UNITED STATES
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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, 2020

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: (720875-5300

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, 2020 was:

Series A common stock

387,364,099

Series B common stock

29,381,251

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-6

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

I-7

QURATE RETAIL, INC. AND SUBSIDIARIES Condensed Consolidated Statements of Equity (unaudited)

I-8

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

I-9

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

I-19

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

I-30

Item 4. Controls and Procedures.

I-30

PART II—OTHER INFORMATION

II-1

Item 1. Legal Proceedings

II-1

Item 1A. Risk Factors

II-1

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

II-2

Item 6. Exhibits

II-3

SIGNATURES

II-4

I-2

Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(unaudited)

    

March 31,

    

December 31,

 

2020

2019

amounts in millions

Assets

Current assets:

Cash and cash equivalents

$

555

 

673

Trade and other receivables, net of allowance for doubtful accounts of $139 million and $129 million, respectively

 

1,440

 

1,854

Inventory, net

 

1,433

 

1,413

Other current assets

 

320

 

636

Total current assets

 

3,748

 

4,576

Investments in equity securities

 

72

 

76

Property and equipment, net

 

1,317

 

1,351

Intangible assets not subject to amortization (note 5):

Goodwill

 

6,563

 

6,576

Trademarks

 

3,168

 

3,168

 

9,731

 

9,744

Intangible assets subject to amortization, net (note 5)

 

886

 

955

Other assets, at cost, net of accumulated amortization

 

756

 

603

Total assets

$

16,510

 

17,305

(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,

 

2020

2019

 

amounts in millions,

 

except share amounts

 

Liabilities and Equity

    

    

    

    

Current liabilities:

Accounts payable

$

844

 

1,091

Accrued liabilities

 

907

 

1,173

Current portion of debt, including $888 million and $1,557 million measured at fair value (note 6)

 

888

 

1,557

Other current liabilities

 

174

 

180

Total current liabilities

 

2,813

 

4,001

Long-term debt, including $444 million and $0 measured at fair value (note 6)

 

6,157

 

5,855

Deferred income tax liabilities

 

1,723

 

1,716

Other liabilities

 

716

 

761

Total liabilities

 

11,409

 

12,333

Equity

Stockholders' equity:

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

 

 

Series A common stock, $.01 par value. Authorized 4,000,000,000 shares; issued and outstanding 387,357,451 shares at March 31, 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 29,381,251 shares at March 31, 2020 and 29,278,424 shares at December 31, 2019

 

 

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

Additional paid-in capital

 

9

 

Accumulated other comprehensive earnings (loss), net of taxes

 

88

 

(55)

Retained earnings

 

4,871

 

4,891

Total stockholders' equity

 

4,972

 

4,840

Noncontrolling interests in equity of subsidiaries

 

129

 

132

Total equity

 

5,101

 

4,972

Commitments and contingencies (note 7)

Total liabilities and equity

$

16,510

 

17,305

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(unaudited)

Three months ended

 

March 31,

 

    

2020

    

2019

 

amounts in millions

 

Total revenue, net

$

2,920

 

3,085

Operating costs and expenses:

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

 

1,933

 

2,023

Operating expense

 

193

 

196

Selling, general and administrative, including stock-based compensation (note 2)

 

421

 

425

Depreciation and amortization

 

142

 

153

 

2,689

 

2,797

Operating income (loss)

 

231

 

288

Other income (expense):

Interest expense

 

(97)

 

(96)

Share of earnings (losses) of affiliates, net

 

(36)

 

(45)

Realized and unrealized gains (losses) on financial instruments, net (note 4)

 

(138)

 

(81)

Other, net

 

13

 

(8)

 

(258)

 

(230)

Earnings (loss) before income taxes

 

(27)

 

58

Income tax (expense) benefit

 

18

 

8

Net earnings (loss)

(9)

66

Less net earnings (loss) attributable to the noncontrolling interests

 

11

 

11

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

$

(20)

 

55

Basic net earnings (loss) attributable to Series A and Series B Qurate Retail, Inc. shareholders per common share (note 3):

$

(0.05)

 

0.13

Diluted net earnings (loss) attributable to Series A and Series B Qurate Retail, Inc. shareholders per common share (note 3):

$

(0.05)

 

0.13

See accompanying notes to condensed consolidated financial statements.

I-5

Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Earnings (Loss)

(unaudited)

Three months ended

 

March 31,

 

    

2020

    

2019

 

amounts in millions

 

Net earnings (loss)

$

(9)

 

66

Other comprehensive earnings (loss), net of taxes:

Foreign currency translation adjustments

 

(22)

 

(7)

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

 

(1)

 

Comprehensive earnings (loss) attributable to debt credit risk adjustments

167

(22)

Other comprehensive earnings (loss)

 

144

 

(29)

Comprehensive earnings (loss)

 

135

 

37

Less comprehensive earnings (loss) attributable to the noncontrolling interests

 

12

 

11

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

$

123

 

26

See accompanying notes to condensed consolidated financial statements.

I-6

Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(unaudited)

Three months ended

 

March 31,

 

    

2020

    

2019

 

amounts in millions

 

Cash flows from operating activities:

Net earnings (loss)

$

(9)

 

66

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

Depreciation and amortization

 

142

 

153

Stock-based compensation

 

11

 

19

Share of (earnings) losses of affiliates, net

 

36

 

45

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

 

138

 

81

Deferred income tax expense (benefit)

 

(43)

 

(31)

Other, net

 

4

 

5

Changes in operating assets and liabilities

Decrease (increase) in accounts receivable

 

411

 

370

Decrease (increase) in inventory

(23)

(86)

Decrease (increase) in prepaid expenses and other assets

62

52

(Decrease) increase in trade accounts payable

(240)

(272)

(Decrease) increase in accrued and other liabilities

(317)

(246)

Net cash provided (used) by operating activities

 

172

 

156

Cash flows from investing activities:

Investments in and loans to cost and equity investees

 

(36)

 

(43)

Capital expenditures

 

(45)

 

(61)

Expenditures for television distribution rights

(1)

(52)

Other investing activities, net

 

8

 

(10)

Net cash provided (used) by investing activities

 

(74)

 

(166)

Cash flows from financing activities:

Borrowings of debt

 

743

 

731

Repayments of debt

 

(942)

 

(618)

Repurchases of Qurate Retail common stock

 

 

(210)

Withholding taxes on net settlements of stock-based compensation

 

(2)

 

(6)

Dividends paid to noncontrolling interest

(15)

(22)

Other financing activities, net

 

6

 

(6)

Net cash provided (used) by financing activities

 

(210)

 

(131)

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

 

(6)

 

(4)

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

 

(118)

 

(145)

Cash, cash equivalents and restricted cash at beginning of period

 

681

 

660

Cash, cash equivalents and restricted cash at end of period

$

563

 

515

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,

2020

2019

in millions

Cash and cash equivalents

$

555

673

Restricted cash included in other current assets

8

8

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

$

563

681

See accompanying notes to condensed consolidated financial statements.

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Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

Condensed Consolidated Statement of Equity

(unaudited)

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, 2020

$

4

(55)

4,891

132

4,972

Net earnings (loss)

 

(20)

11

(9)

Other comprehensive earnings (loss)

 

143

1

144

Stock compensation

11

11

Distribution to noncontrolling interest

(15)

(15)

Other

(2)

(2)

Balance at March 31, 2020

$

4

9

88

4,871

129

5,101

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)

 

55

11

66

Other comprehensive earnings (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.

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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 GCI Liberty Split-Off 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”), Cornerstone Brands, Inc. (“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, 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. 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, 2019.

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.    

In December 2019, a new coronavirus (“COVID-19”) was reported to have surfaced in Wuhan, China and has subsequently spread across the globe causing a global pandemic, impacting all countries where Qurate Retail operates. As a result of the spread of the virus, most local governmental agencies have imposed travel restrictions, local quarantines or stay at home restrictions to contain the spread, which has caused a significant disruption to most sectors of the economy.

As a result of COVID-19, management has increased the amounts of certain estimated reserves, including but not limited to, uncollectible receivables, inventory obsolescence and sales returns. Other than these changes, management is not presently aware of any events or circumstances arising from the COVID-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 financial statements. Actual results could differ from estimates, and any such differences may be material to 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. 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 first quarter of 2018 (the “GCI Liberty 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 GCI 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 made by GCI Liberty (applicable to actions or failures to act by GCI Liberty and its subsidiaries following the completion

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Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

of the GCI Liberty Split-Off), or (ii) result from Section 355(e) of the Internal Revenue Code applying to the GCI Liberty Split-Off as a result of the GCI 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 $3 million and $2 million was reimbursable to LMC for the three months ended March 31, 2020 and 2019, respectively.  Qurate Retail had a tax sharing payable in the amount of approximately $85 million and $95 million as of March 31, 2020 and December 31, 2019, respectively, included in Other liabilities in the condensed consolidated balance sheets. 

(2)   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 $11 million and $19 million of stock-based compensation during the three months ended March 31, 2020 and 2019, respectively.

The following table presents the number and weighted average GDFV of options granted by the Company during the three months ended March 31, 2020:

Three months ended

March 31, 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

(1)Grants vest semi-annually over four years.

During the three months ended March 31, 2020, Qurate Retail granted to its employees 9.3 million RSUs of Series A Qurate Retail common stock. The Series A RSUs had a GDFV of $4.44 per share and generally vest annually over four

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Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

years. In connection with our Chairman’s employment agreement, during the three months ended March 31, 2020, Qurate Retail granted 584 thousand performance-based RSUs of Series A Qurate Retail common stock 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 three months ended March 31, 2020, Qurate Retail also granted approximately 725 thousand performance-based RSUs of Series A Qurate Retail common stock 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 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.

The Company has calculated the GDFV for all of its equity classified Awards and any subsequent remeasurement of its liability classified 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.

    

    

    

Weighted

    

Aggregate

 

average

intrinsic

Series A

remaining

value

(000's)

WAEP

life

(millions)

Outstanding at January 1, 2020

 

23,248

$

21.28

Granted

 

4,784

$

4.44

Exercised

 

$

Forfeited/Cancelled

 

(2,656)

$

19.78

Outstanding at March 31, 2020

 

25,376

$

18.26

 

4.7

years

$

11

Exercisable at March 31, 2020

 

12,000

$

24.42

 

3.4

years

$

3

    

    

    

Weighted

    

Aggregate

 

average

intrinsic

Series B

remaining

value

(000's)

WAEP

life

(millions)

Outstanding at January 1, 2020

 

1,844

$

27.09

Granted

 

$

Exercised

 

$

Forfeited/Cancelled

$

Outstanding at March 31, 2020

 

1,844

$

27.09

 

2.8

years

$

Exercisable at March 31, 2020

 

1,844

$

27.09

 

2.8

years

$

There were no options to purchase shares of Series B common stock granted during the three months ended March 31, 2020.

As of March 31, 2020, the total unrecognized compensation cost related to unvested Awards was approximately $47 million. Such amount will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 2.0 years.

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Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

As of March 31, 2020, Qurate Retail reserved for issuance upon exercise of outstanding stock options approximately 25.4 million shares of Series A Qurate Retail common stock and 1.8 million shares of Series B Qurate Retail common stock.

(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.

Excluded from diluted EPS for the three months ended March 31, 2020 and 2019 are 22 million and 24 million potential common shares, respectively, because their inclusion would have been antidilutive.

Qurate Retail Common Stock

    

Three months ended

March 31,

2020

2019

number of shares in millions

Basic WASO

 

416

433

Potentially dilutive shares

 

1

1

Diluted WASO

 

417

434

(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:

Fair Value Measurements at

Fair Value Measurements at

 

March 31, 2020

December 31, 2019

 

    

    

Quoted

    

    

    

Quoted

    

 

prices

prices

 

in active

Significant

in active

Significant

 

markets for

other

markets for

other

 

identical

observable

identical

observable

 

assets

inputs

assets

inputs

 

Description

Total

(Level 1)

(Level 2)

Total

(Level 1)

(Level 2)

 

amounts in millions

 

Cash equivalents

$

248

 

248

 

 

339

 

339

 

Indemnification asset

$

180

180

202

202

Debt

$

1,332

 

 

1,332

 

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.

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Table of Contents

QURATE RETAIL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

The indemnification asset relates to GCI Liberty’s agreement to indemnify Liberty Interactive LLC (“LI LLC”) and pertains to the ability of holders of LI LLC’s 1.75% exchangeable debentures due 2046 (the “1.75% Exchangeable Debentures”) to exercise their 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 March 31, 2020 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 March 31, 2020, a holder of the 1.75% Exchangeable Debentures does not have the ability to exchange and, accordingly, such indemnification asset is included as a long-term asset in our condensed consolidated balance sheet as of that date. Additionally, as of March 31, 2020, 332,241 bonds of the 1.75% Exchangeable Debentures remain outstanding.

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

 

March 31,

 

    

2020

    

2019

 

amounts in millions

 

Equity securities

$

(4)

 

5

Exchangeable senior debentures

 

(50)

 

(116)

Indemnification asset

(22)

32

Other financial instruments

(62)

(2)

$

(138)

 

(81)

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 gain of $220 million and a loss of $29 million for the three months ended March 31, 2020 and 2019, respectively, and the cumulative change was a gain of $391 million as of March 31, 2020.  

(5)   Intangible Assets

Goodwill

Changes in the carrying amount of goodwill are as follows:

Corporate and

    

QxH

QVC Int'l

Zulily

    

Other

    

Total

 

amounts in millions

 

Balance at January 1, 2020

$

5,228

859

477

 

12

 

6,576

Foreign currency translation adjustments

 

(13)

 

 

(13)

Balance at March 31, 2020

$

5,228

846

477

 

12

 

6,563

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Table of Contents

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 $91 million and $100 million for the three months ended March 31, 2020 and 2019, respectively. Based on its amortizable intangible assets as of March 31, 2020, Qurate Retail expects that amortization expense will be as follows for the next five years (amounts in millions):

Remainder of 2020

    

$

273

2021

$

230

2022

$

130

2023

$

78

2024

$

74

(6)   Long-Term Debt

Debt is summarized as follows:

Outstanding

 

principal at

Carrying value

 

    

March 31, 2020

    

March 31, 2020

    

December 31, 2019

 

amounts in millions

 

Corporate level debentures

8.5% Senior Debentures due 2029

$

287

 

285

 

285

8.25% Senior Debentures due 2030

 

504

 

502

 

502

4% Exchangeable Senior Debentures due 2029

431

334

327

3.75% Exchangeable Senior Debentures due 2030

433

245

318

3.5% Exchangeable Senior Debentures due 2031

221

309

422

0.75% Exchangeable Senior Debentures due 2043

2

1.75% Exchangeable Senior Debentures due 2046

332

444

488

Subsidiary level notes and facilities

QVC 5.125% Senior Secured Notes due 2022

 

500

 

500

 

500

QVC 4.375% Senior Secured Notes due 2023

 

750

 

750

 

750

QVC 4.85% Senior Secured Notes due 2024

 

600

 

600

 

600

QVC 4.45% Senior Secured Notes due 2025

600

599

599

QVC 4.75% Senior Secured Notes due 2027

575

575

QVC 5.45% Senior Secured Notes due 2034

400

399

399

QVC 5.95% Senior Secured Notes due 2043

 

300

 

300

 

300

QVC 6.375% Senior Secured Notes due 2067

225

225

225

QVC 6.25% Senior Secured Notes due 2068

500

500

500

QVC Bank Credit Facilities

 

525

 

525

 

1,235

Deferred loan costs

(47)

(40)

Total consolidated Qurate Retail debt

$

7,183

 

7,045

 

7,412

Less current classification

 

(888)

 

(1,557)

Total long-term debt

$

6,157

 

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 $2.95 billion revolving credit facility, with a $450 million sub-limit for standby letters of credit and $1.5 billion of uncommitted incremental revolving 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

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QURATE RETAIL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

$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 (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 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 each 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 2.1% at March 31, 2020. Availability under the Fourth Amended and Restated Credit Agreement at March 31, 2020 was $2.4 billion, including the remaining portion of the $400 million tranche available to Zulily and outstanding letters of credit.  

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.

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 March 31, 2020 the Company’s exchangeable debentures have been classified as current because the Company does not own shares to redeem the debentures or they are currently redeemable, with the exception of the 1.75% Exchangeable Senior Debentures due 2046 which are classified as long-term as they are not currently redeemable. The 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.

Debt Covenants

Qurate Retail and its subsidiaries are in compliance with all debt covenants at March 31, 2020.

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QURATE RETAIL, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Continued)

(unaudited)

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 March 31, 2020 are as follows (amounts in millions):

Senior debentures

$

617

QVC senior secured notes

    

$

3,717

Due to the variable rate nature, Qurate Retail believes that the carrying amount of its other debt, not discussed above, approximated fair value at March 31, 2020.

(7)   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.

(8)   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 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.

For the three months ended March 31, 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.  

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