued dividends that are not paid within 30 days after the applicable dividend payment date will be added to the variable rate nature,liquidation price until paid together with all dividends accrued thereon.
The ability of Qurate Retail believes that the carrying amountto declare or pay any dividend on, or purchase, redeem, or otherwise acquire, any of its common stock or any other debt,stock ranking on parity with the Preferred Stock will be subject to restrictions if Qurate Retail does not discussed above, approximatedpay all dividends and all redemption payments on the Preferred Stock, subject to certain exceptions as set forth in the Certificate of Designations.
Distributions upon Liquidation, Dissolution or Winding Up. Upon Qurate Retail’s liquidation, winding-up or dissolution, each holder of shares of the Preferred Stock will be entitled to receive, before any distribution is made to the holders of Qurate Retail common stock, an amount equal to the liquidation price plus all unpaid dividends (whether or not declared) accrued from the immediately preceding dividend payment date, subject to the prior payment of liabilities owed to Qurate Retail’s creditors and the preferential amounts to which any stock senior to the Preferred Stock is entitled. The Preferred Stock has a liquidation price equal to the sum of (i) $100, plus (ii) all accrued and unpaid dividends (whether or not declared) that have been added to the liquidation price.
Mandatory and Optional Redemption. The Preferred Stock is subject to mandatory redemption on March 15, 2031 at the liquidation price plus all unpaid dividends (whether or not declared) accrued from the most recent dividend payment date. On or after the fifth anniversary of September 14, 2020 (the “Original Issue Date”), Qurate Retail may redeem all or a portion of the outstanding shares of Preferred Stock, at the liquidation price plus all unpaid dividends (whether or not declared) accrued from the most recent dividend payment date plus, if the redemption is (x) on or after the fifth anniversary of the Original Issue Date but prior to its sixth anniversary, 4.00% of the liquidation price, (y) on or after the sixth anniversary of the Original Issue Date but prior to its seventh anniversary, 2.00% of the liquidation price and (z) on or after the seventh anniversary of the Original Issue Date, 0. Both mandatory and optional redemptions must be paid in cash.
Voting Power. Holders of the Preferred Stock will not have any voting rights or powers, except as specified in the Certificate of Designations or as required by Delaware law.
Preferred Stock Directors. So long as the aggregate liquidation price of the outstanding shares of Preferred Stock exceeds 25% of the aggregate liquidation price of the shares of Preferred Stock issued on the Original Issue Date, holders of Preferred Stock will have certain director election rights as described in the Certificate of Designations whenever dividends on shares of Preferred Stock have not been declared and paid for 2 consecutive dividend periods and whenever Qurate Retail fails to pay the applicable redemption price in full with respect to any redemption of the Preferred Stock or fails to make a payment with respect to the Preferred Stock in connection with a liquidation or Extraordinary Transactions (as defined in the Certificate of Designations).
Recognition. As the Preferred Stock is subject to unconditional mandatory redemption in cash and was issued in the form of a share, the Company concluded the Preferred Stock was a mandatorily redeemable financial instrument and should be classified as a liability in the condensed consolidated balance sheets. The Preferred Stock was initially recorded at its fair value, at September 30, 2019.which was determined to be the liquidation preference of $100 per share. Given the liability classification of the Preferred Stock, all dividends accrued will be classified as interest expense in the condensed consolidated statements of operations.
(8) Leases
In February 2016 and subsequently, the FASB issued new guidance which revises the accounting for leases. Under the new guidance, entities that lease assets are required to recognize assets and liabilities on the balance sheet related to the rights and obligations created by those leases regardless of whether they are classified as finance or operating leases. In addition, new disclosures are required to meet the objective of enabling users of the financial statements to better understand the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted this guidance on January 1, 2019 and elected the optional transition method that allowed for a cumulative-effect adjustment in the period of adoption. Results for reporting periods beginning after January 1, 2019 are presented under the new guidance, while prior period amounts were not adjusted and continue to be reported under the accounting standards in effect for those periods.
The Company elected certain of the available transition practical expedients, including those that permit it to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) any initial direct costs for any existing leases as of the effective date. The Company did not elect the hindsight practical expedient, which permits entities to use hindsight in determining the lease term and assessing impairment. The most significant impact of the new guidance was the recognition of right-of-use (“ROU”) assets and lease liabilities for operating leases. In addition, the Company elected the practical expedient to account for the lease and non-lease components as a single lease component and will not recognize right-of-use assets or lease liabilities for short-term leases, which are those leases with a term of twelve months or less at the lease commencement date.
The Company recognized $287 million of operating lease ROU assets, $51 million of short term operating lease liabilities and $259 million of long term operating lease liabilities on the condensed consolidated balance sheet upon adoption of the new standard. The operating lease liabilities were determined based on the present value of the remaining rental payments and the operating lease ROU asset was determined based on the value of the lease liabilities, adjusted primarily for deferred rent, net of prepaid rent of $23 million.
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 data processing hardware and a warehouse. The Company also leases data processing equipment, facilities, office space, retail space and land. These leases are classified as operating leases. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future lease payments using our incremental borrowing rate.
Our leases have remaining lease terms of less than one year to 15 years some of which may include the option to extend for up to 14 years, and some of which include options to terminate the leases within less than one year.
The components of lease cost during the three and nine months ended September 30, 2019 were as follows:
| | | | | |
| Three months ended | | Nine months ended | | |
| September 30, 2019 | | September 30, 2019 | | |
| in millions | | |||
Operating lease cost | $ | 19 | | 54 | |
Finance lease cost | | | | | |
Depreciation of leased assets | $ | 6 | | 16 | |
Interest on lease liabilities | | 2 | | 6 | |
Total finance lease cost | $ | 8 | | 22 | |
I-22I-19
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
The remaining weighted-average lease term and the weighted-average discount rate were as follows:
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Supplemental balance sheet information related to leases was as follows:
| | | |
| September 30, | | |
| 2019 | | |
| in millions | | |
Operating leases: | | | |
Operating lease ROU assets (1) | $ | 403 | |
| | | |
Current operating lease liabilities (2) | $ | 71 | |
Operating lease liabilities (3) | | 354 | |
Total operating lease liabilities | $ | 425 | |
| | | |
Finance Leases: | | | |
Finance lease ROU assets (4) | $ | 271 | |
Finance lease ROU asset accumulated depreciation (4) | | (130) | |
Finance lease ROU assets, net | $ | 141 | |
Current finance lease liabilities (2) | $ | 18 | |
Finance lease liabilities (3) | | 151 | |
Total finance lease liabilities | $ | 169 | |
I-23
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Supplemental cash flow information related to leases was as follows:
| | | |
| Nine months ended | | |
| September 30, 2019 | | |
| in millions | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | $ | 48 | |
Operating cash flows from finance leases | $ | 6 | |
Financing cash flows from finance leases | $ | 17 | |
ROU assets obtained in exchange for lease obligations | | | |
Operating leases | $ | 166 | |
Finance leases | $ | — | |
Future lease payments under finance leases and operating leases with initial terms of one year or more at September 30, 2019 consisted of the following:
| | | | | |
| Finance Leases | | Operating Leases | | |
| | in millions | | ||
Remainder of 2019 | $ | 7 | | 37 | |
2020 | | 25 | | 79 | |
2021 | | 24 | | 68 | |
2022 | | 23 | | 57 | |
2023 | | 22 | | 57 | |
Thereafter | | 116 | | 275 | |
Total lease payments | $ | 217 | | 573 | |
Less: imputed interest | | 48 | | 148 | |
Total lease liabilities | $ | 169 | | 425 | |
On October 5, 2018, QVC entered into a lease (“ECDC Lease”) for an East Coast distribution center. The 1.7 million square foot rental building is located in Bethlehem, Pennsylvania and will be leased to QVC for an initial term of 15 years. QVC obtained initial access to a portion of the ECDC Lease during March 2019 and obtained access to the remaining portion during September 2019. In total, QVC recorded a ROU asset of $141 million and an operating lease liability of $131 million relating to the ECDC Lease, with the difference attributable to prepaid rent. QVC is required to pay an initial base rent of approximately $10 million per year, with payments that began in the third quarter of 2019, and increasing to approximately $14 million per year, as well as all real estate taxes and other building operating costs. QVC also has the option to extend the term of the ECDC Lease for up to 2 consecutive terms of 5 years each and one final term of 4 years.
(9)(8) Commitments and Contingencies
Litigation
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 Qurate Retail 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 amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying condensed consolidated financial statements.
I-24
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
(10)(9) Information About Qurate Retail's Operating Segments
Qurate Retail, through its ownership interests in subsidiaries and other companies, is primarily engaged in the video and online commerce industries. Qurate Retail identifies its reportable segments as (A) those operating segments that represent 10% or more of its consolidated annual revenue, annual Adjusted OIBDA (as defined below) or total assets and (B) those equity method affiliates whose share of earnings represent 10% or more of Qurate Retail's annual pre-tax earnings.
Qurate Retail evaluates performance and makes decisions about allocating resources to its operating segments based on financial measures such as revenue, Adjusted OIBDA, gross margin, average sales price per unit and revenue or sales per customer equivalent. In addition, Qurate Retail reviews nonfinancial measures such as unique website visitors, number of units shipped, conversion rates and active customers, as appropriate.
During the first quarter of 2019 the Company changed its reportable segments to combine HSN and QVC U.S. into one reportable segment called “QxH,” and presented prior period information to conform with this change. As a result of the QRG Initiatives and additional integration activities to drive synergies between HSN and QVC U.S., the chief operating decision maker began reviewing HSN and QVC U.S. information as one business unit during the first quarter of 2019.
For the nine months ended September 30, 2019,2020, Qurate Retail has identified the following operating segments as its reportable segments:
● | QxH - QVC U.S. and HSN market and sell a wide variety of consumer products in the United States, primarily by means of their televised shopping programs and via the Internet through their websites and mobile applications. |
● | QVC International – QVC International markets and sells a wide variety of consumer products in several foreign countries, primarily by means of its televised shopping programs and via the Internet through its international websites and mobile applications. |
● | Zulily – Zulily markets and sells a wide variety of consumer products in the United States and several foreign countries through flash sales events, primarily through its app, mobile and desktop experiences. |
Qurate Retail's operating segments are strategic business units that offer different products and services. They are managed separately because each segment requires different technologies, distribution channels and marketing strategies. The accounting policies of the segments are the same as those described in the Company's Summary of Significant Accounting Policies in the Annual Report on Form 10-K for the year ended December 31, 2018.2019 10-K.
Performance Measures
Disaggregated revenue by segment and product category consisted of the following:
| | | | | | | | | | | | |
| | Three months ended | | |||||||||
| | September 30, 2019 | | |||||||||
| | | QxH | | QVC Int'l | | Zulily | | Corp and other | | Total | |
| in millions | | ||||||||||
Home | | $ | 668 | | 236 | | 95 | | 187 | | 1,186 | |
Apparel | | | 334 | | 107 | | 141 | | 39 | | 621 | |
Beauty | | | 303 | | 161 | | 12 | | — | | 476 | |
Accessories | | | 199 | | 63 | | 90 | | — | | 352 | |
Electronics | | | 207 | | 21 | | 3 | | — | | 231 | |
Jewelry | | | 97 | | 59 | | 12 | | — | | 168 | |
Other revenue | | | 46 | | 3 | | 6 | | — | | 55 | |
Total Revenue | | $ | 1,854 | | 650 | | 359 | | 226 | | 3,089 | |
I-25I-20
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
| | | | | | | | | | | | |
| | Nine months ended | | |||||||||
| | September 30, 2019 | | |||||||||
| | | QxH | | QVC Int'l | | Zulily | | Corp and other | | Total | |
| in millions | | ||||||||||
Home | | $ | 2,002 | | 714 | | 298 | | 530 | | 3,544 | |
Apparel | | | 1,004 | | 327 | | 422 | | 117 | | 1,870 | |
Beauty | | | 912 | | 462 | | 37 | | — | | 1,411 | |
Accessories | | | 666 | | 190 | | 295 | | — | | 1,151 | |
Electronics | | | 561 | | 68 | | 10 | | — | | 639 | |
Jewelry | | | 302 | | 161 | | 37 | | — | | 500 | |
Other revenue | | | 138 | | 12 | | 20 | | — | | 170 | |
Total Revenue | | $ | 5,585 | | 1,934 | | 1,119 | | 647 | | 9,285 | |
Performance Measures
Disaggregated revenue by segment and product category consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | ||
| | Three months ended | | Three months ended | | ||||||||||||||||||
| | September 30, 2018 | | September 30, 2020 | | ||||||||||||||||||
| | | QxH | | QVC Int'l | | Zulily | | Corp and other | | Total | | | QxH | | QVC Int'l | | Zulily | | Corp and other | | Total | |
| | in millions | in millions | | |||||||||||||||||||
Home | | $ | 713 | | 235 | | 118 | | 170 | | 1,236 | | $ | 819 | | 286 | | 115 | | 248 | | 1,468 | |
Apparel | | 331 | | 113 | | 175 | | 37 | | 656 | | 312 | | 115 | | 147 | | 37 | | 611 | | ||
Beauty | | 294 | | 148 | | 11 | | — | | 453 | | 297 | | 168 | | 17 | | — | | 482 | | ||
Accessories | | 219 | | 64 | | 105 | | — | | 388 | | 219 | | 67 | | 94 | | — | | 380 | | ||
Electronics | | 207 | | 26 | | 3 | | — | | 236 | | 197 | | 25 | | 3 | | — | | 225 | | ||
Jewelry | | 117 | | 51 | | 12 | | — | | 180 | | 93 | | 59 | | 12 | | — | | 164 | | ||
Other revenue | | | 48 | | 3 | | 8 | | 23 | | 82 | | | 43 | | 3 | | 7 | | — | | 53 | |
Total Revenue | | $ | 1,929 | | 640 | | 432 | | 230 | | 3,231 | | $ | 1,980 | | 723 | | 395 | | 285 | | 3,383 | |
| | | | | | | | | | | | |
| | Nine months ended | | |||||||||
| | September 30, 2018 | | |||||||||
| | | QxH | | QVC Int'l | | Zulily | | Corp and other | | Total | |
| in millions | | ||||||||||
Home | | $ | 2,090 | | 730 | | 341 | | 520 | | 3,681 | |
Apparel | | | 1,034 | | 348 | | 494 | | 109 | | 1,985 | |
Beauty | | | 916 | | 450 | | 35 | | — | | 1,401 | |
Accessories | | | 668 | | 203 | | 329 | | — | | 1,200 | |
Electronics | | | 543 | | 74 | | 11 | | — | | 628 | |
Jewelry | | | 362 | | 154 | | 35 | | — | | 551 | |
Other revenue | | | 142 | | 13 | | 21 | | 72 | | 248 | |
Total Revenue | | $ | 5,755 | | 1,972 | | 1,266 | | 701 | | 9,694 | |
| | | | | | | | | | | | |
| | Nine months ended | | |||||||||
| | September 30, 2020 | | |||||||||
| | | QxH | | QVC Int'l | | Zulily | | Corp and other | | Total | |
| in millions | | ||||||||||
Home | | $ | 2,303 | | 829 | | 326 | | 631 | | 4,089 | |
Apparel | | | 913 | | 316 | | 411 | | 108 | | 1,748 | |
Beauty | | | 910 | | 499 | | 50 | | — | | 1,459 | |
Accessories | | | 676 | | 188 | | 281 | | — | | 1,145 | |
Electronics | | | 588 | | 78 | | 10 | | — | | 676 | |
Jewelry | | | 273 | | 155 | | 34 | | — | | 462 | |
Other revenue | | | 119 | | 6 | | 21 | | | | 146 | |
Total Revenue | | $ | 5,782 | | 2,071 | | 1,133 | | 739 | | 9,725 | |
| | | | | | | | | | | |
| | Three months ended | |||||||||
| | September 30, 2019 | |||||||||
| | | QxH | | QVC Int'l | | Zulily | | Corp and other | | Total |
| | in millions | |||||||||
Home | | $ | 670 | | 236 | | 95 | | 187 | | 1,188 |
Apparel | | | 334 | | 107 | | 141 | | 39 | | 621 |
Beauty | | | 303 | | 161 | | 12 | | — | | 476 |
Accessories | | | 199 | | 63 | | 90 | | — | | 352 |
Electronics | | | 209 | | 21 | | 3 | | — | | 233 |
Jewelry | | | 98 | | 59 | | 12 | | — | | 169 |
Other revenue | | | 41 | | 3 | | 6 | | — | | 50 |
Total Revenue | | $ | 1,854 | | 650 | | 359 | | 226 | | 3,089 |
I-21
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
| | | | | | | | | | | | |
| | Nine months ended | | |||||||||
| | September 30, 2019 | | |||||||||
| | | QxH | | QVC Int'l | | Zulily | | Corp and other | | Total | |
| in millions | | ||||||||||
Home | | $ | 2,009 | | 714 | | 298 | | 530 | | 3,551 | |
Apparel | | | 1,005 | | 327 | | 422 | | 117 | | 1,871 | |
Beauty | | | 915 | | 462 | | 37 | | — | | 1,414 | |
Accessories | | | 667 | | 190 | | 295 | | — | | 1,152 | |
Electronics | | | 564 | | 68 | | 10 | | — | | 642 | |
Jewelry | | | 303 | | 161 | | 37 | | — | | 501 | |
Other revenue | | | 122 | | 12 | | 20 | | — | | 154 | |
Total Revenue | | $ | 5,585 | | 1,934 | | 1,119 | | 647 | | 9,285 | |
For segment reporting purposes, Qurate Retail defines Adjusted OIBDA as revenue less cost of sales, operating expenses, and selling, general and administrative expenses excluding all stock-based compensation and transaction related costs. Qurate Retail believes this measure is an important indicator of the operational strength and performance of its businesses by identifying those items that are not directly a reflection of each business’ performance or indicative of ongoing business trends. In addition, this measure allows management to view operating results and perform analytical comparisons and benchmarking between businesses and identify strategies to improve performance. This measure of performance excludes depreciation and amortization, stock-based compensation, certain acquisition accounting
I-26
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
adjustments, separately reported litigation settlements, transaction related costs (including restructuring, integration, and advisory fees), and impairment charges that are included in the measurement of operating income pursuant to GAAP. Accordingly, Adjusted OIBDA should be considered in addition to, but not as a substitute for, operating income, net income, cash flows provided by operating activities and other measures of financial performance prepared in accordance with GAAP. Qurate Retail generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current prices.
Adjusted OIBDA is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | ||
| | Three months ended September 30, | | Nine months ended September 30, | | | Three months ended September 30, | | Nine months ended September 30, | | ||||||||||||
| | | 2019 | | 2018 | | | 2019 | | 2018 | | | | 2020 | | 2019 | | | 2020 | | 2019 | |
| | amounts in millions | | | amounts in millions | | | | | | ||||||||||||
QxH | | $ | 346 |
| 371 | | | 1,093 |
| 1,141 | | | $ | 380 |
| 346 | | | 1,061 |
| 1,093 | |
QVC International | | | 106 | | 93 | | | 313 | | 300 | | | | 132 | | 106 | | | 348 | | 313 | |
Zulily | |
| 8 |
| 18 | | | 32 |
| 74 | | |
| 27 |
| 8 | | | 74 |
| 32 | |
Corporate and other | |
| (4) |
| (14) | | | (9) |
| (13) | | |
| 27 |
| (4) | | | 32 |
| (9) | |
Consolidated Qurate Retail | | $ | 456 |
| 468 | | | 1,429 |
| 1,502 | | | $ | 566 |
| 456 | | | 1,515 |
| 1,429 | |
I-22
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Other Information
| | | | | | | | | | | | | | | ||
| | September 30, 2019 |
| | September 30, 2020 |
| ||||||||||
| | Total assets | | Investments in affiliates | | Capital expenditures |
| | Total assets | | Investments in affiliates | | Capital expenditures |
| ||
| | amounts in millions |
| | amounts in millions |
| ||||||||||
QxH | | $ | 12,587 |
| 38 | | 202 | | | $ | 11,928 |
| 38 | | 121 | |
QVC International | | 2,160 | | — | | 23 | | | 2,294 | | — | | 19 | | ||
Zulily | | 1,157 | | — | | 18 | | | 1,085 | | — | | 17 | | ||
Corporate and other | |
| 1,075 |
| 117 | | 6 | | |
| 1,485 |
| 14 | | 8 | |
Consolidated Qurate Retail | | $ | 16,979 |
| 155 | | 249 | | | $ | 16,792 |
| 52 | | 165 | |
The following table provides a reconciliation of Adjusted OIBDA to Operating income (loss) and Earnings (loss) from continuing operations before income taxes:
| | | | | | | | | | | | | | | | | | | ||
| | Three months ended | | Nine months ended |
| | Three months ended | | Nine months ended |
| ||||||||||
| | September 30, | | September 30, |
| | September 30, | | September 30, |
| ||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||
| | amounts in millions |
| | amounts in millions |
| ||||||||||||||
Adjusted OIBDA | | $ | 456 |
| 468 |
| 1,429 |
| 1,502 | | | $ | 566 |
| 456 |
| 1,515 |
| 1,429 | |
Stock-based compensation | |
| (17) |
| (21) |
| (54) |
| (67) | | |
| (19) |
| (17) |
| (46) |
| (54) | |
Depreciation and amortization | |
| (146) |
| (167) |
| (457) |
| (489) | | |
| (141) |
| (146) |
| (427) |
| (457) | |
Impairment of intangible assets | | (1,020) | | — | | (1,020) | | — | | | — | | (1,020) | | — | | (1,020) | | ||
Transaction related costs | | | — | | (43) | | (1) | | (57) | | | | — | | — | | — | | (1) | |
Operating income (loss) | | | (727) | | 237 | | (103) | | 889 | | | $ | 406 | | (727) | | 1,042 | | (103) | |
Interest expense | |
| (93) |
| (94) |
| (282) |
| (288) | | |
| (98) |
| (93) |
| (290) |
| (282) | |
Share of earnings (loss) of affiliates, net | |
| (36) |
| (29) |
| (104) |
| (89) | | |
| (32) |
| (36) |
| (96) |
| (104) | |
Realized and unrealized gains (losses) on financial instruments, net | |
| (45) |
| (27) |
| (239) |
| 92 | | |
| (12) |
| (45) |
| (127) |
| (239) | |
Gains (losses) on transactions, net | | 223 | | — | | 224 | | (1) | | |||||||||||
Other, net | |
| (4) |
| (2) |
| (19) |
| 17 | | |
| (65) |
| (4) |
| (65) |
| (18) | |
Earnings (loss) before income taxes | | $ | (905) |
| 85 |
| (747) |
| 621 | | | $ | 422 |
| (905) |
| 688 |
| (747) | |
I-27I-23
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 strategies; QRG InitiativesCOVID-19 (as defined below); revenue growth at QVC, Inc. ("QVC"); remediation of a material weakness; our projected sources and uses of cash; the recoverability of our goodwill and other intangible assets; and fluctuations in interest rates and foreign currency exchange rates. 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 novel coronavirus (“COVID-19”) pandemic and local, state and federal governmental responses to the pandemic on the economy, our customers, our vendors and our businesses generally; |
● | customer demand for our products and services and our ability to anticipate customer demand and to adapt 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 to our businesses' websites and our ability to convert visitors into customers or contributors; |
● | uncertainties inherent in the development and integration of new business lines and business strategies; |
● | our future financial performance, including availability, terms and deployment of capital; |
● | our ability to successfully integrate and recognize anticipated efficiencies and benefits from the businesses we acquire; |
● | the cost and ability of shipping companies, suppliers and vendors to deliver products, equipment, software and services; |
● | the outcome of any pending or threatened litigation; |
● | availability of qualified personnel; |
● | 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, including the impact of Brexit (as defined below); |
● | consumer spending levels, including the availability and amount of individual consumer |
● | advertising spending levels; |
● | changes in distribution and viewing of television programming, including the expanded deployment of |
● | rapid technological changes; |
● | failure to protect the security of personal information, subjecting us to potentially costly government enforcement actions and/or private litigation and reputational damage; |
● | the regulatory and competitive environment of the industries in which we operate; |
● | natural disasters, public health crises (including COVID-19), political crises, and other catastrophic events or other events outside of our control; |
● | threatened terrorist attacks, political and economic unrest in international markets and ongoing military action around the world; and |
● | fluctuations in foreign currency exchange rates. |
I-24
For additional risk factors, please see Part I, Item 1A. Risk Factors of theour Annual Report on Form 10-K for the year ended December 31, 2018.2019 (the “2019 10-K”), as well as Part II, Item 1A. Risk Factors of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. 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.
I-28
The following discussion and analysis provides information concerning our results of operations and financial condition. This discussion should be read in conjunction with our accompanying condensed consolidated financial statements and the notes thereto and our Annual Report on Form 10-K for the year ended December 31, 2018.
See note 1 and note 8 of the accompanying condensed consolidated financial statements for an overview of new accounting standards that we have adopted or that we plan to adopt that have had or may have an impact on our financial statements.2019 10-K.
The information herein relates to Qurate Retail, Inc. (formerly named Liberty Interactive Corporation, prior to the Transactions defined and described below, or “Liberty”)Corporation) and its controlled subsidiaries (collectively “Qurate Retail,” the “Company,” “Consolidated Qurate Retail,” “us,” “we” or “our” unless the context otherwise requires).
Overview
We own controlling and non-controlling interests in a broad range of video and online commerce companies. Our largest businesses and reportable segments are our operating segment comprised of QVC U.S. and HSN (“QxH”) and QVC International. QVC markets and sells a wide variety of consumer products in the United States (“U.S.”) and several foreign countries, primarily by means of its televised shopping programs and the Internet through its domestic and international websites and mobile applications. On December 31, 2018, Qurate Retail transferred its 100% ownership interest in HSN to QVC through a transaction among entities under common control. Following this transaction, Cornerstone (a former subsidiary of HSN) remains a subsidiary of Qurate Retail. HSN is included in the QxH reportable segment, and Cornerstone is included in the “Corporate and other” reportable segment. Zulily, LLC (“Zulily”), an online retailer offering customers a fun and entertaining shopping experience with a fresh selection of new product styles launched every day, is a reportable segment.
Our “Corporate and other” category includes our consolidated subsidiary Cornerstone Brands, Inc. (“Cornerstone”), along with various cost and equity method investments. See discussion below for the entities that were included in Corporate and other in prior periods.
PriorIn December 2019, the COVID-19 pandemic was reported to have surfaced in Wuhan, China and has subsequently spread across the Transactions (described and defined below), the Company utilized tracking stocks in its capital structure. A tracking stock isglobe, impacting all countries where Qurate Retail operates. As a type of common stock that the issuing company intends to reflect or "track" the economic performance of a particular business or "group," rather than the economic performanceresult of the company as a whole. Qurate Retail had two tracking stocks—QVC Group common stock and Liberty Ventures common stock, which were intended to track and reflect the economic performancespread of the businesses, assets and liabilities attributedvirus, certain local governmental agencies have imposed travel restrictions, local quarantines or stay at home restrictions to contain the QVC Group and the Ventures Group, respectively. The QVC Group was comprisedspread, which has caused a significant disruption to most sectors of the Company’s wholly-owned subsidiarieseconomy.
In response to these stay at home restrictions, QVC Zulily, HSN,has mandated that non-essential employees work from home, has reduced the number of employees who are allowed on its production set and Cornerstone among other assetshas implemented increased cleaning protocols, social distancing measures and liabilities. The Ventures Group was comprised of businesses not includedtemperature screenings for those employees who enter into certain facilities. In some cases, the move to a work from home arrangement for QVC’s non-essential employees will be permanent, which may result in the reduction of office space. QVC Grouphas also mandated that all essential employees who do not feel comfortable coming to work will not be required to do so. 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 Evite Inc. (“Evite”)production and our interestsfulfillment center employees. QVC has also paid a one-time work from home allowance to its employees during the second quarter of 2020. While the temporary increase in Liberty Broadband Corporation (“Liberty Broadband”), LendingTree, Inc. (“LendingTree”), investmentswages and salaries has been terminated in Charter Communications, Inc. (“Charter”) and ILG, Inc. (“ILG”), among other assets and liabilities (which were all includedmost of QVC’s facilities, the inability to control the spread of COVID-19, or the expansion or extension of these stay at home restrictions could negatively impact QVC’s results in the Corporatefuture.
The stay at home restrictions imposed in response to COVID-19 required many traditional brick and other category). The Company’s results are attributedmortar retailers to temporarily close their stores, but allowed distance retailers, including QVC, to continue operating. As a result, beginning at the end of March 2020, QVC Groupobserved an increase in new customers and an increase in demand for certain categories, such as home.
As a result, for the Ventures Groupthree and nine months ended September 30, 2020, management has increased certain estimated reserves including, but not limited to, uncollectible receivables in anticipation of higher defaults by customers billed through March 9, 2018.
On March 9, 2018, Qurate Retail completedQVC’s installment payment option, and inventory obsolescence due to decreased demand for certain categories, such as apparel. Management's estimates may change, however, as new events occur and additional information is obtained, and any such changes will be recognized in the transactions contemplated by the Agreement and Plan of Reorganization (as amended, the “Reorganization Agreement,” and the transactions contemplated thereby, the “Transactions”) among General Communication, Inc. (“GCI”), an Alaska corporation, and Liberty Interactive LLC, a Delaware limited liability company and a direct wholly-owned subsidiary of Liberty (“LI LLC”)consolidated financial statements. Pursuant to the Reorganization Agreement, GCI amended and restated its articles of incorporation (which resulted in GCI being renamed GCI Liberty, Inc. (“GCI Liberty”)) and effected a reclassification and auto conversion of its common stock. After market close on March 8, 2018, Qurate Retail’s board of directors approved the reattribution of certain assets and liabilities from Qurate Retail’s Ventures Group to its QVC Group, which was effective immediately. The reattributed assets and liabilities included cash, Qurate Retail’s interest in ILG, certain green energy investments, LI LLC’s exchangeable debentures, and certain tax benefits.
Following these events, Qurate Retail acquired GCI (renamed “GCI Liberty, Inc.”) through a reorganization in which certain Qurate Retail interests, assets and liabilities attributed to the Ventures Group were contributed (the “contribution”) to GCI Liberty in exchange for a controlling interest in GCI Liberty. Qurate Retail and LI LLC contributed to GCI Liberty their entire equity interest in Liberty Broadband, Charter, and LendingTree, the Evite operating business and other assets and liabilities attributed to Qurate Retail’s Venture Group (following the reattribution), in exchange for (a) the issuance to LI LLC of a number of shares of GCI Liberty Class A Common Stock and a number of shares of GCI Liberty Class B
I-29I-25
Common Stock equal to the number of outstanding shares of Series A Liberty Ventures common stock and Series B Liberty Ventures common stock on March 9, 2018, respectively, (b) cash and (c) the assumption of certain liabilities by GCI Liberty.
Following the contribution, Qurate Retail effected a tax-free separation of its controlling interest in the combined company (the “GCI Liberty Split-Off”), GCI Liberty, to the holders of Liberty Ventures common stock in full redemption of all outstanding shares of such stock, in which each outstanding share of Series A Liberty Ventures common stock was redeemed for one share of GCI Liberty Class A common stock and each outstanding share of Series B Liberty Ventures common stock was redeemed for one share of GCI Liberty Class B common stock. Simultaneous with the closing of the Transactions, QVC Group common stock became the only outstanding common stock of Qurate Retail, and thus QVC Group common stock ceased to function as a tracking stock. On April 9, 2018, Liberty Interactive Corporation was renamed Qurate Retail, Inc. On May 23, 2018, Qurate Retail amended its charter to eliminate the tracking stock capitalization structure and reclassify each share of QVC Group common stock into one share of the corresponding series of new common stock of Qurate Retail. With respect to events on or after May 23, 2018, we refer to our Series A and Series B common stock as “Qurate Retail common stock.” In July 2018, the Internal Revenue Service (“IRS”) completed its review of the GCI Liberty Split-Off and informed Qurate Retail that it agreed with the nontaxable characterization of the transactions. Qurate Retail received an Issue Resolution Agreement from the IRS documenting this conclusion.
As discussedZulily has seen increased freight surcharges from China due to COVID-19 and in note 2concert with QVC has made work accommodations in its fulfillment centers which has resulted in an increase in labor expense. Zulily has also incurred additional expenses to the accompanying condensed consolidated financial statements, Qurate Retail’s interest in Liberty Broadband has been presented asdeep cleanse its fulfillment centers and office buildings, coupled with a discontinued operationwork-from-home allowance to reimburse its employees for home office and associated technology costs as a result of the Transactions.COVID-19. In addition, Zulily management cut all travel expenses, and reduced capital expenditures due to uncertainty created by COVID-19.
On October 17, 2018, Qurate Retail announcedIn addition, there are several potential adverse impacts of COVID-19 that could cause a seriesmaterial negative impact to the Company’s financial results, including its capital and liquidity, for the remainder of initiatives designed2020 and beyond. These include governmental restrictions on the Company’s ability to better position its HSNcontinue to operate under stay at home restrictions, produce content, reduced demand for products sold, decreases in the disposable income of existing and QVC- U.S. businesses (“QRG Initiatives”).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, an adverse impact to our supply chain and shipping disruptions for both the products we import and purchase domestically and the products the Company sells, including essential products experiencing higher demand due to factory closures, labor shortages and other resource constraints. While the 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 the Company’s financial results.
In July 2020, QVC implemented a planned workforce reduction with the goal of making the organizational structure more streamlined and efficient. As part of the QRG Initiatives,workforce reduction, QVC will close its fulfillment centersdecided to eliminate live hours on QVC 2 in Lancaster, Pennsylvaniathe U.S. and Roanoke, Virginia and has entered into an agreement to lease a new fulfillment centerother secondary channels within the various markets. See more details below in Bethlehem, Pennsylvania (see note 8the "Results of the accompanying condensed consolidated financial statements). Qurate Retail recorded transaction related costsOperations—Businesses" section.
I-26
Results of Operations—Consolidated
General. We provide in the tables below information regarding our consolidated Operating Results and Other Income and Expense, as well as information regarding the contribution to those items from our principal reporting segments. The "Corporate and other" category consists of those assets or businesses which we do not disclose separately. For a more detailed discussion and analysis of the financial results of the principal reporting segments, see "Results of Operations—Businesses" below.
I-30
Operating Results
| | | | | | | | | | |
| | Three months ended | | Nine months ended |
| |||||
| | September 30, | | September 30, |
| |||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| |
| | amounts in millions |
| |||||||
Revenue | | | | | | | | | | |
QxH |
| $ | 1,980 | | 1,854 | | 5,782 | | 5,585 | |
QVC International | | | 723 | | 650 | | 2,071 | | 1,934 | |
Zulily | | | 395 | | 359 | | 1,133 | | 1,119 | |
Corporate and other | | | 285 | | 226 | | 739 | | 647 | |
Consolidated Qurate Retail |
| $ | 3,383 | | 3,089 | | 9,725 | | 9,285 | |
| | | | | | | | | | |
Operating Income (Loss) | | | | | | | | | | |
QxH |
| $ | 274 | | 243 | | 744 | | 782 | |
QVC International | | | 114 | | 87 | | 295 | | 239 | |
Zulily | | | 3 | | (1,042) | | 3 | | (1,078) | |
Corporate and other | | | 15 | | (15) | | — | | (46) | |
Consolidated Qurate Retail |
| $ | 406 | | (727) | | 1,042 | | (103) | |
| | | | | | | | | | |
Adjusted OIBDA | | | | | | | | | | |
QxH |
| $ | 380 | | 346 | | 1,061 | | 1,093 | |
QVC International | | | 132 | | 106 | | 348 | | 313 | |
Zulily | | | 27 | | 8 | | 74 | | 32 | |
Corporate and other | | | 27 | | (4) | | 32 | | (9) | |
Consolidated Qurate Retail |
| $ | 566 | | 456 | | 1,515 | | 1,429 | |
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| 2019 |
| 2018 |
| 2019 |
| 2018 (a) |
| |
| | amounts in millions |
| |||||||
Revenue | | | | | | | ��� | | | |
QxH |
| $ | 1,854 | | 1,929 | | 5,585 | | 5,755 | |
QVC International | | | 650 | | 640 | | 1,934 | | 1,972 | |
Zulily | | | 359 | | 432 | | 1,119 | | 1,266 | |
Corporate and other | | | 226 | | 230 | | 647 | | 701 | |
Consolidated Qurate Retail |
| $ | 3,089 | | 3,231 | | 9,285 | | 9,694 | |
| | | | | | | | | | |
Operating Income (Loss) | | | | | | | | | | |
QxH |
| $ | 243 | | 228 | | 782 | | 803 | |
QVC International | | | 87 | | 77 | | 239 | | 248 | |
Zulily | | | (1,042) | | (38) | | (1,078) | | (93) | |
Corporate and other | | | (15) | | (30) | | (46) | | (69) | |
Consolidated Qurate Retail |
| $ | (727) | | 237 | | (103) | | 889 | |
| | | | | | | | | | |
Adjusted OIBDA | | | | | | | | | | |
QxH |
| $ | 346 | | 371 | | 1,093 | | 1,141 | |
QVC International | | | 106 | | 93 | | 313 | | 300 | |
Zulily | | | 8 | | 18 | | 32 | | 74 | |
Corporate and other | | | (4) | | (14) | | (9) | | (13) | |
Consolidated Qurate Retail |
| $ | 456 | | 468 | | 1,429 | | 1,502 | |
| | | | | | | | | | |
Revenue. Consolidated Qurate Retail revenue decreased 4.4%increased 9.5% or $142$294 million and 4.2%4.7% or $409$440 million for the three and nine months ended September 30, 2019,2020, respectively, as compared to the corresponding periods in the prior year. The decreaseincrease in the three and nine months ended September 30, 20192020 was due to decreasedincreased revenue at QxH of $75$126 million decreasedand $197 million for the three and nine months ended September 30, 2020, respectively, increased revenue at QVC International of $73 million and $137 million for the three and nine month periods ended September 30, 2020, respectively, increased revenue at Zulily of $73$36 million and decreased$14 million for the three and nine months ended September 30, 2020, and increased revenue in the Corporate and other segment of $4$59 million partially offset by increased revenue at QVC International of $10 million. The decrease inand $92 million for the three and nine months ended September 30, 20192020, respectively, compared to the same periods in the prior year. The increase in Corporate and other revenue was due to decreasedan increase in revenue at QxH of $170 million, decreased revenue at QVC International of $38 million, decreased revenue at Zulily of $147 million, and decreasedCornerstone due to strong revenue in the Corporate and other segment of $54 million. The decreases in revenue in the Corporate and other segment were due to decreases in Cornerstone revenue primarily due to the shutdown of the Improvements catalog business in December 2018.home category. See "Results of Operations—Businesses" below for a more complete discussion of the results of operations of QVC and Zulily.
Stock-based compensation. Stock-based compensation includes compensation primarily related to options, restricted stock awards and restricted stock units for shares of our common stock that are granted to certain of our officers and employees.
We recorded $17$19 million and $21$17 million of stock-based compensation for the three months ended September 30, 2020 and 2019, respectively, and 2018, respectively,$46 million and $54 million of stock-based compensation for the nine months ended September 30, 2020 and $672019, respectively. The increase of $2 million for the three months ended September 30, 2020 was primarily due to increases at QxH, Zulily and at the corporate level. The decrease of $8 million for the nine months ended September 30, 2019 and 2018, respectively. The decrease of $4 million for the three months ended September 30, 2019 was primarily due to slight decreases in stock compensation at all levels. The decrease of $13 million for the nine months ended September 30, 20192020 was primarily due to a decrease at QVC of $4 million at QxH, a decrease of $3$1 million due to the GCI Liberty Split-Off,at Zulily, and a decrease at the corporate level of $4 million. As of September 30, 2019, the total unrecognized compensation cost related
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decrease of $3 million at the corporate level. As of September 30, 2020, the total unrecognized compensation cost related to unvested Qurate Retail equity awards was approximately $46$45 million. Such amount will be recognized in our condensed consolidated statements of operations over a weighted average period of approximately 2.32.4 years.
Operating income. Our consolidated operating results decreased $964income increased $1,133 million and $992$1,145 million for the three and nine months ended September 30, 2019,2020, respectively, as compared to the corresponding periods in the prior year. The decreaseincrease in operating results for the three months ended September 30, 2019 was primarily due to increased operating losses at Zulily due to a $1,020 million impairment of intangible assets, slightly offset by increased operating income at QxH and QVC International. The decrease in operating results for the nine months ended September 30, 20192020 was primarily due to an increasea decrease in operating losses at Zulily of $1,045 million and $1,081 million for the three and nine months ended September 30, 2020 due to a $1,020 million impairment of intangible assets in the third quarter of 2019 and to a lesser extent, decreased, respectively, an increase in operating income at QxH and QVC International. Operating loss in the Corporate and other segment improved $15International of $27 million and $23$56 million for the three and nine months ended September 30, 2019,2020, respectively, asan increase in operating income at QxH of $31 million for the three months ended September 30, 2020, and a decrease in operating losses at the Corporate and other segment of $30 million and $46 million for the three and nine months ended September 30, 2020, respectively, partially offset by a decrease in operating income at QxH of $38 million for the nine months ended September 30, 2020, compared to the corresponding periods in the prior year. Operating loss in the Corporate and other segment improved for the three months ended September 30, 2020, as compared to the corresponding period in the prior year, primarily related to decreasedan increase in operating income at Cornerstone due to strong revenue and product margin performance in the home category. Operating loss in the Corporate and other segment improved for the nine months ended September 30, 2020, compared to the same period in the prior year, primarily related to a decrease in operating losses at Cornerstone.the corporate level and increased operating income at Cornerstone due to strong revenue and product margin performance in the home category. See "Results of Operations—Businesses" below for a more complete discussion of the results of operations of QVC and Zulily.
Adjusted OIBDA. To provide investors with additional information regarding our financial results, we also disclose Adjusted OIBDA, which is a non-GAAP financial measure. We define Adjusted OIBDA as operating income (loss) plus depreciation and amortization, stock-based compensation, separately reported litigation settlements, restructuring, acquisition and other related costs and impairments. Our chief operating decision maker and management team use this measure of performance in conjunction with other measures to evaluate our businesses and make decisions about allocating resources among our businesses. We believe this is an important indicator of the operational strength and performance of our businesses by identifying those items that are not directly a reflection of each business’ performance or indicative of ongoing business trends. In addition, this measure allows us to view operating results, perform analytical comparisons and benchmarking between 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 flows provided by operating activities and other measures of financial performance prepared in accordance with U.S. generally accepted accounting principles. The following table provides a reconciliation of Operating income (loss) to Adjusted OIBDA:
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| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||
| | amounts in millions |
| | amounts in millions |
| ||||||||||||||
Operating income (loss) | | $ | (727) |
| 237 |
| (103) |
| 889 | | | $ | 406 |
| (727) |
| 1,042 |
| (103) | |
Depreciation and amortization | |
| 146 | | 167 | | 457 | | 489 | | |
| 141 | | 146 | | 427 | | 457 | |
Stock-based compensation | |
| 17 | | 21 | | 54 | | 67 | | |
| 19 | | 17 | | 46 | | 54 | |
Impairment of intangible assets | | 1,020 | | — | | 1,020 | | — | | | — | | 1,020 | | — | | 1,020 | | ||
Transaction related costs | | | — | | 43 | | 1 | | 57 | | | | — | | — | | — | | 1 | |
Adjusted OIBDA | | $ | 456 | | 468 | | 1,429 | | 1,502 | | | $ | 566 | | 456 | | 1,515 | | 1,429 | |
Consolidated Adjusted OIBDA decreased 2.6%increased 24.1% or $12$110 million and 4.9%6.0% or $73$86 million for the three and nine months ended September 30, 2019,2020, respectively, as compared to the corresponding periods in the prior year. The decreaseincrease in Adjusted OIBDA for the three months ended September 30, 2019 was primarily due to a decrease at QxH of $25 million and a decrease at Zulily of $10 million, partially offset by an increase at QVC International of $13 million and an increase in the Corporate and other segment of $10 million. The decrease in Adjusted OIBDA for the nine months ended September 30, 2019 was primarily due to a decrease at QxH of $48 million and a decrease at Zulily of $42 million, partially offset by an increase at QVC International of $13 million and an increase in the Corporate and other segment of $4 million. The increase in the Corporate and other segment for both the three and nine months ended September 30, 20192020 was primarily due to an increase at Zulily of $19 million and $42 million for the three and nine months ended September 30, 2020, respectively, an increase at QVC International of $26 million and $35 million for the three and nine months ended September 30, 2020, respectively, an increase at QxH of $34 million for the three months ended September 30, 2020, and an increase at Corporate and other of $31 million and $41 million for the three and nine months ended September 30, 2020, respectively, partially offset by a decrease at QxH of $32 million for the nine months ended September 30, 2020, compared to the same periods in the prior year. The change in the Corporate and other segment for the three months ended September 30, 2020 was primarily due to an increase in Cornerstone Adjusted OIBDA.OIBDA due to strong revenue and product margin performance in the home category. The change in the Corporate and other segment for the nine months ended September 30, 2020 was primarily
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due to a decrease in Adjusted OIBDA losses at the corporate level, and an increase in Cornerstone Adjusted OIBDA due to strong revenue and product margin performance in the home category. See "Results of Operations—Businesses" below for a more complete discussion of the results of operations of QVC and Zulily.
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Other Income and Expense
Components of Other income (expense) are presented in the table below.
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| 2018 |
| 2019 |
| 2018 (a) |
| |
| | amounts in millions |
| |||||||
| | | | | | | | | | |
Interest expense |
| $ | (93) | | (94) | | (282) | | (288) | |
Share of earnings (losses) of affiliates |
| | (36) | | (29) | | (104) | | (89) | |
Realized and unrealized gains (losses) on financial instruments, net |
| | (45) | | (27) | | (239) | | 92 | |
Other, net |
| | (4) | | (2) | | (19) | | 17 | |
Other income (expense) |
| $ | (178) | | (152) | | (644) | | (268) | |
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| 2020 |
| 2019 |
| 2020 |
| 2019 |
| |
| | amounts in millions |
| |||||||
| | | | | | | | | | |
Interest expense |
| $ | (98) | | (93) | | (290) | | (282) | |
Share of earnings (losses) of affiliates |
| | (32) | | (36) | | (96) | | (104) | |
Realized and unrealized gains (losses) on financial instruments, net |
| | (12) | | (45) | | (127) | | (239) | |
Gains (losses) on transactions, net | | | 223 | | — | | 224 | | (1) | |
Other, net |
| | (65) | | (4) | | (65) | | (18) | |
Other income (expense) |
| $ | 16 | | (178) | | (354) | | (644) | |
Interest expense. Interest expense decreased $1increased $5 million and $6$8 million for the three and nine months ended September 30, 2019,2020, respectively, as compared to the corresponding periods in the prior year,year. The increases are primarily related to QVC refinancing its borrowings on its senior secured credit facility with newly issued senior secured notes in February 2020, which have higher interest rates, partially offset by lower debt balances mainly due to the partial redemptionrepayment of amounts outstanding on the 1.75% Exchangeable Senior Debentures due 2046 in the prior year and the partial redemption of the 3.5% Exchangeable Senior Debentures due 2031 in both periods.senior secured credit facility.
Share of earnings (losses) of affiliates. Share of losses of affiliates increased $7decreased $4 million and $15$8 million for the three and nine months ended September 30, 2019,2020, respectively, as compared to the corresponding periods in the prior year. The increases for both periods arelosses decreased during the three and nine months ended September 30, 2020 due to increased lossesimproved results at the Company’s alternative energy solution entities due to continued investment in such ventures.entities. These entities typically operate at a loss and the Company records its share of such losses but have favorable tax attributes and credits, which are recorded in the Company’s tax accounts. Additionally, the change in losses is impacted by the fact that the prior year included losses related to FTD Companies, Inc.
Realized and unrealized gains (losses) on financial instruments, net. Realized and unrealized gains (losses) on financial instruments, net are comprised of changes in the fair value of the following:
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| 2018 |
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||
| | amounts in millions |
| | amounts in millions |
| ||||||||||||||
Equity securities |
| $ | 1 | | 10 | | 3 | | 154 | | ||||||||||
Exchangeable senior debentures | | | (49) | | (52) | | (304) | | (9) | | | | (145) | | (49) | | (225) | | (304) | |
Indemnification asset | | | 3 | | 15 | | 58 | | (49) | | | | 94 | | 3 | | 107 | | 58 | |
Other financial instruments | | | — | | — | | 4 | | (4) | | | | 39 | | 1 | | (9) | | 7 | |
|
| $ | (45) | | (27) | | (239) | | 92 | |
| $ | (12) | | (45) | | (127) | | (239) | |
The changes in realized and unrealized gains (losses) on financial instruments, net are due to market activity in the applicable period related to the financial instruments that are marked to market on a periodic basis. The increasedecrease in realized and unrealized losses for the three months ended September 30, 2019,2020, compared to the corresponding period in the prior year, was primarily driven by a decrease in unrealized gains on the indemnification obligation, describedasset and derivative instruments (described in note 54 of the accompanying condensed consolidated financial statements, and a decrease in realized gains on the investment in ILG due to the purchase of ILG by Marriott Vacations Worldwide during the third quarter of 2018 and subsequent sale of this investment,statements), partially offset by a decreasean increase in unrealized losses on the exchangeable senior debentures. The increasedecrease in realized and unrealized losses for the nine months ended September 30, 2019,2020, compared to the corresponding period in the prior year, was primarily driven by a decrease in unrealized losses on the exchangeable senior debentures and an increase in unrealized gains on the indemnification asset, partially offset by an increase in unrealized losses on exchangeable debt, a decrease due toderivative instruments.
Gains (losses) on transactions, net. Gains (losses) on transactions, net increased during the contributionthree and nine months ended September 30, 2020 as the result of our equity interest in Charter to GCI Liberty in the GCI Liberty Split-Off, and a decrease in realized gains onsale of one of the investment in ILG due toCompany’s alternative energy investments during the purchase ofthird
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ILG by Marriott Vacations Worldwide during the third quarter of 20182020. The Company received total cash consideration of $272 million and subsequentrecorded a gain of $224 million on the sale of this investment, partially offset by an increase in unrealized gains on the indemnification asset with GCI Liberty.alternative energy investment.
Other, net. Other, net expense increased $2declined $61 million and $36$47 million for the three and nine months ended September 30, 2019,2020, respectively, compared to the corresponding periods in the prior year. The activity captured in other, net is primarily attributable to extinguishment of debt in the prior year, interest and dividend income and the impact of the tax sharing arrangement with GCI Liberty.Liberty, extinguishment of debt in the current year, and foreign exchange gains in the current year and losses in the prior year.
Income taxes. We had income tax expense of $70 million and tax benefit of $150 million and expense of $3 million for the three months ended September 30, 2020 and 2019, respectively, and 2018, respectively,tax expense of $111 million and tax benefit of $188 million and tax expense of $85 million for the nine months ended September 30, 2020 and 2019, and 2018, respectively. Income tax benefit was lower than the U.S. statutory tax rate of 21% during the three months ended September 30, 2019 due to a goodwill impairment that is not deductible for tax purposes, partially offset by tax benefits from tax credits generated by our alternative energy investments. Income tax expense was lower than the U.S. statutory tax rate of 21% during the three months ended September 30, 20182020 due to tax benefits from tax credits generated by our alternative energy investments, partially offset by an increase in the valuation allowance against certain deferredstate and foreign income tax assets. expense. Income tax benefit during the three months ended September 30, 2019 was higherdue primarily due to a goodwill impairment that was not deductible for tax purposes, partially offset by tax benefits from tax credits generated by our alternative energy investments. Income tax expense was lower than the U.S. statutory tax rate of 21% during the nine months ended September 30, 2020 due to tax benefits from tax credits generated by our alternative energy investments, partially offset by state and foreign income tax expense. Income tax benefit during the nine months ended September 30, 2019 was due primarily to tax benefits from tax credits generated by our alternative energy investments and tax benefits from losses generated in 2019 and eligible for carryback to tax years with federal income tax rates greater than the U.S. statutory tax rate of 21%, partially offset by a goodwill impairment that is not deductible for tax purposes and an increase in the valuation allowance recorded against foreign tax credits and certain foreign tax losses. Income tax expense was lower than the U.S. statutory tax rate of 21% during the nine months ended September 30, 2018 due to tax benefits from tax credits generated by our alternative energy investments, a reduction in the Company’s state effective tax rate used to measure deferred taxes resulting from the GCI Liberty Split-Off in March 2018, and a reduction in the Company’s state effective tax rate used to measure deferred taxes resulting from a state law change during the second quarter, partially offset by an increase in the valuation allowance against certain deferred tax assets.
Net earnings. We had net lossesearnings of $755$352 million and net earningslosses of $82$755 million for the three months ended September 30, 2020 and 2019, respectively, and 2018, respectively,net earnings of $577 million and net losses of $559 million and net earnings of $677 million for the nine months ended September 30, 20192020 and 2018,2019, respectively. The change in net earnings (loss) was the result of the above-described fluctuations in our revenue, expenses and other gains and losses.
Material Changes in Financial Condition
As of September 30, 2019,2020, substantially all of our cash and cash equivalents are invested in U.S. Treasury securities, securities of other government agencies, AAA rated money market funds and other highly rated financial and corporate debt instruments.
The following are potential sources of liquidity: available cash balances, equity issuances, interest receipts, proceeds from asset sales, debt (including availability under QVC’s Senior Secured Credit Facility (the “Fourth Amended and Restated Credit Facility”)), as discussed in note 76 of the accompanying condensed consolidated financial statements)statements, debt issuances, equity issuances, interest receipts, proceeds from asset sales, and cash generated by the operating activities of our wholly-owned subsidiaries. Cash generated by the operating activities of our subsidiaries is only a source of liquidity to the extent such cash exceeds the working capital needs of the subsidiaries and is not otherwise restricted such as, in the case of QVC and Zulily, due to a requirement that a leverage ratio (calculated in accordance with the terms of the document governing such indebtedness which is filed as an exhibit to our Annual Report on Form 10-K for the year ended December 31, 2018)indebtedness) of less than 3.5 must be maintained.
During the threenine months ended September 30, 2019 there have been no changes to our corporate or subsidiary2020 the Company’s issuer debt credit ratings.rating was lowered from BB to BB- and QVC’s issue-level rating on secured debt was lowered from BBB- to BB+ by S&P Global Ratings. All other credit ratings remained unchanged.
I-34I-30
As of September 30, 2019,2020, Qurate Retail's liquidity position included the following:
| | | | | | | ||
| | Cash and cash | | | Cash and cash | | ||
| | equivalents | | | equivalents | | ||
| | amounts in millions | | amounts in millions | ||||
QVC |
| $ | 551 | |
| $ | 574 | |
Zulily | | 20 | | | 18 | | ||
Corporate and other | | | 34 | | | | 452 | |
Total Qurate Retail |
| $ | 605 | |
| $ | 1,044 | |
| | | | |||||
| | Borrowing capacity | ||||||
| | amount in billions | | |||||
Fourth Amended and Restated Credit Facility | | $ | 2.9 | |
To the extent that the Company recognizes any taxable gains from the sale of assets we may incur tax expense and be required to make tax payments, thereby reducing any cash proceeds. Additionally, we have borrowing capacity of approximately $1.9 billion under the Fourth Amended and Restated Credit Facility at September 30, 2019, including the remaining portion of the $400 million tranche that Zulily may utilize. As of September 30, 2019,2020, the Company had approximately $218$306 million of cash and cash equivalents held in foreign subsidiaries that is available for domestic purposes with no significant tax consequences upon repatriation to the United States. QVC accrues foreign taxes on the unremitted earnings of its international subsidiaries. Approximately 73%63% of QVC’s foreign cash balance was that of QVC-Japan.QVC-Japan (as defined below). QVC owns 60% of QVC-Japan and shares all profits and losses with the 40% minority interest holder, Mitsui & Co., LTD (“Mitsui”).
Additionally, our operating businesses have generated, on average, more than $1 billion in annual cash provided by operating activities over the prior three years and we do not anticipate any significant reductions in that amount in future periods.
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| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| ||
| | amounts in millions |
| | amounts in millions |
| ||||||
Cash Flow Information | | | | | | | | | | | | |
Net cash provided (used) by operating activities |
| $ | 910 | | 996 | |
| $ | 1,855 | | 910 | |
Net cash provided (used) by investing activities |
| $ | (486) | | (84) | |
| $ | (25) | | (486) | |
Net cash provided (used) by financing activities |
| $ | (468) | | (1,283) | |
| $ | (1,464) | | (468) | |
During the nine months ended September 30, 2019,2020, Qurate Retail's primary uses of cash were the repurchasesnet debt repayments of Series A Qurate Retail$777 million, payment of cash dividends to common stockstockholders of $392$626 million, capital expenditures of $249$165 million and payments for television distribution rights at QVCinvestments in and loans to equity method investments of $128$88 million, partially offset by proceeds from dispositions of investments of $269 million, which are includedprimarily related to the sale of an investment in the Other investing activities, net line item in the accompanying condensed consolidated statement of cash flows.
an alternative energy company accounted for as an equity method investment.
The projected uses of Qurate Retail cash for the remainder of 20192020 are the continued capital improvement spending of approximately $115 million, the repayment of certain debt obligationsservice payments (including approximately $45$40 million for interest payments on outstanding debt), the potential buyback of common stock under the approved share buyback program, payment of dividends to the holders of the 8.0% Series A Cumulative Redeemable Preferred Stock and additional investments in existing or new businesses. We also may be required to make net payments of income tax liabilities to settle items under discussion with tax authorities. We expect that cash on hand and cash provided by operating activities and borrowing capacity in future periods will be sufficient to fund projected uses of cash.
I-31
Results of Operations—Businesses
QVC. QVC 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 U.S., QVC’s televised shopping programs, including live and recorded content, are broadcastdistributed across multiple channels nationally on a full-time basis, including QVC, QVC 2, QVC 3, HSN and HSN2. During the nine months ended September 30,first quarter of 2019, QVC transitioned its televised Beauty iQ broadcast channel to QVC 3 and Beauty iQ content was moved to a digital only platform. QVC U.S. programming is also available on QVC.com and HSN.com, QVC’s U.S. websites; mobile applications via streaming video; over-the-air broadcasters; and over-the-top content platforms (Roku,Facebook Live, Roku, Apple TV and Amazon Fire, Facebook, etc.).Fire; mobile applications; social pages and over-the-air broadcasters.
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QVC’s digital platforms enable consumers to purchase goods offered on its broadcasttelevised programming, along with a wide assortment of products that are available only on QVC.com and HSN.com. QVC.com and HSN.com and QVC’s other digital platforms (including mobile applications, social pages, and others) are natural extensions of its business model, allowing customers to engage in its shopping experience wherever they are, with live or on-demand content customized to the device they are using. In addition to offering video content, QVC.com and HSN.com 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.
QVC’s international televised shopping programs, including live and recorded content, are distributed to households outside of the U.S., primarily in Germany, Austria, Japan, the United Kingdom ("U.K."), the Republic of Ireland and Italy. In some of the countries where QVC operates, its televised shopping programs are broadcastdistributed 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., QVC’s 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.
QVC's Japanese operations (“QVC-Japan”) are conducted through a joint venture with Mitsui. QVC-Japan is owned 60% by QVC and 40% by Mitsui. QVC and Mitsui share in all profits and losses based on their respective ownership interests. During the nine months ended September 30, 20192020 and 2018,2019, QVC-Japan paid dividends to Mitsui of $46 million and $34 million, respectively.
In response to stay at home restrictions as a result of COVID-19, QVC has mandated that non-essential employees work from home, has reduced the number of employees who are allowed on its production set and $23has implemented increased cleaning protocols, social distancing measures and temperature screenings for those employees who enter into certain facilities. In some cases, the move to a work from home arrangement for QVC’s non-essential employees will be permanent, which may result in the reduction of office space. QVC has also mandated that all essential employees who do not feel comfortable coming to work will not be required to do so. 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 total increase in wages and salaries of $8 million respectively.was recorded during the second quarter of 2020 and is primarily recorded in cost of goods sold for the nine months ended September 30, 2020. QVC has also paid a one-time work from home allowance to its employees during the second quarter of 2020 totaling $4 million, which is primarily recorded in selling, general and administrative expenses for the nine months ended September 30, 2020. While the temporary increase in wages and salaries has been terminated in most of QVC’s facilities, the inability to control the spread of COVID-19, or the expansion or extension of these stay at home restrictions could negatively impact QVC’s 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 at the end of March 2020, QVC observed an increase in new customers and an increase in demand for certain categories, such as home.
As a result, for the nine months ended September 30, 2020, management has increased certain estimated reserves including, but not limited to, uncollectible receivables in anticipation of higher defaults by customers billed through QVC’s installment payment option, and inventory obsolescence due to decreased demand for certain categories, such as apparel.
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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.
In July 2020, QVC implemented a planned workforce reduction with the goal of making the organizational structure more streamlined and efficient. As part of the workforce reduction, QVC has decided to eliminate live hours on QVC 2 in the U.S. and other secondary channels within the various markets. As a result, QVC recorded $2 million and $18 million of severance expense during the three and nine months ended September 30, 2020, respectively, which is recorded in selling, general and administrative expense.
QVC's operating results were as follows:
| | | | | | | | | | | | | | | | | | | | |
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| ||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||
| | amounts in millions |
| | amounts in millions |
| ||||||||||||||
Net revenue |
| $ | 2,504 |
| 2,569 |
| 7,519 |
| 7,727 | |
| $ | 2,703 |
| 2,504 |
| 7,853 |
| 7,519 | |
Cost of sales | | | (1,615) |
| (1,637) |
| (4,803) |
| (4,882) | | | | (1,722) |
| (1,615) |
| (5,041) |
| (4,803) | |
Operating | | | (181) |
| (208) |
| (537) |
| (630) | | ||||||||||
Operating expenses | | | (184) |
| (181) |
| (548) |
| (537) | | ||||||||||
SG&A expenses (excluding stock-based compensation and transaction related costs) | | | (256) |
| (260) |
| (773) |
| (774) | | | | (285) |
| (256) |
| (855) |
| (773) | |
Adjusted OIBDA | | | 452 |
| 464 |
| 1,406 |
| 1,441 | | | | 512 |
| 452 |
| 1,409 |
| 1,406 | |
Stock-based compensation | | | (10) |
| (10) |
| (30) |
| (34) | | | | (10) |
| (10) |
| (26) |
| (30) | |
Depreciation and amortization | | | (112) |
| (108) |
| (354) |
| (306) | | | | (114) |
| (112) |
| (344) |
| (354) | |
Transaction related costs | | | — | | (41) | | (1) | | (50) | | | | — | | — | | — | | (1) | |
Operating income |
| $ | 330 |
| 305 |
| 1,021 |
| 1,051 | |
| $ | 388 |
| 330 |
| 1,039 |
| 1,021 | |
Net revenue was generated in the following geographical areas:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||||||
| | amounts in millions |
| | amounts in millions |
| ||||||||||||||||||||
QxH |
| $ | 1,854 |
| | 1,929 |
| | 5,585 |
| | 5,755 | |
| $ | 1,980 |
| | 1,854 |
| | 5,782 |
| | 5,585 | |
QVC International | | | 650 | | | 640 | | | 1,934 | | | 1,972 | | | | 723 | | | 650 | | | 2,071 | | | 1,934 | |
Consolidated QVC |
| $ | 2,504 | | | 2,569 | | | 7,519 | | | 7,727 | |
| $ | 2,703 | | | 2,504 | | | 7,853 | | | 7,519 | |
QVC's consolidated net revenue decreased 2.5%increased 7.9% and 2.7%4.4% for the three and nine months ended September 30, 2019,2020, respectively, as compared to the corresponding periods in the prior year. The decreasethree month increase in net revenue for the three month period wasis primarily due to a 3.9% decrease6.6% increase in units shipped, and $9 million in unfavorable foreign exchange rates across all markets, which was partially offset by a 2.8% increase in average selling price (“ASP”). The decrease in net revenue for the nine month period was primarily due to a 2.6% decrease in units shipped and $70 million in unfavorable foreign exchange rates across all markets, which was partially offset by a 1% increase in ASP driven by the international market and a $23$45 million decrease in estimated product returns, primarily driven by theQxH, a $27 million increase in shipping and handling revenue across all markets except Japan and $24 million in favorable foreign exchange rates, which was partially offset by a 2.8% decline in average selling price per unit ("ASP"), primarily at QxH. The nine months increase in net revenue is primarily due to a 3.4% increase in units shipped, a $105 million decrease in sales volume at QxH. estimated product returns, primarily driven by QxH, a $23 million increase in shipping and handling revenue across all markets except Italy and $11 million in favorable foreign exchange rates, which was partially offset by a 1% decline in ASP.
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During the three and nine months ended September 30, 20192020 and 2018,2019, 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 describing QVC’s operating results, the term currency exchange rates refers to the currency exchange rates QVC uses to convert the operating results for all countries where the functional currency is not the U.S. Dollar. QVC calculates the effect of changes in currency exchange rates as the difference between current period activity translated using the prior period's currency exchange rates. QVC refers to the results of this calculation as the impact of currency exchange rate fluctuations. Constant currency operating results refers to operating results without the impact of the currency exchange
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rate fluctuations. The disclosure of constant currency amounts or results permits investors to better understand QVC’s underlying performance without the effects of currency exchange rate fluctuations.
The percentage change in net revenue for each of QVC's geographic areas in U.S. Dollars and in constant currency was as follows:
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| | September 30, 2020 | | September 30, 2020 |
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|
| U.S. Dollars | | Foreign Currency Exchange Impact | | Constant Currency | | U.S. Dollars | | Foreign Currency Exchange Impact | | Constant currency |
|
| U.S. Dollars | | Foreign Currency Exchange Impact | | Constant Currency | | U.S. Dollars | | Foreign Currency Exchange Impact | | Constant currency |
| ||||||||||||
QxH |
| (3.9) | % | | — | % | | (3.9) | % | | (3.0) | % | | — | % | | (3.0) | % | |
| 6.8 | % | | — | % | | 6.8 | % | | 3.5 | % | | — | % | | 3.5 | % | |
QVC International |
| 1.6 | % | | (1.3) | % | | 2.9 | % | | (1.9) | % | | (3.5) | % | | 1.6 | % | |
| 11.2 | % | | 3.5 | % | | 7.7 | % | | 7.1 | % | | 0.5 | % | | 6.6 | % | |
The decreaseincrease in QxH net revenue for the three months ended September 30, 20192020 was primarily due to a 4.3% decrease6.7% increase in units shipped, partially offset by a slight increase in ASP and a $10$40 million decrease in estimated product returns primarily drivenand an $18 million increase in shipping and handling revenue, which was partially offset by the decreasea 3.3% decline in sales volume.ASP. For the three months ended September 30, 2019,2020, QxH experienced shipped sales growth in home and accessories with declines in jewelry, accessories and home, partially offset by growth in apparel and beauty while electronics remained flat. The decrease in QxH net revenue for the nine months ended September 30, 2019 was due to a 2.6% decrease in units shipped and a slight decline in ASP, which was partially offset by a $33 million decrease in estimated product returns, primarily driven by the decrease in sales volume.all other categories. For the nine months ended September 30, 2019,2020, QxH net revenue increased due to a 2.8% increase in units shipped, a $100 million decrease in estimated product returns and a $13 million increase in shipping and handling revenue, partially offset by a 1.3% decline in ASP. For the nine months ended September 30, 2020, QxH experienced shipped sales declinegrowth in home, electronics, and accessories with declines in all other categories. The decrease in estimated product returns for both comparable periods was primarily driven by a shift in product mix to lower return rate categories, except electronics.partially offset by an increase in sales volume. The increase in shipping and handling revenue for both comparable periods was primarily driven by the increase in units shipped.
QVC International net revenue growth in constant currency for the three months ended September 30, 20192020 was primarily due to an 8.4%a 6.6% increase in units shipped, driven by increases in units shipped across all markets, partially offset by a 1.5% decline in ASP, driven by ASP increases all markets, which was partially offset by a 2.9% decreasedeclines in units shipped driven by all markets except Japan and a $10 million increase in estimated product returns.Italy. For the three months ended September 30, 2019,2020, QVC International experienced shipped sales growth in constant currency in all categories except electronics. QVC Internationaljewelry. QVC-International net revenue growth in constant currency for the nine months ended September 30, 20192020 was primarily due to a 5.3%4.6% increase in units shipped, driven by increases in units shipped across all markets, and a 0.5% increase in ASP, driven by ASP increases in Japan, Germany Italy and the U.K., which was partially offset by a 2.5% decrease in units shipped driven by Germany, Italy and the U.K. and a $10 million increase in estimated product returns. The increase in estimated product returns during both periods was primarily due to increased sales volume. For the nine months ended September 30, 2019, QVC International2020, QVC-International experienced shipped sales growth in constant currency in home, beauty and electronics with declines in all categories except electronics and accessories.other categories.
QVC's future net revenue growth will primarily depend on sales growth from e-commerce, and mobile platforms, and applications via streaming video, additions of new customers from households already receiving QVC's broadcasttelevised programming and increased spending from existing customers. QVC's future net revenue may also be affected by (i) the willingness of cable television and direct-to-home satellite system operators to continue carrying QVC's programming service; (ii) QVC's ability to maintain favorable channel positioning, which may become more difficult due to governmental action or from distributors converting analog customers to digital; (iii) changes in television viewing habits because of personal video recorders, video-on-demand technologies and Internet video services; (iv) QVC’s ability to source new and compelling products; and (v) general economic conditions.
The current economic uncertainty due to COVID-19 in various regions of the world in which QVC’s subsidiaries and affiliates operate could adversely affect demand for its products and services since a substantial portion of its revenue is derived from discretionary spending by individuals, which typically declines during times of economic instability. Global financial markets have recently experienced disruptions, including increased volatility and diminished liquidity and credit availability. If economic and financial market conditions in the U.S. or other key markets, including Japan and Europe, continues to be uncertain, QVC’s customers may respond by suspending, delaying or reducing their discretionary spending. A suspension, delay or reduction in discretionary spending could adversely affect revenue. Accordingly, QVC’s ability to increase or maintain revenue and earnings could be adversely affected to the extent that relevant economic environments decline.
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On June 23, 2016, the U.K. held a referendum in which British citizens approved an exit from the European Union (the “E.U.”), commonly referred to as “Brexit.” As a result of the referendum, the global marketsThe Brexit process and currenciesnegotiations have been
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adversely impacted, including a sharp declinecreated political and economic uncertainty, particularly in the value of the U.K. Pound Sterling as compared to the U.S. Dollar. Volatility in exchange rates is expected to continue in the short term as the U.K. negotiates its exit from the E.U. In the longer term, any impact from Brexit on us will depend, in part, on the outcome of tariff, trade, regulatory and other negotiations. Although it is unknown what the result of those negotiations will be, or whether the U.K. will leave the E.U. with any agreement as to the terms of its withdrawal, it is possible that new terms may adversely affect QVC’s operations and financial results in a number of ways, not all of which are currently readily apparent. The U.K. is scheduled to withdraw from the E.U. no later than January 31, 2020. Notably, in October 2019, the E.U. and the U.K. announced an agreement in principle on the withdrawal of the U.K. from the E.U. This agreement still remains subject to the successful ratification of the parties’ respective legislative bodies. As a result, the final terms of the U.K.’s exit from the E.U. are, and will remain for the immediate future, unclear. The U.K. may leave the E.U. without any agreement as to the terms of its withdrawal or the future economic relationship between the U.K. and the E.U. It is alsoand this uncertainty may last for years, and could potentially have a negative impact on QVC’s business. The potential impacts include, but are not limited to, unfavorable new trade agreements, the possible thatimposition of trade or other regulatory barriers which could result in shipping delays or shortages of products, and a negative impact to the U.K. will withdraw its notification to leave the E.U. or that there will be a second referendum on Brexit.global economy and consumer demand.
QVC's cost of sales as a percentage of net revenue was 63.7% and 64.2% for the three and nine months ended September 30, 2020, respectively, compared to 64.5% and 63.9% for the three and nine months ended September 30, 2019, respectively, compared to 63.7% and 63.2%respectively. The decrease in cost of goods sold as a percentage of revenue for the three months ended September 30, 2020 is primarily due to strategic promotional and pricing initiatives, which decreased product costs as a percentage of net revenue across QxH, the U.K. and Germany, which was partially offset by increased freight and obsolescence charges at QxH. The increase in cost of goods sold as a percentage of revenue for the nine months ended September 30, 2018, respectively. For the three and nine months ended September 30, 2019, cost of sales as a percentage of revenue increased2020 is primarily due to an increase in product fulfillment costsincreased freight and obsolescence charges at QxH.
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 $27increased $3 million or 13% and $93$11 million or 15% for the three and nine months ended September 30, 2019,2020, respectively, as compared to the same periods in the prior year. For the three months ended September 30, 2019, operating expenses decreased primarily due to a $20 million decrease in commissions at QxH and a $3 million decrease in personnel costs at QxH. For the nine months ended September 30, 2019, operating expenses decreased2019. The three month increase is primarily due to a $74 million decreasean increase in customer service expenses primarily at QxH partially offset by lower commissions at QxH a $10 million decreaseand Germany. The nine month increase is primarily due to an increase in personnel costscustomer service expenses and an increase in credit card fees at QxH and a $4 million decreasepartially offset by lower commissions at QxH. The increase in credit card fees for the nine months is primarily due to favorable exchange rates.increased sales during the periods and lower sales penetration of QVC’s U.S. Private Label Credit Cards, which do not charge credit card fees. The decrease in commissions for both comparable periods is primarily due to new longer term television distribution rights agreements entered into at HSN, which led to increased capitalization of television distribution rights agreements and favorable terms on commissions.digital penetration.
QVC's SG&A expenses (excluding stock-based compensation and transaction related costs) include personnel, information technology, provision for doubtful accounts, production costs, and marketing and advertising expenses. Such expenses decreased $4increased $29 million and $1increased $82 million for the three and nine months ended September 30, 2019,2020, respectively, as compared to the same periods in the prior year, and as a percentage of net revenue, increased from 10.1%10.2% to 10.2%10.5% and from 10.0%10.3% to 10.3%10.9% for the three and nine months ended September 30, 2019,2020, respectively, as compared to the three and nine months ended September 30, 2018,2019, respectively. For the three months ended September 30, 2019,2020, the decreaseincrease was primarily due to an $11a $35 million decreaseincrease in personnel costs across all markets, an $8 million increase in marketing primarily at QxH France and the U.K., partially offset by increases in Japan and Germany, and a $2$3 million decreaseincrease due to favorableunfavorable exchange rates. The decreasesincreases were partially offset by a $3$13 million increasedecrease in credit losses, primarily at QxH, a $5 million decrease in outside services primarily inat QxH offset by decreases in Germany and the U.K., a $3 million increase in online marketing expenses in QxH, a $2 million increase in software expenses in QxH and a $1 million increase in bad debt expense due to increased Easy Pay usage and the number of installments taken at QxH offset by a decrease in Japan. travel expenses across all markets.
For the nine months ended September 30, 2019,2020, the decreaseincrease was primarily due to a $24$65 million decreaseincrease in personnel costs across all markets and a $26 million increase in marketing primarily in QxH, France and the U.K. offset byat QxH. These increases in Japan and Germany, and an $11 million decrease due to favorable exchange rates. The decreases were partially offset by a $12$7 million increasedecrease in travel expenses across all markets and a $4 million decrease in outside services primarily at QxH and Japan, partially offset by a decrease in Germany, an $11 million increase in bad debt expense and an $8 million increase in online marketing expenses primarily in QxH. The increase in bad debt expenserelated to personnel costs for the three and nine months ended September 30, 2020 was primarily due to an increase to our estimated incentive pay across all markets. Additionally, the nine months ended September 30, 2019 is2020 increase was impacted by increased severance and a work from home allowance as a result of COVID-19, which was partially offset by the closure of our operations in France in 2019. The decrease to estimated credit losses for the three months ended September 30, 2020 was due to favorable adjustments based on actual collections and the release of the additional credit loss reserve that was recorded during the first and second quarters of 2020 as a result of the additional risk due to COVID-19. The decrease in travel expenses for both comparable periods was primarily due to increased Easy Pay usage and the numberless travel as a result of installments taken at QxH, and to a lesser extent, Germany.COVID-19.
Stock-based compensation includes compensation related to options and restricted stock units granted to certain officers and employees. QVC recorded $10 million and $30 million of stock-based compensation expense for both of the three months ended September 30, 2020 and September 30, 2019, and $26 million and $30 million for the nine months ended September 30, 2019, respectively,2020 and recorded $10 million and $34 million of stock-based compensation expense for the three and nine months ended September 30, 2018,2019, respectively. The decrease in stock compensation expense for the nine months ended September 30, 20192020 is primarily duerelated to forfeiturescertain officers not reaching performance targets for restricted stock units.
Depreciation and amortization decreased $2 million and $10 million for the three and nine months ended September 30, 2020 and September 30, 2019, respectively, and included $17 million and $50 million of non-vested options from terminated individuals.acquisition related
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Depreciationamortization for the three and nine months ended September 30, 2020, respectively, and $17 million and $51 million of acquisition related amortization consisted of the following:
| | | | | | | | | | |
| | Three months ended | | Nine months ended |
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| | September 30, | | September 30, |
| |||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| |
| | amounts in millions |
| |||||||
Affiliate agreements |
| $ | 1 |
| 1 |
| 3 |
| 3 | |
Customer relationships | |
| 13 |
| 13 |
| 37 |
| 37 | |
Other technology | | | 3 | | 3 | | 11 | | 11 | |
Acquisition related amortization | |
| 17 |
| 17 |
| 51 |
| 51 | |
Property and equipment | |
| 43 |
| 43 |
| 143 |
| 130 | |
Software amortization | |
| 20 |
| 25 |
| 64 |
| 71 | |
Channel placement amortization and related expenses | |
| 32 |
| 23 |
| 96 |
| 54 | |
Total depreciation and amortization |
| $ | 112 |
| 108 |
| 354 |
| 306 | |
Forfor the three and nine months ended September 30, 2019, channel placement amortization expense increasedrespectively. The decrease was primarily due to new television distribution contracts entered into at HSN. For the nine months ended September 30, 2019, property, plant and equipment depreciation increased due toa result of the disposition of assets in France in the second quarter of 2019.
Transaction related costs were zero and $1 million for the three and nine months ended September 30, 2019, respectively, and $41 million and $50 million for the three and nine months ended September 30, 2018, respectively. The costs in the prior year related to the Company’s acquisition of HSN on December 29, 2017 and related follow on restructuring activities.
Zulily. Zulily is an online retailer offering customers a fun and entertaining shopping experience with a fresh selection of new product styles launched each day. The Zulily website was launched in January 2010 with the goal of revolutionizing the way consumers shop. Through its app, mobile and desktop experiences, Zulily helps its customers discover new and unique products at great values that they would likely not find elsewhere. Zulily’s merchandise includes women’s, children’s and men’s apparel and other products such as home, accessories and beauty products.
Zulily's stand-alone operating results for the three and nine months ended September 30, 20192020 and 20182019 were as follows:
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| | Three months ended | | Nine months ended |
| | Three months ended | | Nine months ended |
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| | September 30, | | September 30, |
| | September 30, | | September 30, |
| ||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||
| | amounts in millions |
| | amounts in millions |
| ||||||||||||||
Net revenue |
| $ | 359 |
| 432 |
| 1,119 |
| 1,266 | |
| $ | 395 |
| 359 |
| 1,133 |
| 1,119 | |
Costs of sales | | | (267) |
| (319) |
| (832) |
| (928) | | | | (288) |
| (267) |
| (836) |
| (832) | |
Operating expenses | | | (10) |
| (12) |
| (31) |
| (35) | | | | (11) |
| (10) |
| (31) |
| (31) | |
SG&A expenses (excluding stock-based compensation) | | | (74) |
| (83) |
| (224) |
| (229) | | | | (69) |
| (74) |
| (192) |
| (224) | |
Adjusted OIBDA | | | 8 |
| 18 |
| 32 |
| 74 | | | | 27 |
| 8 |
| 74 |
| 32 | |
Stock-based compensation | | | (4) |
| (5) |
| (12) |
| (13) | | | | (4) |
| (4) |
| (11) |
| (12) | |
Depreciation and amortization | | | (26) |
| (51) |
| (78) |
| (154) | | | | (20) |
| (26) |
| (60) |
| (78) | |
Impairment of intangible assets | | | (1,020) | | — | | (1,020) | | — | | | | — | | (1,020) | | — | | (1,020) | |
Operating income (loss) |
| $ | (1,042) |
| (38) |
| (1,078) |
| (93) | |
| $ | 3 |
| (1,042) |
| 3 |
| (1,078) | |
Zulily's consolidated net revenue decreased 16.9%increased 10.0% and 11.6%1.3% for the three and nine months ended September 30, 2019,2020, respectively, as compared to the corresponding periods in the prior year. The decreaseincrease in net revenue for the three months ended September 30, 2020 was primarily related to an increase of 4.7% in total units shipped and 6.7% in average sale price driven by increased demand for online shopping and Zulily’s merchandise as a result of stay-at-home orders and the temporary closure of brick-and-mortar retail due to COVID-19 and higher merchandise pricing. The increase in net revenue for the nine months ended September 30, 20192020 was primarily attributed to decreasesincreased demand in the nine months ended September 30, 2020 and an increase of 15.7% and 8.5%, respectively,4.6% in total units shipped drivenaverage sale price, partially offset by a decrease in new customers and lower purchasing frequency from existing customers compared to the corresponding periods in the prior year, and decreases of 1.0% and 2.8%, respectively, in ASP due to a change in customer behavior towards lower price points.year.
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Zulily's cost of sales as a percentage of net revenue was 74.4%72.9% and 73.8%74.4% for the three months ended September 30, 20192020 and 2018,2019, respectively, and 74.4%73.8% and 73.3%74.4% for the nine months ended September 30, 20192020 and 2018,2019, respectively. For the three and nine months ended September 30, 2019,2020, the increasedecrease was primarily due to an increase of 6.7% in freight costs and lower ASP.average sale price.
Operating expenses are principally comprised of credit card processing fees and customer service expenses. For the three and nine months ended September 30, 2019,2020, operating expenses decreasedincreased compared to the corresponding period in the prior year, driven by lowerincreased sales volumes. For the nine months ended September 30, 2020, operating expenses remained flat.
Zulily’s SG&A expenses (excluding stock-based compensation) include personnel related costs for general corporate functions, marketing and advertising expenses, information technology, and the costs associated with the use by these functions of facilities and equipment, including rent. For the three months ended September 30, 2019,2020, as a percentage of net revenue, these expenses increaseddecreased from 19.2%20.6% to 20.6%17.5%, and for the nine months ended September 30, 2019,2020, as a percentage of net revenue, these expenses increaseddecreased from 18.1%20.0% to 20.0%16.9%. The increasedecrease is primarily attributable to anlower marketing spend and better leverage attributable to the increase in wages and benefits and deleverage onsales. Additionally, Zulily recognized a $10 million reduction in a sales tax accrual during the decline in sales.nine months ended September 30, 2020, which was originally recorded at the acquisition date.
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Zulily’s total depreciation and amortization of intangible assets expense decreased for the three and nine months ended September 30, 2019,2020, as compared to the corresponding periods in the prior year. The decreasedecline is primarily attributabledue to certainthe amortization of Zulily’s assets recognizedcustomer relationship asset being front-loaded in purchase accounting becoming fully amortized during 2018.
For discussionthe earlier years of the impairment of intangible assets, see note 6 of the accompanying condensed consolidated financial statements.its useful life.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to market risk in the normal course of business due to our ongoing investing and financial activities and the conduct of operations by our subsidiaries in different foreign countries. Market risk refers to the risk of loss arising from adverse changes in 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. We have established policies, procedures and internal processes governing our management of market risks and the use of financial instruments to manage our exposure to such risks.
We are exposed to changes in interest rates primarily as a result of our borrowing and investment activities, which include investments in fixed and floating rate debt instruments and borrowings used to maintain liquidity and to fund business operations. The nature and amount of our long-term and short-term debt are expected to vary as a result of future requirements, market conditions and other factors. We manage our exposure to interest rates by maintaining what we believe is an appropriate mix of fixed and variable rate debt. We believe this best protects us from interest rate risk. We have achieved this mix by (i) issuing fixed rate debt that we believe has a low stated interest rate and significant term to maturity, (ii) issuing variable rate debt with appropriate maturities and interest rates and (iii) entering into interest rate swap arrangements when we deem appropriate. As of September 30, 2019,2020, our debt is comprised of the following amounts:
| | | | | | | | | | | | | | | | | | | | | | |
| | Variable rate debt | | Fixed rate debt |
| | Variable rate debt | | Fixed rate debt |
| ||||||||||||
|
| | |
| Weighted |
| | |
| Weighted |
|
| | |
| Weighted |
| | |
| Weighted |
|
| | Principal | | average | | Principal | | average |
| | Principal | | average | | Principal | | average |
| ||||
| | amount | | interest rate | | amount | | interest rate |
| | amount | | interest rate | | amount | | interest rate |
| ||||
| | dollar amounts in millions |
| | dollar amounts in millions |
| ||||||||||||||||
QxH and QVC International |
| $ | 1,240 | | 3.4 | % | $ | 3,750 | | 4.8 | % |
| $ | — | | — | % | $ | 4,450 | | 5.0 | % |
Zulily | | $ | 162 | | 3.4 | % | $ | — | | — | % | |||||||||||
Corporate and other |
| $ | — | | — | % | $ | 2,290 | | 5.1 | % |
| $ | — | | — | % | $ | 2,204 | | 5.1 | % |
Qurate Retail is exposed to foreign exchange rate fluctuations related primarily to the monetary assets and liabilities and the financial results of QVC's 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 generally 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
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adjustments. Cumulative translation adjustments are recorded in accumulated other comprehensive earnings (loss) as a separate component of stockholders' 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 translations) or realized upon settlement of the transactions. Cash flows from our operations in foreign countries are translated at the average rate for the period. Accordingly, Qurate Retail may experience economic loss and a negative impact on earnings and equity with respect to our holdings solely as a result of foreign currency exchange rate fluctuations. QVC's reported Adjusted OIBDA for the nine months ended September 30, 20192020 would have been impacted by approximately $3$4 million, for every 1% change in foreign currency exchange rates relative to the U.S. Dollar.
We periodically assess the effectiveness of our derivative financial instruments. With regard to interest rate swaps, we monitor the fair value of interest rate swaps as well as the effective interest rate the interest rate swap yields, in comparison to historical interest rate trends. We believe that any losses incurred with regard to interest rate swaps would be largely offset by the effects of interest rate movements on the underlying debt facilities. These measures allow our management to evaluate the success of our use of derivative instruments and to determine when to enter into or exit from derivative instruments.
Item 4. Controls and ProceduresProcedures..
Disclosure Controls and Procedures
In accordance with Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended, 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
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the Company's disclosure controls and procedures were not effective as of September 30, 20192020 because of the material weaknessesweakness in our internal control over financial reporting as discussed in more detail in our Annual Report on Form 10-K for the year ended December 31, 2018 (the “2018 Form 10-K”).2019 10-K. Management has continued to monitor the implementation of the remediation plan described in the 2018 Form2019 10-K, as described below.
Changes in Internal Control Over Financial Reporting
During the third quarter of 2019,2020, we continued to review the design of our controls, made adjustmentsassess Information Technology system related risks and continued implementing controlsimplement control improvements to alleviate the noted control deficiencies. Other than these items, there has been no change in the Company's internal control over financial reporting that occurred during the three months ended September 30, 20192020 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting. We have not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees are working remotely due to the COVID-19 pandemic.
Remediation Plan for Material WeaknessesWeakness in Internal Control Over Financial Reporting
In response to the material weaknessesweakness identified in Management’s Report on Internal Control Over Financial Reporting as set forth in Part II, Item 9A in the 2018 Form2019 10-K, the Company developed a plan with oversight from the Audit Committee of the Board of Directors of Qurate Retail to remediate the material weaknesses.weakness. The remediation efforts being implemented include the following:
● |
● |
● |
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The Company believeshas appropriately restricted access to the foregoing efforts will remediateaffected IT systems in Germany and has implemented annual and ongoing processes to assess and address risk in the material weaknesses disclosed in our 2018 Form 10-K. BecauseIT environment. However, because the reliability of the internal control process requires repeatable execution, the successful on-going remediation of the material weaknessesweakness will require on-going reviewrisk assessments and evidence of effectiveness priorcontrol improvements to concluding thatmitigate risks identified. We expect to conclude the controls are effective. Our remediation efforts are underway, and we expect that theeffective remediation of thesethe material weaknesses will be completedweakness prior to the end of 2019.
Additionally, the Company will continue to enhance the ITGC and U.K. revenue risk assessment process, evaluate talent and address identified gaps, deliver training on internal control over financial reporting, and monitor information system access and program changes to determine whether additional adjustments should be made to reduce or eliminate the occurrence of access and program change management issues.2020.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Share Repurchase Programs
In March 2018, the board authorized the repurchase of $693 million of Series A QVC Group common stock. In May 2019, the board authorized the repurchase of an additional $500 million of Series A or Series B Qurate Retail common stock. The previous authorization with respect to QVC GroupThere were no repurchases of Series A or Series B common stock remained effective and applied to Qurate Retail common stock.
A summary of the repurchase activity forduring the three months ended September 30, 2019 is as follows:2020. As of September 30, 2020, $497 million was available to be used for share repurchases of Series A or Series B common stock under the Company’s share repurchase program.
| | | | | | | | | | | | |||
| | Series A Qurate Retail Common Stock |
| |||||||||||
|
| |
| | |
| (c) Total Number |
| (d) Maximum Number |
| ||||
| | | | | | | of Shares | | (or Approximate Dollar |
| ||||
| | | | | | | Purchased as | | Value) of Shares that |
| ||||
| | (a) Total Number | | (b) Average | | Part of Publicly | | May Yet Be Purchased |
| |||||
| | of Shares | | Price Paid per | | Announced Plans or | | Under the Plans or |
| |||||
Period | | Purchased | | Share | | Programs | | Programs |
| |||||
July 1 - 31, 2019 |
| 5,235,698 | | $ | 12.81 |
| 5,235,698 | | | $526 | million | |||
August 1 - 31, 2019 |
| 2,164,700 | | $ | 13.33 |
| 2,164,700 | | | $497 | million | |||
September 1 - 30, 2019 |
| — | | $ | — |
| — | | | $497 | million | |||
Total |
| 7,400,398 | | $ | 12.96 |
| 7,400,398 | | | | |
During the three months ended September 30, 2019,2020, no shares of Series A Qurate Retail common stock were surrendered by our officers and employees to pay withholding taxes and other deductions in connection with the vesting of their restricted stock and restricted stock units.
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Item 6. Exhibits
(a) Exhibits
Listed below are the exhibits which are filed as a part of this Quarterly Report (according to the number assigned to them in Item 601 of Regulation S-K):
| | |
4.2 | | |
10.1 | | |
10.2 | | |
31.1 | | |
31.2 | | |
32 | | |
99.1 | | |
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 |
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SIGNATURES
Pursuant to the requirements 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.
| | QURATE RETAIL, INC. | |
Date: November | | By: | /s/ MICHAEL A.GEORGE |
| | | Michael A. George President and Chief Executive Officer |
Date: November | | By: | /s/ BRIAN J. WENDLING |
| | | Brian J. Wendling
|
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