qrtea_Current folio_10Q

Table of Contents

 

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, 2018

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)

 


incorporation or organization)

 


Identification No.)

 

State of Delaware

(State or other jurisdiction of
incorporation or organization)

84-1288730

(I.R.S. Employer
Identification No.)

 

 

12300 Liberty Boulevard
Englewood, Colorado

(Address of principal executive offices)

80112

(Zip Code)

 

Registrant's telephone number, including area code: (720) 875-5300

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, 2018 was:

 

 

 

 

 

Series A common stock

 

420,149,728

 

Series B common stock

 

29,258,343

 

 

 

 


 

Table of Contents

Table of Contents

 

 

 

 

PART I – FINANCIAL INFORMATION 

 

 

Item 1. Financial Statements. 

 

 

QURATE RETAIL, INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (unaudited) 

    

I-3

QURATE RETAIL, INC. AND SUBSIDIARIES Condensed Consolidated Statements Of Operations (unaudited) 

 

I-5

QURATE RETAIL, INC. AND SUBSIDIARIES Condensed Consolidated Statements Of Comprehensive Earnings (Loss) (unaudited) 

 

I-7

QURATE RETAIL, INC. AND SUBSIDIARIES Condensed Consolidated Statements Of Cash Flows (unaudited) 

 

I-8

QURATE RETAIL, INC. AND SUBSIDIARIES Condensed Consolidated Statement Of Equity (unaudited) 

 

I-9

QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (unaudited) 

 

I-10

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 

 

I-31

Item 3. Quantitative and Qualitative Disclosures about Market Risk. 

 

I-46

Item 4. Controls and Procedures. 

 

I-47

 

 

 

PART II—OTHER INFORMATION 

 

II-1

Item 1. Legal Proceedings 

 

II-1

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

 

II-1

Item 6. Exhibits 

 

II-2

 

 

 

SIGNATURES 

 

II-3

 

I-2


 

Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(unaudited)

 

 

 

 

 

 

 

 

 

    

September 30,

    

December 31,

 

 

 

2018

 

2017

 

 

 

amounts in millions

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

532

 

903

 

Trade and other receivables, net of allowance for doubtful accounts of $96 million and $92 million, respectively

 

 

1,186

 

1,726

 

Inventory, net

 

 

1,727

 

1,411

 

Other current assets

 

 

198

 

125

 

Total current assets

 

 

3,643

 

4,165

 

Investments in equity securities (note 4)

 

 

376

 

2,363

 

Investments in affiliates, accounted for using the equity method

 

 

178

 

309

 

Property and equipment, net

 

 

1,300

 

1,341

 

Intangible assets not subject to amortization (note 8):

 

 

 

 

 

 

Goodwill

 

 

7,009

 

7,082

 

Trademarks

 

 

3,925

 

3,929

 

 

 

 

10,934

 

11,011

 

Intangible assets subject to amortization, net (note 8)

 

 

1,102

 

1,248

 

Other assets, at cost, net of accumulated amortization

 

 

140

 

50

 

Assets of discontinued operations (note 4)

 

 

 —

 

3,635

 

Total assets

 

$

17,673

 

24,122

 

 

(continued)

 

See accompanying notes to condensed consolidated financial statements.

I-3


 

Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Continued)

(unaudited)

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

 

 

2018

 

2017

 

 

 

amounts in millions,

 

 

 

except share amounts

 

Liabilities and Equity

    

 

    

    

    

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

1,166

 

1,151

 

Accrued liabilities

 

 

955

 

1,125

 

Current portion of debt, including $1,054 million and $978 million measured at fair value (note 9)

 

 

1,472

 

996

 

Other current liabilities

 

 

175

 

169

 

Total current liabilities

 

 

3,768

 

3,441

 

Long-term debt, including $372 million and $868 million measured at fair value (note 9)

 

 

5,885

 

7,553

 

Deferred income tax liabilities

 

 

2,008

 

2,500

 

Other liabilities

 

 

255

 

242

 

Liabilities of discontinued operations (note 4)

 

 

 —

 

303

 

Total liabilities

 

 

11,916

 

14,039

 

Equity

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

Preferred stock, $.01 par value. Authorized 50,000,000 shares; no shares issued

 

 

 —

 

 —

 

Series A Qurate Retail common stock, $.01 par value. Authorized 4,000,000,000 shares; issued and outstanding 426,254,718 shares at September 30, 2018 and 449,335,940 shares at December 31, 2017

 

 

 5

 

 5

 

Series B Qurate Retail common stock, $.01 par value. Authorized 150,000,000 shares; issued and outstanding 29,258,343 shares at September 30, 2018 and 29,203,895 shares at December 31, 2017

 

 

 —

 

 —

 

Series C Qurate Retail common stock, $.01 par value. Authorized 400,000,000 shares; no shares issued

 

 

 —

 

 —

 

Series A Liberty Ventures common stock, $.01 par value. Authorized 400,000,000 shares; issued and outstanding 81,686,659 shares at December 31, 2017

 

 

NA

 

 1

 

Series B Liberty Ventures common stock, $.01 par value. Authorized 15,000,000 shares; issued and outstanding 4,455,311 shares at December 31, 2017

 

 

NA

 

 —

 

Series C Liberty Ventures common stock, $.01 par value. Authorized 400,000,000 shares; no shares issued

 

 

NA

 

 —

 

Additional paid-in capital

 

 

 —

 

1,043

 

Accumulated other comprehensive earnings (loss), net of taxes

 

 

(116)

 

(133)

 

Retained earnings

 

 

5,747

 

9,068

 

Total stockholders' equity

 

 

5,636

 

9,984

 

Noncontrolling interests in equity of subsidiaries

 

 

121

 

99

 

Total equity

 

 

5,757

 

10,083

 

Commitments and contingencies (note 10)

 

 

 

 

 

 

Total liabilities and equity

 

$

17,673

 

24,122

 

 

See accompanying notes to condensed consolidated financial statements.

I-4


 

Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements Of Operations

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

    

2018

    

2017

    

2018

    

2017

 

 

 

amounts in millions

 

Total revenue, net

 

$

3,231

 

2,381

 

 

9,694

 

7,060

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of retail sales (exclusive of depreciation shown separately below)

 

 

2,109

 

1,554

 

 

6,252

 

4,553

 

Operating expense

 

 

241

 

160

 

 

707

 

461

 

Selling, general and administrative, including stock-based compensation and transaction related costs (note 5)

 

 

477

 

279

 

 

1,357

 

777

 

Depreciation and amortization

 

 

167

 

180

 

 

489

 

594

 

 

 

 

2,994

 

2,173

 

 

8,805

 

6,385

 

Operating income (loss)

 

 

237

 

208

 

 

889

 

675

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(94)

 

(88)

 

 

(288)

 

(267)

 

Share of earnings (losses) of affiliates, net

 

 

(29)

 

(86)

 

 

(89)

 

(122)

 

Realized and unrealized gains (losses) on financial instruments, net (note 7)

 

 

(27)

 

 4

 

 

92

 

280

 

Other, net

 

 

 1

 

 7

 

 

(8)

 

 1

 

 

 

 

(149)

 

(163)

 

 

(293)

 

(108)

 

Earnings (loss) from continuing operations before income taxes

 

 

88

 

45

 

 

596

 

567

 

Income tax (expense) benefit

 

 

(6)

 

33

 

 

(60)

 

(127)

 

Earnings (loss) from continuing operations

 

 

82

 

78

 

 

536

 

440

 

Earnings (loss) from discontinued operations, net of taxes

 

 

 —

 

230

 

 

141

 

571

 

Net earnings (loss)

 

 

82

 

308

 

 

677

 

1,011

 

Less net earnings (loss) attributable to the noncontrolling interests

 

 

10

 

12

 

 

34

 

33

 

Net earnings (loss) attributable to Qurate Retail, Inc. shareholders

 

$

72

 

296

 

 

643

 

978

 

 

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) attributable to Qurate Retail, Inc. shareholders:

 

 

 

 

 

 

 

 

 

 

 

Qurate Retail common stock (note 1)

 

$

72

 

119

 

 

401

 

321

 

Liberty Ventures common stock (note 1)

 

 

 —

 

177

 

 

242

 

657

 

 

 

$

72

 

296

 

 

643

 

978

 

 

 

 

 

 

 

 

 

 

 

(Continued)

 

 

See accompanying notes to condensed consolidated financial statements.

I-5


 

Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements Of Operations (Continued)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

 

2018

    

2017

    

2018

    

2017

 

Basic net earnings (losses) from continuing operations attributable to Qurate Retail, Inc. shareholders per common share (note 6):

 

 

 

 

 

 

 

 

 

 

 

Series A and Series B Qurate Retail common stock

 

$

0.16

 

0.27

 

 

0.86

 

0.71

 

Series A and Series B Liberty Ventures common stock

 

$

NA

 

(0.62)

 

 

1.17

 

1.01

 

Diluted net earnings (losses) from continuing operations attributable to Qurate Retail, Inc. shareholders per common share (note 6):

 

 

 

 

 

 

 

 

 

 

 

Series A and Series B Qurate Retail common stock

 

$

0.16

 

0.26

 

 

0.85

 

0.71

 

Series A and Series B Liberty Ventures common stock

 

$

NA

 

(0.61)

 

 

1.16

 

1.00

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net earnings (losses) attributable to Qurate Retail, Inc. shareholders per common share (note 6):

 

 

 

 

 

 

 

 

 

 

 

Series A and Series B Qurate Retail common stock

 

$

0.16

 

0.27

 

 

0.86

 

0.71

 

Series A and Series B Liberty Ventures common stock

 

$

NA

 

2.06

 

 

2.81

 

7.73

 

Diluted net earnings (losses) attributable to Qurate Retail, Inc. shareholders per common share (note 6):

 

 

 

 

 

 

 

 

 

 

 

Series A and Series B Qurate Retail common stock

 

$

0.16

 

0.26

 

 

0.85

 

0.71

 

Series A and Series B Liberty Ventures common stock

 

$

NA

 

2.03

 

 

2.78

 

7.64

 

 

See accompanying notes to condensed consolidated financial statements.

 

I-6


 

Table of Contents

 

QURATE RETAIL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements Of Comprehensive Earnings (Loss)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

Nine months ended

 

 

 

September 30,

 

September 30,

 

 

    

2018

    

2017

    

2018

    

2017

 

 

 

amounts in millions

 

Net earnings (loss)

 

$

82

 

308

 

677

 

1,011

 

Other comprehensive earnings (loss), net of taxes:

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(21)

 

28

 

(46)

 

111

 

Recognition of previously unrealized losses (gains) on debt, net

 

 

 —

 

 —

 

16

 

 —

 

Share of other comprehensive earnings (losses) of equity affiliates

 

 

 —

 

 —

 

(1)

 

 3

 

Comprehensive earnings (loss) attributable to debt credit risk adjustments

 

 

 4

 

 —

 

(28)

 

 —

 

Other comprehensive earnings (loss)

 

 

(17)

 

28

 

(59)

 

114

 

Comprehensive earnings (loss)

 

 

65

 

336

 

618

 

1,125

 

Less comprehensive earnings (loss) attributable to the noncontrolling interests

 

 

 7

 

12

 

34

 

38

 

Comprehensive earnings (loss) attributable to Qurate Retail, Inc. shareholders

 

$

58

 

324

 

584

 

1,087

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

I-7


 

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QURATE RETAIL, INC. AND SUBSIDIARIES

 

Condensed Consolidated Statements Of Cash Flows

(unaudited)

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

 

September 30,

 

 

    

2018

    

2017

 

 

 

amounts in millions

 

Cash flows from operating activities:

 

 

 

 

 

 

Net earnings (loss)

 

$

677

 

1,011

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

(Earnings) loss from discontinued operations

 

 

(141)

 

(571)

 

Depreciation and amortization

 

 

489

 

594

 

Stock-based compensation

 

 

67

 

59

 

Share of (earnings) losses of affiliates, net

 

 

89

 

122

 

Cash receipts from returns on equity investments

 

 

 —

 

21

 

Realized and unrealized (gains) losses on financial instruments, net

 

 

(92)

 

(280)

 

Deferred income tax expense (benefit)

 

 

(84)

 

21

 

Other, net

 

 

29

 

 8

 

Changes in operating assets and liabilities

 

 

 

 

 

 

Current and other assets

 

 

444

 

162

 

Payables and other liabilities

 

 

(482)

 

(67)

 

Net cash provided (used) by operating activities

 

 

996

 

1,080

 

Cash flows from investing activities:

 

 

 

 

 

 

Cash proceeds from dispositions of investments

 

 

281

 

 —

 

Investments in and loans to cost and equity investees

 

 

(73)

 

(140)

 

Capital expended for property and equipment

 

 

(172)

 

(126)

 

Other investing activities, net

 

 

(120)

 

(36)

 

Net cash provided (used) by investing activities

 

 

(84)

 

(302)

 

Cash flows from financing activities:

 

 

 

 

 

 

Borrowings of debt

 

 

3,142

 

1,689

 

Repayments of debt

 

 

(3,415)

 

(1,917)

 

GCI Liberty Split-Off

 

 

(475)

 

 —

 

Repurchases of Qurate Retail common stock

 

 

(623)

 

(452)

 

Withholding taxes on net settlements of stock-based compensation

 

 

(24)

 

(14)

 

Indemnification payment from GCI Liberty, Inc.

 

 

133

 

 —

 

Other financing activities, net

 

 

(21)

 

(26)

 

Net cash provided (used) by financing activities

 

 

(1,283)

 

(720)

 

Effect of foreign currency exchange rates on cash, cash equivalents and restricted cash

 

 

(2)

 

13

 

Net increase (decrease) in cash, cash equivalents and restricted cash

 

 

(373)

 

71

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

912

 

836

 

Cash, cash equivalents and restricted cash at end of period

 

$

539

 

907

 

 

See accompanying notes to condensed consolidated financial statements.

 

I-8


 

Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

Condensed Consolidated Statement Of Equity

(unaudited)

Nine months ended September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

Option exercises

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 2

 

 —

 

 —

 

 —

 

 2

 

Withholding taxes on net share settlements of stock-based compensation

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

(24)

 

 —

 

 —

 

 —

 

(24)

 

Cumulative effect of accounting change (note 2)

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

76

 

(70)

 

 —

 

 6

 

Reattribution of the Ventures Group to the Qurate Retail

 

 

 —

 

 —

 

 —

 

(1)

 

 —

 

 1

 

 —

 

 —

 

 —

 

 —

 

GCI Liberty Split-Off

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

(4,360)

 

 —

 

 —

 

11

 

(4,349)

 

Reclassification

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

3,894

 

 —

 

(3,894)

 

 —

 

 —

 

Balance at September 30, 2018

 

$

 —

 

 5

 

 —

 

 —

 

 —

 

 —

 

(116)

 

5,747

 

121

 

5,757

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

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Table of Contents

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 Transactions defined and described below, or “Liberty”) 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”), zulily, llc (“zulily”), and HSN, Inc. (“HSNi” which includes its televised shopping business “HSN” and its catalog retail business “Cornerstone”), 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, HSNi 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, 2017, 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. 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, 2017.

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 measurement, (ii) accounting for income taxes, (iii) assessments of other-than-temporary declines in fair value of its investments and (iv) estimates of retail-related adjustments and allowances to be its most significant estimates.   

Prior to the Transactions (described and defined below), the Company utilized tracking stocks in its capital structure. A tracking stock is 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. Qurate Retail had two 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 and HSNi (as of December 29, 2017), 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”), FTD Companies, Inc. (“FTD”), 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 29, 2017, Qurate Retail acquired the approximately 62% of HSNi it did not already own in an all-stock transaction making HSNi a wholly-owned subsidiary. HSNi stockholders (other than Qurate Retail) received fixed consideration of 1.65 shares of Series A QVC Group common stock (“QVCA”) for each share of HSNi common stock. Qurate Retail issued 53.6 million shares QVCA common stock to HSNi stockholders.

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 “Transactions”) among General Communication, Inc. (“GCI”), an Alaska corporation, and Liberty Interactive LLC, a

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Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

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, FTD, 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.

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.

On October 17, 2018, Qurate Retail announced a series of initiatives designed to better position its HSNi and QVC- U.S. businesses (“QRG Initiatives”). As part of the QRG Initiatives, QVC will close its fulfillment center in Lancaster, Pennsylvania and has entered into an agreement to lease a new fulfillment center in Bethlehem, Pennsylvania, commencing in 2019 (see note 10). 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.

As a result of repurchases of Series A Qurate Retail common stock and the GCI Liberty Split-Off, the Company’s additional paid-in capital balance was in a deficit position as of September 30, 2018.  In order to ensure that the additional paid-in capital account is not negative, we reclassified the amount of the deficit ($3.9 billion) at September 30, 2018 to retained earnings.

Qurate Retail holds investments that are accounted for using the equity method. Qurate Retail does not control the decision making process or business management practices of these affiliates. Accordingly, Qurate Retail relies on management of these affiliates to provide it with accurate financial information prepared in accordance with GAAP that Qurate Retail uses in the application of the equity method. In addition, Qurate Retail relies on audit reports that are provided by the affiliates' independent auditors on the financial statements of such affiliates. The Company is not aware, however, of any errors in or possible misstatements of the financial information provided by its equity affiliates that would have a material effect on Qurate Retail's condensed consolidated 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,

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Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

services agreement and facilities sharing agreement. Neither Qurate Retail nor LMC has any stock ownership, beneficial or otherwise, in the other.

 

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 and $3 million was reimbursable to LMC for the three months ended September 30, 2018 and 2017, respectively, and $6 million and $8 million was reimbursable to LMC for the nine months ended September 30, 2018 and 2017, respectively. 

 

The Tax Cuts and Jobs Act (the “Tax Act”) was enacted in December 2017. The Tax Act significantly changed U.S. tax law by, among other things, lowering the U.S. corporate income tax rate, implementing a territorial tax system and imposing a one-time transition tax on deemed repatriated earnings of foreign subsidiaries.  In the prior year, we recognized the provisional tax impacts related to the one-time transition tax and the revaluation of deferred tax balances and included these estimates in our consolidated financial statements for the year ended December 31, 2017. We are still in the process of analyzing the impact of the various provisions of the Tax Act. The ultimate impact may materially differ from these provisional amounts due to, among other things, continued analysis of the estimates and further guidance and interpretations on the application of the law. We expect to complete our analysis by December 2018.

 

(2) Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Revenue Recognition. In May 2014, the Financial Accounting Standards Board (the “FASB”) issued new accounting guidance on revenue from contracts with customers.  The new guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In March 2016, the FASB issued additional guidance which clarifies principal versus agent considerations, and in April 2016, the FASB issued further guidance which clarifies the identification of performance obligations and the implementation guidance for licensing. On January 1, 2018, the Company adopted the revenue accounting standard using the modified retrospective method. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company does not expect the adoption of the new revenue standard to have a material impact to our net income on an ongoing basis. Refer to the table below for the adoption of this guidance.

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Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Balance at

 

Adjustments

 

Balance at

 

 

 

December 31, 

 

Due to ASU

 

January 1,

 

 

 

2017

 

2014-09

 

2018

 

 

 

in millions

 

Assets: 

 

 

 

 

 

 

 

Inventory, net

$

1,411

 

(27)

 

1,384

 

Other current assets

$

125

 

(11)

 

114

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

Other current liabilities

$

169

 

(46)

 

123

 

Deferred income tax liabilities

$

2,500

 

2

 

2,502

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

Retained earnings

$

9,068

 

6

 

9,074

 

 

In accordance with the new revenue standard requirements, the following table illustrates the impact on our reported results in the condensed consolidated statements of operations assuming we did not adopt the new revenue standard on January 1, 2018. Other than as previously discussed, upon the adoption of the new revenue standard on January 1, 2018, there were no additional material adjustments to our condensed consolidated balance sheet as of September 30, 2018.

 

 

 

 

 

 

 

 

 

 

 

As reported

 

 

 

Balance without

 

 

 

Three months ended

 

 

 

adoption of

 

 

 

September 30, 2018

 

Impact of ASC 606

 

ASC 606

 

 

 

in millions

 

Net revenue

$

3,231

 

(54)

 

3,177

 

 

 

 

 

 

 

 

 

Cost of retail sales

$

2,109

 

(11)

 

2,098

 

Selling, general and administrative expenses, including stock-based compensation and transaction related costs

$

477

 

(31)

 

446

 

Operating expense

$

241

 

(1)

 

240

 

Income tax (expense) benefit

$

(6)

 

3  

 

(3)

 

Net income

$

72

 

(8)

 

64

 

 

 

 

 

 

 

 

 

 

 

 

 

As reported

 

 

 

Balance without

 

 

 

Nine months ended

 

 

 

adoption of

 

 

 

September 30, 2018

 

Impact of ASC 606

 

ASC 606

 

 

 

in millions

 

Net revenue

$

9,694

 

(142)

 

9,552

 

 

 

 

 

 

 

 

 

Cost of retail sales

$

6,252

 

(23)

 

6,229

 

Selling, general and administrative expenses, including stock-based compensation and transaction related costs

$

1,357

 

(94)

 

1,263

 

Operating expense

$

707

 

(3)

 

704

 

Income tax (expense) benefit

$

(60)

 

5  

 

(55)

 

Net income

$

643

 

(17)

 

626

 

 

The effect of changes of adoption is primarily due to changes in the timing of revenue recognition and the classification of credit card income for the QVC-branded credit card and the HSN-branded credit card. Additionally, for the three and nine months ended September 30, 2018, revenue is recognized at the time of shipment to our customers consistent with when control passes and credit card income is recognized in revenue. For the three and nine months ended September 30, 2017, revenue was recognized at the time of delivery to the customers and deferred revenue, as well as inventory and related expenses, were recorded to account for the shipments in-transit. In addition, credit card income was recognized as an offset to selling, general and administrative expenses.  The Company also recognized a separate $77 

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QURATE RETAIL, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

million asset (included in other current assets) relating to the expected return of inventory and a $190 million liability (included in other current liabilities) relating to its sales return reserve at September 30, 2018, instead of the net presentation that was used at December 31, 2017.

 

Disaggregated revenue by segment and product category consisted of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

September 30, 2018

 

 

 

QVC U.S.

 

QVC Int'l

 

HSN

 

zulily

 

Corp and other

 

Total

 

 

in millions

 

Home

$

497

 

235

 

216

 

118

 

170

 

1,236

 

Apparel

 

286

 

113

 

23

 

175

 

37

 

634

 

Beauty

 

228

 

148

 

67

 

11

 

 —

 

454

 

Accessories

 

180

 

64

 

62

 

105

 

 —

 

411

 

Electronics

 

115

 

26

 

92

 

 3

 

 —

 

236

 

Jewelry

 

79

 

51

 

39

 

12

 

 —

 

181

 

Other revenue

 

33

 

 3

 

14

 

 8

 

21

 

79

 

Total Revenue

$

1,418

 

640

 

513

 

432

 

228

 

3,231

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine months ended

 

 

September 30, 2018

 

 

 

QVC U.S.

 

QVC Int'l

 

HSN

 

zulily

 

Corp and other

 

Total

 

 

in millions

 

Home

$

1,450

 

730

 

640

 

341

 

520

 

3,681

 

Apparel

 

898

 

348

 

74

 

494

 

109

 

1,923

 

Beauty

 

717

 

450

 

200

 

35

 

 —

 

1,402

 

Accessories

 

560

 

203

 

170

 

329

 

 —

 

1,262

 

Electronics

 

290

 

74

 

255

 

11

 

 —

 

630

 

Jewelry

 

250

 

154

 

112

 

35

 

 —

 

551

 

Other revenue

 

97

 

13

 

44

 

21

 

70

 

245

 

Total Revenue

$

4,262

 

1,972

 

1,495

 

1,266

 

699

 

9,694

 

 

Consumer Product Revenue and Other Revenue. Qurate Retail's revenue includes sales of consumer products in the following categories: home, apparel, beauty, accessories, electronics and jewelry, which are primarily sold through live merchandise-focused televised shopping programs and via our websites and other interactive media, including catalogs.

 

Other revenue consists primarily of income generated from our company branded credit cards in which a large consumer financial services company provides revolving credit directly to the Company’s customers for the sole purpose of purchasing merchandise or services with these cards.  In return, the Company receives a portion of the net economics of the credit card program.

 

Revenue Recognition. Revenue is recognized when obligations with our customers are satisfied; generally this occurs at the time of shipment to our customers consistent with when control of the shipped product passes. The recognized revenue reflects the consideration we expect to receive in exchange for transferring goods, net of allowances for returns.

 

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Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

The Company recognizes revenue related to its company branded credit cards over time as the credit cards are used by Qurate Retail's customers.

 

Sales, value add, use and other taxes we collect concurrent with revenue-producing activities are excluded from revenue.

 

The Company has elected to treat shipping and handling activities after the customer obtains control of the goods as a fulfillment cost and not as a promised good or service.  Accordingly, the Company will accrue all fulfillment costs related to the shipping and handling of consumer goods at the time of shipment.

 

The Company generally has payment terms with its customers of one year or less and has elected the practical expedient applicable to such contracts not to consider the time value of money.

 

Significant Judgments. Qurate Retail’s products are generally sold with a right of return for up to 30 days after the date of shipment and we may provide other credits or incentives, which are accounted for as variable consideration when estimating the amount of revenue to recognize.  Returns and credits are estimated at contract inception and updated at the end of each reporting period as additional information becomes available. The Company has determined that it is the principal in vendor arrangements as the Company can establish control over the goods prior to shipment. Accordingly, the Company records revenue for these arrangements on a gross basis.

 

Recognition and Measurement of Financial Instruments. In January 2016, the FASB issued new accounting guidance that is intended to improve the recognition and measurement of financial instruments.  The new guidance requires equity investments with readily determinable fair values (except those accounted for under the equity method of accounting or those that result in consolidation) to be measured at fair value, with changes in fair value recognized in net income, and simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment. The Company adopted this guidance during the first quarter of 2018.  As the Company has historically measured its investments in equity securities with readily determinable fair values at fair value, the new guidance had no impact on the accounting for these instruments. The Company has elected the measurement alternative for its equity securities without readily determinable fair values and will perform a qualitative assessment of these instruments to identify potential impairments.  In addition, a portion of the unrealized gain (loss) recognized on the Company’s exchangeable debt accounted for at fair value is now presented in other comprehensive income as it relates to instrument specific credit risk, however this impact was not material to the overall financial statements for the period ended September 30, 2018. 

 

Statement of Cash Flows. In November 2016, the FASB issued new accounting guidance which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The Company adopted this guidance during the first quarter of 2018 and has reclassified prior period balances in cash and cash equivalents within the condensed consolidated statements of cash flows in order to conform with current period presentation. 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: