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 March 31, 2019 

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

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

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 April  30, 2019 was:

 

 

 

 

 

Series A common stock

 

400,279,393

 

Series B common stock

 

29,367,790

 

 

 

 


 

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 Statements Of Equity (unaudited) 

 

I-9

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

 

I-11

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

 

I-26

Item 3. Quantitative and Qualitative Disclosures about Market Risk. 

 

I-37

Item 4. Controls and Procedures. 

 

I-38

 

 

 

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)

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

2019

 

2018

 

 

 

amounts in millions

 

Assets

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$

508

 

653

 

Trade and other receivables, net of allowance for doubtful accounts of $118 million and $117 million, respectively

 

 

1,464

 

1,835

 

Inventory, net

 

 

1,562

 

1,474

 

Other current assets

 

 

184

 

224

 

Total current assets

 

 

3,718

 

4,186

 

Investments in equity securities

 

 

103

 

96

 

Property and equipment, net

 

 

1,304

 

1,322

 

Intangible assets not subject to amortization (note 6):

 

 

 

 

 

 

Goodwill

 

 

7,013

 

7,017

 

Trademarks

 

 

3,895

 

3,895

 

 

 

 

10,908

 

10,912

 

Intangible assets subject to amortization, net (note 6)

 

 

1,106

 

1,058

 

Other assets, at cost, net of accumulated amortization

 

 

658

 

267

 

Total assets

 

$

17,797

 

17,841

 

 

(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)

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

 

2019

 

2018

 

 

 

amounts in millions,

 

 

 

except share amounts

 

Liabilities and Equity

    

 

    

    

    

 

Current liabilities:

 

 

 

 

 

 

Accounts payable

 

$

938

 

1,204

 

Accrued liabilities

 

 

970

 

1,182

 

Current portion of debt, including $1,089 million and $990 million measured at fair value (note 7)

 

 

1,488

 

1,410

 

Other current liabilities

 

 

260

 

155

 

Total current liabilities

 

 

3,656

 

3,951

 

Long-term debt, including $383 million and $344 million measured at fair value (note 7)

 

 

5,955

 

5,963

 

Deferred income tax liabilities

 

 

1,887

 

1,925

 

Other liabilities

 

 

737

 

258

 

Total liabilities

 

 

12,235

 

12,097

 

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 400,253,222 shares at March 31, 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 29,386,390 shares at March 31, 2019 and 29,248,343 shares at December 31, 2018

 

 

 —

 

 —

 

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

 

 

 —

 

 —

 

Additional paid-in capital

 

 

 —

 

 —

 

Accumulated other comprehensive earnings (loss), net of taxes

 

 

(84)

 

(55)

 

Retained earnings

 

 

5,533

 

5,675

 

Total stockholders' equity

 

 

5,453

 

5,624

 

Noncontrolling interests in equity of subsidiaries

 

 

109

 

120

 

Total equity

 

 

5,562

 

5,744

 

Commitments and contingencies (note 9)

 

 

 

 

 

 

Total liabilities and equity

 

$

17,797

 

17,841

 

 

See accompanying notes to condensed consolidated financial statements.

I-4


 

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QURATE RETAIL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements Of Operations

(unaudited)

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31,

 

 

    

2019

    

2018

 

 

 

amounts in millions

 

Total revenue, net

 

$

3,085

 

3,230

 

Operating costs and expenses:

 

 

 

 

 

 

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

 

 

2,023

 

2,093

 

Operating expense

 

 

196

 

228

 

Selling, general and administrative, including stock-based compensation and transaction related costs (note 3)

 

 

425

 

452

 

Depreciation and amortization

 

 

153

 

163

 

 

 

 

2,797

 

2,936

 

Operating income (loss)

 

 

288

 

294

 

Other income (expense):

 

 

 

 

 

 

Interest expense

 

 

(96)

 

(98)

 

Share of earnings (losses) of affiliates, net

 

 

(45)

 

(14)

 

Realized and unrealized gains (losses) on financial instruments, net (note 5)

 

 

(81)

 

99

 

Other, net

 

 

(8)

 

11

 

 

 

 

(230)

 

(2)

 

Earnings (loss) from continuing operations before income taxes

 

 

58

 

292

 

Income tax (expense) benefit

 

 

 8

 

(36)

 

Earnings (loss) from continuing operations

 

 

66

 

256

 

Earnings (loss) from discontinued operations, net of taxes

 

 

 —

 

141

 

Net earnings (loss)

 

 

66

 

397

 

Less net earnings (loss) attributable to the noncontrolling interests

 

 

11

 

13

 

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

 

$

55

 

384

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Qurate Retail common stock (note 1)

 

$

55

 

142

 

Liberty Ventures common stock (note 1)

 

 

 —

 

242

 

 

 

$

55

 

384

 

 

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 

 

 

 

March 31,

 

 

 

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

 

$

0.13

 

0.30

 

Series A and Series B Liberty Ventures common stock

 

$

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

 

$

0.13

 

0.30

 

Series A and Series B Liberty Ventures common stock

 

$

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

 

$

0.13

 

0.30

 

Series A and Series B Liberty Ventures common stock

 

$

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

 

$

0.13

 

0.30

 

Series A and Series B Liberty Ventures common stock

 

$

NA

 

2.78

 

 

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 

 

 

 

March 31,

 

 

    

2019

    

2018

 

 

 

amounts in millions

 

Net earnings (loss)

 

$

66

 

397

 

Other comprehensive earnings (loss), net of taxes:

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(7)

 

71

 

Share of other comprehensive earnings (losses) of equity affiliates

 

 

 —

 

 1

 

Comprehensive earnings (loss) attributable to debt credit risk adjustments

 

 

(22)

 

(5)

 

Other comprehensive earnings (loss)

 

 

(29)

 

67

 

Comprehensive earnings (loss)

 

 

37

 

464

 

Less comprehensive earnings (loss) attributable to the noncontrolling interests

 

 

11

 

20

 

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

 

$

26

 

444

 

 

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)

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31,

 

 

    

2019

    

2018

 

 

 

amounts in millions

 

Cash flows from operating activities:

 

 

 

 

 

 

Net earnings (loss)

 

$

66

 

397

 

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

 

 

 

 

 

 

(Earnings) loss from discontinued operations

 

 

 —

 

(141)

 

Depreciation and amortization

 

 

153

 

163

 

Stock-based compensation

 

 

19

 

23

 

Non-cash interest expense

 

 

 7

 

 —

 

Share of (earnings) losses of affiliates, net

 

 

45

 

14

 

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

 

 

81

 

(99)

 

Deferred income tax expense (benefit)

 

 

(31)

 

(7)

 

Other, net

 

 

 2

 

 3

 

Changes in operating assets and liabilities

 

 

 

 

 

 

Current and other assets

 

 

313

 

303

 

Payables and other liabilities

 

 

(509)

 

(368)

 

Net cash provided (used) by operating activities

 

 

146

 

288

 

Cash flows from investing activities:

 

 

 

 

 

 

Investments in and loans to cost and equity investees

 

 

(43)

 

(22)

 

Capital expended for property and equipment

 

 

(61)

 

(47)

 

Other investing activities, net

 

 

(52)

 

(20)

 

Net cash provided (used) by investing activities

 

 

(156)

 

(89)

 

Cash flows from financing activities:

 

 

 

 

 

 

Borrowings of debt

 

 

731

 

2,026

 

Repayments of debt

 

 

(618)

 

(1,354)

 

GCI Liberty Split-Off

 

 

 —

 

(475)

 

Repurchases of Qurate Retail common stock

 

 

(210)

 

(217)

 

Withholding taxes on net settlements of stock-based compensation

 

 

(6)

 

(19)

 

Dividends paid to noncontrolling interest

 

 

(22)

 

(23)

 

Other financing activities, net

 

 

(6)

 

 1

 

Net cash provided (used) by financing activities

 

 

(131)

 

(61)

 

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

 

 

(4)

 

13

 

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

 

 

(145)

 

151

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

660

 

912

 

Cash, cash equivalents and restricted cash at end of period

 

$

515

 

1,063

 

 

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:

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31, 

 

 

 

2019

 

2018

 

 

in millions

Cash and cash equivalents

 

$

508

 

653

Restricted cash included in other current assets

 

 

7

 

7

Total cash, cash equivalents and restricted cash  in the condensed consolidated statement of cash flows

 

$

515

 

660

 

See accompanying notes to condensed consolidated financial statements.

 

I-8


 

Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

Condensed Consolidated Statement Of Equity

(unaudited)

Three months ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 January 1, 2019

 

$

 —

 

 4

 

 —

 

 —

 

(55)

 

5,675

 

120

 

5,744

 

Net earnings (loss)

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

55

 

11

 

66

 

Other comprehensive income (loss)

 

 

 —

 

 —

 

 —

 

 —

 

(29)

 

 —

 

 —

 

(29)

 

Stock compensation

 

 

 —

 

 —

 

 —

 

19

 

 —

 

 —

 

 —

 

19

 

Series A Qurate Retail stock repurchases

 

 

 —

 

 —

 

 —

 

(210)

 

 —

 

 —

 

 —

 

(210)

 

Distribution to noncontrolling interest

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

(22)

 

(22)

 

Withholding taxes on net share settlements of stock-based compensation

 

 

 —

 

 —

 

 —

 

(6)

 

 —

 

 —

 

 —

 

(6)

 

Reclassification

 

 

 —

 

 —

 

 —

 

197

 

 —

 

(197)

 

 —

 

 —

 

Balance at March 31, 2019

 

$

 —

 

 4

 

 —

 

 —

 

(84)

 

5,533

 

109

 

5,562

 

 

See accompanying notes to condensed consolidated financial statements.

 

I-9


 

Table of Contents

 

Condensed Consolidated Statement Of Equity

(unaudited)

Three months ended March 31, 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)

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

384

 

13

 

397

 

Other comprehensive income (loss)

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

60

 

 —

 

 7

 

67

 

Stock compensation

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

23

 

 —

 

 —

 

 —

 

23

 

Series A Qurate Retail stock repurchases

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

(217)

 

 —

 

 —

 

 —

 

(217)

 

Distribution to noncontrolling interest

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

(23)

 

(23)

 

Option exercises

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 1

 

 —

 

 —

 

 —

 

 1

 

Withholding taxes on net share settlements of stock-based compensation

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

(19)

 

 —

 

 —

 

 —

 

(19)

 

Cumulative effect of accounting change

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

 —

 

76

 

(69)

 

 —

 

 7

 

Reattribution of the Ventures Group to the QVC Group

 

 

 —

 

 —

 

 —

 

(1)

 

 —

 

 1

 

 —

 

 —

 

 —

 

 —

 

GCI Liberty Split-Off

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

(4,362)

 

 —

 

 —

 

11

 

(4,351)

 

Reclassification

 

 

 —

 

 —

 

 —

 

 —

 

 —

 

3,530

 

 —

 

(3,530)

 

 —

 

 —

 

Balance at March 31, 2018

 

$

 —

 

 5

 

 —

 

 —

 

 —

 

 —

 

 3

 

5,853

 

107

 

5,968

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

I-10


 

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”), 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”), 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, 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 quarter 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.

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.   

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, 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

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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.

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 HSN 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 8). As a result 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.”

As a result of repurchases of Series A Qurate Retail common stock, the Company’s additional paid-in capital balance was in a deficit position as of March 31, 2019.  In order to ensure that the additional paid-in capital account is not negative, we reclassified the amount of the deficit ($197 million) at March 31, 2019 to retained earnings.

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. Neither Qurate Retail nor LMC has any stock ownership, beneficial or otherwise, in the other. In connection with the GCI Liberty Split-Off, Qurate Retail and GCI Liberty (for accounting purposes a related party of Qurate Retail) entered into a tax sharing agreement.

 

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

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QURATE RETAIL, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

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 March 31, 2019 and 2018, respectively.  Qurate Retail has a tax sharing payable to GCI Liberty in the amount of approximately $112 million as of March 31, 2019, the majority of which is included in Other liabilities in the condensed consolidated balances sheets, with the exception of $37 million, which is included in Other current liabilities on the condensed consolidated balance sheets. 

 

Accounting Pronouncements Not Yet Adopted

 

Internal-Use Software.  In August 2018, 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, Charter 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 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 three months ended March 31, 2018, related to Evite. Included in net earnings (loss) in the accompanying condensed consolidated statements of operations are losses of $2 million for the three months ended March 31, 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 three months ended March 31, 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 

 

 

 

 

 

March 31,

 

 

 

 

 

2019

 

2018

 

 

 

 

 

amounts in millions

 

 

Earnings (loss) before income taxes

 

$

NA

 

187

 

 

Income tax (expense) benefit

 

$

NA

 

(46)

 

 

 

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QURATE RETAIL, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

The impact from discontinued operations on basic and diluted earnings (loss) per share is as follows:

 

 

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

 

 

March 31,

 

 

 

 

 

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

 

 

Series A and Series B Liberty Ventures common stock

 

$

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

 

 

Series A and Series B Liberty Ventures common stock

 

$

NA

 

1.62

 

 

 

 

 

 

(3)   Stock-Based Compensation

The Company has granted to certain of its directors, employees and employees of its subsidiaries, restricted stock, 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.

Included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations are $19 million and $23 million of stock-based compensation during the three months ended March 31, 2019 and 2018, respectively.

The following table presents the number and weighted average GDFV of options granted by the Company during the three months ended March 31, 2019:

 

 

 

 

 

 

 

 

 

Three months ended 

 

 

 

March 31, 2019

 

 

 

Options Granted (000's)

 

Weighted Average GDFV

 

Series B Qurate Retail common stock, Qurate Retail Chairman of the Board (1)

 

26

 

$

5.84

 


1)

Grant cliff vested immediately upon grant.

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 three months ended March 31, 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 in one year, subject to the satisfaction of certain performance objectives.  During the three months ended March 31, 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 in one year, 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.  

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QURATE RETAIL, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

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 zero 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Qurate Retail

 

 

    

 

    

 

 

    

Weighted

    

Aggregate

 

 

 

 

 

 

 

 

average

 

intrinsic

 

 

 

Series A

 

 

 

 

remaining

 

value

 

 

 

(000's)

 

WAEP

 

life

 

(millions)

 

Outstanding at January 1, 2019

 

28,438

 

$

24.47

 

 

 

 

 

 

 

Granted

 

 —

 

$

 —

 

 

 

 

 

 

 

Exercised

 

(447)

 

$

15.45

 

 

 

 

 

 

 

Forfeited/Cancelled

 

(1,001)

 

$

26.72

 

 

 

 

 

 

 

Outstanding at March 31, 2019

 

26,990

 

$

24.54

 

3.3

years

 

$

 9

 

Exercisable at March 31, 2019

 

17,474

 

$

23.97

 

2.5

years

 

$

 9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Qurate Retail

 

 

    

 

    

 

 

    

Weighted

    

Aggregate

 

 

 

 

 

 

 

 

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 March 31, 2019

 

1,844

 

$

27.09

 

3.8

years

 

$

 —

 

Exercisable at March 31, 2019

 

1,521

 

$

26.50

 

4.0

years

 

$

 —

 

 

 

As of March 31, 2019, the total unrecognized compensation cost related to unvested Awards was approximately $61 million. Such amount will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 1.8 years.

As of March 31, 2019, Qurate Retail reserved for issuance upon exercise of outstanding stock options approximately 27.0 million shares of Series A Qurate Retail common stock and 1.8 million shares of Series B Qurate Retail common stock.

 

(4)   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.

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QURATE RETAIL, INC. AND SUBSIDIARIES

 

Notes to Condensed Consolidated Financial Statements (Continued)

 

(unaudited)

 

Series A and Series B Qurate Retail Common Stock

Excluded from diluted EPS for the three months ended March 31, 2019 and 2018, are 24 million and 11 million potential common shares, respectively, because their inclusion would have been antidilutive.

 

 

 

 

 

 

 

 

Qurate Retail Common Stock

 

 

    

Three months ended 

 

 

 

March 31,

 

 

 

2019

 

2018

 

 

 

number of shares in millions

 

Basic WASO

 

433

 

476

 

Potentially dilutive shares

 

 1

 

 5

 

Diluted WASO

 

434

 

481

 

 

Series A and Series B Liberty Ventures Common Stock

 

Excluded from diluted EPS for the three months ended March 31, 2018 were 2 million potential common shares, because their inclusion would have been antidilutive.

 

 

 

 

 

 

 

 

 

Liberty Ventures Common Stock

 

 

    

Three months ended 

 

 

 

March 31,

 

 

 

2019 (1)

 

2018

 

 

 

number of shares in millions

 

Basic WASO

 

NA

 

86

 

Potentially dilutive shares