UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017 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
LIBERTY INTERACTIVE CORPORATIONQURATE RETAIL, INC.
(Exact name of Registrant as specified in its charter)
State of Delaware (State or other jurisdiction of incorporation or organization) | 84-1288730 (I.R.S. Employer Identification No.) |
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12300 Liberty Boulevard Englewood, Colorado (Address of principal executive offices) | 80112 (Zip Code) |
Registrant's telephone number, including area code: (720) (720) 875-5300
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of exchange on which registered |
Series A | QRTEA | The Nasdaq Stock Market LLC |
Series B | QRTEB | The Nasdaq Stock Market LLC |
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒ No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
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 |
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 aggregate market value of the voting stock held by nonaffiliates of Liberty Interactive CorporationQurate Retail, Inc. computed by reference to the last sales price of Liberty Interactive CorporationQurate Retail, Inc. common stock, as of the closing of trading on June 30, 2017,28, 2019, was approximately $14.3$4.8 billion.
The number of outstanding shares of Liberty Interactive Corporation'sQurate Retail, Inc.'s common stock as of January 31, 20182020 was:
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| Series A |
| Series B |
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QVC Group common stock |
| 448,261,047 |
| 29,203,895 |
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Liberty Ventures common stock |
| 81,687,188 |
| 4,455,308 |
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Series A common stock | | 386,702,662 | | |
Series B common stock | | 29,278,424 | | |
Documents Incorporated by Reference
The Registrant's definitive proxy statement for its 20182020 Annual Meeting of Stockholders is hereby incorporated by reference into Part III of this Annual Report on Form 10-K.
QURATE RETAIL, INC.
LIBERTY INTERACTIVE CORPORATION
20172019 ANNUAL REPORT ON FORM 10‑K
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| Management's Discussion and Analysis of Financial Condition and Results of Operations | |
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| Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | |
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| Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | | III‑1 | | |
| Certain Relationships and Related Transactions, and Director Independence | | III‑1 | | |
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(a)General Development of Business
Liberty Interactive Corporation, formerly known as Liberty Media Corporation,Qurate Retail, Inc. ("Liberty"Qurate Retail", the “Company”, “we”, “us” and “our”), formerly known as Liberty Interactive Corporation prior to the Transactions (defined and described below), owns interests in subsidiaries and other companies which are primarily engaged in the video and online commerce industries. Through our subsidiaries and affiliates, we operate in North America, Europe and Asia. Our principal businesses and assets include our consolidated subsidiaries QVC, Inc. ("QVC"), which includes HSN, Inc. (“HSNi”HSN”) following the transfer of ownership of HSN to QVC (described below), zulily, llcCornerstone Brands, Inc. (former subsidiary of HSN prior to the transfer of ownership of HSN to QVC), Zulily, LLC (“zulily”Zulily”) and Evite, Inc. (“Evite”)other cost and our equity affiliates FTD Companies, Inc. (“FTD”), LendingTree, Inc. (“LendingTree”) and Liberty Broadband Corporation (“Liberty Broadband”).
method investments.
On September 23, 2011, LibertyQurate Retail completed the split-off (the "LMC Split-Off") of a wholly owned subsidiary, Liberty Media Corporation ("LMC") (formerly known as Liberty CapStarz, Inc. and prior thereto known as Liberty Splitco, Inc.) (the "LMC Split-Off"). At the time of the LMC Split-Off, LMC owned all the assets, businesses and liabilities previously attributed to the Capital and Starz tracking stock groups. The LMC Split-Off was effected by means of a redemption of all of the Liberty Capital common stock and Liberty Starz common stock of Liberty in exchange for the common stock of LMC. Following the LMC Split-Off, LibertyQurate Retail and LMC operate as separately publicly traded companies and neither has any stock ownership, beneficial or otherwise, in the other.
Qurate Retail and LMC entered into certain agreements in order to govern certain of the ongoing relationships between the two companies. These agreements include a reorganization agreement, a services agreement (the “Services Agreement”), a facilities sharing agreement (the “Facilities Sharing Agreement”) and a tax sharing agreement. Pursuant to the Services Agreement, LMC provides Qurate Retail with general and administrative services including legal, tax, accounting, treasury and investor relations support. See below for a description of an amendment to the services agreement entered into in December 2019. 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, Qurate Retail shares office space with LMC and related amenities at LMC's corporate headquarters.
In December 2019, the Company entered into an amendment to the Services Agreement with LMC 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. (“TripAdvisor Holdings”), GCI Liberty, Inc. (“GCI Liberty”), and Liberty Broadband Corporation (“Liberty Broadband”) (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 new agreement provides for a five year employment term which began on January 1, 2020 and ends December 31, 2024, with an aggregate annual base salary of $3 million (with no contracted increase), an aggregate one-time cash commitment bonus of $5 million, an aggregate annual target cash performance bonus of $17 million, aggregate annual equity awards of $17.5 million and aggregate equity awards granted in connection with his entry into his new agreement of $90 million (the “upfront awards”). A portion of the grants made to our Chairman in the year ended December 31, 2019 related to our Company’s allocable portion of these upfront awards.
On August 9, 2012, LibertyQurate Retail completed the approved recapitalization of its common stock through the creation of the Liberty Interactive common stock and Liberty Ventures common stock as tracking stocks. In the recapitalization, each holder of Liberty Interactive Corporation common stock remained a holder of the same amount and series of Liberty Interactive common stock and received 0.05 of a share of the corresponding series of Liberty Ventures common stock, by means of a dividend, with cash issued in lieu of fractional shares of Liberty Ventures common stock.
On October 3, 2014, Liberty reattributed from the Interactive Group to the Ventures Group approximately $1 billion in cash and its Digital Commerce businesses (as defined below), including Backcountry.com, Inc., Bodybuilding.com, LLC (“Bodybuilding”), CommerceHub, Inc. (then, Commerce Technologies, Inc.) (“CommerceHub”), Provide Commerce, Inc. (“Provide”), and Evite (collectively, the “Digital Commerce businesses”). Subsequent to the reattribution, the Interactive Group is now referred to as the QVC Group. The QVC Group has attributed to it Liberty’s wholly-owned subsidiaries QVC, zulily (as of October 1, 2015) and HSNi (as of December 29, 2017), along with cash and certain liabilities. In connection with the reattribution, the Liberty Interactive tracking stock trading symbol “LINTA” was changed to "QVCA" and the "LINTB" trading symbol to "QVCB," effective October 7, 2014. Other than the issuance of Liberty Ventures shares in the fourth quarter of 2014, the reattribution of tracking stock groups has no consolidated impact on Liberty. Effective June 4, 2015, the name of the “Liberty Interactive common stock” was changed to the “QVC Group common stock.”
TrackingA 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. Liberty hasPrior to the Transactions, Qurate Retail had two tracking stocks, QVC Group common stock and Liberty Ventures common stock, which arewere intended to track and reflect the economic performance of Liberty’sQurate Retail’s QVC Group and Ventures Group, respectively. While the QVC Group and the Ventures Group havehad separate collections of businesses, assets and liabilities attributed to them, no group iswas a separate legal entity and therefore no group cancould own assets, issue securities or enter into legally binding agreements. Holders of tracking stock havehad no direct claim to the group's stock or assets and arewere not represented by separate boards of directors. Instead, holders of tracking stock arewere stockholders of the parent corporation, with a single board of directors and subject to all of the risks and liabilities of the parent corporation.
The term "Ventures Group" does not represent a separate legal entity, rather it represents those businesses, assets and liabilities that have been attributed to that group. The Ventures Group consists of our businesses not included in the QVC Group including Evite and our interests in Liberty Broadband, LendingTree, FTD, investments in Charter Communications, Inc. and ILG, Inc. (“ILG”), as well as cash in the amount of approximately $573 million (at December 31, 2017), including subsidiary cash. The Ventures Group also has attributed to it certain liabilities related to our
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exchangeable debentures and certain deferred tax liabilities. The Ventures Group is primarily focused on the maximization of the value of these investments and investing in new business opportunities.
The term "QVC Group" does not represent a separate legal entity, rather it represents those businesses, assets and liabilities that have been attributed to that group. The QVC Group is primarily focused on our video operating businesses. The QVC Group has attributed to it the remainder of our businesses and assets, including our wholly-owned subsidiaries QVC, HSNi (as of December 29, 2017), and zulily (as of October 1, 2015) as well as cash in the amount of approximately $330 million (at December 31, 2017), including subsidiary cash.
On August 27, 2014, Liberty completed the spin-off to holders of its Liberty Ventures common stock shares of its former wholly-owned subsidiary, Liberty TripAdvisor Holdings, Inc. (“TripAdvisor Holdings”) (the “TripAdvisor Holdings Spin-Off”), which was effected as a pro-rata dividend of shares of TripAdvisor Holdings to the stockholders of Liberty’s Series A and Series B Liberty Ventures common stock. At the time of the TripAdvisor Holdings Spin-Off, TripAdvisor Holdings was comprised of Liberty’s former 22% economic and 57% voting interest in TripAdvisor, Inc. (“TripAdvisor”), as well as BuySeasons, Inc., Liberty’s former wholly-owned subsidiary, and a corporate level net debt balance of $350 million. Concurrently with TripAdvisor Holdings’ execution of certain margin loans in connection with the TripAdvisor Holdings Spin-Off, Liberty and TripAdvisor Holdings entered into a promissory note that expired in 2017 pursuant to which TripAdvisor Holdings could have requested, if the closing price per share of TripAdvisor common stock were to fall below certain minimum values, up to $200 million in funds from Liberty. The TripAdvisor Holdings Spin-Off was recorded at historical cost due to the pro rata nature of the distribution. Following the completion of the TripAdvisor Holdings Spin-Off, Liberty and TripAdvisor Holdings operate as separate, publicly traded companies, and neither has any stock ownership, beneficial or otherwise, in the other. The consolidated financial statements of Liberty have been prepared to reflect TripAdvisor Holdings as discontinued operations.
On October 1, 2015, LibertyQurate Retail acquired zulily, inc. (now known as zulily, llc)Zulily, LLC) for consideration of approximately $2.3 billion, comprised of $9.375 of cash and 0.3098 newly issued shares of Series A QVC Group common stock for each zulilyZulily share, with cash paid in lieu of any fractional shares. zulily is attributed to the QVC Group. zulilyZulily is an online retailer offering customers a fun and entertaining shopping experience with a fresh selection of new product styles launched every day.
On May 18, 2016, LibertyQurate Retail completed a $2.4 billion investment in Liberty Broadband in connection with the merger of Charter Communications, Inc. ("Legacy Charter") and Time Warner Cable Inc. ("TWC"). The proceeds of this investment were used by Liberty Broadband to fund, in part, its acquisition of $5 billion of stock in the new public parent company (“Charter”) of the combined enterprises. Liberty,Qurate Retail, along with third party investors, all of whom invested on the same terms as Liberty,Qurate Retail, purchased newly issued shares of Liberty Broadband Series C common stock at a per share price of $56.23, which was determined based upon the fair value of Liberty Broadband's net assets on a sum-of-the-parts basis at the time the investment agreements were executed. Liberty'sQurate Retail's investment in Liberty Broadband was funded using cash on hand and iswas attributed to the Ventures Group. See note 9 of our consolidated financial statements found in Part II of this report for additional information relatedGroup prior to this investment.the Transactions.
LibertyQurate Retail also exchanged, in a tax-free transaction, its shares of TWC common stock for shares of Charter Class A common stock, on a one-for-one basis, and Liberty hasQurate Retail granted to Liberty Broadband a proxy and a right of first refusal with respect to the shares of Charter Class A common stock held by Qurate Retail following the exchange, which proxy and right of first refusal was assigned to GCI Liberty in connection with the exchange.Transactions.
On July 22, 2016, LibertyQurate Retail completed the spin-off (the “CommerceHub Spin-Off”) of its former wholly-owned subsidiary CommerceHub.CommerceHub, Inc. (“CommerceHub”) to holders of its Liberty Ventures common stock. The CommerceHub Spin-Off was accomplished by the distribution by LibertyQurate Retail of a dividend of (i) 0.1 of a share of CommerceHub’s Series A common stock for each outstanding share of Liberty’sQurate Retail’s Series A Liberty Ventures common stock as of 5:00 p.m., New York City time, on July 8, 2016 (such date and time, the “Record Date”), (ii) 0.1 of a share of CommerceHub’s Series B common stock for each outstanding share of Liberty’sQurate Retail’s Series B Liberty Ventures common stock as of the Record Date and (iii) 0.2 of a share of CommerceHub’s Series C common stock for each outstanding share of Series A and Series B Liberty Ventures common stock as of the Record Date, in each case, with cash paid in lieu of fractional shares. This transaction has been recorded at historical cost due to the pro rata nature of the distribution. The Internal Revenue Service (“IRS”) completed its review of the CommerceHub Spin-Off and notified LibertyQurate Retail that it agreed with the nontaxable characterization of the CommerceHub Spin-Off. CommerceHub is included in Liberty’sQurate Retail’s Corporate and other segment through July 22, 2016 and is not presented as a discontinued operation as the
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CommerceHub Spin-Off did not represent a strategic shift that hadhave a major effect on Liberty’sQurate Retail’s operations and financial results.
On November 4, 2016, LibertyQurate Retail completed the split-off (the “Expedia Holdings Split-Off”) of its former wholly-owned subsidiary Liberty Expedia Holdings, Inc. (“Expedia Holdings”). to holders of its Liberty Ventures common stock. At the time of the Expedia Holdings Split-Off, Expedia Holdings was comprised of, among other things, Liberty’sQurate Retail’s former interest in Expedia Group, Inc., formerly known as Expedia, Inc. (“Expedia”) and Liberty’sQurate Retail’s former wholly-owned subsidiary Bodybuilding.Bodybuilding.com, LLC (“Bodybuilding”). On November 2, 2016, Expedia Holdings borrowed $350 million under a new margin loan and distributed $299 million, net of certain debt related costs, to LibertyQurate Retail on November 4, 2016. The Expedia Holdings Split-Off was accomplished by the redemption of (i) 0.4 of each outstanding share of Liberty’sQurate Retail’s Series A Liberty Ventures common stock for 0.4 of a share of Expedia Holdings Series A common stock at 5:00 p.m., New York City time, on November 4, 2016 (such date and time, the “Redemption Date”) and (ii) 0.4 of each outstanding share of Liberty’sQurate Retail’s Series B Liberty Ventures common stock for 0.4 of a share of Expedia Holdings Series B common stock on the Redemption Date, in each case, with cash paid in lieu of any fractional shares of Liberty Ventures common stock or Expedia Holdings common stock (after taking into account all of the shares owned of record by each holder thereof, as applicable). The IRS completed its review of the Expedia Holdings Split-Off and informed LibertyQurate Retail that it agreed with the nontaxable characterization of the Expedia Holdings Split-Off.
LibertyQurate Retail viewed Expedia and Bodybuilding as separate components and evaluated them separately for discontinued operations presentation. Based on a quantitative analysis, the split-off of Liberty’sQurate Retail’s interest in Expedia represented a strategic shift that had a major effect on Liberty’sQurate Retail’s operations, primarily due to one-time gains on transactions recognized by Expedia during 2015. Accordingly, Liberty’sQurate Retail’s interest in Expedia is presented as a discontinued operation. The disposition of Bodybuilding as part of the Expedia Holdings Split-Off did not have a major effect on Liberty’sQurate Retail’s historical results nor
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is it expected to have a major effect on Liberty’sQurate Retail’s future operations. The disposition of Bodybuilding did not represent a strategic shift in Liberty’s operations. Accordingly, Bodybuilding is not presented as a discontinued operation.
On December 29, 2017, LibertyQurate Retail acquired the approximate remaining 62% of HSNiHSN it did not already own in an all-stock transaction, making HSNiHSN its wholly-owned subsidiary, attributed to the QVC Group. HSNi is an interactive multi-channel retailer that markets and sells On December 31, 2018, Qurate Retail transferred our 100% ownership interest in HSN to QVC, Inc. through a wide range of third party and proprietary merchandise directlytransaction among entities under common control. References throughout this annual report to consumers through various platforms including (i) television home shopping programming broadcast on the HSN television networks (“HSN”); (ii) catalogs, consisting primarily of the Cornerstone portfolio of leading print catalogs“QVC” refer to QVC, Inc., which includes Ballard Designs, Frontgate, Garnet Hill, Grandin RoadHSN, QVC U.S. and Improvements (“Cornerstone”); (iii) websites, which consist primarilyQVC International. Cornerstone remains a subsidiary of HSN.com,Qurate Retail.
On March 9, 2018, Qurate Retail completed the five branded websites operatedtransactions contemplated by Cornerstone and joymangano.com; (iv) mobile applications; (v) retail and outlet stores; and (vi) wholesale distribution of certain proprietary products to other retailers.
On April 4, 2017, Liberty entered into anthe Agreement and Plan of Reorganization (as amended, the “GCI Reorganization Agreement”“Reorganization Agreement,” and the transactions contemplated thereby, the “Transactions”) withamong General Communication, Inc. (“GCI”), an Alaska corporation, and Liberty Interactive LLC, a Delaware limited liability company and a direct wholly-owned subsidiary of LibertyQurate Retail (“LI LLC”). Pursuant to the Reorganization Agreement, GCI amended and restated its articles of incorporation (which resulted in GCI being renamed 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, Inc., wherebycertain green energy investments, LI LLC’s exchangeable debentures, and certain tax benefits.
Following these events, Qurate Retail acquired GCI Liberty will acquire GCI through a reorganization in which certain Ventures GroupQurate Retail interests, assets and liabilities will beattributed to the Ventures Group were contributed (the “contribution”) to GCI Liberty (as defined below) in exchange for a controlling interest in GCI Liberty. LibertyQurate Retail and LI LLC will contributecontributed to GCI Liberty itstheir entire equity interest in Liberty Broadband, Charter, and Charter, along with, subject to certain exceptions, Liberty’s entire equity interests in LendingTree, together with the Evite, Inc. (“Evite”) operating business and certain other assets and liabilities attributed to Qurate Retail’s Venture Group (following the reattribution), in exchange for (i)(a) the issuance to LI LLC of a number of shares of new GCI Liberty Class A Common Stock and a number of shares of new 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 outstanding on the closing date of the Contribution,March 9, 2018, respectively, (ii)(b) cash and (iii)(c) the assumption of certain liabilities by GCI Liberty (the “Contribution”).Liberty.
Liberty will then effectFollowing the contribution, Qurate Retail effected a tax-free separation of its controlling interest in the combined company (which has since been renamed(the “GCI Liberty Split-Off”), GCI Liberty, Inc. (“GCI Liberty”)) to the holders of Liberty Ventures common stock, distributing one share of the corresponding class of new GCI Liberty common stock for each share of Liberty Ventures common stock held, in full redemption of all outstanding shares of such stock, leavingin 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 asbecame the only outstanding common stock of Liberty. On the business day prior to the Contribution, holders of reclassified GCI Class A Common Stock and reclassified GCI Class B Common Stock each will receive (i) 0.63 of a share of new GCI Liberty Class A Common Stock and (ii) 0.20 of a share of new GCI Liberty Series A Cumulative Redeemable Preferred Stock (the “GCI Liberty preferred stock”) in exchange for each share of their reclassified GCI stock. The exchange ratios were determined based on total consideration of $32.50 per share for existing GCI common stock, comprised of $27.50 per share in new GCI Liberty Class
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A Common Stock and $5.00 per share in newly issued GCI Liberty preferred stock, and a Liberty Ventures reference price of $43.65 (with no additional premium paid for shares of reclassified GCI Class B Common Stock). The GCI Liberty Series A preferred stock will accrue dividends at an initial rate of 5% per annum (which would increase to 7% in connection with a future reincorporation of GCI Liberty in Delaware) and will be redeemable upon the 21st anniversary of the closing of the Transactions.
At the closing of the Transactions, Liberty will reattribute certain assets and liabilities from the Ventures Group to the QVC Group (the “Reattribution”). The reattributed assets and liabilities are expected to include cash, Liberty’s interest in ILG, FTD, certain green energy investments, LI LLC’s exchangeable debentures, and certain tax benefits. Pursuant to a recent amendment to the GCI Reorganization Agreement, LI LLC’s 1.75% Exchangeable Debentures due 2046 (the “1.75% Exchangeable Debentures”) will not be subject to a pre-closing exchange offer and will instead be reattributed to the QVC Group, along with (i) an amount of cash equal to the net present value of the adjusted principal amount of such 1.75% Exchangeable Debentures (determined as if paid on October 5, 2023) and stated interest payments on the 1.75% Exchangeable Debentures to October 5, 2023 and (ii) an indemnity obligation from GCI Liberty with respect to any payments made by LI LLC in excess of stated principal and interest to any holder that exercises its exchange right under the terms of the debentures through October 5, 2023. The cash reattributed to the QVC Group will be funded by available cash attributed to Liberty’s Ventures Group and the proceeds of a margin loan facility attributed to the Ventures Group in an initial principal amount of $1 billion. Within six months of the closing, Liberty, LI LLC and GCI Liberty will cooperate with, and reasonably assist each other with respect to, the commencement and consummation of a purchase offer (the “Purchase Offer”) whereby LI LLC will offer to purchase, either pursuant to privately negotiated transactions or a tender offer, the 1.75% Exchangeable Debentures on terms and conditions (including maximum offer price) reasonably acceptable to GCI Liberty. GCI Liberty will indemnify LI LLC for each 1.75% Exchangeable Debenture repurchased by LI LLC in the Purchase Offer in an amount equal to the difference between (x) the purchase price paid by LI LLC to acquire such 1.75% Exchangeable Debenture in the Purchase Offer and (y) the sum of the amount of cash reattributed with respect to such purchased 1.75% Exchangeable Debenture in the Reattribution plus the amount of certain tax benefits attributable to such 1.75% Exchangeable Debenture so purchased. GCI Liberty’s indemnity obligation with respect to payments made upon a holder’s exercise of its exchange right will be eliminated as to any 1.75% Exchangeable Debentures purchased in the Purchase Offer.
Liberty will complete the Reattribution using similar valuation methodologies to those used in connection with its previous reattributions, including taking into account the advice of its financial advisor. The Transactions are expected to be consummated on March 9, 2018, subject to the satisfaction of customary closing conditions. Simultaneous with that closing, QVC Group common stock will become the only outstanding common stock of Liberty,Qurate Retail, and thus QVC Group common stock will ceaseceased to function as a tracking stock and will effectively become regular common stock, andstock. On April 9, 2018, Liberty will beInteractive 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 Inc.,common stock into one share of the corresponding series of new common stock of Qurate Retail. Throughout this annual report we refer to our Series A and Series B common stock as “Qurate Retail common stock” and “QVC Group common stock.” In July 2018, the IRS completed its review of the GCI Liberty Split-Off and informed Qurate Retail that it agreed with QVC, HSNithe nontaxable characterization of the transactions. Qurate Retail received an Issue Resolution Agreement from the IRS documenting this conclusion.
Qurate Retail viewed LendingTree, Evite and zulilyLiberty Broadband as wholly-owned subsidiaries.separate components and evaluated them separately for discontinued operations presentation. Based on a quantitative analysis, the split-off of Qurate Retail’s interest in Liberty Broadband had a major effect on Qurate Retail’s operations. Accordingly, Qurate Retail’s interest in Liberty Broadband is presented as a discontinued operation. The disposition of Evite and LendingTree as part of the GCI Liberty Split-Off did not have a major effect on Qurate Retail’s historical results nor is it expected to have a major effect on Qurate Retail’s future operations. Accordingly, Evite and LendingTree are not presented as discontinued operations.
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Certain statements in this Annual Report on Form 10-K constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our business, product and marketing strategies; QRG Initiatives (as defined below); remediation of a material weakness; new service offerings; the Transactions and the Reattribution; revenue growth at QVC; synergies; the recoverability of our goodwill and other long-livedintangible assets; our projected sources and uses of cash; repayment of debt; fluctuations in interest rates and foreign currency exchange rates; and the anticipated impact of certain contingent liabilities related to legal and tax proceedings and other matters arising in the ordinary course of business. In particular, statements under Item 1. "Business," Item 1A. "Risk-Factors," Item 2. "Properties," Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Item 7A. "Quantitative and Qualitative Disclosures About Market Risk" contain forward-looking statements. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:
| customer demand for our products and services and our ability to anticipate |
| competitor responses to our products and services; |
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| increased digital TV penetration and the impact on channel positioning of our programs; |
| the levels of online traffic to our businesses' websites and our ability to convert visitors into consumers or contributors; |
| uncertainties inherent in the development and integration of new business lines and business strategies; |
| our future financial performance, including availability, terms and deployment of capital; |
| our ability to successfully integrate and recognize anticipated efficiencies and benefits from the businesses we acquire; |
| the cost and ability of shipping companies, suppliers and vendors to deliver products, equipment, software and services; |
| the outcome of any pending or threatened litigation; |
| availability of qualified personnel; |
| changes in, or failure or inability to comply with, government regulations, including, without limitation, regulations of the Federal Communications Commission (“FCC”), and adverse outcomes from regulatory proceedings; |
| changes in the nature of key strategic relationships with partners, distributors, suppliers and vendors; |
| domestic and international economic and business conditions and industry trends; |
| changes in tariffs, trade policy and trade relations |
| consumer spending levels, including the availability and amount of individual consumer debt; |
| advertising spending levels; |
| changes in distribution and viewing of television programming, including the expanded deployment of personal video recorders, video on demand, streaming and Internet protocol (“IP”) television and their impact on home shopping programming; |
| rapid technological changes; |
| failure to protect the security of personal information about our customers, subjecting us to potentially costly government enforcement actions or private litigation and reputational damage; |
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| the regulatory and competitive environment of the industries in which we operate; |
| threatened terrorist attacks, political unrest in international markets and ongoing military action around the world; and |
| fluctuations in foreign currency exchange |
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These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Annual Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based. When considering such forward-looking statements, you should keep in mind the factors described in Item 1A, "Risk Factors" and other cautionary statements contained in this Annual Report. Such risk factors and statements describe circumstances which could cause actual results to differ materially from those contained in any forward-looking statement.
This Annual Report includes information concerning companies in which we have controlling and non-controlling interests that file reports and other information with the Securities and Exchange Commission (“SEC”) in accordance with the Securities Exchange Act of 1934, as amended. Information in this Annual Report concerning those companies has been derived from the reports and other information filed by them with the SEC. If you would like further information about these companies, the reports and other information they file with the SEC can be accessed on the Internet website maintained by the SEC at www.sec.gov. Those reports and other information are not incorporated by reference in this Annual Report.
(b)Financial Information About Segments
Through our ownership of interests in subsidiaries and other companies, we are primarily engaged in the video and online commerce industries. Each of these businesses is separately managed.
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We identify our reportable segments as (A) those consolidated subsidiaries that represent 10% or more of our annual consolidated revenue, Adjusted OIBDA (defined in Part II, Item 7 of this report) or total assets and (B) those equity method affiliates whose share of earnings represent 10% or more of our annual pre-tax earnings. Financial information related to our operating segments can be found in note 19 to our consolidated financial statements found in Part II of this report.
(c)Narrative Description of Business
The following table identifies our more significant subsidiaries and minority investments:
subsidiaries:
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QVC, Inc. |
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QVC
On December 29, 2017, Qurate Retail completed the acquisition of the remaining 62% ownership interest of HSN in an all-stock transaction. On December 31, 2018, Qurate Retail transferred our 100% ownership interest in HSN to QVC, Inc. through a transaction among entities under common control. References throughout this Annual Report to “QVC” refer to QVC, Inc., which includes HSN, QVC U.S. and QVC International. On October 17, 2018, Qurate Retail announced a series of initiatives designed to better position its HSN and QVC U.S. businesses (the “QRG Initiatives”). 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.”
QVC a wholly-owned subsidiary, marketscurates and sells a wide variety of consumer products primarily through live merchandise-focused televisedvia highly engaging, video-rich, interactive shopping programsexperiences distributed to approximately 374216 million worldwide households each day, (including the joint venture in China as discussed below in further detail) and viathrough its broadcast networks. QVC also reaches audiences through its websites including(including QVC.com, HSN.com and other interactive media, such asothers), its applications via streaming video (Facebook Live, Roku, Apple TV, and Amazon Fire), its mobile applications.applications, its social pages and over-the-air broadcasters. QVC believes it is thea global leader in televisionvideo retailing, e-commerce, mobile commerce and a leading multimedia retailer,social commerce, with operations based in the U.S., Germany, Japan, the U.K., Italy and France. Additionally, it has a 49% interestItaly. QVC’s operating strategies are to (i) Curate special products at compelling values; (ii) Extend video reach and relevance; (iii) Reimagine daily digital discovery; (iv) Expand and engage its passionate community; and (v) Deliver joyful customer service. In addition, QVC is exploring opportunities to evolve the International operating model to pursue growth opportunities in a retailing joint venture in China, which operates through a television shopping channel with an associated website. The joint venture is accounted for by QVC as an equity method investment. The name, QVC, stands for "Quality, Value and Convenience," which is what QVC strives to deliver to its customers. QVC’s operating strategy is to create a premier multimedia lifestyle brand and shopping destination for its customers, further penetrate its core customer base, generate new customers, enhance programming distribution offerings and expand internationally to drive revenue and profitability.more leveraged way across markets. For the year ended December 31, 2017,2019, approximately 93% of its worldwide shipped sales were from repeat and reactivated customers (i.e., customers who made a purchase from QVC during the prior twelve months and customers who previously made a purchase from QVC but not during the prior twelve months). In the same period, QVC
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attracted approximately 3.24.3 million new customers. QVC’scustomers and the global e-commerce operation comprised $4.4$5.8 billion, or 50%53%, of its consolidated net revenue for the year ended December 31, 2017.2019.
QVC markets its products in an engaging, entertaining format primarily through merchandise-focused live television programs and interactive features on its websites and other interactive media. In the U.S., QVC distributes its programming live 2420 hours per day, 364 days per yearyear. The QVC and presentsHSN brands present on average 800710 products and 580 products, respectively, every week (such U.S. operations, “QVC-U.S”).week. Internationally, QVC distributes live programming 8 to 24 hours per day, depending on the market. QVC classifies its products into six groups: home, apparel, beauty, accessories, electronics and jewelry.
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| Years ended December 31, | ||||
Product category | 2017 |
| 2016 |
| 2015 |
Home | 34% |
| 33% |
| 33% |
Apparel | 19% |
| 19% |
| 17% |
Beauty | 17% |
| 17% |
| 17% |
Accessories | 13% |
| 13% |
| 13% |
Electronics | 9% |
| 9% |
| 10% |
Jewelry | 8% |
| 9% |
| 10% |
Total | 100% |
| 100% |
| 100% |
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Many of QVC's brands are exclusive, while others are created by well-known designers. It is QVC's product sourcing team's mission to research and locate compelling and differentiated products from manufacturers who have sufficient scale to meet anticipated demand. QVC offers many QVC-exclusive products, as well as popular brand name and lesser known products available from other retailers. Many of its products are endorsed by celebrities, designers and other well-known personalities who often join its presenters to personally promote their products and provide lead-in publicity on their own television shows. QVC believes that its ability to demonstrate product features and present “faces and places” differentiates and defines the QVC shopping experience. QVC closely monitors customer demand and its product mix to remain well-positioned and relevant in popular and growing retail segments, which QVC believes is a significant competitive advantage relative to competitors who operate brick-and-mortar stores.
QVC does not depend on any single supplier or designer for a significant portion of its inventory purchases.
Since its inception, QVC has shipped over 2 billion packages in the U.S. alone. QVC operates ninefifteen distribution centers and seveneight call centers worldwide. In the U.S., QVC is able to ship approximately 90% of its orders within two days of the order placement. Globally, QVC is able to ship approximately 91% of its orders within two days of the order placement. In 2017,2019, QVC's work force consisted of approximately 17,10020,400 employees who handled approximately 131120 million customer calls, shipped approximately 191233 million units globally and served approximately 1315.2 million unique customers. QVC believes its long-term relationships with major U.S. television distributors, including cable operators (e.g., Comcast, Charter and Cox), satellite television providers (e.g., DISH Network and DIRECTV) and telecommunications companies (e.g., Verizon and AT&T (excluding DIRECTV))&T), provide it with broad distribution, favorable channel positioning and significant competitive advantages. QVC believes that its significant market share, brand awareness, outstanding customer service, repeat customer base, flexible payment options, international reach and scalable infrastructure distinguishes QVC from its competitors.
QxH
QVC-U.S.'sQxH's live televised shopping programs areprogramming is distributed nationally, 2420 hours per day, 364 days per year, to approximately 10192 million television households. QVChouseholds and distributes its programming to approximately 99% of television households subscribing to services offered by television distributors. QVC-U.S.QxH’s televised shopping programs, including live and recorded content, are broadcast across multiple channels nationally on a full time basis, including the main QVC and HSN channels as well as the additional channels of QVC2, QVC3, and HSN2. These additional channels offer viewers access to a broader range of QxH programming isoptions as well as more relevant programming for viewers in different time zones. During the first quarter of 2019, QxH transitioned its Beauty iQ broadcast channel to QVC 3 and Beauty iQ content was moved to a digital only platform. QxH also available on QVC.com, its U.S. website, and mobile applications via streaming video; over-the air broadcasters in 93 markets; and on the Roku and Apple TV platforms. QVC-U.S., including QVC.com, contributed $6.1 billion, or 70%, of consolidated net revenue, $994 million of operating income and $1.4 billion of Adjusted OIBDA (defined in Part II, Item 7 of this report) for the year ended December 31, 2017.
In March 2013, QVC-U.S. launchedhas over-the-air broadcasting in designated U.S. markets that can be accessed by any television household with a digital antennaeantenna in such markets, regardless of whether it subscribes to a paid television service. This allows QVC-U.S.QxH to reach new customers who previously did not have access to the program through other television platforms. In August 2013, QVC-U.S. launched an additional channel, QVC2, which
QxH's programming is being distributedalso available through cableQVC.com and satellite systems. The channel allows viewers to have access to a broader range of QVC programming optionsHSN.com (collectively, QVC’s “Websites”), as well as more relevant programming for viewers in differing time zones. In October 2016, QVC-U.S. launched a third channel, Beauty iQ, which is being distributed through satelliteapplications via streaming video (Facebook Live, Roku, Apple TV, and streaming platforms. The channelAmazon Fire), mobile applications, social pages and supporting platforms are dedicated to a complete beauty shopping experience for customers.
QVC.com, launched in 1996, complements QVC-U.S.'s televised shopping programs by allowingover-the-air broadcasters (collectively, QVC’s “Digital Platforms”). QxH’s Digital Platforms enable consumers to purchase a wide assortment of goods offered on its televised programs, as well as otherbroadcast programming along with a wide assortment of products that are available only on QVC.com. QVC views e-commerce (QVC.comits Websites. QxH’s Websites and mobile devices) as aother Digital Platforms are natural extensionextensions of its business model, allowing itcustomers to streamengage in its shopping experience wherever they are, with live videoor on-demand content customized to the device they are using. In addition, its Websites and offer on-demand video segments of items recently presented live on its televised programs. QVC.com allowsmobile applications allow shoppers to browse, research, compare and perform targeted searches for products, read customer reviews, control the order‑entryorder-entry process and conveniently access their QVC account. For the year ended December 31, 2017,2019, approximately 80% of new U.S.QxH customers made their first purchase through QVC.com (including mobile).QxH’s Digital Platforms. QxH, including its Digital Platforms, contributed $8.3 billion, or 75%, of consolidated QVC net revenue, $1,120 million of operating income and $1,536 million of Adjusted OIBDA (defined below) for the year ended December 31, 2019. QxH’s Digital Platform usage as a percentage of total QxH net revenue has increased from 53.3% in 2017 to 56.9% in 2019.
QVC's televisedQVC International
QVC International brings the QVC shopping programs reachedexperience to approximately 144124 million television households outside of the U.S., primarily in Germany, Austria, Japan, the U.K., the Republic of Ireland Italy and France. In addition, QVC's joint venture in China reached approximately 129 million homes. The programming created for most of these markets is also available via streaming video on its international websites and mobile applications. QVC'sItaly. Similar to the U.S. business QVC’s international business employsengages customers via multiple platforms, including broadcast networks, websites, mobile applications and social pages. QVC International product sourcing teams who select products tailored to the interests of each local market. For the year ended December 31, 2017, QVC's international operations2019, QVC International, including its Digital Platforms generated $2.6$2.7 billion, or 30%25%, of consolidated QVC net revenue, $353$354 million of operating
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income and $451$446 million of Adjusted OIBDA (defined in Part II, Item 7 of this report) and QVC's international websitesQVC International’s Digital Platform usage generated $950$1,114 million, or 36%41.2%, of its total international net revenue.
On July 4, 2012,
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Merchandise
QVC’s global merchandise mix features: (i) home, (ii) apparel, (iii) beauty, (iv) accessories, (v) electronics and (vi) jewelry. Many of its brands are exclusive, while others are created by well-known designers. QVC’s global sales mix is provided in the table below:
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| Years ended December 31, | ||||
Product category | 2019 | | 2018 | | 2017 (1) |
Home | 37% | | 38% | | 34% |
Beauty | 18% | | 18% | | 17% |
Apparel | 16% | | 16% | | 19% |
Accessories | 12% | | 11% | | 13% |
Electronics | 11% | | 11% | | 9% |
Jewelry | 6% | | 6% | | 8% |
Total | 100% | | 100% | | 100% |
(1) | For the year ended December 31, 2017 in the table above, the sales mix does not include HSN. |
Unlike traditional brick-and-mortar retailers with inventories across a network of stores, QVC entered intois able to quickly adapt its offerings in direct response to changes in its customers purchasing patterns. QVC utilizes a joint venturetest and re-order model to determine initial customer demand. Through constant monitoring, QVC manages its product offerings to maximize net revenue and fulfill current demand in large growth segments where it can gain a greater share of its customers' purchases. QVC’s merchandising team is dedicated to continually researching, pursuing and launching new products and brands. With a mandate to deliver hard-to-find value, its merchants find and curate collections of high quality goods from manufacturers with Beijing‑the scale to offer sufficient supply to QVC’s existing and future customers. QVC maintains strong relationships with its vendors, which are attracted by the showcasing and story-telling elements of its programming, and the volume of sales during featured presentations.
QVC purchases, or obtains on consignment, products from U.S. and foreign manufacturers and wholesalers, often on favorable terms based CNR Media Group, formerly knownupon the volume of the transactions. QVC has attracted some of the world's most respected consumer brands as China Broadcasting Corporation,well as celebrities, entrepreneurs and designers to promote these brands. Brand leaders such as Dell, Dooney & Bourke, Dyson, Judith Ripka and Philosophy reach a limited liability company owned by China National Radio (“CNR”), China's government‑owned radio division. The joint venture, CNR Home Shopping Co., Ltd. (“CNRS”), is owned 49% bybroad audience while product representatives share the stories behind these brands. QVC has agreements with celebrities, entrepreneurs and 51% by CNR through subsidiariesdesigners such as Isaac Mizrahi, Rachael Ray and Martha Stewart enabling it to provide entertaining and engaging programming that develops a lifestyle bond with its customers. These celebrity personalities and product representatives often provide pre-appearance publicity for their QVC products on their own social pages and broadcast shows, enhancing demand during their QVC appearances. QVC presents and promotes across its networks, websites, mobile applications and social platforms, allowing shoppers to engage with QVC on multiple platforms and devices.
QVC does not depend on any single supplier or designer for a significant portion of each company. CNRS operates a retailing business in China through a shopping television channel with an associated website. CNRS distributes live programming for 10 hours each day and recorded programming for 14 hours each day. The CNRS joint venture is accounted for as an equity method investment.its inventory purchases.
Video Distribution
QVC distributes its television programs,programming via satellite and optical fiber, to cable television and/or direct-to-home satellite system operators for retransmission to their subscribers in the U.S., Germany, Japan, the U.K., FranceItaly and neighboring countries. QVC also transmits its television programsprogramming over digital terrestrial broadcast television to viewers throughout Italy, Germany, and the U.K. and to viewers in certain geographic regions in the U.S. In the U.S., QVC uplinks its digital programming transmissions using a third-party service.service, or internal resources. The transmissions are uplinked to protected, non-preemptible transponders on U.S. satellites. "Protected" status means that, in the event of a transponder failure, the signal will be transferred to a spare transponder or, if none is available, to a preemptible transponder located on the same satellite or, in certain cases, to a transponder on another satellite owned by the same service provider if one is available at the time of the failure. "Non-preemptible" status means that, in the event of a transponder failure, QVC's transponders cannot be preempted in favor of a user of a failed transponder, even another user with "protected status." The international
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business units each obtain uplinking services from third parties and transmit their programming to non-preemptible transponders on international satellites and terrestrial transmitters. The transponder service agreements for the U.S. transponders expire at the earlier of the end of the lives of the satellites or the service agreements. The service agreements in the U.S.for QxH expire between 20182020 and 2023.2025. The transponder service agreements for the internationalQVC International transponders and terrestrial transmitters expire between 20192020 and 2027.2029.
QVC continually seeks to expand and enhance its televisionbroadcast and e-commerce platforms, as well as to further its international operations and multimedia capabilities. QVC launched QVCHD in the U.S. in April 2008, and in May 2009, became the first U.S. multimedia retailer to offer aoffers native high definition (“HD”) service. QVCHD is a HD simulcast of QVC's U.S. telecast utilizing the full 16x9 screen ratio, while keeping the side panel forprogramming in addition to standard definition programming, which provides additional information. HD programmingchannel locations and allows QVC to utilize a typically wider television screen with crisper and more colorful images to present a larger “storefront,” which QVC believes captures the attention of channel “surfers” and engages its customers. In the U.S., QVCHDQVC’s HD programming reaches approximately 8980 million television households. QVC continues to develop and launch features to further enrich the television viewing experience.
Beyond the main live programming QVC channels, including QVCHD, in the U.S., Germany and the U.K. also broadcast shows on additional channels that offer viewers access to a broader range of QVC programming options. These channels include QVC2 and Beauty iQ in the U.S., QVC Beauty & Style and QVC2 in Germany, and QVC Beauty, QVC Extra, and QVC Style in the U.K.Affiliation Agreements
QVC enters into long-term affiliation agreements with certain of its television distributors who downlink its programming and distribute the programming to customers. QVC's affiliation agreements with both domestic and international distributors have termination dates ranging from 20182020 to 2027.2024. QVC's ability to continue to sell products to its customers is dependent on its ability to maintain and renew these affiliation agreements in the future. Although QVC is typically successful in obtaining and renewing these agreements, it does not have distribution agreements with some of the distributors that carry its programming. In total, QVC is currently providing programming without affiliation agreements to distributors representing approximately 10%5.8% of its QVC channel distribution in the U.S. distribution, and short-term, rolling 30 day letters of extension, to distributors who represent approximately 27%1.1% of its U.S.HSN channel distribution. Some of its international programming may continue to be carried by distributors after the expiration dates on its affiliation agreements with such distributors have passed.
In return for carrying QVC's signals, each programming distributor in thefor its U.S. distribution receives an allocated portion, based upon market share, of up to 5% of the net sales of merchandise sold via the television programs and from certain Internet sales to customers located in the programming distributor's service areas. Internationally,In some cases, pay television operators receive additional compensation in the form of commission guarantees in exchange for their commitments to deliver a specified number of subscribers, channel placement incentives and advertising insertion time. QVC International programming distributors
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predominately predominantly receive an agreed-upon annual fee, a monthly or yearly fee per subscriber regardless of the net sales, a variable percentage of net sales or some combination of the above arrangements.
In addition to sales-based commissions or per-subscriber fees, QVC also makes payments to distributors primarily in the U.S. for carriage and to secure channel positioning within a broadcast area or within the general entertainment area on the distributor's channel line-up. QVC believes that a portion of its sales are attributable to purchases resulting from channel “surfing” and that a channel position near broadcast networks and more popular cable networks increases the likelihood of such purchases. As technology evolves, QVC will continue to monitor optimal channel placement and attempt to negotiate agreements with its distributors to maximize the viewership of its television programming.
Demographics of customers
QVC enjoys a very loyal customer base, as demonstrated by the fact that for the twelve months ended December 31, 2017,2019, approximately 87%86% of its worldwide shipped sales came from repeat customers (i.e., customers who made a purchase from QVC during the prior twelve months), who spent an average of $1,264$1,281 each during this period. An additional 6%7% of shipped sales in that period came from reactivated customers (i.e., customers who previously made a purchase from QVC, but not during the prior twelve months).
Customer growth was essentially flatQVC had slight decline in 2017.customer count during 2019. On a trailing twelve month basis, total consolidated customers (excluding the joint venture in China) were approximately 12.715.2 million which includes approximately 8.110.6 million in the U.S.QxH customers and approximately 4.6 million internationally.QVC International customers. QVC believes its core customer base represents an attractive demographic target market. Based on internal customer data for QxH, approximately 48%44% of its 8.110.6 million U.S. customers for the twelve months ended December 31, 20172019 were women between the ages of 35 and 64.
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QVC does not depend on any single customer for a significant portion of its revenue.
Ordering and fulfillment
QVC strives to be prompttakes a majority of its orders via its websites and efficientvia mobile applications on iPhone, iPad, Apple Watch, Android and other devices. QxH and QVC International customers placed approximately 39% and 32%, respectively, of all orders directly through their mobile devices in order taking and fulfillment. 2019.
QVC has two domestic phonethree customer contact centers located in San Antonio, Texasthe US and Chesapeake, Virginia,five international customer contact centers that can direct calls, e-mail contacts and social contacts from one call center to the other as volume mandates. Internationally, QVC also has one phone center in each of Japan, the U.K. and Italy, and two call centers in Germany. For France, order taking is handled by a third party located in Portugal. Many markets also utilize home agents to handle calls, allowing staffing flexibility for peak hours. In addition, QVC utilizes computerized interactive voice response units,order systems for telephonic orders, which handle approximately 25%28% of all orders taken on a worldwide basis.
In addition to taking orders from its customers through phone centers and online, QVC continues to expand its ordering platforms. QVC is expanding mobile device ordering capabilities and over the past several years QxH has launched iPhone, iPad, Apple Watch, Android, Blackberry and Apple TV applications, a WAP (wireless application protocol) mobile website and a robust SMS (short message services) program. On a global basis, customers placed approximately 32% of all orders directly through their mobile devices in 2017.
Through QVC's nine worldwide distribution centers, QVC shipped approximately 91% of its orders within two days of the order placement in 2017. QVC's domestic distribution centers are located in Suffolk, Virginia; Lancaster, Pennsylvania; Rocky Mount, North Carolina; Florence, South Carolina; and Ontario, California. QVC’s domesticeleven distribution centers and dropship partners have shipped nearly 743,000 units and over 669,000 packages in a single day during 2017. QVC alsoInternational has four distribution centers. QVC’s distribution centers in Sakura-shi, Chiba, Japan; Hücklehoven, Germany; Knowsley, U.K.; and Castel San Giovanni, Italy.drop ship partners shipped, on average, 454,000 units per day at QxH and 183,000 units per day at QVC International during 2019. Refer to Item 2. “Properties” for further details.
QVC has built a scalable operating infrastructure focused on sustaining efficient, flexible and cost-effective sale and distribution of its products. Since its physical store locations are minimal, QVC requires lower inventory levels and capital expenditures compared to traditional brick-and-mortar retailers. In recent years, QVC has made and continues to make significant investments in its distribution centers that it believes will accommodate its foreseeable growth needs. Further, since QVC has no set “floor plan” and can closely manage inventory levels at its centralized warehouses, QVC believes it has the flexibility to analyze and react quickly to changing trends and demand by shifting programming time and product mix. QVC's cost structure is highly variable, which QVC believes allows it to consistently achieve attractive margins relative to brick-and-mortar retailers.
QVC's web and mobile platforms are fully integrated with its televised programming and product distribution capabilities. QVC's web and mobile platform features include a live video stream of its television programming, full integration with its order fulfillment and its product branding, as well as the thematic offerings and events that have become fundamental to its televised programming.
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Third party carriers transport QVC's packages from its distribution centers to its customers. In each market where QVC operates, it has negotiated long-term contracts with shipping companies, which in certain circumstances provides for favorable shipping rates.
Competition
QVC operates in a rapidly evolving and highly competitive retail business environment. Based on domestic net revenue for the twelve months ended December 31, 2017, QVC is the leading television retailer in the U.S. and generates substantially more net revenue than its two closest televised shopping competitors, HSNi and EVINE Live Inc. (“EVINE Live”). On December 29, 2017, the Company acquired the remaining 62% ownership interest of HSNi and QVC no longer considers HSNi a competitor. QVC's international operations face similar competition in their respective markets, such as Shop Channel in Japan, HSE 24 in Germany and Italy, Ideal World in the U.K., and M6 Boutique in France. Additionally, QVC has numerous and varied competitors at the national and local levels, ranging from large department stores to specialty shops, electronice-commerce retailers, direct marketing retailers, wholesale clubs, discount retailers, infomercial retailers, Internet retailers, and mail-order and catalog companies. Some of QVC’s competitors, such as Amazon and Walmart, have a significantly greater web-presence. QVC believes that the principal competitive factors for its web-commerce operations are high-quality products, brand recognition, selection, value, convenience, price, website performance, customer service and accuracy of order shipment.
QVC believes that QxH is a leader in video shopping, e-commerce, mobile commerce and social commerce by curating quality products at outstanding values, providing exceptional customer service, establishing favorable channel positioning and multiple touchpoints across digital platforms and generating repeat business from its core customer base and that it also compares favorably in terms of sales to general, non-video based retailers due to its extensive customer reach and efficient cost structure. QxH's closest video shopping competitor is ShopHQ (formerly referred to as Evine) and QVC International operations face similar competition in their respective markets, such as Jupiter Shop Channel in Japan, HSE 24 in Germany, Austria, and Italy, and Ideal World in the U.K.
QVC also competes for access to customers and audience share with other providers of televised, onlinebroadcast, digital and hard copy entertainment and content. The price and availability of other programming and the conversion to digital programming platforms may unfavorably affect the placement of its programming in the channel line-ups of its distributors, and may affect its ability to obtain distribution agreements with small cable distributors. Competition from other programming also affects the compensation that must be paid to distributors for carriage, which continues to increase.carriage. Principal competitive factors for QVC include (i) value, quality and selection of merchandise; (ii) customer experience, including customer service and speed, cost and reliability of fulfillment and delivery services; and (iii) convenience and accessibility of sales channels.
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Intellectual Property
QVC established QVC-U.S. as the televised shopping leader after building a track record of outstanding quality and customer service, establishing favorable channel positioning and generating repeat business from its core customer base. QVC believes QVC-U.S. also compares favorably in terms of sales to general, non-television based retailers due to its extensive customer reach and efficient cost structure.
QVC regards its trademarks,tradenames, service marks, patents, copyrights, domain names, trade dress, trade secrets, proprietary technologies and similar intellectual property as critical to its success. QVC relies on a combination of trademarktradename, patent and copyright law, trade‑-secret protection, and confidentiality and/or license agreements with its employees, customers, suppliers, affiliates and others to protect these proprietary rights. QVC has registered, or applied for the registration of, a number of tradenames, service marks, patents, copyrights and domain names trademarks, service marks and copyrights bythrough U.S. and foreign governmental authorities and vigorously protects its proprietary rights against infringement.
Domestically, QVC has registered tradenames and service marks including, but not limited to its brand name,names and logo, "QVC," "Quality Value Convenience," "Find What You Love, Love What You Find," the "Q QVC Ribbon Logo," and "Q" and trademarkstradenames for its proprietary products sold such as "Arte D'Oro," "Cook's Essentials," "Denim & Co.," "Diamonique," “Nature’s Code,” "Northern Nights" and "Ultrafine Silver." Similarly, foreign registrations have been obtained for many trademarkstradenames and service marks for its brand namenames, logo and propriety products including, but not limited to, "QVC," the "Q QVC Ribbon Logo," "Q," "Cook’s Essentials," "Denim & Co.," "Diamonique" and "Northern Nights."
HSN has numerous tradename registrations or pending applications in the United States which help to expand HSN’s brand awareness. These registrations and applications include the “HSN” brand name and the “HSN logo” as well as registrations for HSN’s proprietary products and services, including, but not limited to, “HSN Shop By Remote,” “Technibond,” and “Concierge Collection.”
QVC considers the service mark for the "QVC" nameand “HSN” names the most significant trademark ortradenames and service mark held bymarks it holds because of itstheir impact on market awareness across all of its geographic markets and on customers' identification with QVC. As with all domestic trademarkstradenames or service marks, QVC's trademarktradename and service mark registrations in the U.S. are for a ten year period and are renewable every ten years, prior to their respective expirations, as long as the trademarkstradenames or service marks are used in the regular course of trade.
Seasonality
QVC's business is seasonal due to a higher volume of sales in the fourth calendar quarter related to year-end holiday shopping. In recent years, QVC has earned, on average, between 22% and 24%23% of its global revenue in each of the first three quarters of the year and between 30% and 32% of its global revenue in the fourth quarter of the year.
HSNiZulily
HSNi becameOn October 1, 2015, we acquired 100% of Zulily. Zulily is an online retailer offering customers a separate public companyfun and entertaining shopping experience with a fresh selection of new product styles every day. The Zulily website was launched in August 2008 in connectionJanuary 2010 with the separationgoal of IAC/InterActiveCorp (“IAC”) into five separate companies. HSNi offers innovative, differentiatedrevolutionizing the way consumers shop. Through its app, mobile and desktop experiences, Zulily helps its customers discover new and unique products at great values that they would likely not find elsewhere. Zulily’s merchandise includes women’s, children’s and men’s apparel and other products such as home, accessories and beauty products. Zulily sources its merchandise from thousands of vendors, including emerging brands and smaller boutique vendors, as well as larger national brands. By bringing together millions of customers and a daily selection of products chosen from its broad vendor base, Zulily has built a large scale and uniquely curated shopping destination.
Every morning, Zulily launches a variety of flash sales events. These events feature thousands of product styles from different vendors and typically last for 72 hours. Product offerings are typically only available for a limited time and in a limited quantity, creating urgency to browse, discover and purchase.
Before Zulily launches an event, Zulily obtains photographs of the merchandise and its editorial team writes about the merchandise based on the product details provided by the vendor. Zulily strives to offer the lowest price points for its customers, with the average item offered for a significant discount off the manufacturer’s suggested or comparison retail experiencesprice. Zulily then uses its proprietary technology, data analytics and marketspersonalization tools to segment its audience, offering each customer a curated and sells aoptimized shopping experience that features brands, products and events that it believes are most relevant for that customer.
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wideZulily acquires new customers through a diverse set of paid and unpaid marketing channels, including affiliate channels and partners, customer referrals, direct navigation, display advertising, key word search campaigns, search engine optimization, social media and television ads. Core to its business model is that Zulily acquires customers via paid and unpaid sources, and then drives engagement and repeat purchases from those customers over a long period of time through diversified marketing channels.
Continual innovation through investment in technology is core to Zulily’s business. Zulily uses its technology platform to improve the experience of its customers and vendors, increase the purchase frequency and average order size and optimize the efficiency of its business operations. Zulily’s technology team is focused on rapid innovation through advanced agile software development processes. Investment in machine learning and data science helps place the right product in front of the right customer at the right time. Zulily’s scalable platform uses custom-built and third-party technologies to support its specific customer and vendor requirements, including handling significant spikes in site traffic and transactions on a daily basis, and the rapid and complex order supply chain needs that are unique to Zulily’s flash sales and minimal inventory model. Zulily believes it can quickly scale its infrastructure to accommodate significantly higher volumes of site traffic, customers, orders and the overall growth in its business.
To best serve its customers and vendors, Zulily has a custom, fully integrated fulfillment infrastructure consisting of receiving, sorting, inventory management and repackaging systems which are driven by proprietary fulfillment management software. Zulily’s supply chain solution efficiently handles the small-to-medium lot sizes and high inventory turnover required by constantly changing, limited-time product offerings. Zulily operates a minimal inventory, intermediary model where it typically takes customer orders before purchasing inventory from vendors. As a result, Zulily is able to offer a much larger selection of products to customers and to generate greater sales for vendors, who are able to match a broader range of their product supply to actual customer demand. In addition, Zulily also offers third party fulfillment services to its vendors. This program allows vendors to store their inventory in Zulily’s warehouses and fulfill orders for Zulily’s events or other retail channels and has helped reduce shipping times to Zulily customers.
Zulily views its target market broadly and competes with any retailer where its customers shop. It faces significant competition from both online and offline retailers, competing on: product curation and selection, personalization, price, convenience, ease of use, consumer experience, vendor satisfaction and shipping time and cost.
Zulily relies on laws and regulations, contractual restrictions, copyrights, and tradenames to protect its intellectual property and proprietary merchandise directlyrights. Zulily’s employees and contractors also typically enter into agreements to consumers throughassign to Zulily the inventions and content they produce in performing their jobs. Zulily controls access to confidential information by entering into confidentiality agreements with its two operating segments, HSNemployees, contractors and Cornerstone.third parties, such as vendors, service providers, individuals and entities that may be exploring a business relationship with Zulily. Despite the protection of general intellectual property law and its contractual restrictions, it may be possible for a third party to copy or otherwise obtain and use Zulily’s intellectual property without Zulily’s authorization.
HSN. HSN includesZulily has registered numerous Internet domain names related to its business. In addition, Zulily pursues the HSN television networks;registration of its related website, HSN.com;tradenames in the U.S. and certain other locations outside of the U.S.; however, effective intellectual property protection or enforcement may not be available in every country in which Zulily’s products and services are made available in the future. In the U.S. and certain other countries, Zulily has registered or has applications pending for its key tradenames, including: Zulily, the Zulily design mark and designs associated with its mobile applications;applications and branded social channels.
Zulily’s results are impacted by a limited numberpattern of outlet stores; and its wholesale distribution of certain proprietary products to other retailers. The HSN television network broadcasts customer interactive homeelevated sales volume during the holiday shopping programming live seven days a week. HSN2, which debuted in August 2010, is a network that primarily distributes taped programming. HSN’s programming is intended to promote sales and customer loyalty through a combination of product quality, value and selection, coupled with product information, entertainment and interactive experiences. Programming is divided into separately televised segments, most of which have hosts who present and convey information regarding featured products, sometimes with the assistance of a celebrity, industry expert, representative from the product vendor or someone retained to aidseason in the salefourth quarter. The fourth quarter accounted for approximately 28.8% and 30.3% of the products. HSN also produces entertainment to engage with customers and promote certain products. HSN.com is a business-to-consumer digital commerce site that sells all of the merchandise offered on the HSN television networks, together with complementary products and select merchandise sold exclusively on HSN.com. HSN provides seamless experiences across all digital platforms and optimizes each unique platform by delivering exclusive content both at HSN.com and on mobile phones and tablets, including the iPad, iPhone, Android and Windows devices. The HSN strategy is to create immersive experiences, offer differentiated products and leverage technology to build seamless relationships with its customers across all of its platforms. HSN fosters social communities as part of the HSN experience to encourage customers to share their product finds, thoughts and reviews with their friends via Facebook, Twitter, Pinterest and Instagram.
HSN produces both live and recorded programmingZulily’s revenue for the HSN television network primarily from its studios in St. Petersburg, Florida, and distributes this programming by means of satellite uplink facilities, which it owns and operates, to a satellite transponder which service is leased for a multi-year term. The satellite transponder agreement provides for continued carriage of the HSN television networks on a replacement transponder and/or replacement satellite, as applicable, in the event of a failure of the transponder and/or satellite.
As ofyears ended December 31, 20172019 and 2016, HSN's live broadcast reached approximately 89.1 million and 91.1 million homes of the approximately 112.1 million and 114.7 million homes, respectively, in the United States with a television set. Television households reached by the HSN television network as of December 31, 2017 and 2016 include approximately 59.8 million and 61.1 million households capable of receiving cable and/or telephone company ("Telco") transmissions, respectively, and approximately 29.3 million and 30.0 million direct broadcast satellite system ("DBS") households, respectively. As of December 31, 2017 and 2016, HSN2 reached approximately 52.1 million and 47.5 million homes, respectively. Television households reached by HSN2 as of December 31, 2017 and 2016 primarily include approximately 42.8 million and 37.3 million households capable of receiving cable and/or Telco transmissions, respectively, and approximately 9.3 million and 10.2 million DBS households,2018, respectively.
HSN has entered into distribution and affiliation agreements with cable television, Telco and DBS operators, collectively referred to in this document as pay television operators, in the United States to carry the HSN television networks. HSN’s larger pay television operators include Comcast, AT&T/DirecTV, Charter Communications and Echostar/DISH. In exchange for this carriage and related promotional and other efforts, HSN generally pays these pay television operators a fee consisting of commissions based on a percentage of the net merchandise sales to their subscriber bases and/or a per subscriber fee. In some cases, pay television operators receive additional compensation in the form of commission guarantees in exchange for their commitments to deliver a specified number of subscribers, channel placement incentives and advertising insertion time on the HSN television network.
HSN typically negotiates agreements that require HSN to pay monthly or annual fees. Distribution and affiliation agreements with pay television operators expire from time to time and renewal and negotiation processes may be lengthy. At any given time in the ordinary course of business HSN is likely to be engaged in renewal and/or negotiation processes with multiple pay television operators. In some cases, renewals are not agreed upon prior to the expiration of a given agreement and the HSN television networks continue to be carried by the relevant pay television operator without an effective affiliation agreement in place or via month-to-month contracts. HSN expects that any extension of agreements that have expired will be on terms that, when taken as a whole, are commercially reasonable.
As of December 31, 2017, HSN also had affiliation agreements with 120 broadcast television stations for leased carriage of the HSN television networks with terms ranging from several weeks to several years. In exchange for this carriage, HSN pays the broadcast television stations hourly or monthly fixed rates or commissions based on a percentage
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of the net merchandise sales to their viewership bases. As of December 31, 2017, HSNi’s subsidiary, Ventana Television, Inc. also owned 23 broadcast television stations that carry the HSN television networks on a full-time basis.
HSN also includes HSN.com, a transactional e-commerce site that sells merchandise offered on the HSN television networks, as well as select merchandise sold exclusively on HSN.com. HSN.com provides customers with additional content to support and enhance HSN television programming. For example, HSN.com provides users with an online program guide, value-added video of product demonstrations, live streaming video of the HSN television network, customer-generated product reviews and additional information about HSN show hosts and guest personalities. HSN.com offers customers a content-rich experience that houses more than 50,000 product and how-to videos.
HSN has applications for the iPhone, iPad, Android and Windows devices. These applications are highly video-centric, customized experiences that allow users to order merchandise, stream live video from HSN and watch previously-aired content from the network’s video library while simultaneously browsing related products. Among other things, these applications also allow customers to create their own personalized channels, select their favorite brands or categories of merchandise and compile videos focused on these preferences. Mobile devices represent HSN’s fastest growing sales channel.
HSN purchases products from numerous foreign and domestic manufacturers and importers by way of short- and long-term contracts and purchase orders, including products made to their respective specifications, as well as name brand merchandise and lines from third party partners, typically with certain exclusive rights. In some cases, these contracts provide for the payment of additional amounts to partners in the form of commissions, the amount of which is based upon the achievement of agreed upon sales targets, among other milestones. In addition, in the case of some purchases, HSN may have certain return, extended payment and/or termination rights. No single vendor accounted for more than 10% of HSNi’s consolidated net sales in 2017, 2016 or 2015. HSN classifies its products into six groups: home, electronics, beauty, accessories, jewelry and apparel.
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| Years Ended December 31, | ||||
Product Category | 2017 |
| 2016 |
| 2015 |
Home | 41% |
| 40% |
| 40% |
Electronics | 22% |
| 23% |
| 23% |
Beauty | 13% |
| 13% |
| 13% |
Accessories | 9% |
| 9% |
| 9% |
Jewelry | 8% |
| 8% |
| 9% |
Apparel | 7% |
| 7% |
| 6% |
Total | 100% |
| 100% |
| 100% |
HSN offers its customers a broad assortment of differentiated products in a compelling, informative and entertaining format that will inspire them to regularly engage and shop with HSN. For example, HSN frequently collaborates with experts from a variety of fields to present special events on the HSN television network featuring HSN products and relevant expert content. HSN produces live entertainment as a way to further engage with its customers. These events are staged at HSN’s television studios or elsewhere.
In an effort to promote its own differentiated brand, HSN seeks to provide its customers with unique products that can only be purchased through HSN. HSN frequently partners with leading personalities and brands to develop product lines exclusive to HSN and believes that these affiliations enhance the awareness of the HSN brand among consumers, as well as increase the extent to which HSN and/or products sold through HSN are featured in the media. In some cases, vendors have agreed to market their HSN affiliation to their existing customers (e.g., notifying customers when their products will be featured on the HSN television network).
HSN engages in co-promotional partnerships with major media companies. These are done primarily because they offer HSN editorial authority while they also secure print advertising in national fashion, style and/or lifestyle publications to market HSN to prospective customers in its target demographics. HSN also engages in targeted offline advertising. As part of HSN's entertainment strategy, it participates in innovative joint marketing and promotional partnerships with major motion picture companies as well as well-known recording artists. HSN also creates strategic alliances with world-class, consumer brands in an effort to reach new prospects through relevant brand integrations and occasion-based event
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marketing. These promotions are designed to not only generate additional revenue and create brand awareness, but to also provide unique experiences for HSN customers in its continued effort to drive customer engagement as well as position HSN as a proven and powerful marketing vehicle.Cornerstone
HSN's credit card program offers eligible customers a private label credit card. All cardholders receive certain rewards and benefits which are designed to recognize and promote customer loyalty. HSN designs, executes and administers marketing programs to promote usage of the card to current and potential customers. These marketing programs are funded largely by the sponsoring bank. Typically, customers using the HSN private label credit card shop with HSN more frequently, as well as spend more money per visit, than customers not using the card. In addition to fostering greater customer loyalty and driving more sales, HSN also saves on interchange fees that it would incur if its customers used third-party cards.
Cornerstone.Cornerstone consists of a portfolio of aspirational home and apparel brands, prominent in the direct marketing and retail space, including catalog distribution and related websites. Although there is some overlap in the product offerings, the home brands are comprised of Frontgate, Ballard Designs, Frontgate, and Grandin Road and Improvements.Road. Garnet Hill focusesand Ryllace focus primarily on apparel and accessories and isare categorized by HSNi as an apparel brand.brands. There are also 1920 retail and outlet stores located throughout the United States.
Frontgate features premium, high quality indoor (including bed, bath, kitchen, dining and living room) and outdoor (including patio, garden and pool) furnishings and accessories. Ballard Designs features European‑inspiredEuropean-inspired bed, bath, dining, outdoor and office furnishings and accessories, as well as rugs, shelving and architectural accents for the home. Grandin Road offers an affordable style assortment of products ranging from occasional furniture, accessories, holiday décor and outdoor furniture and Improvements features thousands of innovative home, patio and outdoor products. Garnet Hill offers apparel and accessories for women and children as well as bed and bath furnishings and soft goods.furniture.
The Cornerstone brands generally incorporate on-site photography and real-life settings, coupled with related editorial content describing the merchandise and depicting situations in which it may be used. Branded catalogs are designed and produced in-house, which enables each individual brand to control the production process and reduces the amount of lead time required to produce a given catalog.
New editions of full-color catalogs are mailed to customers several times each year, with a total annual circulation in 20172019 of approximately 267177 million catalogs. The timing and frequency of catalog circulation varies by brand and depends upon a number of factors, including the timing of the introduction of new products, marketing campaigns and promotions and inventory levels, among other factors.
Cornerstone also operates websites for each of its featured brands, such as BallardDesigns.com, Frontgate.com, BallardDesigns.com, GarnetHill.com, GrandinRoad.com and Improvementscatalog.com.Ryllace.com. These websites serve as additional storefronts for products featured in related print catalogs, as well as provide customers with additional content and product assortments to support and enhance their shopping experience. Additional content provided by these websites, which differs across the various websites, includes decorating tips, measuring information, online design centers, gift registries and travel centers, as well as a feature that allows customers to browse the related catalog online. In addition, a growing number of customers use mobile devices to shop the Cornerstone brands.
The Cornerstone brands differentiate themselves by offering customers an assortment of innovative proprietary and branded apparel and home products. In many cases, Cornerstone seeks to secure exclusive distribution rights for certain products. Cornerstone employs in-house designers and partners with leading manufacturers and designers to aid in the development of its unique, exclusive product assortment. The Cornerstone brands use their respective websites and e-mail marketing to promote special offers, including cross-promotions for other Cornerstone brands. In addition, Cornerstone partners with third parties to offer promotional events such as sweepstakes and/or enter into other advertising agreements. Cornerstone believes that these affiliations enhance the awareness of the Cornerstone brands among consumers as well as strengthen its various brands overall. Cornerstone has also been extending its distributed commerce platform through both its experiential and more traditional retail and outlet stores, as a marketing tool to increase demand in the overall regions where the stores reside.
HSNi provides customers with convenient options in connection with the purchase, payment and shipment of merchandise. Merchandise may be purchased online, through mobile devices, or ordered using toll free phone numbers
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through live sales and service agents. HSN also offers the convenience of an automated attendant system and, in limited markets, remote control ordering capabilities through pay television set-top boxes. Cornerstone’s catalog orders can also be made via submission of traditional catalog sales order forms.
HSNi allows the customer to pay using traditional payment options (credit and certain debit cards), as well as evolving payment alternatives such as PayPal, VISA Checkout and Apple Pay. HSNi also offers other payment options including private label and co-branded credit cards and, in the case of HSN, Flexpay. By utilizing Flexpay, customers may pay for select merchandise in two to six interest-free, monthly credit or debit card payments. HSN also offers its customers the convenience of ordering products under its Autoship program, through which customers may arrange to have products automatically shipped and billed at scheduled intervals. Standard and express shipping options are available and customers may generally return most merchandise for a full refund or exchange in accordance with applicable return policies (which vary by brand and business). Returns generally must be received within specified time periods after purchase, ranging from a minimum of thirty days to a maximum of one year, depending upon the applicable policy.
HSNi seeks to fulfill customer orders and process returns quickly and accurately from a network of fulfillment centers. For HSN, these centers are located in Tennessee, California, Virginia and New York, and for Cornerstone, the fulfillment centers are located in Ohio and Arizona. HSNi contracts with several third party carriers and other fulfillment partners for the delivery of products to its customers and processing of returns.
Through HSN.com and the various websites operated by Cornerstone or through HSNi’s common carriers, customers can also generally track the status of their orders, confirm information regarding shipping and, in some cases, confirm the availability of inventory and establish and manage personal accounts. Customers may communicate directly with customer service via e-mail or by telephone with call center representatives available seven days a week.
HSNi regards its intellectual property rights, including patents, service marks, trademarks, domain names, copyrights and trade secrets, as important to its success. HSNi’s businesses also rely heavily upon software, informational databases and other systemic components that are necessary to manage and support its operations. HSNi relies on a combination of laws and contractual restrictions with employees, customers, suppliers, licensees, affiliates and other third parties to establish and protect these proprietary rights. Despite these precautions, it may be possible for a third party to copy or otherwise obtain and use trade secrets or copyrighted intellectual property without authorization which, if discovered, might require legal action to correct. In addition, third parties may independently and lawfully develop substantially similar intellectual properties.
HSNi has generally registered and continues to apply to register, or secure by contract when appropriate, its trademarks and service marks as they are developed and used, and reserve and register domain names as HSNi deems appropriate. HSNi considers the protection of its trademarks to be important for purposes of brand maintenance and reputation. While HSNi vigorously protects its trademarks, service marks and domain names, effective trademark protection may not be available or may not be sought in every country in which products and services are made available, and contractual disputes may affect the use of marks governed by private contract. Similarly, not every variation of a domain name may be available to be registered, even if available. HSNi’s failure to protect its intellectual property rights in a meaningful manner or challenges to related contractual rights could result in dilution of brand names and/or limit its ability to control marketing on or through the internet using its various domain names either of which could adversely affect HSNi’s business, financial condition and results of operations.
Some of HSNi’s businesses have been granted patents and/or have patent applications pending with the United States Patent and Trademark Office and/or foreign patent authorities for various proprietary technologies and other inventions. HSNi considers applying for patents or for other appropriate statutory protection when it develops or identifies new or improved proprietary technologies or inventions, and will continue to consider the appropriateness of filing for patents to protect future proprietary technologies and inventions as circumstances may warrant. The issuance or assessment of the validity of any patent involves complex legal and factual questions, and the breadth of claims allowed is uncertain. Accordingly, any patent application filed may not result in a patent being issued or existing or future patents may not be adjudicated valid by a court or be afforded adequate protection against competitors with similar technology. In addition, third parties may create new products or methods that achieve similar results without infringing upon patents that HSNi owns. Likewise, the issuance of a patent to HSNi does not mean that its processes or inventions will not be found to infringe upon patents or other rights previously issued to third parties.
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HSNi's business is seasonal due to a higher volume of sales in the fourth calendar quarter related to year-end holiday shopping. In recent years, HSNi has earned, on average, between 23% and 24% of its global revenue in each of the first three quarters of the year and between 29% and 30% of its global revenue in the fourth quarter of the year.
zulily
On October 1, 2015, we acquired 100% of zulily. zulily is an online retailer offering customers a fun and entertaining shopping experience with a fresh selection of new product styles launched each day. The zulily website was launched in January 2010 with the goal of revolutionizing the way women shop. Through its desktop, mobile, and app experiences, zulily helps its customers discover new and unique products at great values that they would likely not find elsewhere. zulily’s merchandise includes women’s, children’s and men’s apparel and other products such as home, beauty and personalized products. zulily sources its merchandise from thousands of vendors, including emerging brands and smaller boutique vendors, as well as larger national brands. By bringing together millions of customers and a daily selection of products chosen from its vendor base, zulily has built a large scale and uniquely curated marketplace.
Every morning, zulily launches a variety of flash sales events. These events feature thousands of product styles from different vendors and typically last for 72 hours. The day’s events are kicked off by an early morning email to zulily’s email subscribers and “push” communication to users of zulily’s mobile applications and other platforms such as Facebook Messenger. Product offerings are typically only available for a limited time and in a limited quantity, creating urgency to browse, discover and purchase.
Before zulily launches an event, zulily shoots or obtains photographs of the merchandise and its editorial team writes about the merchandise based on the product details provided by the vendor. zulily works to create the most compelling price points for its customers, with the average item offered for a significant discount off the manufacturer’s suggested or comparison retail price. zulily then uses its proprietary technology, data analytics and personalization tools to segment its audience, offering each customer a curated and optimized shopping experience that features brands, products and events that it believes are most relevant for that customer.
zulily acquires new email subscribers through a diverse set of paid and unpaid marketing channels, including affiliate channels and partners, customer referrals, direct navigation, display advertising, key word search campaigns, search engine optimization, social media and television ads. Core to its business model is that zulily acquires customers once via paid and unpaid sources, and then drives engagement and repeat purchases from those customers over a long period of time through the sending of daily emails, mobile “push” communications, remarketing as well as offers and incentives.
Continual innovation through investment in technology is core to zulily’s business. zulily uses its technology platform to improve the experience of its customers and vendors, increase the purchase frequency and average order size and optimize the efficiency of its business operations. zulily’s technology team is focused on rapid innovation through advanced agile software development processes. zulily’s scalable platform uses custom-built and third-party technologies to support its specific customer and vendor requirements, including handling significant spikes in site traffic and transactions on a daily basis, and the rapid and complex order supply chain needs that are unique to zulily’s flash sales and minimal inventory model. zulily believes it can quickly scale its infrastructure to accommodate significantly higher volumes of site traffic, customers, orders and the overall growth in its business.
To best serve its customers and vendors, zulily has a custom, fully integrated fulfillment infrastructure consisting of receiving, sorting, inventory management and repackaging systems which are driven by proprietary fulfillment management software. zulily’s supply chain solution efficiently handles the small-to-medium lot sizes and high inventory turnover required by constantly changing, limited-time product offerings. zulily operates a minimal inventory, intermediary model where it typically takes customer orders before purchasing inventory from vendors. As a result, zulily is able to offer a much larger selection of products to customers and to generate greater sales for vendors, who are able to match a broader range of their product supply to actual customer demand. In addition, zulily also offers third party fulfillment services to its vendors. This program allows vendors to store their inventory in zulily’s warehouses and fulfill orders for zulily’s events or other retail channels and has helped reduce shipping times to its customers.
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zulily views its target market broadly and competes with any retailer where its customers shop. It faces significant competition from both online and offline retailers, competing on: product curation and selection, personalization, value, convenience, ease of use, consumer experience, vendor satisfaction and shipping time and cost.
zulily relies on laws and regulations, contractual restrictions, copyrights, and trademarks to protect its intellectual property and proprietary rights. zulily’s employees and contractors also typically enter into agreements to assign to zulily the inventions and content they produce in performing their jobs. zulily controls access to confidential information by entering into confidentiality agreements with its employees, contractors and third parties, such as vendors, service providers, individuals and entities that may be exploring a business relationship with zulily. Despite the protection of general intellectual property law and its contractual restrictions, it may be possible for a third party to copy or otherwise obtain and use zulily’s intellectual property without zulily’s authorization.
zulily has registered numerous Internet domain names related to its business. In addition, zulily pursues the registration of its trademarks in the U.S. and certain other locations outside of the U.S.; however, effective intellectual property protection or enforcement may not be available in every country in which zulily’s products and services are made available in the future. In the U.S. and certain other countries, zulily has registered or has applications pending for its key trademarks: zulily, the zulily design mark and the “Z” design associated with its mobile applications.
zulily’s results are impacted by a pattern of increased sales during the back-to-school shopping season in the third quarter and holiday shopping season in the fourth quarter, which it expects would result in lower sequential growth in the first quarter. The fourth quarter accounted for approximately 32.2% and 30.2% of zulily’s revenue for the years ended December 31, 2017 and 2016, respectively.
Evite
With over 250 million accounts, Evite (www.evite.com), a wholly owned subsidiary, is the world’s leading digital platform for bringing people together to celebrate their most important life moments. The service has sent over 2 billion invitations in its history, enabling 3 billion unique face-to-face connections. Evite makes getting together effortless and more memorable for its over one hundred million annual users, sending 20,000 invitations every hour and handling hundreds of millions of RSVPs every year. Evite also offers a free private sharing feed in every invitation where users can share photos and conversations before, during and after an event, as well as free thank you notes, gifting, donations and video content. With its recent launch of SMS invitations, Evite is now the leading provider of text-based invitations online. Evite generates revenue primarily from the sale of digital advertising for publication on its platform, including custom display advertising, native advertising content, custom video and brand partnerships. The company conducts advertising sales through its direct regional sales teams and programmatically through ad exchanges. Launched in 1998, Evite is headquartered in Los Angeles.
FTD
FTD is a premier floral and gifting company that provides floral, specialty foods, gift, and related products and services to consumers, retail florists, and other retail locations and companies in need of floral and gifting solutions. Liberty obtained its ownership interest in FTD during December 2014 in a transaction whereby Liberty exchanged its former wholly-owned subsidiary Provide for cash and a 35% ownership interest in FTD. We owned approximately 37% of the outstanding common stock of FTD as of December 31, 2017. We have entered into an agreement with FTD pursuant to which, among other things, we have the right to proportional representation on FTD’s board of directors based on our ownership interest in FTD. In connection with this transaction, FTD increased the size of its board of directors from seven to 11 directors. Liberty nominated the four additional directors to the board of directors.
LendingTree
LendingTree was spun off by IAC in August 2008. LendingTree operates what it believes to be the leading online loan marketplace for consumers seeking loans and other credit-based offerings. LendingTree offers consumers tools and resources, including free credit scores, that facilitate comparison-shopping for mortgage loans, home equity loans, reverse mortgage loans, auto loans, credit cards, personal loans, deposit accounts, student loans, small business loans and other related offerings. LendingTree primarily seeks to match in-market consumers with multiple lenders on its marketplace who
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can provide them with competing quotes for the loans, deposits or credit-based offerings they are seeking. LendingTree also serves as a valued partner to lenders seeking an efficient, scalable and flexible source of customer acquisition with directly measurable benefits, by matching the consumer loan inquiries it generates with these lenders. LendingTree is headquartered in Charlotte, North Carolina.
We own approximately 27% of the outstanding common stock of LendingTree as of December 31, 2017. We have entered into an agreement with LendingTree pursuant to which, among other things, we have the right to nominate 20% of the members of LendingTree’s board of directors. We have nominated two of the ten current board members.
Liberty Broadband
Liberty Broadband was spun off by LMC in November 2014. Liberty Broadband consists of its interest in Charter and its subsidiary Skyhook Holding, Inc. (“Skyhook”). Charter is one of the largest providers of cable services in the U.S., offering a variety of entertainment, information and communications solutions to residential and commercial customers. Skyhook provides mobile positioning and contextual location intelligence solutions.
In May 2016, Liberty completed a $2.4 billion investment in Liberty Broadband in connection with the merger of Legacy Charter and TWC. We own approximately 23.5% of the outstanding common stock of Liberty Broadband as of December 31, 2017. Due to overlapping boards of directors and management, Liberty has been deemed to have significant influence over Liberty Broadband (for accounting purposes) even though Liberty does not have any voting rights. Liberty has elected to apply the fair value option for its investment in Liberty Broadband as it is believed that the Company’s investors value this investment based on the trading price of Liberty Broadband.
Regulatory Matters
Programming and Interactive Television Services
Although QVC, and HSN,a wholly owned subsidiaries, marketsubsidiary, markets and sellsells consumer products through a variety of outlets, eachit does so, in large part, through live video programming services distributed by cable television systems, satellite systems and over-the-air broadcasters. Consequently, regulation of programming services and the entities that distribute themit can affect QVC and HSN.QVC. In the U.S., the FCC regulates broadcasters, the providers of satellite communications services and facilities for the transmission of programming services, the cable television systems and other MVPDsmultichannel video programming distributors (“MVPDs”) that distribute such services, and, to some extent, the availability of the programming services themselves through its regulation of program licensing. Cable television systems in the U.S. are also regulated by
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municipalities or other state and local government authorities. Regulatory carriage requirements also could adversely affect the number of channels available to QVC and HSN.QVC.
Regulation of Program Licensing. The Cable Television Consumer Protection and Competition Act of 1992 (the “1992 Cable Act”) directed the FCC to promulgate regulations regarding the sale and acquisition of cable programming between MVPDs (including cable operators) and satellite-delivered programming services in which a cable operator has an attributable interest. The 1992 Cable Act and implementing regulations generally prohibit a cable operator that has an attributable interest in a satellite programmer from improperly influencing the terms and conditions of sale to unaffiliated MVPDs. Further, the 1992 Cable Act requires that such affiliated programmers make their programming services available to cable operators and competing MVPDs such as multi-channel multi-point distribution systems and DBSdirect broadcast satellite system (“DBS”) distributors on terms and conditions that do not unfairly discriminate among distributors, and the FCC has established complaint enforcement and damages remedy procedures. FCC rules attribute the ownership interest in Charter of Liberty Broadband, and Liberty Global plc’sLatin America Ltd.’s ownership interest in Liberty Cablevision of Puerto Rico LLC to us, thereby subjecting us and satellite-delivered programming services in which we have an interest to the program access rules. Our subsidiariessubsidiary QVC and HSN areis subjected to program access rules as a result of our ownershipattributable interest in Charter.Charter under FCC rules. We are also subject to the program access rules as a condition of FCC approval of Liberty’sQurate Retail’s transaction with News Corporation in 2008.
In 2014, the FCC released a notice of proposed rulemaking seeking comment on a proposal to revise the definition of MVPD in its rules to include services, such as Internet-based services, that make available for purchase by viewers, multiple linear streams of video programming, regardless of the technology used to distribute the programming. If the
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FCC were to adopt its proposed definition and determine that the program access rules apply to such MVPDs, QVC and HSNi potentially would be required to negotiate with, and license their programming services to, such MVPDs and to comply with other related regulatory requirements.
Regulation of Carriage of Programming. Under the 1992 Cable Act, the FCC has adopted regulations prohibiting cable operators from requiring a financial interest in a programming service as a condition to carriage of such service, coercing exclusive rights in a programming service or favoring affiliated programmers so as to restrain unreasonably the ability of unaffiliated programmers to compete. The FCC has established program carriage complaint rules. Our subsidiariessubsidiary QVC and HSN areis subjected to program carriage rules as a result of our ownershipattributable interest in Charter.Charter under FCC rules.
Regulation of Ownership. The 1992 Cable Act required the FCC, among other things, (1) to prescribe rules and regulations establishing reasonable limits on the number of channels on a cable system that will be allowed to carry programming in which the owner of such cable system has an attributable interest and (2) to consider the necessity and appropriateness of imposing limitations on the degree to which MVPDs (including cable operators) may engage in the creation or production of video programming. Although the FCC adopted regulations limiting carriage by a cable operator, the United States Court of Appeals for the District of Columbia Circuit (“D.C. Circuit”) vacated the channel occupancy limits adopted by the FCC and remanded the rule to the FCC for further consideration in 2001. In response to the D.C. Circuit’s decision, the FCC subsequently issued further notices of proposed rulemaking to consider channel occupancy limitations, but has not adopted any rules.
Regulation of Carriage of Broadcast Stations. The 1992 Cable Act granted broadcasters a choice of must carry rights or retransmission consent rights. The rules adopted by the FCC generally provided for mandatory carriage by cable systems of all local full-power commercial television broadcast signals selecting must carry rights and, depending on a cable system's channel capacity, non-commercial television broadcast signals. Such statutorily mandated carriage of broadcast stations coupled with the provisions of the Cable Communications Policy Act of 1984, which require cable television systems with 36 or more "activated" channels to reserve a percentage of such channels for commercial use by unaffiliated third parties and permit franchise authorities to require the cable operator to provide channel capacity, equipment and facilities for public, educational and government access channels, could adversely affect QVC and HSN by limiting the carriage of such services in cable systems with limited channel capacity.
Closed Captioning Regulation. The Telecommunications Act of 1996 also required the FCC to establish rules and an implementation schedule to ensure that video programming is fully accessible to the hearing impaired through closed captioning. The rules adopted by the FCC require substantial closed captioning, with only limited exemptions. In 2012,
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the FCC adopted regulations pursuant to the Twenty-First Century Communications and Video Accessibility Act of 2010 that require, among other things, video programming owners to send caption files for IP delivered video programming to video programming distributors and providers along with program files. In 2014, the FCC adopted closed captioning quality standards regarding captioning accuracy, synchronicity, completeness and placement, and captioning best practices for programmers. In 2016, the FCC amended its closed captioning regulations to assign captioning compliance responsibility to programmers jointly with distributors, and to adopt certain registration, certification and complaint procedures applicable to programmers. The video programmer registration and compliance certification requirements of the amended rules have not yet become effective. As a result of these captioning requirements, QVC and HSNi may incur additional costs for closed captioning.
Internet Services
Our online commerce businesses are subject, both directly and indirectly, to various domestic and foreign laws and governmental regulations. Certain of these businesses engaged in the provision of goods and services over the Internet must comply with federal and state laws and regulations applicable to online communications and commerce. For example, the Children's Online Privacy Protection Act ("COPPA") prohibits web sites from collecting personally identifiable information online from children under age 13 without parental consent and imposes a number of operational requirements. The Federal Trade Commission ("FTC") has adopted regulations implementing COPPA. Certain email activities are subject to the Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003, commonly known as the CAN-SPAM Act. The CAN-SPAM Act regulates the sending of unsolicited commercial email by requiring the email sender, among other things, to comply with specific disclosure requirements and to provide an "opt-out" mechanism for recipients.
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Both of these laws include statutory penalties for non-compliance. The Digital Millennium Copyright Act limits, but does not eliminate, liability for listing or linking to third party websites that may include content that infringes on copyrights or other rights so long as our Internet businesses comply with the statutory requirements. Various states also have adopted laws regulating certain aspects of Internet communications. In 2016, Congress enacted a permanent moratorium on state and local taxes on Internet access and commerce.
Our online commerce businesses also are subject to laws governing the collection, use, retention, security and transfer of personally-identifiable information about their users. In particular, the collection and use of personal information by companies has received increased regulatory scrutiny on a global basis. The enactment, interpretation and application of user data protection laws are in a state of flux, and the interpretation and application of such laws may vary from country to country. For example, in April 2016, the European Parliament and the Council of the European Union adopted theUnion’s (“EU”) General Data Protection Regulation (“GDPR”) which established new data laws that give customers additional rights and impose additional restrictions and penalties on companies for illegal collection and misuse of personal information. The new data laws takeinformation, took effect in May 2018. Further, in 2015, the Court of Justice of the European Union invalidated the “Safe Harbor Framework,” which had allowed companies to collect and process personal data in European Union (“EU”)EU nations for use in the U.S. A new data transfer framework, the EU-U.S. Privacy Shield, became fully operational on August 1, 2016, but is the subject of litigation. Finally,The Court of Justice of the European Union is expected to rule on January 10, 2017,the challenges to the EU-U.S. Privacy Shield this year. Finally, the European Commission proposed new regulations in 2017 regarding privacy and electronic communications, which would remain pending, including additional regulation of the Internet tracking tools known as “cookies.”
Finally, countries in other regions, most notably Asia, Eastern Europe and Latin America, are increasingly implementing new privacy regulations, resulting in additional compliance burdens and uncertainty as to how some of these laws will be enforced.
In the U.S., the FTC has proposed a privacy policy framework, and the new Congress may consider legislation that would require organizations that suffer a breach of security related to personal information to notify owners of such information. Many states have adopted laws requiring notification to users when there is a security breach affecting personal data, such as California's Information Practices Act. California also has enacted the California Consumer Privacy Act of 2018 (“CCPA”), which, among other things, allows California consumers to request that certain companies disclose the types of personal information collected by such companies. The CCPA became effective on January 1, 2020. The California Attorney General is drafting regulations and guidance regarding the law. Complying with these different national and state privacy requirements may cause the Internet companies in which we have interestsCompany to incur substantial costs. In addition, such companiesthe Company generally havehas and postposts on theirits websites privacy policies and practices regarding the collection, use and disclosure of user data. A failure to comply with such posted privacy policies or with the regulatory requirements of federal, state, or foreign privacy laws could result in proceedings or actions by governmental agencies or others (such as class action litigation) which could adversely affect our online commerce businesses.
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the Company’s business. Technical violations of certain privacy laws can result in significant penalties, including statutory penalties. In 2012, the FCC amended its regulations under the Telephone Consumer Protection Act ("TCPA"), which could subject our Internet businesses to increased liability for certain telephonic communications with customers, including but not limited to text messages to mobile phones. Under the TCPA, plaintiffs may seek actual monetary loss or statutory damages of $500 per violation, whichever is greater, and courts may treble such damage awards for willful or knowing violations. Data collection, privacy and security are growing public concerns. If consumers were to decrease their use of our Internet businesses' websites to purchase products and services, such businesses could be harmed. Congress, individual states and foreign authorities may consider additional online privacy legislation.
Goods sold over the Internet also must comply with traditional regulatory requirements, such as the FTC requirements regarding truthful and accurate claims. Other Internet-related laws and regulations enacted in the future may cover issues such as defamatory speech, copyright infringement, pricing and characteristics and quality of products and services. The future adoption of such laws or regulations may slow the growth of commercial online services and the Internet, which could in turn cause a decline in the demand for the services and products of our online commerce businesses and increase their costs of doing business or otherwise have an adverse effect on their businesses, operating results and financial conditions. Moreover, the applicability to commercial online services and the Internet of existing laws governing issues such as property ownership, libel, personal privacy and taxation is uncertain and could expose these companies to substantial liability.
In 2015, the FCC adopted open Internet rules that reclassified wireline and wireless broadband services as Title II common carrier services and regulate broadband services offered by Internet service providers (“ISPs”) under Title II, Title III and Section 706 of the Telecommunications Act of 1996. Among other things, the regulations prohibited ISPs from: (1) blocking access to, or impairing or degrading, legal content, applications, services or non-harmful devices; and (2) favoring selected Internet traffic in exchange for consideration. On December 14, 2017, the FCC adopted a Declaratory Ruling, Report and Order and Order (“2017 Order”) that, among other things, eliminates these prohibitions. The 2017
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Order does require ISPs to disclose information to consumers regarding practices such as throttling, paid prioritization and affiliated prioritization. VariousOn October 1, 2019, the D.C. Circuit ruled on numerous appeals by interested parties likely will challengeand largely upheld the 2017 Order. However, the D.C. Circuit vacated that portion of the 2017 Order in courtthat preempted inconsistent state and atlocal regulations and remanded the FCC.2017 Order for further consideration of its effects on public safety, pole attachment regulation and the Lifeline support program. The D.C. Circuit’s ruling may be subject to further judicial review. Legislative proposals regarding the open Internet rules are pending in Congress.
Proposed Changes in Regulation
The regulation of programming services, cable television systems, DBS providers, Internet services, online sales and other forms of product marketing is subject to the political process and has been in constant flux over the past decade. Further material changes in the law and regulatory requirements must be anticipated and there can be no assurance that our business will not be adversely affected by future legislation, new regulation or deregulation.
Competition
Our businesses that engage in video and online commerce compete with traditional brick-and-mortar and online retailers ranging from large department stores to specialty shops, electronic retailers, direct marketing retailers, such as mail order and catalog companies, and discount retailers. Due to the nature of these businesses there is not a single or small group of competitors that own a significant portion of the overall market share. However, some of these competitors, such as Amazon and Walmart, have a significantly greater web-presence than our e-commerce subsidiaries and equity affiliates. We believe that the principal competitive factors in the markets in which our electronic commerce businesses compete are high-quality products, brand recognition, selection, value, convenience, price, website performance, customer service and accuracy of order shipment. Our businesses that offer services through the Internet compete with businesses that offer their own services directly through the Internet as well as with traditional offline providers of similar services. We believe that the principal competitive factors in the markets in which our businesses that offer services through the Internet engage are selection, price, availability of inventory, convenience, brand recognition, accessibility, customer service, reliability, website performance, and ease of use.
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Employees
AsPursuant to a services agreement between LMC and the Company, 86 LMC corporate employees provide certain management services to the Company for a determined fee. Additionally, as of December 31, 2017, our corporate function is supported by a services agreement with LMC which has approximately 85 corporate employees who are also considered employees of Liberty. Additionally,2019, our consolidated subsidiaries had an aggregate of approximately 28,17025,228 full and part-time employees. We believe that our employee relations are good.
(d)Financial Information About Geographic Areas
For financial information related to the geographic areas in which we do business, see note 19 to our consolidated financial statements found in Part II of this report.
(e)Available Information
All of our filings with the SEC, including our Form 10-Ks, Form 10-Qs and Form 8-Ks, as well as amendments to such filings are available on our Internet website free of charge generally within 24 hours after we file such material with the SEC. Our website address is www.libertyinteractive.com.
www.qurateretail.com.
Our corporate governance guidelines, code of business conduct and ethics, compensation committee charter, nominating and corporate governance committee charter, and audit committee charter are available on our website. In addition, we will provide a copy of any of these documents, free of charge, to any shareholder who calls or submits a request in writing to Investor Relations, Liberty Interactive Corporation,Qurate Retail, Inc., 12300 Liberty Boulevard, Englewood, Colorado 80112, Tel. No. (866) 876-0461.
The information contained on our website and the websites of our subsidiaries and affiliated businesses mentioned throughout this report are not incorporated by reference herein.
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The risks described below and elsewhere in this annual report are not the only ones that relate to our businesses or our capitalization. The risks described below are considered to be the most material. However, there may be other unknown or unpredictable economic, business, competitive, regulatory or other factors that also could have material adverse effects on our businesses. Past financial performance may not be a reliable indicator of future performance and historical trends should not be used to anticipate results or trends in future periods. If any of the events described below were to occur, our businesses, prospects, financial condition, results of operations and/or cash flows could be materially adversely affected.
Risk Factors Related to our Company, theOur subsidiary QVC Group and the Ventures Group
The risks described below apply to our company and to the businesses and assets attributable to the QVC Group and the Ventures Group.
The historical financial information of the QVC Group and the Ventures Group included in this Annual Report, may not necessarily reflect their results had they been separate companies. One of the reasons for the creation of a tracking stock is to permit equity investors to apply more specific criteria in valuing the shares of a particular group, such as comparisons of earnings multiples with those of other companies in the same business sector. In valuing shares of QVC Group tracking stock and Ventures Group tracking stock, investors should recognize that the historical financial information of the QVC Group and the Ventures Group has been extracted from our consolidated financial statements and may not necessarily reflect what the QVC Group’s and the Ventures Group’s results of operations, financial condition and cash flows would have been had the QVC Group and the Ventures Group been separate, stand-alone entities pursuing independent strategies during the periods presented.
Our subsidiaries QVC and HSN dependdepends on the television distributors that carry theirits programming, and no assurance can be given that QVC and HSN will be able to maintain and renew theirits affiliation agreements on favorable terms or at all. QVC and HSN currently distribute theirdistributes its programming through affiliation or transmission agreements with many television providers, including, but not limited to, Comcast, AT&T/DIRECTV, Charter, DISH Network, Verizon and Cox in the U.S., Vodafone Kabel Deutschland GmbH, Media Broadcast GmbH, SES ASTRA, SES Platform Services GmbH, Telekom Deutschland GmbH, Unitymedia GmbH, Tele Columbus and Primacom in Germany, Jupiter Telecommunications, Ltd., Sky Perfect and World Hi-Vision Channel, Inc. in Japan, A1 Telekom Austria AG and UPC Telekabel Wien GmbH in Austria, British Sky Broadcasting, Freesat, Freeview and Virgin Media in the U.K., and Mediaset, Hot Bird and Sky Italia in Italy, Orange, Free, Canalsat, Bouygues Telecom and Fransat.Italy. QVC’s and HSN’s affiliation agreements with theirits distributors are scheduled to expire between 20182020 and 2027. 2024.
As part of normal course renewal discussions, occasionally QVC and HSN havehas disagreements with theirits distributors over the terms of theirits carriage, such as channel placement or other contract terms. If not resolved through business negotiation, such disagreements could result in litigation or termination of an existing agreement. Termination of an existing agreement resulting in the loss of distribution of QVC’s or HSN’s programming to a material portion of theirits television households may adversely affect theirits growth, net revenue and earnings.
The renewal negotiation process for affiliation agreements is typically lengthy. In some cases, renewals are not agreed upon prior to the expiration of a given agreement while the programming continues to be carried by the relevant distributor without an effective agreement in place. QVC and HSN dodoes not have distribution agreements with some of the cable operators that
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carry theirits programming. In total, QVC and HSN areis currently providing programming without affiliation agreements to distributors representing approximately 10% and 0.4%5.8% of theirits QVC U.S. distribution, respectively, and short-term, rolling 30 day lettersapproximately 1.1% of extension, to distributors who represent approximately 27% and 51% of their U.S. distribution, respectively.its HSN distribution. Some of QVC’s international programming may continue to be carried by distributors after the expiration dates on its affiliation agreements with such distributors have passed.
QVC and HSN may be unable to obtain renewals with theirits current distributors on acceptable terms, if at all. QVC and HSN may also be unable to successfully negotiate affiliation agreements with new or existing distributors to carry theirits programming and no assurance can be given that they will be successful in negotiating renewals with these distributors or that the financial and other terms of these renewals will be acceptable. Although QVC and HSN consider theirconsiders its current levels of distribution without written agreement to be ordinary course, no assurance can be given that QVC and HSN will be successful in negotiating renewals with all these operators or that the financial and other terms of renewal will be on
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acceptable terms. The failure to successfully renew or negotiate new affiliation agreements covering a material portion of television households on acceptable terms could result in a discontinuation of carriage that may adversely affect theirits viewership, growth, net revenue and earnings.
Our programming and online commerce businesses depend on their relationships with third party suppliers and vendors and any adverse changes in these relationships could adversely affect our results of operations and those attributed to any of our groups.operations. An important component of the success of our programming and online commerce businesses is their ability to maintain their existing, as well as build new, relationships with a limited number of local and foreign suppliers, manufacturers and vendors, among other parties. There can be no assurance that our subsidiaries and business affiliates will be able to maintain their existing supplier or vendor arrangements on commercially reasonable terms or at all or, with respect to goods sourced from foreign markets, if the supply costs will remain stable. In addition, our subsidiaries and business affiliates cannot guarantee that goods produced and delivered by third parties will meet applicable quality standards, which is impacted by a number of factors, some of which are not within the control of these parties. Adverse changes in existing relationships or the inability to enter into new arrangements with these parties on favorable terms, if at all, could result in lost sales or cause a failure to meet customer expectations and timely delivery of products, which could in turn have a significant adverse effect on our results of operations.
Our programming and online commerce businesses rely on distribution facilities to operate their business, and any damage to one of these facilities, or any disruptions caused by incorporating new facilities into their operations, could have a material adverse impact on their business.Our programming and those attributedonline commerce businesses operate a limited number of distribution facilities worldwide. Their ability to meet the needs of their customers depends on the proper operation of these distribution facilities. If any of these distribution facilities were to shut down or otherwise become inoperable or inaccessible for any reason, these businesses could suffer a substantial loss of inventory and disruptions of deliveries to their customers. In addition, they could incur significantly higher costs and longer lead times associated with the distribution of their products during the time it takes to reopen or replace the damaged facility. Any of the foregoing factors could result in decreased sales and have a material adverse effect on our business, financial condition and operating results. In addition, these businesses have been implementing new warehouse management systems to further support their efforts to operate with increased efficiency and flexibility. There are risks inherent in operating in new distribution environments and implementing new warehouse management systems, including operational difficulties that may arise with such transitions. Our businesses may experience shipping delays should there be any disruptions in their new warehouse management systems or warehouses themselves.
In October 2018, we announced that our HSN and QVC U.S. business units would be opening a new distribution facility in Bethlehem, Pennsylvania in 2019 and that we anticipated closing distribution facilities in Lancaster, Pennsylvania, Roanoke, Virginia, and Greeneville, Tennessee in 2020. In late 2019, QVC began shipping customer orders from its Bethlehem distribution center, but it is not operating at full capacity. Difficulties experienced in increasing shipping volumes from the Bethlehem distribution center as a result of the package handling equipment or warehouse management systems not performing as anticipated, has caused delays in the Bethlehem distribution center operating at full capacity. Delays in the Bethlehem distribution center operating at full capacity could cause delays in closing other facilities, including the Lancaster, Pennsylvania facility. Delays in closing these facilities or disruptions caused by transitioning order fulfillment operations or returns processing from closing facilities to other facilities may increase operating expenses for these businesses, cause disruptions to their order fulfillment processes and cause delays in delivering product to customers which would result in lost sales, strain relationships with customers, and cause harm to
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our businesses’ reputations, any of which could have a material adverse impact on our business, financial condition and operating results.
Natural disasters, public health crises, political crises, and other catastrophic events or other events outside of our control may damage our facilities or the facilities of third parties on which we depend, and could impact consumer spending. Our businesses operate headquarters and administrative offices, distribution centers and call centers worldwide. If any of these facilities or the facilities of our vendors or third-party service providers, is affected by natural disasters, such as earthquakes, tsunamis, power shortages or outages, floods or monsoons, public health crises, such as pandemics and epidemics, political crises, such as terrorism, war, political instability or other conflict, or other events outside of our businesses’ control, our business, financial condition and results of operations could be materially adversely affected. Disasters occurring at our businesses’ or their vendors’ facilities also could impact our businesses’ reputation and their customers’ perception of the products they sell. Moreover, these types of events could negatively impact consumer spending in the impacted regions or depending upon the severity, globally, which could adversely impact our business, financial condition and results of operations.
For example, in December 2019, a strain of coronavirus was reported to have surfaced in Wuhan, China. It may adversely impact our businesses’ supply chains and lead to shipping disruptions for products they import. In particular, certain of the products that our businesses sell are manufactured in China and other countries and imported to the countries where our businesses operate. As a result of the coronavirus, Chinese officials and business owners have temporarily closed certain factories and certain other factories are operating at a limited capacity due to, among other reasons, employee shortages resulting in part from government imposed travel restrictions and local statutory quarantines. In addition, the travel restrictions and local statutory quarantines imposed to contain the coronavirus have resulted in delays in shipping of products our businesses import and may result in additional shipping delays. These events and any future factory closures, reductions in factory operations or government imposed travel restrictions or quarantines in China or elsewhere could negatively affect the ability of manufacturers and vendors to produce and deliver the products our businesses sell. Further, broader global effects of potentially reduced consumer confidence and other macro issues related to the coronavirus could also have a negative effect on our businesses and our financial condition and results of operations. At this point, the extent to which the coronavirus may impact our businesses is uncertain.
The unanticipated loss of certain larger vendors or the consolidation of our programming and online commerce businesses’ vendors could negatively impact their sales and profitability on a short term basis.It is possible that one or more of the larger vendors for our programming and online commerce businesses could experience financial difficulties, including bankruptcy, or otherwise could elect to cease doing business with our businesses. While these businesses have periodically experienced the loss of a major vendor, if multiple major vendors ceased doing business with these businesses, or did not perform consistently with past practice, this could have a material adverse impact on our business, financial condition and operating results. Further, there has been a trend among these vendors towards consolidation in recent years that may continue. This consolidation could exacerbate the foregoing risks and increase these vendors’ bargaining power and their ability to demand terms that are less favorable to our groups.businesses.
Our businesses attributed to each group are subject to risks of adverse government regulation. Our programming businesses, such asbusiness QVC markets and HSNi, market and provideprovides a broad range of merchandise through television shopping programs and proprietary websites. Similarly, our online commerce businesses, such as zulilybusiness Zulily markets and the e-commerce companies, market and provideprovides a broad range of merchandise and/or services through theirits proprietary websites. As a result, theseour businesses are subject to a wide variety of statutes, rules, regulations, policies and procedures in various jurisdictions, including foreign jurisdictions, which are subject to change at any time, including laws regarding consumer protection, data privacy and security, the regulation of retailers generally, the license requirements for television retailers in foreign jurisdictions, the importation, sale and promotion of merchandise and the operation of retail stores and warehouse facilities, as well as laws and regulations applicable to the Internet and businesses engaged in online commerce, such as those regulating the sending of unsolicited, commercial electronic mail and texts. The failure by our businesses to comply with these laws and regulations could result in a revocation of required licenses, fines and/or proceedings by governmental agencies and/or consumers, which could adversely affect our businesses, financial condition and results of operations. Moreover, unfavorable changes in the laws, rules and regulations applicable to our businesses could decrease demand for our businesses’ products and services, increase costs and/or subject our businesses to additional liabilities. Similarly, new disclosure and reporting requirements, established under existing or new state, federal or foreign laws, such as regulatory rules regarding requirements to disclose efforts to identify the origin and existence of certain “conflict
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“conflict minerals” or abusive labor practices in portions of QVC’s and HSNi’s supply chains, could increase the cost of doing business, adversely affecting our results of operations. In addition, certain of these regulations may impact the marketing efforts of our businesses and their brands.
As mentioned above, the manner in which certain of our subsidiaries and business affiliates sell and promote merchandise and related claims and representations made in connection with these efforts is regulated by federal, state and local law, as well as the laws of the foreign countries in which they operate. Certain of our subsidiaries and business affiliates may be exposed to potential liability from claims by purchasers or from regulators and law enforcement agencies, including, but not limited to, claims for personal injury, wrongful death and damage to personal property relating to merchandise sold and misrepresentation of merchandise features and benefits. In certain instances, these subsidiaries and business affiliates have the right to seek indemnification for related liabilities from their respective vendors and may require such vendors to carry minimum levels of product liability and errors and omissions insurance. These vendors, however, may be unable to satisfy indemnification claims, obtain suitable coverage or maintain this coverage on acceptable terms, or insurance may provide inadequate coverage or be unavailable with respect to a particular claim.
In addition, programming services, cable television systems, the Internet, telephony services and satellite service providers are subject to varying degrees of regulation in the U.S. by the FCC and other entities and in foreign countries by similar regulators. Such regulation and legislation are subject to the political process and have been in constant flux over the past decade. The application of various sales and use tax provisions under state, local and foreign law to the products and services of our subsidiaries and certain of our business affiliates sold via the Internet, television and telephone is
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subject to interpretation by the applicable taxing authorities, and no assurance can be given that such authorities will not take a contrary position to that taken by our subsidiaries and certain of our business affiliates, which could have a material adverse effect on their businesses. In addition, there have been numerous attempts at the federal, state and local levels to impose additional taxes on online commerce transactions. Moreover, most foreign countries in which our subsidiaries or business affiliates have, or may in the future make, an investment, regulate, in varying degrees, the distribution, content and ownership of programming services and foreign investment in programming companies and the Internet.
In addition, certain of our businesses are subject to consent decrees issued by the FTC barring them from making deceptive claims for specified weight-loss products and dietary supplements and prohibiting them from making certain claims about specified weight-loss, dietary supplement and anti-cellulite products unless they have competent and reliable scientific evidence to substantiate such claims. In October 1996, HSNi becameHSN was subject to a consent order issued by the FTC that had expired in 2019 and which terminates on the later of April 15, 2019, or 20 years from the most recent date that the United States or the FTC files a complaint in federal court alleging any violation thereunder. Pursuant to this consent order, HSNibarred HSN (including its subsidiaries and affiliates) is prohibited from making certain claims forwith respect to specified categories of products, including claims that a given product can cure, treat or prevent any disease or have an effect on the structure or function of the human body, unless it has competent and reliable scientific evidence to substantiate such claims. The FTC periodically investigates HSNi’s business and operations on an ongoing basis for purposes of determining its compliance with the consent order.products. Violation of these consent decrees may result in the imposition of significant civil penalties for non-compliance and related redress to consumers and/or the issuance of an injunction enjoining these businesses from engaging in prohibited activities. Further material changes in the law and increased regulatory requirements must be anticipated, and there can be no assurance that theour businesses and or any of our assets attributed to each group will not become subject to increased expenses or more stringent restrictions as a result of any future legislation, new regulation or deregulation.
Weak economic conditions worldwide may reduce consumer demand for our businesses’ products and services. Prolonged economic uncertainty in various regions of the world in which our subsidiaries and affiliates operate could adversely affect demand for our businesses’ products and services since a substantial portion of our businesses’ revenue is derived from discretionary spending by individuals, which typically falls during times of economic instability. Global financial markets may experience disruptions, including increased volatility and diminished liquidity and credit availability. If economic and financial market conditions in the U.S. or other key markets, including China, Japan and Europe deteriorate, customers of our subsidiaries and affiliates may respond by suspending, delaying, or reducing their discretionary spending. A suspension, delay or reduction in discretionary spending could adversely affect revenue across each of our tracking stock groups. Accordingly, our ability to increase or maintain revenue and earnings could be adversely affected to the extent that relevant economic environments decline. Such weak economic conditions may also inhibit the expansion of our subsidiaries and affiliates into new European and other markets. We currently are unable to predict the extent of any of these potential adverse effects.
We may be subject to significant tax liabilities related to the CommerceHub Spin-Off or the Expedia HoldingsGCI Liberty Split-Off. In connection with the CommerceHub Spin-Off, we We received an opinion of our tax counsel in connection with the contribution and split-off forming a part of the Transactions (the “GCI Liberty Split-Off”) to the effect that, for U.S. federal income tax purposes, the CommerceHub Spin-Off will qualify as a tax-free transaction toGCI Liberty and to the holders of its Liberty Ventures common stock under Section 355 of the Internal Revenue Code of 1986, as amended (the “Code”), except with respect to the receipt of cash in lieu of fractional shares. We also received an opinion of counsel in connection with the Expedia Holdings Split-Off to the effect that the Expedia Holdings Split-Off will qualify as a tax-free transaction to Libertyour company and to the former holders of itsour Liberty Ventures common stock under Section 355, Section 368(a)(1)(D) and related provisions of the Internal Revenue Code except with respect toof 1986, as amended (the “Code”). In July 2018, the receipt of cash in lieu of fractional shares. In September 2016, the IRSInternal Revenue Service (“IRS”) completed its review of the CommerceHub Spin-OffGCI Liberty Split-Off and informed Libertyour Company that it agreed with the nontaxable characterization of the transaction. LibertyTransactions. We received an Issue Resolution Agreement from the IRS documenting this conclusion. In February 2017,
Even if the IRS completed its reviewGCI Liberty Split-Off otherwise qualifies under Section 355, Section 368(a)(1)(D), and related provisions of the Expedia HoldingsCode, the GCI Liberty Split-Off and informedwould result in a significant U.S. federal income tax liability to us (but not to the former holders of Liberty that it agreed with the nontaxable characterizationVentures common stock) under Section 355(e) of the transaction.Code if one or more persons acquire, directly or indirectly, a 50% or greater interest (measured by either vote or value) in the stock of our company or in the stock of GCI Liberty received(excluding, for this purpose, acquisitions of GCI Liberty’s common stock meeting statutory exceptions) as part of a plan or series of related transactions that includes the GCI Liberty Split-Off. Any acquisition of the stock of our company or GCI Liberty (or any successor corporation) within two years before or after the GCI Liberty
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Split-Off would generally be presumed to be part of a plan that includes the GCI Liberty Split-Off, although the parties may be able to rebut that presumption under certain circumstances. The process for determining whether an Issue Resolution Agreement fromacquisition is part of a plan under these rules is complex, inherently factual in nature and subject to a comprehensive analysis of the IRS documenting this conclusion.facts and circumstances of the particular case. Notwithstanding the opinion of tax counsel described above, we or GCI Liberty might inadvertently cause or permit a prohibited change in ownership of our company or GCI Liberty, thereby triggering tax liability to us.
Prior to the CommerceHub Spin-Off,GCI Liberty Split-Off, we entered into a tax sharing agreement with CommerceHub.GCI Liberty. Under this agreement, with CommerceHub, our company is generally responsible for any taxes and losses resulting from the failure of the CommerceHub Spin-Off to qualify as a tax-free transaction; however, CommerceHub is required to indemnify our company for any taxes and losses which (i) result primarily from, individually or in the aggregate, the breach of certain
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covenants made by CommerceHub (applicable to actions or failures to act by CommerceHub and its subsidiaries following the completion of the CommerceHub Spin-Off), or (ii) result from the application of Section 355(e) of the Code to the CommerceHub Spin-Off as a result of the treatment of the CommerceHub Spin-Off as 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 either vote or value) in the stock of CommerceHub or any successor corporation. As the taxpaying entity, however, we are subject to the risk of non-payment by CommerceHub of its indemnification obligations under the tax sharing agreement.
Similarly, prior to the Expedia Holdings Split-Off, we entered into a tax sharing agreement with Expedia Holdings. Under this agreement with Expedia Holdings, our company is generally responsible for any taxes and losses resulting from the failure of the Expedia HoldingsGCI Liberty Split-Off to qualify as a tax-free transaction; however, Expedia HoldingsGCI Liberty is required to indemnify our companyus for any taxes and losses which (i) result primarily from, individually or in the aggregate, the breach of certain covenants made by Expedia HoldingsGCI Liberty (applicable to actions or failures to act by Expedia HoldingsGCI Liberty and its subsidiaries following the completion of the Expedia HoldingsGCI Liberty Split-Off), or (ii) result from the application of Section 355(e) of the Code to the Expedia HoldingsGCI Liberty Split-Off as a result of the treatment of the Expedia HoldingsGCI Liberty Split-Off as part of a plan (or series of related transactions) pursuant to which one or more persons acquire, directly or indirectly, a 50-percent50% or greater interest (measured by either vote or value) in the stock of Expedia Holdings orGCI Liberty (or any successor corporation.corporation). As the taxpaying entity, however, we are subject to the risk of non-payment by Expedia HoldingsGCI Liberty of its indemnification obligations under the tax sharing agreement.
To preserve the tax-free treatment of the CommerceHub Spin-Off and the Expedia HoldingsGCI Liberty Split-Off, we may determine to foregoforgo certain transactions that might have otherwise been advantageous to our company, including certain asset dispositions or other strategic transactions for some period of time following each of the CommerceHub Spin-Off and the Expedia HoldingsGCI Liberty Split-Off. In addition, our potential tax liabilities related to the CommerceHub Spin-Off and the Expedia HoldingsGCI Liberty Split-Off might discourage, delay or prevent a change of control transaction for some period of time following each of the CommerceHub Spin-Off and the Expedia HoldingsGCI Liberty Split-Off.
Rapid technological advances could render the products and services offered by our subsidiaries and our business affiliates attributed to our QVC Group and our Ventures Group obsolete or non-competitive. Our subsidiaries and business affiliates attributed to each group must stay abreast of rapidly evolving technological developments and offerings to remain competitive and increase the utility of their products and services. As their operations grow in size and scope, our subsidiaries and business affiliates must continuously improve and upgrade their systems and infrastructure while maintaining or improving the reliability and integrity of their systems and infrastructure. These subsidiaries and business affiliates must be able to incorporate new technologies into their products and services in order to address the needs of their customers. The emergence of alternative platforms such as mobile and tablet computing devices and the emergence of niche competitors who may be able to optimize products, services or strategies for such platforms will require new investment in technology. New developments in other areas, such as cloud computing, could also make it easier for competition to enter their markets due to lower up-front technology costs. There can be no assurance that our subsidiaries and business affiliates will be able to compete with advancing technology or be able to maintain existing systems or replace or introduce new technologies and systems as quickly as they would like or in a cost-effective manner, and any failure to do so could result in customers seeking alternative products or service providers, and may adversely affect the group to which they are attributed, thereby adversely impacting our revenue and operating income.
Our subsidiaries and business affiliates attributed to each of our QVC and Ventures Groups conduct their businesses under highly competitive conditions. Although QVC and HSNi are twois one of the nation’s largest home shopping networks, they and their e-commerce businesses haveit has numerous and varied competitors at the national and local levels, ranging from large department stores to specialty shops, electronic retailers, direct marketing retailers, wholesale clubs, discount retailers, infomercial retailers, and Internet retailers, and mail-order and catalog companies.retailers. In addition, QVC and HSNi competecompetes with other televised shopping retailers, such as EVINE LiveShopHQ in the U.S., Shop Channel in Japan, HSE 24 in Germany and Italy, and Ideal World in the U.K., and M6 Boutique in France, infomercial retailers, Internet retailers, including livestream shopping retailers, and mail-order and catalog companies. QVC and HSNi also competecompetes for access to customers and audience share with other providers of televised, online and hard copy entertainment and content. Similarly, zulily competesZulily and Cornerstone compete with e-commerce businesses such as Amazon.com, Inc. and Alibaba Group, the e-commerce platforms of traditional retailers such as Target Corporation Toys”R”Us, Inc. and Wal-Mart Stores, Inc., and online marketplaces such as eBay Inc. zulilyCornerstone also competes with other mail-order and catalog companies. Zulily expects
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increased competition with companies employing a flash sales model as there are no significant barriers to entry. Competition is characterized by many factors, including assortment, advertising, price, quality, service,services, accessibility, site functionality,the attractiveness and ease of use of digital platforms, cost and speed of options for delivery, reputation and credit availability, as well as the financial, technical and marketing expertise of competitors. For example, many of our businesses’ competitors have greater resources, longer histories, more customers and greater brand recognition
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than our businesses do, and competitors may secure better terms from vendors, adopt more aggressive pricing, offer free or subsidized shipping and devote more resources to technology, fulfillment and marketing. In addition, many retailers, especially online retailers with whom our subsidiaries and business affiliates compete, are increasingly offering customers aggressive shipping terms, including free or discounted expedited shipping. As these practices become more prevalent, our subsidiaries and business affiliates may experience further competitive pressures to attract customers and/or to change their shipping programs. Other companies also may enter into business combinations or alliances that strengthen their competitive positions. Such business combinations or alliances may result in competitors with greatly improved financial resources, improved access to merchandise, greater market penetration than they previously enjoyed and other improvements in their competitive positions. This may cause QVC’s customers to elect to purchase products from a competitor that they would have historically purchased from QVC, resulting in less revenue to QVC. If our subsidiaries and business affiliates do not compete effectively with regard to these factors, our results of operations could be materially and adversely affected.
Moreover, although our subsidiaries and business affiliates sell a variety of exclusive products, one of the most significant challenges our subsidiaries and business affiliates face is competition on the basis of price. Price is of great importance to most customers, and price transparency and comparability continues to increase, particularly as a result of digital technology. The ability of consumers to compare prices on a real-time basis puts additional pressure on our subsidiaries and business affiliates to maintain competitive prices. In addition, many retailers, especially online retailers with whom our subsidiaries and business affiliates compete, are increasingly offering customers aggressive shipping terms, including free or discounted expedited shipping. As these practices become more prevalent, our subsidiaries and business affiliates may experience further competitive pressures to attract customers and/or to change their shipping programs. Our subsidiaries and business affiliates ability to be competitive on delivery times and shipping costs depends on many factors, and their failure to successfully manage these factors and offer competitive shipping terms could negatively impact the demand for their products and our profit margins.
The sales and operating results of theour businesses attributed to each of our QVC Group and Ventures Group depend on their ability to attract new customers, retain existing customers and predict or respond to consumer preferences. In an effort to attract and retain customers, these businesses engage in various merchandising and marketing initiatives, which involve the expenditure of money and resources. For example, HSNi hasQVC and Cornerstone have spent, and expectsexpect to continue to spend, increasing amounts of money on, and devote greater resources to, certain of these initiatives, particularly in connection with the growth and maintenance of itstheir brands generally, as well as in the continuing efforts of itstheir businesses to increasingly engage customers through online digital channels. marketing. These initiatives, however, may not resonate with existing customers or consumers generally or may not be cost-effective. In addition, costs associated with the production and distribution of television programming (in the case of QVC and HSN)QVC), paper and printing costs for catalogs (in the case of Cornerstone) and costs associated with onlinedigital marketing, including search engine marketing (primarily the purchase of relevant keywords)on third-party platforms such as Google and Facebook, have increased and are likely to continue to increase in the foreseeable future and, if significant, could have a material adverse effect to the extent that they do not result in corresponding increases in net revenue. These companies also continuously develop new retail concepts and adjust their product mix in an effort to satisfy customer demands. Any sustained failure to identify and respond to emerging trends in lifestyle and consumer preferences could have a material adverse effect on the businesses of these subsidiaries and business affiliates. Consumer spending may be affected by many factors outside of their control, including competition from store-based retailers, mail-order and third-party Internet companies, consumer confidence and preferences, and general economic conditions.
Weak economic conditions worldwide may reduce consumer demand for our businesses’ products and services. Prolonged economic uncertainty in various regions of the world in which our subsidiaries and business affiliates operate could adversely affect demand for our businesses’ products and services since a substantial portion of our businesses’ revenue is derived from discretionary spending by individuals, which typically falls during times of economic instability. Global financial markets may experience disruptions, including increased volatility and diminished liquidity and credit availability. If economic and financial market conditions in the U.S. or other key markets, including China, Japan and Europe deteriorate, customers of our subsidiaries and business affiliates may respond by suspending, delaying, or reducing their discretionary spending. A suspension, delay or reduction in discretionary spending could adversely affect our revenue. Accordingly, our ability to increase or maintain revenue and earnings could be adversely affected to the extent that relevant economic environments decline. Such weak economic conditions may also inhibit the expansion of our subsidiaries and
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business affiliates into new European and other markets. We currently are unable to predict the extent of any of these potential adverse effects.
The failure of our subsidiariessubsidiary QVC and HSN to maintain suitable placement for their respectiveits programming or to adapt to changes in consumer behavior driven by online video distribution platforms for viewing content could adversely affect theirits ability to attract and retain television viewers and could result in a decrease in revenue. QVC and HSN areis dependent upon the continued ability of theirits programming to compete for viewers. Effectively competing for television viewers is dependent, in substantial part, on theirits ability to negotiate and maintain placement of theirits programming at a favorable channel position, such as in a basic tier or within a general entertainment or general broadcasting tier. The advent of digital compression technologies and the adoption of digital cable have resulted in increased channel capacity, which together with other changing laws, rules and regulations regarding cable television ownership, impacts the ability of both QVC and HSN to negotiate and maintain suitable channel placement with their respective distributors. Increased channel capacity could adversely affect the ability to attract television viewers to QVC’s or HSN’s programming to the extent it results in a lessLess favorable channel position for their respectiveQVC’s programming, such as placement adjacent to programming that does not complement their respectiveits programming, a position next to their respectiveits televised home shopping competitors or isolation in a "shopping" tier more competitors entering the marketplace, or more programming options being availablecould adversely affect QVC’s ability to the viewing public in the form of newattract television networks and timeshifted viewing (e.g., personal video recorders, video-on-demand, interactive television and streaming video over Internet connections).viewers to its programming. In addition, if QVC’s or HSN’s programming is carried exclusively by a distributor on a digital programming tier, QVC or HSN may experience a reduction in revenue to the extent that the digital programming tier has less television viewer penetration than the basic or expanded basic programming tier. QVC and HSN may experience a further reduction in revenue due to increased television viewing audience fragmentation to the extent that not all television sets within a digital cable home are equipped to receive television programming in a digital format.
Changes in consumer behavior driven by online video distribution platforms for viewing content may have an adverse impact on QVC’s business. Distribution platforms for viewing content over the internet have been, and will likely continue to be, developed that further increase the competition for viewers of programming. These distribution platforms are driving changes in consumer behavior as consumers seek more control over when, where and how they consume content.
Consumers are increasingly turning to online sources for viewing content, which has and likely will continue to reduce the number of viewers of our television programming. Although QVC has attempted to adapt its offerings to changing consumer behaviors, virtual multichannel video providers, online video distributors and programming networks providing their content directly to consumers over the internet rather than through traditional television services continue to emerge, gain consumer acceptance and disrupt traditional television distribution services, which QVC relies on for the distribution of its television programming.
An increasing number of companies offering streaming services, including some with exclusive high-quality original video programming, as well as programming networks offering content directly to consumers over the internet, have increased the number of entertainment choices available to consumers, which has intensified audience fragmentation. The increase in entertainment choices adversely affects the viewership of our programming. Additionally, time-shifting technologies, such as video on demand services and DVR and cloud-based recording services, could adversely affect QVC’s ability to attract television viewers to its programming.
QVC’s future success of each of QVC and HSN will depend, in part, on theirits ability to anticipate and adapt to technological changes and to offer elements of their respectiveits programming via new technologies in a cost-effective manner that meetsmeet customer demands and evolving industry standards. QVC’s failure to effectively anticipate or adapt to emerging technologies or competitors or changes in consumer behavior, including among younger consumers, could have an adverse effect on QVC’s competitive position, businesses and results of operations.
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Any continued or permanent inability of QVC or HSN to transmit theirits programming via satellite would result in lost revenue and could result in lost customers. The success of our subsidiariessubsidiary QVC and HSN is dependent upon theirits continued ability to transmit their respectiveits programming to television providers from their respectiveits satellite uplink facilities, whichand for QVC’s distributors to continue to receive its programming at its satellite earth station downlink facilities. These transmissions are subject to FCC regulation and compliance in the U.S. and foreign regulatory requirements in QVC’s international operations. In most cases, each of QVC and HSN has entered into long-term satellite transponder leases to provide for continued carriage of its programming on replacement transponders and/or replacement satellites, as applicable, in the event of a failure of either the transponders and/or satellites currently carrying its programming. Although QVC and HSN believebelieves that they takeit takes reasonable and customary measures to ensure continued satellite transmission capability and believebelieves that these international transponder service agreements can be renewed (or replaced, if necessary) in the ordinary course of business, termination or interruption of satellite transmissions may occur, particularly if either QVC or HSN is not able to successfully negotiate renewals or replacements of any of its expiring transponder service agreements in the future.
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In order to free up additional spectrum for the provision of next generation commercial wireless broadband services, commonly referred to as 5G, the FCC has commenced and is in the process of completing, a rulemaking proceeding that is expected to reallocate for 5G a portion of the 500 MHz in the 3.7 to 4.2 GHz (“C-Band”) spectrum, which is currently used for the delivery of QVC’s programming to its distributors’ satellite earth stations. Currently, there is no immediately available, ubiquitous alternative to C-Band delivery of QVC’s programming, particularly outside of its major markets. Depending on the parameters for the reallocation adopted by the FCC, there could be an impact on our ability to deliver QVC’s programming reliably and without interruption to its distributors. QVC is actively looking at alternatives to C-Band distribution to mitigate the risks posed to its operations from the C-Band reallocation proceeding, but QVC can give no assurance that these alternatives will adequately mitigate such risks.
System interruption and the lack of integration and redundancy in the systems and infrastructures of our subsidiariessubsidiary QVC and HSNi and our other online commerce and catalog businesses may adversely affect their ability to, as applicable, operate their businesses, transmit their television programs, operate websites, process and fulfill transactions, respond to customer inquiries and generally maintain cost-efficient operations. The success of our subsidiaries and business affiliates depends, in part, on their ability to maintain the integrity of their transmissions, systems and infrastructures, including the transmission of television programs (in the case of QVC and HSN)QVC), as well as their websites, information and related systems, call centers and fulfillment facilities. These subsidiaries and business affiliates may experience occasional system interruptions that make some or all transmissions, systems or data unavailable or prevent them from transmitting their signals or efficiently providing services or fulfilling orders, as the case may be. QVC is in the process of implementing new technology systems and upgrading others. The failure to properly implement new systems or delays in implementing new systems could impair the ability of our subsidiaries and business affiliates to provide services and content, fulfill orders and/or process transactions. Each of QVC and HSNiCornerstone also rely on affiliate and third-party computer systems, broadband, transmission and other communications systems and service providers in connection with the transmission of theirits respective signals, as well as to facilitate, process and fulfill transactions. Any interruptions, outages or delays in theirits signal transmissions, systems and infrastructures, or any deterioration in the performance of these transmissions, systems and infrastructures, could impair theirits ability to provide services, fulfill orders and/or process transactions. Fire, flood, power loss, telecommunications failure, hurricanes, tornadoes, earthquakes, acts of war or terrorism, acts of God and similar events or disruptions may damage or interrupt television transmissions, computer, broadband or other communications systems and infrastructures at any time. Any of these events could cause transmission or system interruption, delays and loss of critical data, and could prevent our subsidiaries and business affiliates from providing services, fulfilling orders and/or processing transactions. While our subsidiaries and business affiliates have backup systems for certain aspects of their operations, these systems are not fully redundant and disaster recovery planning is not sufficient for all possible risks. In addition, some of our subsidiaries and business affiliates may not have adequate insurance coverage to compensate for losses from a major interruption.
The processing, storage, sharing, use, disclosure and protection of personal data could give rise to liabilities as a result of governmental regulation, conflicting legal requirements or differing views of personal privacy rights. In the processing of consumer transactions and managing their employees, our businesses receive, transmit and store a large volume of personally identifiable information and other user data. The processing, storage, sharing, use, disclosure and protection of this information are governed by the privacy and data security policies maintained by these businesses. Moreover, there are federal, state and international laws regarding privacy and the processing, storage, sharing, use, disclosure and protection of personally identifiable information and user data. Specifically, personally identifiable information is increasingly subject to legislation and regulations, including changes inchanging legislation and regulations, in numerous jurisdictions around the world, the intent of which isare intended to protect the privacy of personal information that is collected, processed and transmitted in or from the governing jurisdiction. Compliance with these laws and regulations, or changes in these laws and regulations may be onerous and expensive and may be inconsistent from jurisdiction to jurisdiction, further increasing the cost of compliance. For example, the European Court of Justice in 2015 invalidated the U.S.-EUU.S.-E.U. Safe Harbor Framework, which facilitated personal data transfers to the U.S. in compliance with applicable European data protection laws. A new data transfer framework,The E.U.-U.S. Privacy Shield, which replaced the EU-U.S. Privacy ShieldU.S.-E.U. Safe Harbor Framework, became fully operational on August 1, 2016, but is the subject of litigation. In addition, Standard Contractual Clauses - another key mechanism to allow data transfers between the U.S. and the EUE.U. - are also subject to litigation over whether Standard Contractual Clauses can
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be used for transferring personal data from the EUE.U. to the U.S. Further, the European Parliament and the CouncilThe Court of Justice of the European Union have approved ais expected to rule on the challenges to the EU-U.S. Privacy Shield and Standard Contractual Clauses in 2020. Further, the General Data Protection Regulation, which becomesbecame effective on May
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25, 2018, and which will givegives consumers in the E.U. additional rights and imposeimposes additional restrictions and penalties on companies for illegal collection and misuse of personal information. Finally, theThe European Commission proposedis continuing to consider whether to propose new regulations in 2017 regarding privacy and electronic communications that would complement the GDPR, including additional regulation of the Internet tracking tools known as “cookies.” In the absence of such new regulations, European data regulators are indicating their intent to take greater enforcement efforts with respect to the use of cookies. The “Brexit” withdrawal of the United Kingdom (UK) from the E.U. may cause transfers of personal data from the E.U. to the UK to be subject to increased regulations that would impede the continued sharing of E.U. personal data with the UK. California has enacted the California Consumer Privacy Act of 2018 (“CCPA”), which, among other things, allows California consumers to request that certain companies disclose the types of personal information collected by such companies. The CCPA took effect on January 1, 2020. The California Attorney General is drafting implementing regulations and guidance regarding the law. Other states in the U.S. are also separately proposing laws to regulate privacy and security of personal data. QVC’s, HSNi’sCornerstone’s and zulily’sZulily’s failure, and/or the failure by the various third party vendors and service providers with which QVC, HSNiCornerstone and zulilyZulily do business, to comply with applicable privacy policies or federal, state or similar international laws and regulations, or changes in applicable laws and regulations, or any compromise of security that results in the unauthorized release of personally identifiable information or other user data could damage QVC’s, HSNi’sCornerstone’s and zulily’sZulily’s reputations and the reputation of their third party vendors and service providers, discourage potential users from trying their products and services and/or result in fines and/or proceedings by governmental agencies and/or consumers, any one or all of which could adversely affect QVC’s, HSNi’s,Cornerstone’s and zulily’sZulily’s business, financial condition and results of operations and, as a result, our company. In addition, we, our subsidiaries or our business affiliates may not have adequate insurance coverage to compensate for losses.
Our home television and online commerce businesses are subject to security risks, including security breaches and identity theft. Through their operations, sales, marketing activities, and use of third-party information, our businesses collect and store certain non-public personal information that customers provide to purchase products, enroll in promotional programs, register on websites, or otherwise communicate to them. This may include phone numbers, driver license numbers, contact preferences, personal information stored on electronic devices, and payment information, including credit and debit card data. Our businesses gather and retain information about employees in the normal course of business. Our businesses may share information about such persons with vendors, contractors and other third-parties that assist with certain aspects of their business. In order to succeed,addition, our home television andbusinesses’ online commerce businesses must be able to provide for secureoperations depend upon the transmission of confidential information over public networks and protect their confidentialthe Internet, such as information on their systems.permitting cashless payments. Unauthorized parties may attempt to gain access to our businesses’ or our businesses’ vendors’ systems by, among other things, hacking into our businesses’ systems or those of our businesses’ partners or vendors, or through fraud or other means of deceiving our businesses’ employees, partners or vendors.vendors, burglaries, errors by our or our vendors’ employees, misappropriation of data by employees, vendors or unaffiliated third-parties, or other irregularities that may result in persons obtaining unauthorized access to our businesses’ data. The techniques used to gain such access to our businesses’ or our businesses’ vendors’ information technology systems, our businesses'businesses’ data or customers'customers’ data, disable or degrade service, or sabotage systems are constantly evolving, may be difficult to detect quickly, and often are not recognized until launched against a target. Our businesses’businesses have implemented systems and processes intended to secure their information technology systems and prevent unauthorized access to or loss of sensitive data, but as with all companies, these security measures may not be sufficient for all eventualities and there is no guarantee that they will be adequate to safeguard against all data security breaches,cyber attacks, system compromises or misuses of data. Although we have not detected a material security breach or cybersecurity incident to date, we have been the target of events of this nature and expect to be subject to similar attacks in the future. Any penetration of network security or other misappropriation or misuse of customer, employee or other personal information, whether at our businesses’ or any of our businesses’ vendors, could cause interruptions in the operations of our businesses and subject them to increased costs, fines, litigation, regulatory actions and other liabilities. Security breaches could also significantly damage their reputation with their customers and third parties with whom they do business. business, which could result in lost sales and customer and vendor attrition. Our businesses continue to invest in new and emerging technology and other solutions to protect their retail commerce websites, mobile commerce applications and information systems, but there can be no assurance that these investments and solutions will prevent any of the risks described above. If our businesses’businesses are unable to maintain the security of their retail commerce websites and mobile commerce applications, they could suffer loss of sales, reductions in traffic, diversion of management attention, and deterioration of their competitive position and incur liability for any damage to customers whose personal information is unlawfully obtained and used. Our businesses may be required to expend significant additional capital and other resources to protect against and remedy any potential or existing security breaches and their consequences. Theyconsequences, such as additional infrastructure capacity spending to mitigate any system
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degradation and the reallocation of resources from development activities. Our businesses also face similar risks associated with security breaches affecting third parties with which they are affiliated or otherwise conduct business online.business. The loss of confidence in our online commerce businesses resulting from any such security breaches or identity theft could adversely affect the business, financial condition and results of operations of our online commerce businesses and, as a result, our company.
Certain of our subsidiaries and business affiliates may fail to adequately protect their intellectual property rights or may be accused of infringing intellectual property rights of third parties. Our subsidiaries and business affiliates regard their respective intellectual property rights, including service marks, trademarkstradenames and domain names, copyrights (including their programming and their websites), trade secrets and similar intellectual property, as critical to their success. These businesses also rely heavily upon software codes, informational databases and other components that make up their products and services. From time to time, these businesses are subject to legal proceedings and claims in the ordinary course of business, including claims of alleged infringement of the trademarks,tradenames, patents, copyrights and other intellectual property rights of third parties. In addition, litigation may be necessary to enforce the intellectual property rights of these businesses, protect trade secrets or to determine the validity and scope of proprietary rights claimed by others. Any litigation of this nature, regardless of outcome or merit, could result in substantial costs and diversion of management and technical resources, any of which could adversely affect the business, financial condition and results of operations of these businesses and in turn our financial condition and results of operations. The failure of these businesses to protect their intellectual property rights, particularly their proprietary brands, in a meaningful manner or third party challenges to related contractual rights could result in erosion of brand names and limit the ability of these businesses to control marketing on or through the Internet using their various domain names, which could adversely affect the business, financial condition and results of operations of these businesses, as well as the financial condition and results of operations of our company.
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Our home television and online commerce businesses rely on independent shipping companies to deliver the products they sell. Our home television and online commerce businesses rely on third party carriers to deliver merchandise from vendors and manufacturers to them and to ship merchandise to their customers. As a result, they are subject to carrier disruptions and delays due to factors that are beyond their control, including employee strikes, inclement weather and regulation and enforcement actions by customs agencies. Any failure to deliver products to their customers in a timely and accurate manner may damage their reputation and brand and could cause them to lose customers. Enforcement actions by customs agencies can also cause the costs of imported goods to increase, negatively affecting profits. These businesses are also impacted by increases in shipping rates charged by third party carriers, which over the past few years have increased significantly in comparison to historical levels, and it is currently expected that shipping and postal rates will continue to increase. In the case of deliveries to customers, in each market where they operate, they have negotiated agreements with one or more independent, third party shipping companies, which in certain circumstances provide for favorable shipping rates. If any of these relationships were to terminate or if a shipping company was unable to fulfill its obligations under its contract for any reason, these businesses would have to work with other shipping companies to deliver merchandise to customers, which would most likely be at less favorable rates. Other potential adverse consequences of changing carriers include reduced visibility of order status and package tracking, delays in order processing and product delivery, and reduced shipment quality, which may result in damaged products and customer dissatisfaction. Any increase in shipping rates and related fuel and other surcharges passed on to these businesses by their current carriers or any other shipping company would adversely impact profits, given that these businesses may not be able to pass these increased costs directly to customers or offset them by increasing prices without a detrimental effect on customer demand.
Certain businesses attributed toof our QVC Groupbusinesses face significant inventory risk. Certain businesses attributed toof our QVC Groupbusinesses are exposed to significant inventory risks that may adversely affect their operating results as a result of seasonality, new product launches, rapid changes in product cycles and pricing, defective merchandise, changes in consumer demand, consumer spending patterns, changes in consumer tastes with respect to their products and other factors. These businesses endeavor to accurately predict these trends and avoid overstocking or understocking products they sell. Demand for products, however, can change significantly between the time inventory or components are ordered and the date of sale. In addition, when these businesses begin selling a new product, it may be difficult to establish vendor relationships, determine appropriate product or component selection, and accurately forecast demand. The acquisition of certain types of inventory or components may require significant lead-time and prepayment and they may not be returnable. These businesses carry a broad selection and significant inventory levels of certain products, and they may be unable to sell products in sufficient quantities or during
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the relevant selling seasons. Any one of the inventory risk factors set forth above may adversely affect their operating results.
The seasonality of certain of our businesses places increased strain on their operations. The net revenue of our home television and online commerce businesses in recent years indicates that these businesses are seasonal due to a higher volume of sales in certain months or calendar quarters or related to particular holiday shopping. For example, in recent years, QVC and HSNi havehas earned, on average, between 22% and 24%23% of their combinedits global revenue in each of the first three quarters of the year and between 29% and 32% of their combinedits global revenue in the fourth quarter of the year. Similarly, our subsidiary zulilyCornerstone experiences higher sales volume during the second and fourth quarters of the year. Our subsidiary Zulily experiences a stronger third quarter during the back-to-school shopping season and stronger fourth quarter due to the holiday shopping season. If the vendors for these businesses are not able to provide popular products in sufficient amounts such that these businesses fail to meet customer demand, it could significantly affect their revenue and future growth. If too many customers access the websites of these businesses within a short period of time due to increased demand, our businesses may experience system interruptions that make their websites unavailable or prevent them from efficiently fulfilling orders, which may reduce the volume of goods they sell and the attractiveness of their products and services. In addition, they may be unable to adequately staff their fulfillment and customer service centers during these peak periods and delivery and other third party shipping (or carrier) companies may be unable to meet the seasonal demand. To the extent these businesses pay for holiday merchandise in advance of certain holidays (e.g., in the case of QVC, and HSNi, in August through November of each year), their available cash may decrease, resulting in less liquidity.
Our subsidiaries offer their installment payment option on most of their merchandise and, in certain circumstances offer it as the default payment option. The failure of our subsidiaries QVC U.S., QVC International, HSN and HSNZulily to effectively manage the Easy-Pay, Flexpay, Smart-Pay and revolving credit card programs and Flexpay program, respectively,as applicable, could result in less income. negatively impact our results of operations. QVC offers Easy-Payan installment payment option in all of its markets other than Japan, which is available on certain merchandise it sells. This installment payment option is called “Easy-Pay” at QVC-U.S. and in the U.S.U.K., U.K.,“Q-Pay” in Germany and Italy, (knownand “Flex-Pay” at HSN. QVC’s installment payment option is currently offered on most of its merchandise and for QVC U.S. website and mobile sales and QVC U.K. mobile sales, is set as Q-Pay in Germany and Italy), athe default payment planoption on all products on which it is offered. Full payment for merchandise at the time of sale would require the customer to affirmatively change to that option. QVC’s installment payment option, when offered, by QVC, allows customers
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to pay for certain merchandise in two or moremultiple interest-free monthly installments. When Easy-Paythe installment payment option is offered by QVC U.S. and QVC International and elected by the customer (or if the customer inadvertently purchases merchandise using the installment payment option because it was the default payment option), the first installment is typically billed to the customer’s credit or debit card upon shipment. Generally, the customer’s credit or debit card is subsequently billed up to fivein additional monthly installments until the total purchase price of the products has been billed by QVC.billed. QVC U.S. and QVC International cannot predict whether customers will pay their installments when due or at all, regardless of their Easy-Pay installments. In addition, QVC-U.S. has an agreement with a large consumer financial institution (the “Bank”) pursuantwhether the customer would have preferred to which the Bank provides revolving credit directly to QVC’s customers for the sole purpose of purchasing merchandise from QVC with a QVC branded credit card (“Q Card”). QVC receives a portionpay in one lump-sum but did not opt out of the net economicsinstallment payment option. Accordingly, QVC maintains an allowance for customer bad debts arising from these late and unpaid installments. This provision for customer bad debts is provided as a percentage of accounts receivable based on QVC’s historical experience in the credit card program. We cannot predict the extent to which QVC’s customers will use the Q Card, norperiod of sale and is included within selling, general and administrative expense. To the extent that they will make payments on their outstanding balances.customers elect installment payment options at greater rates, or to the extent the number of customers failing to opt out of the default installment payment option increases, QVC would be required to maintain a greater allowance for customer bad debt and to the extent that installment payment option losses exceed historical levels, our and QVC’s results of operations may be negatively impacted.
HSNZulily offers Flexpay,Smart-pay, a program which customers may pay for certain merchandise in two to six interest-free, monthly credit or debit card installments. HSNthree payments. Zulily maintains allowances for estimated losses resulting from the inability of customers to make required payments. Actual losses due to the inability of customers to make required payments may increase in a given period or exceed related estimates. As Flexpay usage continues to grow, HSNZulily may experience these losses at greater rates, which will require it to maintain greater allowances for doubtful accounts of estimated losses than it has historically. To
Federal and state rules and regulations governing various consumer lending practices apply in the jurisdictions where we operate. Although we do not charge interest or impose finance charges as part of our installment payment option, changes in how these rules are interpreted and applied could result in changes to our installment program, and failure to
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comply with these rules and regulations could result in the imposition of fines and penalties, any of which could have an adverse effect on our results of operations.
In addition, QVC U.S., HSN and Zulily have agreements with a large consumer financial institution (the “Bank”) pursuant to which the Bank provides revolving credit directly to U.S. customers for the sole purpose of purchasing merchandise from QVC U.S., HSN and Zulily with a branded credit card (For QVC U.S. the “Q Card”, for HSN the “HSN Credit Card” and for Zulily the “Zulily Credit Card”). QVC U.S., HSN and Zulily receive a portion of the net economics of the respective credit card programs. We cannot predict the extent to which QVC U.S., HSN and Zulily’s customers will use the Q Card, the HSN Credit Card, or the Zulily Credit Card nor the extent that Flexpay losses exceed historical levels, HSN’s results of operations may be negatively impacted.they will make payments on their outstanding balances.
The success of our home television and online commerce businesses depends in large part on their ability to recruit and retain key personnel capable of executing their unique business models.QVCOur home television and HSNi, as well as our e-commerceonline commerce subsidiaries and business affiliates have business models that require them to recruit and retain key employees, including management, with the skills necessary for a unique business that demands knowledge of the general retail industry, television production, direct to consumer marketing and fulfillment and the Internet. We cannot assure you that if QVC, HSNi or our online commerce businessesthese subsidiaries and business affiliates experience turnover of these key employees they will be able to recruit and retain acceptable replacements because the market for such employees is very competitive and limited.
Certain of our subsidiaries and business affiliates have operations outside of the United StatesU.S. that are subject to numerous operational and financial risks. Certain of our subsidiaries and business affiliates have operations in countries other than the United StatesU.S. that are subject to the following risks inherent in international operations:
| fluctuations in currency exchange rates; |
| longer payment cycles for sales in foreign countries that may increase the uncertainty associated with recoverable accounts; |
| recessionary conditions and economic instability, including fiscal policies that are implementing austerity measures in certain countries, which are affecting overseas markets; |
| limited ability to repatriate funds to the U.S. at favorable tax rates; |
| potentially adverse tax consequences; |
| export and import restrictions, changes in tariffs, trade policies and trade relations; |
| increases in taxes and governmental royalties and fees; |
| the ability to obtain and maintain required licenses or certifications, such as for web services and electronic devices, that enable us to operate our businesses in foreign jurisdictions; |
| changes in foreign and U.S. laws, regulations and policies that govern operations of foreign-based companies; |
| changes to general consumer protection laws and regulations; |
| difficulties in staffing and managing international operations as a result of distance, language and cultural differences; and |
| threatened and actual terrorist attacks, political unrest in international markets and ongoing military action around the world that may result in disruptions of service that are critical to QVC’s |
Moreover, in many foreign countries, particularly in certain developing economies, it is not uncommon to encounter business practices that are prohibited by certain regulations, such as the Foreign Corrupt Practices Act and similar laws. Although certain of our subsidiaries and business affiliates have undertaken compliance efforts with respect to these laws, their respective employees, contractors and agents, as well as those companies to which they outsource certain of their business operations, may take actions in violation of their policies and procedures. Any such violation, even if prohibited
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by the policies and procedures of these subsidiaries and business affiliates or the law, could have certain adverse effects on the financial condition of these subsidiaries and business affiliates. Any failure by these subsidiaries and business
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affiliates to effectively manage the challenges associated with the international operation of their businesses could materially adversely affect their, and hence our, financial condition.
Significant developments stemming from the 2016 U.S. presidential electionnegotiation of trade agreements or the Brexit vote could have a material adverse effect on businesses attributed toour businesses. The President of the QVC and Ventures Groups. After the presidential inauguration on January 20, 2017, President Donald J. Trump and his administration took office in the United States. As a presidential candidate, President TrumpU.S. has expressed apprehension towards existing trade agreements, such as the North American Free Trade Agreement and the Trans-Pacific Partnership, and suggested that the U.S. would renegotiate or withdraw from thesecertain trade agreements. During the campaign, heHe has also raised the possibility of significantly increasingadvocated for and imposed tariffs on certain goods imported into the United States,U.S., particularly from China and Mexico.Europe. On January 23, 2017, the President of the United StatesU.S. signed a presidential memorandum to withdraw the U.S. from the Trans-Pacific Partnership. ThisOn October 1, 2018, the U.S., Mexico and Canada agreed to the terms of the United States-Mexico-Canada Agreement (the "USMCA"), a successor to the North American Free Trade Agreement ("NAFTA"), which will impact imports and exports among those countries. The countries agreed to a revised version of the USMCA on December 10, 2019. The USMCA has only been ratified by Mexico and the U.S. Once ratified by the legislature of Canada, the USMCA would be enacted and replace NAFTA. As of the date of this report, there is some uncertainty about whether the USMCA will be ratified by Canada, as well as the timing thereof, and the potential for further re-negotiation, or even termination, of NAFTA. Also, the USMCA could undergo further changes that lead to additional modifications of certain USMCA provisions before being passed into law. These and other proposed actions, if implemented, could adversely affect our businesses attributed to the QVC and Ventures Groups that sell imported products.
Additionally, the Brexit process and negotiations have created political and economic uncertainty, particularly in the U.K. and the EU,E.U., and this uncertainty may last for years. On June 23, 2016, the U.K. held a referendum in which voters approved, on an advisory basis, an exit from the E.U. The U.K. formally left the E.U. on January 31, 2020. This has resulted in a transition period during which the E.U.-U.K. trade relationship will not change, and the U.K. will remain part of the E.U. Customs Union and Single Market, subject to all E.U. trade law. During the transition period, the E.U. and the U.K. will negotiate their new economic and security relationship, including a new agreement on trade. The transition will last until December 31, 2020, which can be extended for up to two years if the E.U. and the U.K. agree to do so. However, at present, the U.K. government’s stated intention is not to seek or agree to an extension. A “no deal” outcome on trade remains a possibility if the E.U. and the U.K. fail to conclude a new trade agreement before December 31, 2020 and the transition period is not extended. In that case, with effect from January 1, 2021, the basis for E.U.-U.K. trade would automatically default to World Trade Organization terms.
The potential impacts, if any, of the considerable uncertainty relating to Brexit or the resulting terms of the new economic and security relationship between the U.K. and the E.U. on the free movement of goods, services, people and capital between the U.K. and the E.U., customer behavior, economic conditions, interest rates, currency exchange rates, availability of capital or other matters are unclear. QVC’s business could be affected with respect to these matters during this period of uncertainty, and perhaps longer bydepending on the impact of this vote.resulting terms. In addition,particular, QVC’s business could be negatively affected by new trade agreements between the U.K. and other countries, including the U.S., and by the possible imposition of trade or other regulatory barriers in the U.K. which could result in shipping delays and the shortage of products sold by it. Additionally, the U.K. economy and consumer demand in the U.K., including for QVC’s products, could be negatively impacted. Further, various geopolitical forces related to Brexit may impact the global economy, the European economy and our businesses, including, for example, due to other E.U. member states where our businesses have operations proposing referendums to, or electing to, exit the E.U. These possible negative impacts, and others resulting from the U.K.’s actual withdrawal from the EU,E.U., may adversely affect QVC’sour operating results.
Our online commerce businesses including QVC, HSNi and zulily could be negatively affected by changes in search enginethird-party digital platform algorithms and dynamics or search engine disintermediation as well as their inability to monetize the resulting web traffic. The success of our online commerce businesses depends on a high degree of website traffic, which is dependent on many factors, including the availability of appealing website content, user loyalty and new user generation from search portalsvarious digital marketing channels that charge a fee (such as Google). In obtaining a significant amount of website traffic via search engines, they utilize techniquesfee. Third-party digital platforms, such as search engine optimization (“SEO”) which is the practice of developing websites with relevantGoogle and current content that rank well in “organic,” or unpaid, search engine results) and search engine marketing (“SEM”) (which is a form of Internet marketing that involves the promotion of websites by increasing their visibility in search engine results pages through the use of paid placement, contextual advertising, and paid inclusion) to improve their placement in relevant search queries. Search engines, including Google,Facebook, frequently update and change the logic that determines the placement and display of results of a user’s search, or advertiser content, such that the purchased or algorithmic placement of advertisements or links to the websites of our online commerce businesses can be negatively affected. Moreover, a search engine could, for competitive or other purposes, alter its search algorithms or results causing their websites to place lower in search query results. If a major search engine or third-party digital platform changes its algorithms in a manner that negatively affects their paid advertisement distribution or unpaid search ranking, or if competitive dynamics impact the effectiveness of SEO or SEM in a negative manner, the business and financial performance of our online commerce businesses would be adversely affected,
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potentially to a material extent. Furthermore, the failure of our online commerce businesses to successfully manage their SEO and SEMdigital marketing strategies could result in a substantial decrease in traffic to their websites, as well as increased costs if they were to replace free traffic with paid traffic. Even if our online commerce businesses are successful in generating a high level of website traffic, no assurance can be given that our online commerce businesses will be successful in achieving repeat user loyalty or that new visitors will explore the offerings on their sites. Monetizing this traffic by converting users to consumers is dependent on many factors, including availability of inventory, consumer preferences, price, ease of use and website quality. No assurance can be given that the fees paid to search portalsthird-party digital platforms will not exceed the revenue generated by their visitors. Any failure to sustain user traffic or to monetize such traffic could materially adversely affect the financial performance of our online commerce businesses and, as a result, adversely affect our financial results.
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Our online commerce businesses including QVC, HSNi and zulily may experience difficulty in achieving the successfulongoing development, implementation and customer acceptance of and a viable advertising market via, applications for smartphone and tablet computingpersonal electronic devices, which could harm their business. Although our online commerce businesses have developed services and applications to address user and consumer interaction with website content on smartphonepersonal electronic devices, such as smartphones and other non-traditional desktoptablets, the ways in which consumers use or laptop computer systems (which typically have smaller screens and less convenient typing capabilities),rely on these personal electronic devices is continually changing. If the efficacy of the smartphone application and its advertising market is still developing. Moreover, if smartphone computing services proveor applications we develop in response to bechanges in consumer behavior are less effective for the users of our online commerce businesses or less economically attractive for advertisers and the smartphone segment of Internet traffic grows at the expense of traditional computer and tablet Internet access,are not accepted by consumers, our online commerce businesses may experience difficulty attracting and retaining traffic and, in turn, advertisers, on these platforms. Any failure to attract and retain traffic on these personal electronic devices could materially adversely affect the financial performance of our online commerce businesses and, as a result, adversely affect our financial results. Additionally, as new devices and new platforms are continually being released, it is difficult to predict the challenges that may be encountered in developing versions of our online commerce businesses’ offerings for use on these alternative devices, and our online commerce businesses may need to devote significant resources to the creation, support, and maintenance of their services on such devices. To the extent that revenue generated from advertising placed on smartphone computing devices becomes increasingly more important to their businesses and they fail to adequately evolve and address this market, their business and financial performance could be negatively impacted. In addition, growth in the use of smartphone products as a substitute for use on personal computers and tablets may adversely impact revenue derived from advertising, as many of the processes used for smartphone advertising and related monetization strategies are still in development.
Our subsidiariessubsidiary QVC and HSNi havehas significant indebtedness, which could limit theirits flexibility to respond to current market conditions, restrict theirits business activities and adversely affect theirits financial condition. As of December 31, 2017,2019, QVC had total debt, other than its finance lease obligations, of approximately $5,215$4,978 million, consisting of $3,550$3,873 million in seniorof secured indebtedness under its existing notes, $1,496and $1,105 million outstanding under its senior secured credit facility (excluding $130 million borrowed by Zulily under the $400 million tranche of the senior secured credit facility for which QVC and $169 millionZulily are jointly and severally liable but that QVC does not expect to repay on behalf of Zulily), in each case, secured by a first priority perfected lien on all shares of QVC’s capital stock, and build to suit lease obligations. QVC also had $877 million available for borrowingan additional $2.4 billion of unused capacity under its senior secured credit facility as(which was subsequently reduced to $1.7 billion upon the $700 million reduction of that date. Asthe revolving credit facility, effective February 4, 2020). In addition, QVC had $181 million of December 31, 2017, HSNi had total debtfinance lease obligations and $218 million of approximately $460 million and also had $533 million available for borrowing.operating lease liabilities. QVC or HSNi may incur significant additional indebtedness in the future. If new indebtedness is added to QVC’s current debt levels, the related risks that it now faces could intensify. The indebtedness of QVC, and HSNi, combined with other financial obligations and contractual commitments, could among other things:
| increase QVC’s |
| require a substantial portion of QVC’s |
| limit QVC’s |
| limit flexibility in planning for, or reacting to, changes in its business and the markets in which it operates; |
| competitively disadvantage QVC |
| limit QVC’s |
| expose QVC |
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In addition, it is possible that QVC or HSNi may need to incur additional indebtedness in the future in the ordinary course of business. If new debt is added to theirits current debt levels, the risks described above could intensify. If QVC or HSNi experiences adverse effects on theirits financial condition as a result of their indebtedness, our financial performance could be adversely affected as well.
QVC may need to refinance its indebtedness. Although QVC expects to refinance or otherwise repay its indebtedness, it may not be able to refinance its indebtedness on commercially reasonable terms or at all. The financial terms or covenants of any new credit facility, notes or other indebtedness may not be as favorable as those under its senior secured credit facility and its existing notes. QVC’s ability to complete a refinancing of its senior secured credit facility and its existing notes prior to their respective maturities will depend on its financial and operating performance, its credit rating with rating agencies, as well as a number of conditions beyond its control. For example, if disruptions in the financial markets were to exist at the time that it intended to refinance this indebtedness, it might be restricted in its ability to access the financial markets. If QVC is unable to refinance its indebtedness, its alternatives would include negotiating an extension of the maturities of its senior secured credit facility and its existing notes with the lenders and seeking or raising new equity capital. If QVC were unsuccessful, the lenders under its senior secured credit facility and the holders of its existing notes could demand repayment of the indebtedness owed to them on the relevant maturity date, which could adversely affect its and our financial condition.
Covenants in QVC’s debt agreements restrict its business in many ways. QVC’s senior secured credit facility and the indentures governing its notes contain various covenants that limit its ability and/or its restricted subsidiaries' ability to, among other things:
● | incur or assume liens or additional debt or provide guarantees in respect of obligations of other persons; |
● | pay dividends or make distributions or redeem or repurchase capital stock; |
● | prepay, redeem or repurchase debt; |
● | make loans, investments and capital expenditures; |
● | enter into agreements that restrict distributions from its subsidiaries; |
● | sell assets and capital stock of its subsidiaries; |
● | enter into sale and leaseback transactions; |
● | enter into certain transactions with affiliates; |
● | consolidate or merge with or into, or sell substantially all of its assets to, another person; and |
● | designate its subsidiaries as unrestricted subsidiaries. |
In addition, QVC’s senior secured credit facility contains restrictive covenants and requires it to maintain a specified leverage ratio. QVC’s ability to meet this leverage ratio test can be affected by events beyond its control, and it may be unable to meet those tests. A breach of any of these covenants could result in a default under QVC’s senior secured credit facility, which in turn could result in a default under the indentures governing its notes. Upon the occurrence of an event of default under QVC’s senior secured credit facility, the lenders could elect to declare all amounts outstanding under its senior secured credit facility to be immediately due and payable and terminate all commitments to extend further credit. If QVC were unable to repay those amounts, the lenders could proceed against the collateral granted to them to secure that indebtedness. QVC’s senior secured credit facility, its notes and certain future indebtedness are secured by a first priority perfected lien in all shares of its capital stock. If the lenders and counterparties under QVC’s senior secured credit facility, its notes and certain future indebtedness accelerate the repayment of obligations, it may not have sufficient assets to repay such obligations. QVC’s borrowings under its senior secured credit facility are, and are expected to continue to be, at
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variable rates of interest and expose it to interest rate risk. If interest rates increase, QVC’s debt service obligations on the variable rate indebtedness will also increase even though the amount borrowed remains the same, and QVC’s net income would decrease.
We may fail to realize the potential benefits of the acquisition of HSNiHSN or those benefits may take longer to realize than expected. We believe there are significant benefits and synergies that may be realized through leveraging the scale, vendor relationships, merchandizing expertise and customer base of QVC U.S. and HSNi.HSN. However, the efforts to realize these benefits and synergies will be a complex process and may disrupt each company’s existing operations if not implemented in a timely and efficient manner. If the respective managements of Liberty,Qurate Retail, QVC U.S. and HSNiHSN are unable to minimize the potential disruption to their respective businesses and operations during this period, we may not realize the anticipated benefits of the acquisition of HSNi.HSN. Realizing these benefits may depend in part on the efficient coordination and alignment of various functions, including marketing, merchandising, buying expertise, customer acquisition and the integration of certain administrative functions, while maintaining adequate focus on QVC’sQVC U.S.’s and HSNi’sHSN’s core businesses. QVC U.S., HSN and Zulily engage in transactions relating to personnel, sales, sourcing of merchandise, marketing initiatives, fulfillment integration and business advisory services with the expectation that these transactions will result in various synergies including, among other things, enhanced revenues, procurement cost savings and operating efficiencies, innovation and sharing of best practices. However, they may not realize these anticipated benefits. We currently anticipate that these efforts will continue for the foreseeable future.
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TheOur operating expenses attributed to the QVC Group are expected to increase over the near term due to the increased headcount, expanded operations and changes related to the assimilation of HSNi.HSN. In addition, we have incurred expenses related to the acquisition of HSNi that have been attributed to the QVC Group,HSN, which may adversely affect our financial results. To the extent that our expenses increase but revenue does not increase commensurately, there are unanticipated expenses related to the assimilation process, there are significant costs associated with presently unknown liabilities, or if the foregoing charges and expenses are larger than anticipated, our consolidated business, operating results and financial condition as well as those attributable to the QVC Group, may be adversely affected. Failure to timely implement, or problems with implementing, the post-acquisition strategy for HSNiHSN also may adversely affect the trading price of QVC Groupour common stock.
We depend on the continued growth of e-commerce in general and zulilyZulily depends on the flash sales model in particular. The business of selling products over the Internet, particularly on the flash sales model, is dynamic and evolving. The market segment for the flash sales model has grown significantly, and this growth may not be sustainable. If customers cease to find the flash sales model shopping experience fun, entertaining and a good value, or otherwise lose interest in shopping in this manner, zulilyZulily may not acquire new customers at rates consistent with its historical or projected periods, and existing customers’ buying patterns and levels may be less than historical or projected rates. If zulilyZulily is unable to successfully deliver emails or mobile alerts to its subscribers, or if subscribers decline to open its emails or mobile alerts, zulily’sZulily’s net sales and profitability would be adversely affected. In addition, changes in how webmail application providers, such as Google Inc. and Yahoo! Inc., prioritize, filter and deliver email may also reduce the number of subscribers opening zulily’sZulily’s emails which may also result in a decline in net sales. If the market segment for the flash sales model were to become saturated or decline overall, zulilyZulily may not be able to acquire new customers or engage existing customers, which could adversely affect the QVC Group’sour financial condition and operating results.
We do not have the right to manage our business affiliates, attributed to our Ventures Group, which means we are not able to cause those business affiliates to act in a manner that we deem desirable. We do not have the right to manage the businesses or affairs of any of our business affiliates (generally those companies in which we have less than a majority voting stake or with respect to which we have provided a proxy over our voting power to a third party)stake). Rather, our rights may take the form of representation on the board of directors or similar committee that supervises management or possession of veto rights over significant or extraordinary actions. The scope of our veto rights varies from agreement to agreement. Although our board representation and veto rights may enable us to exercise influence over the management or policies of a business affiliate, enable us to prevent the sale of material assets by a business affiliate in which we own less than a majority voting interest or prevent usa business affiliate from paying dividends or making distributions to ourits stockholders or partners, they will not enable us to cause these actions to be taken as these companies are business affiliates in which we own a partial interest.
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We have overlapping directors and officers with LMC,Liberty Media Corporation (“LMC”), Liberty TripAdvisor Holdings, Inc. (“TripAdvisor Holdings”), Liberty Broadband, and Expedia Holdings, and are expected to have overlapping directors and officers with GCI Liberty, Inc., which may lead to conflicting interests. As a result of the LMC Split-Off, othercertain transactions that occurred between 2011 and 20162018 that resulted in the separate corporate existence of Liberty,our company, LMC, TripAdvisor Holdings, Liberty Broadband and Expedia Holdings, as well as the completion of the proposed transactions (the “Transactions”) involvingGCI Liberty, and GCI (renamed GCI Liberty), most of the executive officers of LibertyQurate Retail also serve or will serve as executive officers of LMC, TripAdvisor Holdings, Liberty Broadband Expedia Holdings and GCI Liberty and there are overlapping directors. Other than Liberty’sGCI Liberty’s current ownership of shares of Liberty Broadband’sBroadband’s non-voting Series C common stock, which we expect to be held by GCI Liberty after the completion of the Transactions, none of the foregoing companies has any ownership interest in any of the others. Our executive officers and the members of our company’scompany’s board of directors have fiduciary duties to our stockholders. Likewise, any such persons who serve in similar capacities at LMC, TripAdvisor Holdings, Liberty Broadband Expedia Holdings or GCI Liberty have fiduciary duties to that company’scompany’s stockholders. Therefore, such persons may have conflicts of interest or the appearance of conflicts of interest with respect to matters involving or affecting more than one of the companies to which they owe fiduciary duties. For example, there may be the potential for a conflict of interest when our company, LMC, TripAdvisor Holdings, Liberty Broadband Expedia Holdings or GCI Liberty looks at acquisitions and other corporate opportunities that may be suitable for each of them. Moreover, most of our company's directors and officers own LMC, TripAdvisor Holdings, Liberty Broadband Expedia Holdings, and will ownand/or GCI Liberty stock and equity awards. These ownership interests could create, or appear to create, potential conflicts of interest when the applicable individuals are faced with decisions that could have different implications for our company, LMC, TripAdvisor Holdings,
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Liberty Broadband Expedia Holdings and/or GCI Liberty. Any potential conflict that qualifies as a "related party transaction" (as defined in Item 404 of Regulation S-K under the Securities Act of 1933, as amended) is subject to review by an independent committee of the applicable issuer's board of directors in accordance with its corporate governance guidelines. Each of Liberty Broadband, TripAdvisor Holdings and Expedia HoldingsGCI Liberty has renounced its rights to certain business opportunities and each company’stheir respective restated certificate of incorporation contains provisions deeming directors and officers not in breach of their fiduciary duties in certain cases for directing a corporate opportunity to another person or entity (including LMC, TripAdvisor Holdings, Liberty Broadband and Expedia Holdings)GCI Liberty) instead of such company. In addition, we understand that GCI Liberty is expected to adopt similar renouncement and waiver provisions if it is successfully able to reincorporate in Delaware following the closing of the Transactions. Any other potential conflicts that arise will be addressed on a case-by-case basis, keeping in mind the applicable fiduciary duties owed by the executive officers and directors of each issuer. From time to time, we may enter into transactions with LMC, TripAdvisor Holdings, Liberty Broadband Expedia Holdings or GCI Liberty and/or their subsidiaries or other affiliates. There can be no assurance that the terms of any such transactions will be as favorable to our company, LMC, TripAdvisor Holdings, Liberty Broadband Expedia Holdings or GCI Liberty or any of their respective subsidiaries or affiliates as would be the case where there is no overlapping officer or director.
The liquidity and value of our public investments may be affected by market conditions beyond our control that could cause us to record losses for declines in their market value. Included among our assets are equity interests in publicly-traded companies that are not consolidated subsidiaries. The value of these interests may be affected by economic and market conditions that are beyond our control; and our ability to liquidate or otherwise monetize these interests without adversely affecting their value may be limited. In addition, as of December 31, 2017, we owned (and attributed to our Ventures Group) shares of Charter valued at approximately $1.8 billion and shares of Liberty Broadband, which is Charter's largest stockholder with a 25.01% voting interest in Charter, valued at approximately $3.6 billion. The risks associated with the business of Charter, and hence the business of Liberty Broadband, are different than those associated with the video and online commerce industries in which our subsidiaries and equity affiliates operate. For additional information regarding these risks and uncertainties, we refer the holders of Liberty Ventures common stock to “Item 1A, Risk Factors, Factors Relating to Our Corporate History and Structure” and “Item 1A, Risk Factors, Factors Relating to Charter” of Liberty Broadband Corporation’s Annual Report on Form 10-K for the year ended December 31, 2017, filed with the SEC on February 9, 2018.
A substantial portion of our consolidated debt attributed to each group is held above the operating subsidiary level, and we could be unable in the future to obtain cash in amounts sufficient to service that debt and our other financial obligations. As of December 31, 2017,2019, our wholly-owned subsidiary Liberty InteractiveLI LLC (“Liberty LLC”) had $2,738$2,238 million principal amount of publicly-traded debt outstanding. LibertyLI LLC is a holding company for all of our subsidiaries and investments. Our ability to meet the financial obligations of LibertyLI LLC and our other financial obligations will depend on our ability to access cash. Our sources of cash include our available cash balances, net cash from operating activities, dividends and interest from our investments, availability under credit facilities at the operating subsidiary level, monetization of our public investment portfolio and proceeds from asset sales. There are no assurances that we will maintain the amounts of cash, cash equivalents or marketable securities that we maintained over the past few years. The ability of our operating subsidiaries including QVC and HSNi, to pay dividends or to make other payments or advances to us or LibertyLI LLC depends on their individual operating results, any statutory, regulatory or contractual restrictions to which they may be or may become subject and the terms of their own indebtedness, including QVC’s credit facility and bond indentures and HSNi’s credit facility.indentures. The agreements governing such indebtedness restrict sales of assets and prohibit or limit the payment of dividends or the making of distributions, loans or advances to stockholders and partners. Neither we nor LibertyLI LLC will generally receive cash, in the form of dividends, loans, advances or otherwise, from our business affiliates. See “We do not have the right to manage our business affiliates, attributed to our Ventures Group, which means we are not able to cause those affiliates to act in a manner that we deem desirable” above.
We have disposed of certain of the reference shares underlying the exchangeable debentures of LibertyLI LLC, attributed to our Ventures Group, which exposes us to liquidity risk. Liberty LI LLC currently has outstanding multiple tranches of exchangeable debentures in the aggregate principal amount of $1,947$1,447 million as of December 31, 2017.2019. Under the terms of these exchangeable debentures, which are attributed to our Ventures Group (other than the 1% Exchangeable Senior Debentures due 2043, which are attributed to the QVC Group), the holders may elect to require LibertyLI LLC to exchange the debentures for the value of a specified number of the underlying reference shares, which LibertyLI LLC may
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honor through delivery of reference shares, cash or a combination thereof. Also, LibertyLI LLC is required to distribute to the holders of its exchangeable debentures any cash, securities (other than publicly traded securities, which would themselves become reference shares) or other payments made by the issuer of the reference shares
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in respect of those shares. The principal amount of the debentures will be reduced by the amount of any such required distributions other than regular cash dividends. As LibertyLI LLC has disposed of some of the reference shares underlying certain of these exchangeable debentures,debentures. For example, in connection with the Transactions, our company contributed its entire equity interest in Charter Communications, Inc. to GCI Liberty. Shares of Charter serve as the underlying reference shares for the 1.75% Exchangeable Debentures. Pursuant to a reorganization agreement and indemnification agreement entered into in connection with the Transactions, our company, LI LLC and GCI Liberty agreed to cooperate with, and reasonably assist each other with respect to, the commencement and consummation of one or more privately negotiated transactions with respect to the 1.75% Exchangeable Debentures within six months of the closing of the Transactions. In June 2018, Qurate Retail repurchased 417,759 of the 1.75% Exchangeable Debentures, and GCI Liberty made a payment under the indemnification agreement to Qurate Retail in the amount of $133 million. Following the initial six month period, the remaining indemnification from GCI Liberty to LI LLC for certain payments made to a holder of the 1.75% Exchangeable Debentures pertains to the holder’s ability to exercise its exchange right according to the terms of the 1.75% Exchangeable Debentures on or before October 5, 2023. However, we cannot give any assurance as to whether GCI Liberty will fulfill its indemnification obligations pursuant to the indemnification agreement.
As a result of LI LLC having disposed of these reference shares, any exercise of the exchange right by, or required distribution of cash, securities or other payments to, holders of such debentures will require that LibertyLI LLC fund the required payments from its own resources, which will depend on the availability of cash or other sources of liquidity to LibertyLI LLC at that time. Additionally, in the event all reference shares underlying a series of exchangeable debentures are liquidated or otherwise cease to be outstanding without replacement, there is a possibility that the treatment of tax matters associated with that series could change. This may include acceleration of tax liabilities that are recorded as deferred tax liabilities in our financial statements, in amounts that would be significant.
Risks Relating to the Ownership of Our Common Stock due to our Tracking Stock Capitalization
Holders of QVC Group tracking stock and Ventures Group tracking stock are common stockholders of our company and are, therefore, subject to risks associated with an investment in our company as a whole, even if a holder does not own shares of common stock of both of our groups. Even though we have attributed, for financial reporting purposes, all of our consolidated assets, liabilities, revenue, expenses and cash flows to either the QVC Group or the Ventures Group in order to prepare the separate financial statement schedules for each of those groups, we retain legal title to all of our assets and our capitalization does not limit our legal responsibility, or that of our subsidiaries, for the liabilities included in any set of financial statement schedules. Holders of QVC Group tracking stock and Ventures Group tracking stock do not have any legal rights related to specific assets attributed to the QVC Group or the Ventures Group and, in any liquidation, holders of QVC Group tracking stock and holders of Ventures Group tracking stock will be entitled to receive a pro rata share of our available net assets based on their respective numbers of liquidation units.
Our board of directors' ability to reattribute businesses, assets and expenses between tracking stock groups may make it difficult to assess the future prospects of either tracking stock group based on its past performance. Our board of directors is vested with discretion to reattribute businesses, assets and liabilities that are attributed to one tracking stock group to the other tracking stock group, without the approval of any of our stockholders. For example, in October 2014, our board of directors approved the change in attribution from the QVC Group to the Ventures Group of certain Liberty online commerce subsidiaries and approximately $1 billion in cash, without stockholder approval. Any reattribution made by our board of directors, as well as the existence of the right in and of itself to effect a reattribution, may impact the ability of investors to assess the future prospects of either tracking stock group, including its liquidity and capital resource needs, based on its past performance. Stockholders may also have difficulty evaluating the liquidity and capital resources of each group based on past performance, as our board of directors may use one group's liquidity to fund the other group's liquidity and capital expenditure requirements through the use of inter-group loans and inter-group interests.
We could be required to use assets attributed to one group to pay liabilities attributed to the other group. The assets attributed to one group are potentially subject to the liabilities attributed to the other group, even if those liabilities arise from lawsuits, contracts or indebtedness that are attributed to such other group. While our current management and allocation policies provide that reattributions of assets between groups will result in the creation of an inter-group loan or an inter-group interest or an offsetting reattribution of cash or other assets, no provision of our restated charter prevents us from satisfying liabilities of one group with assets of the other group, and our creditors are not in any way limited by our tracking stock capitalization from proceeding against any assets they could have proceeded against if we did not have a tracking stock capitalization.
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The market price of QVC Group tracking stock and Ventures Group tracking stock may not reflect the performance of the QVC Group and the Ventures Group, respectively, as we intend. We cannot assure you that the market price of the common stock of a group, in fact, will reflect the performance of the group of businesses, assets and liabilities attributed to that group. Holders of QVC Group tracking stock and Ventures Group tracking stock are common stockholders of our company as a whole and, as such, will be subject to all risks associated with an investment in our company and all of our businesses, assets and liabilities. As a result, the market price of each series of stock of a group may simply reflect the performance of our company as a whole or may more independently reflect the performance of some or all of the group of assets attributed to such group. In addition, investors may discount the value of the stock of a group because it is part of a common enterprise rather than a stand-alone entity.
The market price of QVC Group tracking stock and Ventures Group tracking stock may be volatile, could fluctuate substantially and could be affected by factors that do not affect traditional common stock. The market prices of QVC Group tracking stock and Ventures Group tracking stock may be materially affected by, among other things:
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The market value of QVC Group tracking stock and Ventures Group tracking stock could be adversely affected by events involving the assets and businesses attributed to either of the groups. Because we are the issuer of QVC Group tracking stock and Ventures Group tracking stock, an adverse market reaction to events relating to the assets and businesses attributed to either of our groups, such as earnings announcements, announcements of new products or services, or acquisitions or dispositions that the market does not view favorably, may cause an adverse reaction to the common stock of our other group. This could occur even if the triggering event is not material to us as a whole. A certain triggering event may also have a greater impact on one group than the same triggering event would have on the other group due to the asset composition of the affected group. In addition, the incurrence of significant indebtedness by us or any of our subsidiaries on behalf of one group, including indebtedness incurred or assumed in connection with acquisitions of or investments in businesses, could affect our credit rating and that of our subsidiaries and, therefore, could increase the borrowing costs of businesses attributable to our other group or the borrowing costs of our company as a whole.
We may not pay dividends equally or at all on QVC Group tracking stock or Ventures Group tracking stock. We do not presently intend to pay cash dividends on QVC Group tracking stock or Ventures Group tracking stock for the foreseeable future. However, we will have the right to pay dividends on the shares of common stock of each group in equal or unequal amounts, and we may pay dividends on the shares of common stock of one group and not pay dividends on shares of common stock of the other group. In addition, any dividends or distributions on, or repurchases of, shares relating to either group will reduce our assets legally available to be paid as dividends on the shares relating to the other group.
Our tracking stock capital structure could create conflicts of interest, and our board of directors may make decisions that could adversely affect only some holders of our common stock. Our tracking stock capital structure could give rise to occasions when the interests of holders of stock of one group might diverge or appear to diverge from the interests of holders of stock of the other group. In addition, given the nature of their businesses, there may be inherent conflicts of interests between the QVC Group and the Ventures Group. Our tracking stock groups are not separate entities and thus holders of QVC Group tracking stock and Ventures Group tracking stock do not have the right to elect separate boards of directors. As a result, our company's officers and directors owe fiduciary duties to our company as a whole and all of our stockholders as opposed to only holders of a particular group. Decisions deemed to be in the best interest of our
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company and all of our stockholders may not be in the best interest of a particular group when considered independently. Examples include:
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Our directors' or officers' ownership of QVC Group tracking stock and Ventures Group tracking stock may create or appear to create conflicts of interest. If directors or officers own disproportionate interests (in percentage or value terms) in QVC Group tracking stock or Ventures Group tracking stock, that disparity could create or appear to create conflicts of interest when they are faced with decisions that could have different implications for the holders of QVC Group tracking stock or Ventures Group tracking stock.
Other than pursuant to our management and allocation policies, we have not adopted any specific procedures for consideration of matters involving a divergence of interests among holders of shares of stock relating to our two groups, or among holders of different series of stock relating to a specific group. Rather than develop additional specific procedures in advance, our board of directors intends to exercise its judgment from time to time, depending on the circumstances, as to how best to:
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Our board of directors believes the advantage of retaining flexibility in determining how to fulfill its responsibilities in any such circumstances as they may arise outweighs any perceived advantages of adopting additional specific procedures in advance.
Our board of directors may change the management and allocation policies to the detriment of either group without stockholder approval. Our board of directors has adopted certain management and allocation policies to serve as guidelines in making decisions regarding the relationships between the QVC Group and the Ventures Group with respect to matters such as tax liabilities and benefits, inter-group loans, inter-group interests, attribution of assets, financing alternatives, corporate opportunities and similar items. These policies also set forth the initial focuses and strategies of these groups and the initial attribution of our businesses, assets and liabilities between them. These policies are not included in the restated certificate of incorporation (the “restated charter”). Our board of directors may at any time change or make exceptions to these policies. Because these policies relate to matters concerning the day-to-day management of our company as opposed to significant corporate actions, such as a merger involving our company or a sale of substantially all
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of our assets, no stockholder approval is required with respect to their adoption or amendment. A decision to change, or make exceptions to, these policies or adopt additional policies could disadvantage one group while advantaging the other.
Holders of shares of stock relating to a particular group may not have any remedies if any action by our directors or officers has an adverse effect on only that stock, or on a particular series of that stock. Principles of Delaware law and the provisions of our restated charter may protect decisions of our board of directors that have a disparate impact upon holders of shares of stock relating to a particular group, or upon holders of any series of stock relating to a particular group. Under Delaware law, the board of directors has a duty to act with due care and in the best interests of all of our stockholders, regardless of the stock, or series, they hold. Principles of Delaware law established in cases involving differing treatment of multiple classes or series of stock provide that a board of directors owes an equal duty to all stockholders and does not have separate or additional duties to any subset of stockholders. Judicial opinions in Delaware involving tracking stocks have established that decisions by directors or officers involving differing treatment of holders of tracking stocks may be judged under the “business judgment rule.” In some circumstances, our directors or officers may be required to make a decision that is viewed as adverse to the holders of shares relating to a particular group or to the holders of a particular series of that stock. Under the principles of Delaware law and the business judgment rule referred to above, a stockholder may not be able to successfully challenge decisions that a stockholder believes have a disparate impact upon the stockholders of one of our groups if a majority of our board of directors is disinterested and independent with respect to the action taken, is adequately informed with respect to the action taken and acts in good faith and in the honest belief that the board is acting in the best interest of Liberty and all of our stockholders.
Stockholders will not vote on how to attribute consideration received in connection with a merger involving our company among holders of QVC Group tracking stock and Ventures Group tracking stock. Our restated charter does not contain any provisions governing how consideration received in connection with a merger or consolidation involving our company is to be attributed to the holders of QVC Group tracking stock and holders of Ventures Group tracking stock or to the holders of different series of stock, and none of the holders of QVC Group tracking stock or Ventures Group tracking stock will have a separate class vote in the event of such a merger or consolidation. Consistent with applicable principles of Delaware law, our board of directors will seek to divide the type and amount of consideration received in a merger or consolidation involving our company among holders of QVC Group tracking stock and Ventures Group tracking stock in a fair manner. As the different ways the board of directors may divide the consideration between holders of stock relating to the different groups, and among holders of different series of a particular stock, might have materially different results, the consideration to be received by holders of QVC Group tracking stock and Ventures Group tracking stock in any such merger or consolidation may be materially less valuable than the consideration they would have received if they had a separate class vote on such merger or consolidation.
We may dispose of assets of the QVC Group or the Ventures Group without your approval. Delaware law requires stockholder approval only for a sale or other disposition of all or substantially all of the assets of our company taken as a whole, and our restated charter does not require a separate class vote in the case of a sale of a significant amount of assets of any of our groups. As long as the assets attributed to the QVC Group or the Ventures Group proposed to be disposed of represent less than substantially all of our assets, we may approve sales and other dispositions of any amount of the assets of such group without any stockholder approval.
If we dispose of all or substantially all of the assets attributed to any group (which means, for this purpose, assets representing 80% of the fair market value of the total assets of the disposing group, as determined by our board of directors), we would be required, if the disposition is not an exempt disposition under the terms of our restated charter, to choose one or more of the following three alternatives:
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In this type of a transaction, holders of the disposing group's common stock may receive less value than the value that a third-party buyer might pay for all or substantially all of the assets of the disposing group.
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Our board of directors will decide, in its sole discretion, how to proceed and is not required to select the option that would result in the highest value to holders of any group of our common stock.
Holders of QVC Group tracking stock or Ventures Group tracking stock may receive less consideration upon a sale of the assets attributed to that group than if that group were a separate company. If the QVC Group or the Ventures Group were a separate, independent company and its shares were acquired by another person, certain costs of that sale, including corporate level taxes, might not be payable in connection with that acquisition. As a result, stockholders of a separate, independent company with the same assets might receive a greater amount of proceeds than the holders of QVC Group tracking stock or Ventures Group tracking stock would receive upon a sale of all or substantially all of the assets of the group to which their shares relate. In addition, we cannot assure our stockholders that in the event of such a sale the per share consideration to be paid to holders of QVC Group tracking stock or Ventures Group tracking stock, as the case may be, will be equal to or more than the per share value of that share of stock prior to or after the announcement of a sale of all or substantially all of the assets of the applicable group. Further, there is no requirement that the consideration paid be tax-free to the holders of the shares of common stock of that group. Accordingly, if we sell all or substantially all of the assets attributed to the QVC Group or the Ventures Group, our stockholders could suffer a loss in the value of their investment in our company.
We may split off, spin off or reattribute assets, liabilities and businesses attributed to our tracking stock groups in a manner that may disparately impact some of our stockholders if our board of directors determines such transaction to be in the best interest of all of our stockholders, and in some cases, not all of our stockholders would be entitled to vote on such a transaction. Pursuant to the terms of the restated charter, our board of directors may determine that it is in the best interest of all of our stockholders to effect a redemptive split-off whereby all or a portion of the outstanding shares of a particular tracking stock would be redeemed for shares of common stock of a subsidiary (“Splitco”) that holds all or a portion of the assets and liabilities attributed to such tracking stock group subject to the approval of only the holders of the tracking stock to be redeemed. However, the vote of holders of our other tracking stock would not be required, unless Splitco also held assets and liabilities of such other tracking stock group. If we were to effect a redemptive split-off, then, pursuant to the terms of the restated charter, we would be required to redeem the outstanding shares of the affected tracking stock from its holders on an equal per share basis (i.e., we could not redeem shares from holders of only certain series of the affected tracking stock or redeem from all holders of the affected tracking stock on a non-pro rata basis). Following a redemptive split-off, the other tracking stock would become the only outstanding common stock of Liberty, and thus would cease to function as a tracking stock and would effectively become a regular common stock (even if the tracking stock structure set forth in the restated charter remained in place until the restated charter was amended to eliminate the tracking stock specific provisions). In addition, in the case of a partial redemptive split-off, holders of the affected tracking stock would hold shares of Splitco and continue to hold a reduced number of shares of the affected tracking stock which would track the remaining assets and liabilities retained by us and attributed to such tracking stock after the split-off.
We are also permitted, pursuant to the terms of the restated charter, to effect a spin-off of certain of our assets and liabilities through the dividend of shares of a subsidiary holding such assets and liabilities, and the spin-off would not be subject to prior stockholder approval. In this situation, a tracking stock holder would retain their tracking stock shares and receive shares of the spun-off entity.
Furthermore, in structuring these transactions, our board of directors may determine to alter the composition of the assets and liabilities underlying our tracking stock groups through a reattribution. As contemplated by both the restated charter and the Management and Allocation Policies designed to assist us in managing and separately presenting the businesses and operations attributed to our tracking stock groups, our board of directors is vested with the discretion to reattribute assets and liabilities from one tracking stock group to another tracking stock group without the approval of any of its stockholders, and the only limitations on its exercise of such discretion are that the reattribution be in the best interest of all of our stockholders and that the reattribution be done on a fair value basis. Holders of the affected tracking stock groups will not be entitled to a separate vote to approve a reattribution, even if such reattribution is occurring in connection with a redemptive split-off and such stockholders would otherwise be entitled to vote on the redemptive split-off itself.
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In the event of a liquidation of Liberty, holders of Ventures Group tracking stock and QVC Group tracking stock will not have a priority with respect to the assets attributed to the related tracking stock group remaining for distribution to stockholders. Under the restated charter, upon Liberty's liquidation, dissolution or winding up, holders of the Ventures Group tracking stock and the QVC Group tracking stock will be entitled to receive, in respect of their shares of such stock, their proportionate interest in all of Liberty's assets, if any, remaining for distribution to holders of common stock in proportion to their respective number of "liquidation units" per share. Relative liquidation units were determined based on the volume weighted average prices of the Ventures Group tracking stock and the QVC Group tracking stock over the 20 trading day period which commenced shortly after the initial filing of the restated charter. Hence, the assets to be distributed to a holder of either tracking stock upon a liquidation, dissolution or winding up of Liberty will have nothing to do with the value of the assets attributed to the related tracking stock group or to changes in the relative value of the QVC Group tracking stock and the Ventures Group tracking stock over time.
Our board of directors may in its sole discretion elect to convert the common stock relating to one group into common stock relating to the other group, thereby changing the nature of your investment and possibly diluting your economic interest in our company, which could result in a loss in value to you. Our restated charter permits our board of directors, in its sole discretion, to convert all of the outstanding shares of common stock relating to either of our groups into shares of common stock of the other group on specified terms. A conversion would preclude the holders of stock in each group involved in such conversion from retaining their investment in a security that is intended to reflect separately the performance of the relevant group. We cannot predict the impact on the market value of our stock of (1) our board of directors' ability to effect any such conversion or (2) the exercise of this conversion right by our company. In addition, our board of directors may effect such a conversion at a time when the market value of our stock could cause the stockholders of one group to be disadvantaged.
Holders of QVC Group tracking stock and Ventures Group tracking stock will vote together and will have limited separate voting rights. Holders of QVC Group tracking stock and Ventures Group tracking stock will vote together as a single class, except in certain limited circumstances prescribed by our restated charter and under Delaware law. Each share of Series B common stock of each group has ten votes per share, and each share of Series A common stock of each group has one vote per share. Holders of Series C common stock of each group have no voting rights, other than those required under Delaware law. When holders of QVC Group tracking stock and Ventures Group tracking stock vote together as a single class, holders having a majority of the votes will be in a position to control the outcome of the vote even if the matter involves a conflict of interest among our stockholders or has a greater impact on one group than the other.
Transactions in our common stock by our insiders could depress the market price of our common stock. Sales of or hedging transactions such as collars relating to our shares by John C. Malone, a director of our company and our former Chairman of the Board, Gregory B. Maffei, our former Chief Executive Officer and current Chairman of the Board, or Michael George, our current Chief Executive Officer, or any of our other directors or executive officers could cause a perception in the marketplace that our stock price has peaked or that adverse events or trends have occurred or may be occurring at our company. This perception can result notwithstanding any personal financial motivation for these insider transactions. As a result, insider transactions could depress the market price for shares of one or more series of our tracking stocks.common stock.
Our capital structure, as well as the fact that the QVC Group and the Ventures Group are not independent companies,It may inhibit or prevent acquisition bids for the QVC Group or the Ventures Group and may make itbe difficult for a third party to acquire us, even if doing so may be beneficial to our stockholders. If the QVC Group and the Ventures Group were separate independent companies, any person interested in acquiring the QVC Group or the Ventures Group without negotiating with management could seek control of that group by obtaining control of its outstanding voting stock, by means of a tender offer, or by means of a proxy contest. Although we intend QVC Group tracking stock and Ventures Group tracking stock to reflect the separate economic performance of the QVC Group and the Ventures Group, respectively, those groups are not separate entities and a person interested in acquiring only one group without negotiation with our management could obtain control of that group only by obtaining control of a majority in voting power of all of the outstanding shares of common stock of our company. The existence of shares of common stock, and different series of shares, relating to different groups could present complexities and in certain circumstances pose obstacles, financial and otherwise, to an acquiring person that are not present in companies that do not have capital structures similar to ours.
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Certain provisions of our restated charter and bylaws may discourage, delay or prevent a change in control of our company that a stockholder may consider favorable. These provisions include:
| authorizing a capital structure with multiple series of common stock, a Series B common stock |
| classifying our board of directors with staggered three-year terms, which may lengthen the time required to gain control of our board of directors; |
| limiting who may call special meetings of stockholders; |
| prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of the stockholders; |
| establishing advance notice requirements for nominations of candidates for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings; |
| requiring stockholder approval by holders of at least 66 2/3% of our aggregate voting power or the approval by at least 75% of our board of directors with respect to certain extraordinary matters, such as a merger or consolidation of our company, a sale of all or substantially all of our assets or an amendment to our restated charter; and |
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| the existence of authorized and unissued stock, including "blank check" preferred stock, which could be issued by our board of directors to persons friendly to our then current management, thereby protecting the continuity of our management, or which could be used to dilute the stock ownership of persons seeking to obtain control of our company. |
Our chairman, John C. Malone, a director of our company and our former Chairman of the Board, beneficially owns shares representing the power to direct approximately 37% and 32%41% of the aggregate voting power in our company, due to his beneficial ownership of approximately 95% and 90%94% of the outstanding shares of each of our Series B QVC GroupQurate Retail common stock and Series B Liberty Ventures common stock, respectively, as of January 31, 2018.2020.
Risks Relating to the Transactions
In addition to the other information includedWe have identified a material weakness in this Annual Report and the risks described below, you should carefully consider the risks associated with the Transactions, including the risks relating to the completion of the Transactions and, subject to the completion of the Transactions, the risks relating to the legacy GCI operations and GCI Liberty’s corporate and capital structure and certainour internal control over financial matters. These risks are described in “Risk Factors” in Amendment No. 3 to GCI’s Registration Statement on Form S-4, filed with the SEC on December 27, 2017.
We expect to incur significant costs and expenses in connection with the Transactions. We expect to incur certain nonrecurring costs in connection with the consummation of the Transactions contemplated by the related GCI Reorganization Agreement including advisory, legal and other transaction costs. A majority of these costs have already been incurred or will be incurred regardless of whether the Transactions are completed. While many of the expensesreporting, that, will be incurred, by their nature, are difficult to estimate accurately at the present time, our management continues to assess the magnitude of these costs, and additional unanticipated costs may be incurred in connection with the Transactions. Although we expect that the realization of benefits related to the Transactions will offset such costs and expenses over time, no assurances can be made that this net benefit will be achieved in the near term, or at all.
The announcement and pendency of the Transactions could divert the attention of management and cause disruptions in the businesses of GCI and Liberty, which could have an adverse effect on the business and financial results of both GCI and Liberty. Liberty and GCI are unaffiliated companies that are currently operating independently of each other. Management of both GCI and Liberty may be required to divert a disproportionate amount of attention away from their respective day-to-day activities and operations, and devote time and effort to consummating the Transactions. The risks, and adverse effects, of such disruptions and diversions could be exacerbated by a delay in the completion of the Transactions. These factors could adversely affect the financial position or results of operations of Liberty and GCI, regardless of whether the Transactions are completed.
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We are subject to contractual restrictions while the Transactions are pending, whichif not properly remediated, could adversely affect our business and results of operations. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. As described in “Item 9A. Controls and Procedures,” we have concluded that our internal control over financial reporting was ineffective as of December 31, 2019 due to a material weakness that was first disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018 and continues to be unremediated in full. The identified material weakness that remained unremediated at December 31, 2019 relates to information technology general controls (“ITGCs”) in QVC’s Germany business. The GCI Reorganization Agreement imposesSpecifically, the ITGCs were not consistently designed and operating effectively to ensure that access to certain restrictive interim covenantsfinancially significant applications and data, were adequately restricted to appropriate personnel. Our business process controls (automated and manual) that are dependent on our Company. For instance, the consent of GCI is requiredaffected ITGCs were also deemed ineffective because they could have been adversely impacted.
While the control deficiencies did not result in respect of, among other things, amendments to our organizational documents, certain payments of dividends with respectany identified misstatements, a reasonable possibility exists that a material misstatement to the Liberty Ventures common stockannual or interim consolidated financial statements and certain issuances of shares of Liberty Ventures common stock. These restrictions may prevent us fromdisclosures will not be prevented or detected on a timely basis.
As further described in “Item 9A. Controls and Procedures,” we are taking certain actions before the closingnecessary steps to remediate the material weakness. However, as the reliability of the Transactionsinternal control process requires repeatable execution, the successful on-going remediation of this material weakness will require on-going review and evidence of effectiveness prior to concluding that the controls are effective. Therefore, we cannot assure you that the remediation efforts will remain effective following their completion in the future or the termination of the GCI Reorganization Agreement, including making certain acquisitionsthat additional or otherwise pursuing certain business opportunities,similar material weaknesses will not develop or making certainbe identified.
Implementing any further changes to our capital stock,internal controls may distract our officers and employees and entail material costs to implement new processes and/or modify our existing processes. Moreover, these changes do not guarantee that we will be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or consequent inability to produce accurate financial statements on a timely basis, could harm our business. In addition, investors’ perceptions that our boardinternal controls are inadequate or that we are unable to produce accurate financial statements on a timely basis may harm the price of directors may deem beneficial.
Failure to complete the Transactions could negatively impact our stock price and financial results. If the Transactions are not completed for any reason, including as a result of the GCI stockholders or Liberty stockholders failing to approve the necessary proposals, we may be subject to numerous risks, including the following:common stock.
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In addition, we could be subject to the cost of litigation related to any dispute regarding an alleged failure of a closing condition or any related enforcement proceeding commenced against us to perform our obligations under the GCI Reorganization Agreement or any of the other transaction documents, as well as any judgment potentially sustained against us in any such action. All of these risks, expenses and contingencies could adversely affect our financial position and results of operation.
Item 1B. Unresolved Staff Comments
None.
Properties
We lease our corporate headquarters in Englewood, Colorado under a facilities agreement with LMC. All of our other real or personal property is owned or leased by our subsidiaries and business affiliates.
QVCQxH owns its corporate headquarters and operations center in West Chester, Pennsylvania which consistconsists of office space and includeincludes executive offices, televisionvideo broadcast studios, showrooms, broadcast facilities and administrative offices for QVC. QVC alsooffices. QxH owns call centers in San Antonio, Texas;Texas and Chesapeake, Virginia. QxH owns a multi-functional building in St. Petersburg, Florida. QxH owns distribution centers in Lancaster, Pennsylvania; Piney Flats, Tennessee; Suffolk, Virginia;
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Rocky Mount, North Carolina; Florence, South Carolina; and Ontario, California and leases a distribution center in Bethlehem, Pennsylvania.
QVC International owns call centers in Bochum and Kassel, Germany; and Chiba-Shi, Japan. QVC International owns distribution centers in Lancaster, Pennsylvania; Suffolk, Virginia; Rocky Mount, North Carolina; Florence, South Carolina; Ontario, California; Chiba, Japan; and Hücklehoven,ckelhoven, Germany. Additionally, QVC International owns multi-functional buildings in Knowsley, United Kingdom,Kingdom; Chiba, JapanJapan; Brugherio, Italy; and Brugherio, Italy. In Dusseldorf, Germany, QVC owns its administrative offices within the headquarters locatedand leases a multi-functional building in Düsseldorf, Germany which also includes leased television studios and broadcast facilities. To supplement the facilities QVC owns, it also leases various facilities worldwide.London, U.K.
zulilyZulily leases its corporate headquarters in Seattle, Washington, fulfillment centers in Lockbourne, Ohio, McCarran, Nevada, and Bethlehem, Pennsylvania, and a corporate officeoffices in Gahanna, Ohio.Ohio and Shenzhen, China.
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HSNi owns its corporate headquarters in St. Petersburg, Florida, which consist of office space and include executive offices, television studios, showrooms, broadcast facilities and administrative offices for HSNi. HSN owns its fulfillment center in Piney Flats, Tennessee. HSN leases its fulfillment centers in Fontana, California; Roanoke, Virginia; Ronkonkoma, New York and Greeneville, Tennessee; as well as five outlet stores and other properties in various locations in the United States for administrative offices and data centers. Cornerstone owns an office and storage facility in Franconia, New Hampshire. Cornerstone leases its fulfillment centers in West Chester, Ohio; Monroe,Butler and Warren Counties in Ohio and Phoenix, Arizona. It also leases other properties consisting of administrative offices, 1920 retail stores and outlets, and photo centers in various locations throughout the United States.
Our other subsidiaries and business affiliates own or lease the fixed assets necessary for the operation of their respective businesses, including office space, transponder space, headends, cable television and telecommunications distribution equipment and telecommunications switches.
Item 3. Legal Proceedings
None.
On September 7, 2017, a putative class action complaint was filed by a purported HSNi stockholder in the United States District Court for the District of Delaware: McClure v. HSN, Inc., et al., Case No. 1:17-cv-01279. The complaint names as defendants HSNi and members of the HSNi board. The complaint asserts claims under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 and rules and regulations promulgated thereunder, and alleges that HSNi and the members of the HSNi board caused a registration statement that allegedly omitted material information to be filed in connection with the merger, which allegedly rendered the registration statement false and misleading. The complaint further alleges that the members of the HSNi board acted as controlling persons of HSNi and had knowledge of the allegedly false statements contained in the registration statement or were negligent in not knowing that material information was allegedly omitted from the registration statement. Among other relief, the complaint seeks a declaration certifying a class, an injunction to prevent the merger from proceeding unless and until HSNi discloses the material information allegedly omitted from the registration statement, unspecified damages, and unspecified costs, expenses and attorneys’ fees. The complaint was dismissed in early 2018.
On September 28, 2017, a putative class action complaint was filed by a purported HSNi stockholder in the United States District Court for the Middle District of Florida: Palkon v. HSN, Inc., et al., Case No. 8:17-cv-2271. The complaint names as defendants HSNi, members of the HSNi board, Liberty and Liberty Horizon, Inc., a Delaware corporation and a direct, wholly-owned subsidiary of Liberty (“Merger Sub”). The complaint asserts claims under Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended, and rules and regulations promulgated thereunder, and alleges that HSNi and the members of the HSNi board caused a registration statement that omitted material information to be filed in connection with Liberty’s acquisition on December 29, 2017 of the approximately 62% of HSNi it did not already own in an all-stock transaction (the “Merger”), which registration statement allegedly rendered the registration statement false and misleading.
The complaint further alleges that the members of the HSNi board, Liberty and Merger Sub acted as controlling persons of HSNi, were involved in the making and composition of the registration statement, and had knowledge of the allegedly false statements contained in the registration statement. The complaint seeks, among other relief, an injunction to prevent the Merger from proceeding, rescission of the Merger, an order directing HSNi to disseminate a registration statement that does not contain any untrue statements of material fact, a judgment declaring a violation of Sections 14(a) and/or 20(a) of the Exchange Act, as well as Rule 14a-9 promulgated thereunder, unspecified damages, and unspecified costs, expenses, and attorneys’ fees. In early 2018, the case was voluntarily dismissed.
Item 4. Mine Safety Disclosures
Not applicable.
I-44I-37
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Each series of the common stock of Qurate Retail, Inc. (formerly named Liberty Interactive Corporation, (“Liberty,“Qurate Retail,” the “Company,” “we,” “us” and “our”) trades on the Nasdaq Global Select Market. Our Series A and Series B QVC Group common stock tradetraded on the Nasdaq Global Select Market under the symbols “QVCA” and “QVCB,” respectively. OurOn May 23, 2018, the Company filed its restated certificate of incorporation, which (i) eliminated the tracking stock capitalization structure of the Company and (ii) reclassified each outstanding share of our Series A and Series B Liberty Ventures common stock trade under the symbols “LVNTA” and “LVNTB,” respectively. Our Series B QVC Group common stock and Series B Liberty Ventures common stock are not actively traded. In connection with the Expedia Holdings Split-Off (as defined below), Liberty redeemed (i) 0.4 of each outstandinginto one share of Liberty’s Series A and Series B Liberty Ventures common stock for 0.4 of a share of Expedia Holdingsour Series A and Series B common stock, respectively, at 5:00 p.m., New York City time, on November 4, 2016. Accordingly,respectively. Following the high and low sales prices of thereclassification, our Series A and Series B Liberty Ventures common stock have been retroactively restated in the table below. Each series of our common stock tradescontinued trading on the Nasdaq Global Select Market.Market, but under the symbols “QRTEA” and “QRTEB.” Stock price information for securities traded on the Nasdaq Global Select Market can be found on the Nasdaq’s website at www.nasdaq.com. Although the reclassification resulted in stock name and related ticker symbol changes, historical information for our Series B QVC Group common stock refers to such stock herein as our Series B common stock. The following table sets forth the range of high and low sales prices of shares of our Series B common stock for the years ended December 31, 20172019 and 2016.2018. Although our Series B common stock is traded on the Nasdaq Global Select Market, an established public trading market does not exist for the stock, as it is not actively traded.
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| Series A (QVCA) |
| Series B (QVCB) |
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| Low |
| High |
| Low |
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2016 |
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| | | Series B (QRTEB) |
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| | | High | | Low |
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2018 | | | | | | | ||||||||||
First quarter |
| $ | 26.97 |
| 22.51 |
| 30.62 |
| 24.40 |
| | $ | 28.90 | | 24.49 |
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Second quarter |
| $ | 27.25 |
| 23.01 |
| 26.98 |
| 24.02 |
| | $ | 25.46 | | 20.32 | |
Third quarter |
| $ | 27.06 |
| 18.42 |
| 26.69 |
| 19.00 |
| | $ | 23.09 | | 19.62 | |
Fourth quarter |
| $ | 22.33 |
| 17.88 |
| 24.10 |
| 17.78 |
| | $ | 24.24 | | 18.47 | |
2017 |
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2019 | | | | | | | ||||||||||
First quarter |
| $ | 20.88 |
| 17.24 |
| 22.05 |
| 17.62 |
| | $ | 22.37 | | 15.91 | |
Second quarter |
| $ | 24.94 |
| 19.81 |
| 24.93 |
| 19.40 |
| | $ | 17.50 | | 11.62 | |
Third quarter |
| $ | 26.00 |
| 20.90 |
| 25.10 |
| 21.14 |
| | $ | 14.62 | | 10.10 | |
Fourth quarter |
| $ | 26.79 |
| 20.79 |
| 26.79 |
| 20.93 |
| | $ | 10.62 | | 7.84 | |
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| Series A (LVNTA) |
| Series B (LVNTB) |
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| High |
| Low |
| High |
| Low |
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2016 |
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First quarter |
| $ | 40.22 |
| 29.24 |
| 36.83 |
| 33.14 |
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Second quarter |
| $ | 36.55 |
| 30.97 |
| 36.72 |
| 34.36 |
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Third quarter (July 1 - July 22) |
| $ | 38.59 |
| 32.76 |
| 37.87 |
| 37.33 |
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Third quarter (July 23 - September 30) (1) |
| $ | 40.80 |
| 36.09 |
| 39.89 |
| 38.05 |
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Fourth quarter (October 1 - November 4) |
| $ | 41.37 |
| 38.40 |
| 41.57 |
| 39.29 |
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Fourth quarter (November 5 - December 31) (2) |
| $ | 41.74 |
| 36.54 |
| 41.94 |
| 36.93 |
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2017 |
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First quarter |
| $ | 45.17 |
| 36.69 |
| 46.61 |
| 38.61 |
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Second quarter |
| $ | 55.93 |
| 44.13 |
| 56.33 |
| 53.33 |
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Third quarter |
| $ | 62.41 |
| 50.56 |
| 59.88 |
| 51.80 |
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Fourth quarter |
| $ | 59.90 |
| 52.43 |
| 54.30 |
| 54.30 |
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II-1
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Holders
As of January 31, 2018,2020, there were 2,7422,449 and 8570 record holders of our Series A and Series B QVC Group common stock, respectively, and 991 and 61 record holders of our Series A and Series B Liberty VenturesQurate Retail common stock, respectively. The foregoing numbers of record holders do not include the number of stockholders whose shares are held nominally by banks, brokerage houses or other institutions, but include each such institution as one shareholder.
Dividends
We have not paid any cash dividends on our common stock, and we have no present intention of so doing. Payment of cash dividends, if any, in the future will be determined by our board of directors in light of our earnings, financial condition and other relevant considerations. See Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operation – Liquidity and Capital Resources.”
Securities Authorized for Issuance Under Equity Compensation Plans
Information required by this item is incorporated by reference to our definitive proxy statement for our 20182020 Annual Meeting of Stockholders that will be filed with the Securities and Exchange Commission on or before April 30, 2018.Stockholders.
II-1
Purchases of Equity Securities by the Issuer
Share Repurchase Programs
On several occasions our board of directors has authorized a share repurchase program for our Series A and Series B QVC Group common stock. On each ofIn May 5, 2006, November 3, 2006 and October 30, 2007 our board authorized the repurchase of $1 billion of Series A and Series B Liberty Interactive common stock for a total of $3 billion. These previous authorizations remained effective following the LMC Split-Off, notwithstanding the fact that the Liberty Interactive common stock ceased to be a tracking stock during the period following the LMC Split-Off (as defined below) and prior to the creation of our Liberty Ventures common stock in August 2012. On February 22, 20122019, the board authorized the repurchase of an additional $700$500 million of Series A and Series B Liberty Interactive common stock. Additionally, on each of October 30, 2012 and February 27, 2014, the board authorized the repurchase of an additional $1 billion of Series A and Series B Liberty Interactive common stock. In connection with the TripAdvisor Holdings Spin-Off (as defined below) during August 2014, the board authorized $350 million for the repurchase of either the Liberty Interactive or Liberty Ventures tracking stocks. In October 2014, the board authorized the repurchase of an additional $650 million of Series A and Series B Liberty Ventures common stock. In August 2015, the board authorized the repurchase of an additional $1 billion of Series A or Series B QVC GroupQurate Retail common stock. In addition, on October 26, 2016, the board authorized the repurchase of an additional $300 million of either the QVC Group common stock or the Liberty Ventures common stock. On September 19, 2017, the board authorized the repurchase of an additional $1 billion. There were no repurchases of Series A QVC Groupor Series B Qurate Retail common stock.
II-2
A summary of the repurchase activity forstock during the three months ended December 31, 2017 is as follows:2019. As of December 31, 2019, $497 million was available to be used for share repurchases of Series A or Series B Qurate Retail common stock under the Company’s share repurchase program.
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| Series A QVC Group Common Stock (QVCA) |
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| Maximum Number |
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| (or Approximate Dollar |
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| Total Number of |
| Value) of Shares that |
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| Total Number |
| Average |
| Shares Purchased as Part |
| May Yet Be purchased |
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| of Shares |
| Price Paid per |
| of Publicly Announced |
| Under the Plans or |
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Period |
| Purchased |
| Share |
| Plans or Programs |
| Programs |
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October 1 - 31, 2017 |
| 7,736,267 |
| $ | 23.03 |
| 7,736,267 |
| $ | 822 | million |
November 1 - 30, 2017 |
| 5,901,315 |
| $ | 23.23 |
| 5,901,315 |
| $ | 684 | million |
December 1 - 31, 2017 |
| — |
| $ | — |
| — |
| $ | 684 | million |
Total |
| 13,637,582 |
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| 13,637,582 |
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3,13534,535 shares of Series A QVC Group common stock and zero shares of Series A Liberty VenturesQurate Retail common stock were surrendered by certain of our officers and employees to pay withholding taxes and other deductions in connection with the vesting of their restricted stock during the three months ended December 31, 2017.2019.
Item 6. Selected Financial Data.
The following tables present selected historical information relating to our financial condition and results of operations for the past five years. Certain prior period amounts have been reclassified for comparability with the current year presentation. The following data should be read in conjunction with our consolidated financial statements.
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| | December 31, |
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| 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 |
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| | amounts in millions |
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Summary Balance Sheet Data: | | | | | | | | | | | | |
Cash and cash equivalents | | $ | 673 |
| 653 |
| 903 |
| 825 |
| 2,449 | |
Investments in available-for-sale securities and other cost investments | | $ | 76 |
| 96 |
| 2,363 |
| 1,922 |
| 1,353 | |
Intangible assets not subject to amortization (1) | | $ | 9,744 |
| 10,912 |
| 11,011 |
| 9,354 |
| 9,485 | |
Noncurrent assets of discontinued operations (2) (3) | | $ | — |
| — |
| 3,635 |
| 3,161 |
| 927 | |
Total assets | | $ | 17,305 |
| 17,841 |
| 24,122 |
| 20,355 |
| 21,180 | |
Long-term debt | | $ | 5,855 |
| 5,963 |
| 7,553 |
| 7,166 |
| 7,481 | |
Deferred income tax liabilities | | $ | 1,716 |
| 1,925 |
| 2,500 |
| 3,354 |
| 3,217 | |
Noncurrent liabilities of discontinued operations (2) (3) | | $ | — |
| — |
| 303 |
| 282 |
| 285 | |
Total equity (1) | | $ | 4,972 |
| 5,744 |
| 10,083 |
| 6,861 |
| 6,875 | |
Noncontrolling interest in equity of subsidiaries | | $ | 132 |
| 120 |
| 99 |
| 89 |
| 88 | |
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| December 31, |
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| 2017 |
| 2016 |
| 2015 |
| 2014 |
| 2013 |
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| amounts in millions |
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Summary Balance Sheet Data: |
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Cash and cash equivalents |
| $ | 903 |
| 825 |
| 2,449 |
| 2,306 |
| 902 |
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Investments in available-for-sale securities and other cost investments |
| $ | 2,363 |
| 1,922 |
| 1,353 |
| 1,224 |
| 1,313 |
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Investment in affiliates, accounted for using the equity method |
| $ | 309 |
| 581 |
| 714 |
| 1,119 |
| 760 |
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Investment in Liberty Broadband measured at fair value |
| $ | 3,635 |
| 3,161 |
| — |
| — |
| — |
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Intangible assets not subject to amortization (1) |
| $ | 11,011 |
| 9,354 |
| 9,485 |
| 7,893 |
| 8,383 |
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Noncurrent assets of discontinued operations (2) (3) |
| $ | — |
| — |
| 927 |
| 514 |
| 7,572 |
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Total assets |
| $ | 24,122 |
| 20,355 |
| 21,180 |
| 18,598 |
| 24,642 |
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Long-term debt |
| $ | 7,553 |
| 7,166 |
| 7,481 |
| 7,062 |
| 6,072 |
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Deferred income tax liabilities |
| $ | 2,803 |
| 3,636 |
| 3,217 |
| 2,681 |
| 2,794 |
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Noncurrent liabilities of discontinued operations (2) (3) |
| $ | — |
| — |
| 285 |
| 140 |
| 1,584 |
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Total equity (1) |
| $ | 10,083 |
| 6,861 |
| 6,875 |
| 5,780 |
| 11,435 |
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Noncontrolling interest in equity of subsidiaries (2) |
| $ | 99 |
| 89 |
| 88 |
| 107 |
| 4,499 |
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II-2
| | | | | | | | | | | | |
| | Years ended December 31, | | |||||||||
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| 2019 |
| 2018 |
| 2017 |
| 2016 |
| 2015 |
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| | amounts in millions, | | |||||||||
| | except per share amounts | | |||||||||
Summary Statement of Operations Data: | | | | | | | | | | | | |
Revenue | | $ | 13,458 |
| 14,070 |
| 10,404 |
| 10,647 |
| 9,989 | |
Operating income (loss) | | $ | 184 |
| 1,324 |
| 1,043 |
| 968 |
| 1,116 | |
Interest expense | | $ | (374) |
| (381) |
| (355) |
| (363) |
| (360) | |
Share of earnings (losses) of affiliates, net | | $ | (160) |
| (162) |
| (200) |
| (68) |
| (178) | |
Realized and unrealized gains (losses) on financial instruments, net | | $ | (251) |
| 76 |
| 145 |
| 414 |
| 114 | |
Gains (losses) on transactions, net (1) | | $ | (1) |
| 1 |
| 410 |
| 9 |
| 110 | |
Earnings (loss) from continuing operations (3) (4): | | | | | | | | | | | | |
Qurate Retail common stock | | $ | (405) |
| 722 |
| 1,254 |
| 511 |
| 674 | |
Liberty Ventures common stock | |
| — |
| 101 |
| 781 |
| 264 |
| (43) | |
| | $ | (405) |
| 823 |
| 2,035 |
| 775 |
| 631 | |
Basic earnings (loss) from continuing operations attributable to Qurate Retail, Inc. stockholders per common share: | | | | | | | | | | | | |
Series A and Series B Qurate Retail common stock | | $ | (1.08) |
| 1.46 |
| 2.71 |
| 0.99 |
| 1.35 | |
Series A and Series B Liberty Ventures common stock (2) (3) | | $ | NA |
| 1.17 |
| 14.34 |
| 5.54 |
| (0.36) | |
Diluted earnings (loss) from continuing operations attributable to Qurate Retail, Inc. stockholders per common share: | | | | | | | | | | | | |
Series A and Series B Qurate Retail common stock | | $ | (1.08) |
| 1.45 |
| 2.70 |
| 0.98 |
| 1.33 | |
Series A and Series B Liberty Ventures common stock (2) (3) | | $ | NA |
| 1.16 |
| 14.17 |
| 5.49 |
| (0.36) | |
(1) | On December 29, 2017, the Company acquired the remaining approximately 62% of HSN, Inc. (“HSN”) it did not already own in an all-stock transaction, making HSN a wholly-owned subsidiary. In conjunction with the application of acquisition accounting, the Company recorded a full step up in basis of HSN along with a gain between our historical basis and the fair value of our interest in HSN. |
(2) | Qurate Retail’s split-off of its former wholly-owned subsidiary Liberty Expedia Holdings, Inc. (“Expedia Holdings”) was effected on November 4, 2016 as a split-off through the redemption of a portion of Qurate Retail’s Series A and Series B Liberty Ventures common stock for shares of Expedia Holdings. The consolidated financial statements of Qurate Retail have been prepared to reflect the Company’s interest in Expedia Group, Inc. as a discontinued operation for the years ended December 31, 2016 and 2015. |
(3) | The GCI Liberty Split-Off (defined below) was effected on March 9, 2018. The split-off of Qurate Retail’s interest in Liberty Broadband (as defined below) had a major effect on Qurate Retail’s operations. Accordingly, Qurate Retail’s interest in Liberty Broadband is presented as a discontinued operation for the years ended December 31, 2018, 2017 and 2016. |
(4) | Includes earnings (losses) from continuing operations attributable to the noncontrolling interests of $51 million, $48 million, $46 million, $39 million and $42 million for the years ended December 31, 2019, 2018, 2017, 2016, and 2015, respectively. |
II-3
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| Years ended December 31, |
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| 2016 |
| 2015 |
| 2014 |
| 2013 |
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| except per share amounts |
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Summary Statement of Operations Data: |
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Revenue |
| $ | 10,404 |
| 10,647 |
| 9,989 |
| 10,499 |
| 10,219 |
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Operating income (loss) |
| $ | 1,043 |
| 968 |
| 1,116 |
| 1,188 |
| 1,136 |
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Interest expense |
| $ | (355) |
| (363) |
| (360) |
| (387) |
| (380) |
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Share of earnings (losses) of affiliates, net |
| $ | (200) |
| (68) |
| (178) |
| (19) |
| 2 |
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Realized and unrealized gains (losses) on financial instruments, net |
| $ | 618 |
| 1,175 |
| 114 |
| (57) |
| (22) |
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Gains (losses) on transactions, net (1) |
| $ | 410 |
| 9 |
| 110 |
| 74 |
| (1) |
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Earnings (loss) from continuing operations (4): |
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QVC Group common stock |
| $ | 1,254 |
| 511 |
| 674 |
| 574 |
| 500 |
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Liberty Ventures common stock |
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| 1,233 |
| 743 |
| (43) |
| (36) |
| 27 |
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| $ | 2,487 |
| 1,254 |
| 631 |
| 538 |
| 527 |
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Basic earnings (loss) from continuing operations attributable to Liberty Interactive Corporation stockholders per common share (5): |
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Series A and Series B QVC Group common stock |
| $ | 2.71 |
| 0.99 |
| 1.35 |
| 1.10 |
| 0.88 |
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Series A and Series B Liberty Ventures common stock |
| $ | 14.34 |
| 5.54 |
| (0.36) |
| (0.43) |
| 0.37 |
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Diluted earnings (loss) from continuing operations attributable to Liberty Interactive Corporation stockholders per common share (5): |
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Series A and Series B QVC Group common stock |
| $ | 2.70 |
| 0.98 |
| 1.33 |
| 1.09 |
| 0.86 |
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Series A and Series B Liberty Ventures common stock (3) |
| $ | 14.17 |
| 5.49 |
| (0.36) |
| (0.43) |
| 0.36 |
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(1)On December 29, 2017, the Company acquired the remaining approximately 62% of HSNi it did not already own in an all-stock transaction, making HSNi a wholly-owned subsidiary, attributed to the QVC Group tracking stock group. In conjunction with the application of acquisition accounting, the Company recorded a full step up in basis of HSNi along with a gain between our historical basis and the fair value of our interest in HSNi.
(2) On December 11, 2012, the Company acquired approximately 4.8 million additional shares of common stock of TripAdvisor, Inc. ("TripAdvisor") (an additional 4% equity ownership interest), for $300 million, along with the right to control the vote of the shares of TripAdvisor's common stock and class B common stock the Company owns. Following the transaction the Company owned approximately 22% of the equity and 57% of the total votes of all classes of TripAdvisor common stock. On August 27, 2014, the Company completed the TripAdvisor Holdings Spin-Off. The consolidated financial statements of Liberty have been prepared to reflect TripAdvisor Holdings as discontinued operations. However, the noncontrolling interest attributable to our former ownership interest in TripAdvisor is included in the noncontrolling interest line item in the consolidated balance sheet from the date of acquisition until the date of completion of the TripAdvisor Holdings Spin-Off. See Item 1 “ Business” for further details on the TripAdvisor Holdings Spin-Off.
(3)The Expedia Holdings Split-Off was effected on November 4, 2016 as a split-off through the redemption of a portion of Liberty’s Series A and Series B Liberty Ventures common stock for shares of Expedia Holdings (as defined below). The consolidated financial statements of Liberty have been prepared to reflect Liberty’s interest in Expedia (as defined below) as a discontinued operation.
(4)Includes earnings (losses) from continuing operations attributable to the noncontrolling interests of $46 million, $39 million, $42 million, $40 million and $45 million for the years ended December 31, 2017, 2016, 2015, 2014, and 2013, respectively.
II-4
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis provides information concerning our results of operations and financial condition. This discussion should be read in conjunction with our accompanying consolidated financial statements and the notes thereto. Additionally, see note 32 in the accompanying consolidated financial statements for an overview of new accounting standards that we have adopted or that we plan to adopt that have had or may have an impact on our financial statements.
Overview
We own controlling and non-controlling interests in a broad range of video and online commerce companies. Our largest businessbusinesses and reportable segment, issegments are QxH (QVC U.S. and HSN) and QVC Inc. (“QVC”).International. QVC (as defined below) markets and sells a wide variety of consumer products in the United States (“U.S.”) and several foreign countries primarily by means of its televisedvia highly engaging video-rich, interactive shopping programs and via the Internet through its domestic and international websites and mobile applications.experiences. On December 29, 2017, we acquired the approximately 62% of HSN Inc. (“HSNi”) we did not already own in an all-stock transaction (the “Merger”) making HSNiHSN a wholly-owned subsidiary. On December 31, 2018, Qurate Retail transferred our 100% ownership interest in HSN to QVC, Inc. through a transaction among entities under common control. Following this transaction, Cornerstone (a former subsidiary attributed to the QVC Group. HSNi has two main operating segments: its televised shopping business “HSN”of HSN) remains a subsidiary of Qurate Retail and its catalog retail business “Cornerstone.” HSN is a reportable segment, and Cornerstone is included in the “Corporate and other” reportable segment. QVC and HSN are referred to collectively as the “Televised Shopping Businesses.” On October 1, 2015 we acquired zulily, inc. (“zulily”) (now, now known as zulily, llc)Zulily, LLC (“Zulily”), an online retailer offering customers a fun and entertaining shopping experience with a fresh selection of new product styles launched every day, whichday. Zulily is also a reportable segment. References throughout this annual report to “QVC” refer to QVC, Inc., which includes HSN, QVC U.S. and QVC International.
Our “Corporate and other” category includes our consolidated subsidiary Cornerstone, along with various cost and equity method investments. See note 5 ofdiscussion below for the accompanying consolidated financial statements for further details on the acquisitions of zulily and HSNi.
Ourentities that were included in Corporate and other category includes entire or majority interests in consolidated subsidiaries, which operate online commerce businessesprior periods.
Prior to the Transactions (described and defined below), the Company utilized tracking stocks in a broad range of retail categories, ownership interests in unconsolidated businesses and corporate expenses. These consolidated subsidiaries include Evite, Inc. (“Evite”), Backcountry.com, Inc. ("Backcountry") (through June 30, 2015, see note 6 of the accompanying consolidated financial statements), CommerceHub, Inc. (“CommerceHub”) (through July 22, 2016, see note 6 of the accompanying consolidated financial statements) and Bodybuilding.com, LLC ("Bodybuilding") (through November 4, 2016, see note 6 of the accompanying consolidated financial statements) (collectively, the “Digital Commerce businesses”), and Cornerstone. Evite is an online invitation and social event planning service on the web. Backcountry operates websites offering sports gear and clothing for outdoor and active individuals in a variety of categories. CommerceHub provides a cloud-based platform for online retailers and their suppliers (manufacturers and distributors) to sell products to consumers without physically owning inventory, or managing the fulfillment of those products. Bodybuilding manages websites related to sports nutrition, bodybuilding and fitness. We also hold ownership interests in FTD Companies, Inc. (“FTD”) and LendingTree, Inc. (“LendingTree”), which we account for as equity method investments; an interest in Liberty Broadband Corporation (“Liberty Broadband”), which we account for at fair value; and we maintain investments and related financial instruments in public companies such as Charter Communications, Inc. (“Charter”), ILG, Inc. (“ILG”) and Time Warner Inc. (“Time Warner”), which are accounted for at their respective fair market values.
Trackingits 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. Liberty hasQurate Retail had two tracking stocks, stocks—QVC Group common stock and Liberty Ventures common stock, which arewere intended to track and reflect the economic performance of Liberty’s QVC GroupQurate Retail’s businesses, assets and Ventures Group, respectively. Whileliabilities attributed to the QVC Group and the Ventures Group, have separate collectionsrespectively. The QVC Group was comprised of businesses,the Company’s wholly-owned subsidiaries QVC, Zulily, HSN and Cornerstone among other assets and liabilities attributed to them, no group is a separate legal entity and therefore no group can own assets, issue securities or enter into legally binding agreements. Holders of tracking stock have no direct claim to the group's stock or assets and are not represented by separate boards of directors. Instead, holders of tracking stock are stockholders of the parent corporation, with a single board of directors and subject to all of the risks and liabilities of the parent corporation.
The term "Ventures Group" does not represent a separate legal entity, rather it represents those businesses, assets and liabilities that have been attributed to that group. liabilities. The Ventures Group consistswas comprised of our businesses not included in the QVC Group including Evite, Inc. (“Evite”) and our interests in Liberty Broadband Corporation (“Liberty Broadband”), LendingTree, FTD,Inc. (“LendingTree”), investments in Charter Communications, Inc. (“Charter”) and ILG, as well as cashInc. (“ILG”), among other assets and liabilities (which were all included in the amount of approximately $573 million (at December 31, 2017), including subsidiary cash.Corporate and other category). The Company’s results are attributed to the QVC Group and the Ventures Group also has attributed to it certain liabilities related to our Exchangeable Debentures and certain deferred tax liabilities.through March 9, 2018.
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The Ventures Group is primarily focused onOn March 9, 2018, Qurate Retail completed the maximization oftransactions contemplated by the value of these investments and investing in new business opportunities.
On April 4, 2017, Liberty entered into an Agreement and Plan of Reorganization (as amended, the “GCI Reorganization Agreement”“Reorganization Agreement,” and the transactions contemplated thereby, the “Transactions”) withamong General Communication, Inc. (“GCI”), an Alaska corporation, and Liberty Interactive LLC, a Delaware limited liability company and a direct wholly-owned subsidiary of LibertyQurate Retail (“LI LLC”), whereby. Pursuant to the Reorganization Agreement, GCI amended and restated its articles of incorporation (which resulted in GCI being renamed GCI Liberty, will acquire 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 Liberty through a reorganization in which certain Ventures GroupQurate Retail interests, assets and liabilities will beattributed to the Ventures Group were contributed (the “contribution”) to GCI Liberty (as defined below) in exchange for a controlling interest in GCI Liberty. LibertyQurate Retail and LI LLC will contributecontributed to GCI Liberty itstheir entire equity interest in Liberty Broadband, Charter, and Charter, along with, subject to certain exceptions, Liberty’s entire equity interests in LendingTree, together with the Evite operating business and certain other assets and liabilities attributed to Qurate Retail’s Venture Group (following the reattribution), in exchange for (i)(a) the issuance to LI LLC of a number of shares of new GCI Liberty Class A Common Stock and a number of shares of new GCI Liberty Class B Common Stock
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equal to the number of outstanding shares of Series A Liberty Ventures common stock and Series B Liberty Ventures common stock outstanding on the closing date of the Contribution,March 9, 2018, respectively, (ii)(b) cash and (iii)(c) the assumption of certain liabilities by GCI Liberty (the “Contribution”).Liberty.
Liberty will then effectFollowing the contribution, Qurate Retail effected a tax-free separation of its controlling interest in the combined company (which has since been renamed(the “GCI Liberty Split-Off”), GCI Liberty, Inc. (“GCI Liberty”)) to the holders of Liberty Ventures common stock, distributing one share of the corresponding class of new GCI Liberty common stock for each share of Liberty Ventures common stock held, in full redemption of all outstanding shares of such stock, leavingin 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 asbecame the only outstanding common stock of Liberty. On the business day prior to the Contribution, holders of reclassified GCI Class A Common Stock and reclassified GCI Class B Common Stock each will receive (i) 0.63 of a share of new GCI Liberty Class A Common Stock and (ii) 0.20 of a share of new GCI Liberty Series A Cumulative Redeemable Preferred Stock (the “GCI Liberty preferred stock”) in exchange for each share of their reclassified GCI stock. The exchange ratios were determined based on total consideration of $32.50 per share for existing GCI common stock, comprised of $27.50 per share in new GCI Liberty Class A Common Stock and $5.00 per share in newly issued GCI Liberty preferred stock, and a Liberty Ventures reference price of $43.65 (with no additional premium paid for shares of reclassified GCI Class B Common Stock). The GCI Liberty Series A preferred stock will accrue dividends at an initial rate of 5% per annum (which would increase to 7% in connection with a future reincorporation of GCI Liberty in Delaware) and will be redeemable upon the 21st anniversary of the closing of the Transactions.
At the closing of the Transactions, Liberty will reattribute certain assets and liabilities from the Ventures Group to the QVC Group (the “Reattribution”). The reattributed assets and liabilities are expected to include cash, Liberty’s interest in ILG, FTD, certain green energy investments, LI LLC’s exchangeable debentures, and certain tax benefits. Pursuant to a recent amendment to the GCI Reorganization Agreement, LI LLC’s 1.75% Exchangeable Debentures due 2046 (the “1.75% Exchangeable Debentures”) will not be subject to a pre-closing exchange offer and will instead be reattributed to the QVC Group, along with (i) an amount of cash equal to the net present value of the adjusted principal amount of such 1.75% Exchangeable Debentures (determined as if paid on October 5, 2023) and stated interest payments on the 1.75% Exchangeable Debentures to October 5, 2023 and (ii) an indemnity obligation from GCI Liberty with respect to any payments made by LI LLC in excess of stated principal and interest to any holder that exercises its exchange right under the terms of the debentures through October 5, 2023. The cash reattributed to the QVC Group will be funded by available cash attributed to Liberty’s Ventures Group and the proceeds of a margin loan facility attributed to the Ventures Group in an initial principal amount of $1 billion. Within six months of the closing, Liberty, LI LLC and GCI Liberty will cooperate with, and reasonably assist each other with respect to, the commencement and consummation of a purchase offer (the “Purchase Offer”) whereby LI LLC will offer to purchase, either pursuant to privately negotiated transactions or a tender offer, the 1.75% Exchangeable Debentures on terms and conditions (including maximum offer price) reasonably acceptable to GCI Liberty. GCI Liberty will indemnify LI LLC for each 1.75% Exchangeable Debenture repurchased by LI LLC in the Purchase Offer in an amount equal to the difference between (x) the purchase price paid by LI LLC to acquire such 1.75% Exchangeable Debenture in the Purchase Offer and (y) the sum of the amount of cash reattributed with respect to such purchased 1.75% Exchangeable Debenture in the Reattribution plus the amount of certain tax benefits attributable to such 1.75% Exchangeable Debenture so purchased. GCI Liberty’s indemnity obligation with respect to payments made upon a holder’s exercise of its exchange right will be eliminated as to any 1.75% Exchangeable Debentures purchased in the Purchase Offer.
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Liberty will complete the Reattribution using similar valuation methodologies to those used in connection with its previous reattributions, including taking into account the advice of its financial advisor. The Transactions are expected to be consummated on March 9, 2018, subject to the satisfaction of customary closing conditions. Simultaneous with that closing, QVC Group common stock will become the only outstanding common stock of Liberty,Qurate Retail, and thus QVC Group common stock will ceaseceased to function as a tracking stock and will effectively become regular common stock, andstock. On April 9, 2018, Liberty will beInteractive Corporation was renamed Qurate Retail, Group, Inc., with QVC, HSNi On May 23, 2018, Qurate Retail amended its charter to eliminate the tracking stock capitalization structure and zulily as wholly-owned subsidiaries.
The term "QVC Group" does not represent a separate legal entity, rather it represents those businesses, assets and liabilities that have been attributed to that group. Thereclassify each share of QVC Group is primarily focused oncommon stock into one share of the Televised Shopping Businessescorresponding series of new common stock of Qurate Retail. Throughout this annual report, we refer to our Series A and other online or catalog retail businesses. TheSeries B common stock as “Qurate Retail common stock” and “QVC Group 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 Group has attributedU.S. businesses (“QRG Initiatives”). As part of the QRG Initiatives, QVC will close its fulfillment centers in Lancaster, Pennsylvania and Roanoke, Virginia and leased a new fulfillment center in Bethlehem, Pennsylvania, that commenced in 2019 (see note 9 to it the remainder of our businesses and assets not attributed to the Ventures Group, including our wholly-owned subsidiaries QVC, zulily (as of October 1, 2015), and HSNi (as of December 29, 2017) as well as cash in the amount of approximately $330 million (at December 31, 2017), including subsidiary cash.
Disposals
On June 30, 2015, Liberty sold Backcountry for aggregate consideration, including assumption of debt, amounts held in escrow, and a noncontrolling interest, of approximately $350 million. The sale resulted in a $105 million gain, which is included in Gains (losses) on transactions, net in the accompanying consolidated statementsfinancial statements). Expenditures related to the QRG Initiatives are recorded as part of operations. Backcountry is included intransaction related costs. Qurate Retail recorded transaction related costs of $41 million during the Corporate and other segment through June 30, 2015 and is not presentedyear ended December 31, 2018, which primarily related to severance as a discontinued operation asresult of the sale did not represent a strategic shift that had a major effect on Liberty’s operations and financial results.
On July 22, 2016, Liberty completed its previously announced spin-off (the “CommerceHub Spin-Off”) of its former wholly-owned subsidiary CommerceHub. CommerceHub is included in the Corporate and other segment through July 22, 2016 and is not presentedQRG Initiatives. Also, as a discontinued operation asresult of changes in internal reporting from the CommerceHub Spin-Off did not representQRG 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.”
Disposals
As a strategic shift that had a major effect on Liberty’s operationsresult of the GCI Liberty Split-Off, Qurate Retail viewed LendingTree, Evite and financial results.
On November 4, 2016, Liberty completed its previously announced split-off (the “Expedia Holdings Split-Off”) of its former wholly-owned subsidiary Liberty Expedia Holdings, Inc. (“Expedia Holdings”). Expedia Holdings is comprised of, among other things, Liberty’s former interest in Expedia, Inc. (“Expedia”) and Liberty’s former wholly-owned subsidiary Bodybuilding. On November 2, 2016, Expedia Holdings borrowed $350 million under a new margin loan and distributed $299 million, net of certain debt related costs, to Liberty on November 4, 2016.
Liberty viewed Expedia and BodybuildingBroadband as separate components and evaluated them separately for discontinued operations presentation. Based on a quantitative analysis, the split-off of Liberty’sQurate Retail’s interest in Expedia represented a strategic shift thatLiberty Broadband had a major effect on Liberty’s operations, primarily due to prior year one-time gains on transactions recognized by Expedia.Qurate Retail’s operations. Accordingly, the consolidated financial statements of Liberty have been prepared to reflect Liberty’sQurate Retail’s interest in ExpediaLiberty Broadband is presented as a discontinued operation. The disposition of BodybuildingEvite and LendingTree as part of the Expedia HoldingsGCI Liberty Split-Off doesdid not have a major effect on Liberty’sQurate Retail’s historical results nor is it expected to have a major effect on Liberty’sQurate Retail’s future operations. The disposition of Bodybuilding does not represent a strategic shift in Liberty’s operations. Accordingly, Bodybuilding isEvite and LendingTree are not presented as a discontinued operation in the consolidated financial statements of Liberty. Bodybuilding is included in the Corporate and other segment through November 4, 2016.operations.
Strategies and Challenges
Televised Shopping Businesses. The goal of QVC is to becomeextend its leadership in video commerce, e-commerce, mobile commerce and social commerce by continuing to create the preeminent global multimediaworld’s most engaging shopping communityexperiences, combining the best of retail, media, and social, highly differentiated from traditional brick-and-mortar stores or transactional e-commerce. QVC provides customers with curated collections of unique products, made personal and relevant by the power of storytelling. QVC curates experiences, conversations and communities for people who love to shop,millions of highly discerning shoppers, and to offer a shopping experience that is as much about entertainment and enrichment as it is about buying. The goalalso curates large audiences, across its many platforms, for its thousands of HSN is to become the preeminent interactive entertainment and lifestyle retailer offering a curated assortment of exclusive products and top brand names to its customers through entertainment, inspiration and personalities providing an entirely unique shopping experience. The objective for both of the Televised Shopping Businesses is to provide an integrated shopping experience that utilizes all forms of media including television, the internet and mobile devices. The Televised Shopping Businesses intendpartners.
QVC intends to employ several strategies to achieve these goals and objectives. Among these strategies are to (i) extend the breadth, relevanceCurate special products at compelling values; (ii) Extend video reach and exposure of the QVCrelevance; (iii) Reimagine daily digital discovery; (iv) Expand and HSN brands; (ii) source products that represent unique quality and value; (iii) create engaging presentation content in televised programming, mobile and online; (iv) leverage customer loyalty and continue multi-platform expansion;engage our passionate community; and (v) create a
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compelling and differentiatedDeliver joyful customer experience.service. In addition, QVC expectsis exploring opportunities to expand globally by leveraging its existing systems, infrastructure and skillsevolve the International operating model to pursue growth opportunities in other countries around the world.a more leveraged way across markets.
Future net revenue growth will primarily depend on sales growth from e-commerce, and mobile platforms and applications via streaming video, additions of new customers from households already receiving the Company’s television QVC’s broadcast
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programming, and increased spending from existing customers. Future net revenue may also be affected by (i) the willingness of cable television and direct-to-home satellite system operators to continue carrying the Company’sQVC’s programming services; (ii) the Televised Shopping Businesses’QVC’s ability to maintain favorable channel positioning, which may become more difficult due to governmental action or from distributors converting analog customers to digital; (iii) changes in television viewing habits because of personal video recorders, video-on-demand and internet video services; (iv) QVC’s ability to source new and (iv)compelling products; and (v) general economic conditions.
Prolonged economicEconomic uncertainty in various regions of the world in which the Televised Shopping Businesses’our subsidiaries and affiliates operate could adversely affect demand for our businesses’their products and services since a substantial portion of our businesses’their revenue is derived from discretionary spending by individuals, which typically falls during times of economic instability. Global financial markets may experiencehave recently experienced disruptions, including increased volatility and diminished liquidity and credit availability. If economic and financial market conditions in the United States (“U.S.”) or other key markets, including Japan and Europe, become uncertain or deteriorate, customers may respond by suspending, delaying, or reducing their discretionary spending. A suspension, delay or reduction in discretionary spending could adversely affect revenue. Accordingly, our businesses’ ability to increase or maintain revenue and earnings could be adversely affected to the extent that relevant economic environments decline. Such weak economic conditions may also inhibit QVC’s expansion into new European and other markets. The Company is currently unable to predict the extent of any of these potential adverse effects.
The Brexit process and negotiations have created political and economic uncertainty, particularly in the U.K. and the E.U., and this uncertainty may last for years. On June 23, 2016, the United Kingdom (“U.K.”) held a referendum in which British citizensvoters approved, on an advisory basis, an exit from the European Union (the "EU"), commonly referred to as “Brexit.” AsE.U. The U.K. formally left the E.U. on January 31, 2020. This has resulted in a resulttransition period during which the E.U.-U.K. trade relationship will not change, and the UK will remain part of the referendum,E.U. Customs Union and Single Market, subject to all E.U. trade law. During the transition period, the E.U. and the U.K. will negotiate their new economic and security relationship, including a new agreement on trade. The transition will last until December 31, 2020, which can be extended for up to two years if the E.U. and the U.K. agree to do so. However, at present, the U.K. government’s stated intention is not to seek or agree to an extension. A “no deal” outcome on trade remains a possibility if the E.U. and the U.K. fail to conclude a new trade agreement before December 31, 2020 and the transition period is not extended. In that case, with effect from January 1, 2021, the basis for E.U.-U.K. trade would automatically default to World Trade Organization terms. The potential impacts, if any, of the considerable uncertainty relating to Brexit or the resulting terms of the new economic and security relationship between the U.K. and the E.U. on the free movement of goods, services, people and capital between the U.K. and the E.U., customer behavior, economic conditions, interest rates, currency exchange rates, availability of capital or other matters are unclear. QVC’s business could be affected with respect to these matters during this period of uncertainty, and perhaps longer, depending on the resulting terms. In particular, its business could be negatively affected by new trade agreements between the U.K. and other countries, including the U.S., and by the possible imposition of trade or other regulatory barriers in the U.K. which could result in shipping delays and the shortage of products sold by QVC. Additionally, the U.K. economy and consumer demand in the U.K., including for QVC’s products, could be negatively impacted. Further, various geopolitical forces related to Brexit may impact the global marketseconomy, the European economy and currencies have been adversely impacted,QVC’s business, including, a sharp decline infor example, due to other E.U. member states where QVC has operations proposing referendums to, or electing to, exit the value of the U.K. Pound Sterling as compared to the U.S. Dollar. Volatility in exchange rates is expected to continue in the short term as the U.K. negotiates its exitE.U. These possible negative impacts, and others resulting from the EU. InU.K.’s withdrawal from the longer term, any impact from Brexit on QVC will depend, in part, on the outcome of tariff, trade, regulatory and other negotiations. Although it is unknown what the result of those negotiations will be, it is possible that new termsE.U., may adversely affect QVC’s operations and financialoperating results.
During his campaign in the 2016 U.S. presidential election, the currentThe President of the U.S. has expressed apprehension towards existing trade agreements, such as the North American Free Trade Agreement and the Trans-Pacific Partnership, and suggested that the U.S. would renegotiate or withdraw from thesecertain trade agreements. He also raised the possibility of significantly increasinghas advocated for and imposed tariffs on certain goods imported into the United States,U.S., particularly from China. In response to these new U.S. tariffs, some foreign governments, including China, have instituted or are considering instituting tariffs on certain U.S. goods. New tariffs and other changes in U.S. trade policy could trigger retaliatory actions by affected countries. Like many other multinational corporations, QVC does a significant amount of business that could be impacted by changes to U.S. and international trade policies (including governmental action related to tariffs and trade agreements). Such changes have the potential to adversely impact the U.S. economy or certain sectors thereof, QVC’s industry and the global demand for its products and, as a result, could have a material adverse effect on QVC’s business, financial condition and results of operations.
On January 23, 2017, the President of the U.S. signed a presidential memorandum to withdraw the U.S. from the Trans- Pacific Partnership. On October 1, 2018, the U.S., Mexico and Canada agreed to the terms of the United States-
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Mexico- Canada Agreement (the "USMCA"), a successor to the North American Free Trade Agreement ("NAFTA"), which will impact imports and exports among those countries. The countries agreed to a revised version of the USMCA on December 10, 2019. The USMCA has only been ratified by Mexico and the U.S. Once ratified by the legislature of Canada, the USMCA would be enacted and replace NAFTA. As of the date of this report, there is some uncertainty about whether the USMCA will be ratified by Canada, as well as the timing thereof, and the potential for further re-negotiation, or even termination, of NAFTA. Further, the USMCA could undergo changes that lead to further modifications of certain USMCA provisions before being passed into law. These and other proposed actions, if implemented, could adversely affect our subsidiaries’ businessessubsidiaries because they sell imported products.
zulily. zulily’sZulily. Zulily’s objective is to be the leading online retail destination for women who love to shop. zulily’sshoppers. Zulily’s goal is to be part of its customers’ daily routine, allowing them to visit zulilyZulily sites and discover a selection of fresh, new and affordable merchandise curated for them every morning. zulilyZulily intends to employ the following strategies to achieve these goals and objectives: (i) acquire new customers; (ii) increase customer loyalty and repeat purchasing; (iii) add new vendors and strengthen existing vendor relationships; and (iv) invest in mobile platform and channels thatwith which its customers want to engage with the brand in. In addition, zulily expects toengage; and (v) invest in and develop international markets andlow cost supply chain systems.systems in the U.S. and cross border.
zulilyZulily has limited contractual assurances of continued supply, pricing or access to new products, and vendors could change the terms upon which they sell to zulilyZulily or discontinue selling to zulilyZulily for future sales at any time. As zulilyZulily grows, continuing to identify a sufficient number of new emerging brands and smaller boutique vendors may become more and more of a challenge. If zulilyZulily is not able to identify and effectively promote these new brands, it may lose customers to competitors. Even if zulilyZulily identifies new vendors, it may not be able to purchase desired merchandise in sufficient quantities or on acceptable terms in the future, and products from alternative sources, if any, may be of a lesser quality or more expensive than those from existing vendors. In addition, larger national brands may offer products that are less unique, and it may be easier for zulily’sZulily’s competitors to offer such products at prices or upon terms that may be compelling to consumers. An inability to purchase suitable merchandise on acceptable terms or to source new vendors could have an adverse effect on zulily’sZulily’s business.
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To support its large and diverse base of vendors and its flash sales model that requires constantly changing products, zulilyZulily must incur costs related to its merchandising team, photography studios and creative personnel. As zulilyZulily grows, it may not be able to continue to expand its product offerings in a cost-effective manner. In addition, the variety in size and sophistication of zulily’sZulily’s vendors presents different challenges to its infrastructure and operations. zulily’sZulily’s emerging brands and smaller boutique vendors may be less experienced in manufacturing and shipping, which in the past has ledmay lead to inconsistencies in quality, delays in the delivery of merchandise or additional fulfillment cost. zulily’sZulily’s larger national brands may impose additional requirements or offer less favorable terms than smaller vendors related to margins and inventory ownership and risk and may also be unable to ship products timely. If zulilyZulily is unable to maintain and effectively manage its relationships with emerging brands and smaller boutique vendors or larger national brands, zulily’sZulily’s business could be adversely affected.
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Results of Operations—Consolidated
General. We provide in the tables below information regarding our Consolidated Operating Results and Other Income and Expense, as well as information regarding the contribution to those items from our principal reportable segments. The "Corporate and other" category consists of those assets or businesses which we do not disclose separately, including our Digital Commerce businesses.consolidated subsidiary Cornerstone, along with various cost and equity method investments. For a more detailed discussion and analysis of the financial results of the principal reporting segments, see "Results of Operations - Businesses" below.
Operating Results
| | | | | | | | |
| | Years ended December 31, |
| |||||
|
| 2019 |
| 2018 |
| 2017 | | |
| | amounts in millions |
| |||||
Revenue | | | | | | | | |
QxH | | $ | 8,277 |
| 8,544 |
| 6,140 | |
QVC International | | | 2,709 | | 2,738 | | 2,631 | |
Zulily | | | 1,571 | | 1,817 | | 1,613 | |
Corporate and other | |
| 901 |
| 973 |
| 23 | |
Inter-segment eliminations | | | — |
| (2) |
| (3) | |
Consolidated Qurate Retail | | $ | 13,458 |
| 14,070 |
| 10,404 | |
| | | | | | | | |
Former QVC Group | | | NA | | (a) | | 10,381 | |
Former Ventures Group | | | NA | | (a) | | 23 | |
| | | | | | | | |
Operating Income (Loss) | | | | | | | | |
QxH | | $ | 973 |
| 1,161 |
| 956 | |
QVC International | | | 354 | | 351 | | 353 | |
Zulily | | | (1,091) |
| (95) |
| (129) | |
Corporate and other | |
| (52) |
| (93) |
| (137) | |
Consolidated Qurate Retail | | $ | 184 |
| 1,324 |
| 1,043 | |
| | | | | | | | |
Former QVC Group | | | | | | | | |
Former Ventures Group | | | NA | | (a) | | 1,100 | |
| | | NA | | (a) | | (57) | |
| | | | | | | | |
Adjusted OIBDA | | | | | | | | |
QxH | | $ | 1,536 |
| 1,630 |
| 1,455 | |
QVC International | | | 446 | | 429 | | 451 | |
Zulily | | | 48 |
| 108 |
| 91 | |
Corporate and other | |
| (1) |
| (13) |
| (47) | |
Consolidated Qurate Retail | | $ | 2,029 |
| 2,154 |
| 1,950 | |
| | | | | | | | |
Former QVC Group | | | NA | | (a) | | 1,977 | |
Former Ventures Group | | | NA | | (a) | | (27) | |
|
|
|
|
|
|
|
|
|
|
| Years ended December 31, |
| |||||
|
| 2017 |
| 2016 |
| 2015 |
| |
|
| amounts in millions |
| |||||
Revenue |
|
|
|
|
|
|
|
|
QVC Group |
|
|
|
|
|
|
|
|
QVC |
| $ | 8,771 |
| 8,682 |
| 8,743 |
|
HSN |
|
| — |
| NA |
| NA |
|
zulily |
|
| 1,613 |
| 1,547 |
| 426 |
|
Corporate and other |
|
| — |
| — |
| — |
|
Inter-segment eliminations |
|
| (3) |
| (10) |
| — |
|
Total QVC Group |
|
| 10,381 |
| 10,219 |
| 9,169 |
|
Ventures Group |
|
|
|
|
|
|
|
|
Corporate and other |
|
| 23 |
| 428 |
| 820 |
|
Total Ventures Group |
|
| 23 |
| 428 |
| 820 |
|
Consolidated Liberty |
| $ | 10,404 |
| 10,647 |
| 9,989 |
|
|
|
|
|
|
|
|
|
|
Operating Income (Loss) |
|
|
|
|
|
|
|
|
QVC Group |
|
|
|
|
|
|
|
|
QVC |
| $ | 1,347 |
| 1,203 |
| 1,275 |
|
HSN |
|
| (38) |
| NA |
| NA |
|
zulily |
|
| (129) |
| (152) |
| (53) |
|
Corporate and other |
|
| (80) |
| (40) |
| (52) |
|
Total QVC Group |
|
| 1,100 |
| 1,011 |
| 1,170 |
|
Ventures Group |
|
|
|
|
|
|
|
|
Corporate and other |
|
| (57) |
| (43) |
| (54) |
|
Total Ventures Group |
|
| (57) |
| (43) |
| (54) |
|
Consolidated Liberty |
| $ | 1,043 |
| 968 |
| 1,116 |
|
|
|
|
|
|
|
|
|
|
Adjusted OIBDA |
|
|
|
|
|
|
|
|
QVC Group |
|
|
|
|
|
|
|
|
QVC |
| $ | 1,897 |
| 1,840 |
| 1,894 |
|
HSN |
|
| — |
| NA |
| NA |
|
zulily |
|
| 91 |
| 112 |
| 21 |
|
Corporate and other |
|
| (35) |
| (16) |
| (28) |
|
Total QVC Group |
|
| 1,953 |
| 1,936 |
| 1,887 |
|
Ventures Group |
|
|
|
|
|
|
|
|
Corporate and other |
|
| (27) |
| 3 |
| 59 |
|
Total Ventures Group |
|
| (27) |
| 3 |
| 59 |
|
Consolidated Liberty |
| $ | 1,926 |
| 1,939 |
| 1,946 |
|
|
|
|
|
|
|
|
|
|
(a) | Due to the GCI Liberty Split-Off, including the redemption of outstanding shares of Liberty Ventures common stock, the Ventures Group and the QVC Group tracking stock structure no longer exists as of March 9, 2018, however amounts were attributed to the Ventures Group and the QVC Group from January 1, 2018 through March 9, 2018. Attributed to the Ventures Group was revenue of $3 million, operating loss of $8 million, and an Adjusted OIBDA loss of $5 million for the year ended December 31, 2018. |
Revenue. Our consolidated revenue decreased 2.3%4.3% and increased 6.6%35.2% for the years ended December 31, 20172019 and 2016,2018, respectively, as compared to the corresponding prior year periods. Corporate
II-8
QxH, Zulily and otherQVC International revenue decreased $405$267 million, for the year ended December 31, 2017, as compared to the corresponding period in the prior year due to the
II-10
disposition of Bodybuilding in November 2016 as part of the Expedia Holdings Split-Off ($355 million) and the CommerceHub Spin-Off in July 2016 ($51 million). Corporate and other revenue decreased $392 million for the year ended December 31, 2016, as compared to the corresponding prior year period due to the sale of Backcountry in June 2015 ($227 million), the disposition of Bodybuilding in November 2016 as part of the Expedia Holdings Split-Off ($109 million) and the CommerceHub Spin-Off in July 2016 ($38 million). QVC’s revenue increased $89$246 million and decreased $61$29 million, for the years ended December 31, 2017 and 2016, respectively, as compared to the corresponding prior year periods. zulily’s revenue increased $66 million during the year ended December 31, 2017,2019, as compared to the corresponding prior year period. The increase in zulily’s revenue in 2016 compared to the same period in the prior year was due to the acquisition of zulily on October 1, 2015. With the exception of $38 million of severance-related costs incurred on December 30, 2017, HSN’s results of operations are not included in our consolidated operating results for the year ended December 31, 2017.year. See "Results of Operations - Businesses" below for a more complete discussion of the results of operations of QVC HSN and zulily.
Operating income (loss). Our consolidated operating income increased $75 million and decreased $148 million for the years ended December 31, 2017 and 2016, respectively, as compared to the corresponding prior year periods. Operating losses forZulily. Corporate and other declined $54revenue decreased $72 million for the year ended December 31, 2017,2019, as compared to the corresponding period in the prior year period, primarily due to an increasea decrease in stock compensation expense as a resultCornerstone revenue of $70 million due to the shutdown of one of the stock option exchange (see note 15 tohome brands in Cornerstone’s portfolio during the accompanying consolidated financial statements),fourth quarter of 2018.
QxH, Zulily and transaction costs associated with the acquisition of HSN, partially offset by the disposition of Bodybuilding in November 2016 as part of the Expedia Holdings Split-Off,QVC International revenue increased $2,404 million, $204 million and the CommerceHub Spin-Off. Operating losses for Corporate and other decreased $23$107 million forduring the year ended December 31, 2016, as2018 compared to the correspondingsame period in the prior year period,year. The QxH increase in 2018 was primarily related to the acquisition of HSN, as no HSN revenue was included in 2017 results due to the CommerceHub Spin-Off. QVC’s operating income increased $144 million and decreased $72 million fortiming of the years ended December 31, 2017 and 2016, respectively as compared to the corresponding prior year periods. zulily’s operating losses improved $23 million and declined $99 million for the years ended December 31, 2017 and 2016, respectively, as compared to the corresponding prior year periods. HSN’s operating loss was the result of $38 million of severance-related expenses, including salaries and wages and stock-based compensation expense, recorded in the period ended December 31, 2017.acquisition. See "Results of Operations - Businesses" below for a more complete discussion of the results of operations of QVC HSN and zulily.Zulily. Corporate and other revenue increased $950 million for the year ended December 31, 2018, as compared to the corresponding prior year period due to the acquisition of Cornerstone which had revenue of $970 million for the year ended December 31, 2018, partially offset by a decrease in revenue due to the disposition of Evite in the GCI Liberty Split-Off ($21 million).
Operating income (loss). Our consolidated operating income decreased $1,140 million and increased $281 million for the years ended December 31, 2019 and 2018, respectively, as compared to the corresponding prior year periods.
Zulily operating losses increased $996 million for the year ended December 31, 2019, as compared to the corresponding prior year period, primarily due to the impairment of intangible assets at Zulily during the third quarter of 2019. QxH and QVC International operating income decreased $188 million and increased $3 million, respectively, for the year ended December 31, 2019, compared to the same period in the prior year. See "Results of Operations - Businesses" below for a more complete discussion of the results of operations of QVC and Zulily. Operating losses for Corporate and other improved $41 million for the year ended December 31, 2019, as compared to the corresponding period in the prior year, due to a reduction in operating losses at Cornerstone as a result of the shutdown of one of the home brands in Cornerstone’s portfolio during the fourth quarter of 2018, along with the elimination of corporate costs at the Liberty Ventures Group due to the GCI Liberty Split-Off in 2018.
QxH and QVC International operating income increased $205 million and decreased $2 million, respectively, for the year ended December 31, 2018, as compared to the corresponding prior year period. Zulily operating losses improved $34 million for the year ended December 31, 2018, as compared to the corresponding prior year period. See "Results of Operations - Businesses" below for a more complete discussion of the results of operations of QVC and Zulily. Operating losses for Corporate and other improved $44 million for the year ended December 31, 2018, as compared to the corresponding prior year period, primarily due to the elimination of corporate costs at the Liberty Ventures Group due to the GCI Liberty Split-Off in the first quarter of 2018 and a decrease in stock compensation expense, partially offset by an increase in purchase accounting amortization at Cornerstone in 2018.
Adjusted OIBDA. To provide investors with additional information regarding our financial results, we also disclose Adjusted OIBDA, which is a non-GAAP financial measure. We define Adjusted OIBDA as revenue less cost of sales, operating expensesincome (loss) plus depreciation and selling, generalamortization, stock-based compensation, separately reported litigation settlements, transaction related costs (including restructuring, integration, and administrative ("SG&A") expenses (excluding stock compensation).advisory fees) and impairments. Our chief operating decision maker and management team use this measure of performance in conjunction with other measures to evaluate our businesses and make decisions about allocating resources among our businesses. We believe this is an important indicator of the operational strength and performance of our businesses includingby identifying those items that are not directly a reflection of each business's ability to service debt and fund capital expenditures.business’ performance or indicative of ongoing business trends. In addition, this measure allows us to view operating results, perform analytical comparisons and benchmarking between businesses and identify strategies to improve performance. This measure of performance excludes such costs as depreciation and amortization, stock-based compensation and restructuring and impairment charges that are included in the measurement of operating income pursuant to generally accepted accounting policies (“GAAP”). Accordingly, Adjusted OIBDA should be considered in addition to, but not as a substitute for, operating income, net income, cash flowflows provided by operating activities and other measures of financial performance prepared in accordance with GAAP. See note 19 to the accompanying consolidated financial statements forU.S. generally accepted accounting principles. The following table provides a reconciliation of Operating income (loss) to Adjusted OIBDA to operating income and earnings (loss) from continuing operations before income taxes.OIBDA.
II-9
| | | | | | | | |
| | Year ended | | |||||
| | December 31, | | |||||
|
| 2019 |
| 2018 |
| 2017 | | |
| | amounts in millions | | |||||
Operating income (loss) | | $ | 184 |
| 1,324 |
| 1,043 | |
Depreciation and amortization | |
| 606 | | 637 | | 725 | |
Stock-based compensation | |
| 71 | | 88 | | 123 | |
Impairment of intangible assets | | | 1,167 | | 33 | | — | |
Transaction related costs | | | 1 | | 72 | | 59 | |
Adjusted OIBDA | | $ | 2,029 | | 2,154 | | 1,950 | |
Consolidated Adjusted OIBDA decreased $13$125 million and $7increased $204 million for the years ended December 31, 20172019 and 2016,2018, respectively, as compared to the corresponding prior year periods. Corporate
QxH and otherZulily Adjusted OIBDA decreased $49$94 million and $60 million for the year ended December 31, 2019, respectively, as compared to the corresponding prior year period. QVC International Adjusted OIBDA increased $17 million for the year ended December 31, 2019, as compared to the corresponding prior year period, primarily due to the closure of QVC’s operations in France in March of 2019. Adjusted OIBDA losses related to QVC France were $6 million and $32 million for the years ended December 31, 2019 and 2018, respectively. See "Results of Operations - Businesses" below for a more complete discussion of the results of operations of QVC and Zulily. Corporate and other Adjusted OIBDA increased $12 million for the year ended December 31, 2019, as compared to the corresponding period in the prior year due to higher Adjusted OIBDA at Cornerstone due to the impacts of the shutdown of one of the home brands in Cornerstone’s portfolio discussed above and improved performance in the businesses’ home segment, and the elimination of corporate costs at the Liberty Ventures Group due to the GCI Liberty Split-Off.
QxH and Zulily Adjusted OIBDA increased $175 million and $17 million, respectively, for the year ended December 31, 2018, as compared to the same period in the prior year. The QxH increase in 2018 was primarily related to HSN which had Adjusted OIBDA of $213 million for the year ended December 31, 2018, and no Adjusted OIBDA for the year ended December 31, 2017 due to the timing of the acquisition. QVC International Adjusted OIBDA decreased $22 million for the year ended December 31, 2018, as compared to the same period in the prior year. See "Results of Operations - Businesses" below for a more complete discussion of the results of operations of QVC and Zulily. Corporate and other Adjusted OIBDA increased $34 million for the year ended December 31, 2018, as compared to the corresponding period in the prior year, primarily due to the disposition of Bodybuilding in November 2016 as part of the Expedia Holdings Split-Off ($24 million), the CommerceHub Spin-Off in July 2016 ($16 million), and transaction costs associated with the acquisition of HSNi (approximately $15 million). Corporate and other adjusted OIBDA decreased $44 million for the year ended December 31, 2016,Cornerstone as well as fewer corporate costs compared to the corresponding prior year period, primarily due to the CommerceHub Spin-Off in July 2016 ($28 million), the sale of Backcountry in June 2015 ($8 million) and the disposition of Bodybuilding in November 2016 as part of the Expedia Holdings Split-Off ($5 million). QVC’s Adjusted OIBDA increased $57 million and decreased $54 million for the years ended December 31, 2017 and 2016, respectively, as compared to the corresponding prior year periods. zulily’s Adjusted OIBDA decreased $21 million and increased $91 million for the years ended December 31, 2017 and 2016, respectively, as compared to the corresponding prior year periods. See "Results of Operations - Businesses" below for a more complete discussion of the results of operations of QVC, HSN and zulily. year.
II-11II-10
Other Income and Expense
Components of Other Income (Expense) are presented in the table below.
| | | | | | | | |
| | Years ended December 31, |
| |||||
|
| 2019 |
| 2018 |
| 2017 |
| |
| | amounts in millions |
| |||||
| | | | | | | | |
Interest expense | | $ | (374) |
| (381) |
| (355) | |
Share of earnings (losses) of affiliate, net | | | (160) |
| (162) |
| (200) | |
Realized and unrealized gains (losses) on financial instruments, net | | | (251) |
| 76 |
| 145 | |
Gains (losses) on transactions, net | | | (1) |
| 1 |
| 410 | |
Tax sharing income (expense) with GCI Liberty, Inc. | | | (26) | | 32 | | — | |
Other, net | | | 6 |
| (7) |
| 7 | |
Other income (expense) | | $ | (806) | | (441) | | 7 | |
| | | | | | | | |
Former QVC Group | | | NA | | (a) | | 151 | |
Former Ventures Group | | | NA | | (a) | | (144) | |
(a) | Due to the GCI Liberty Split-Off, the Ventures Group and the QVC Group tracking stocks no longer exist as of March 9, 2018, however amounts were attributed to the Ventures Group and the QVC Group from January 1, 2018 through March 9, 2018. Attributed to the Ventures Group was other income of $120 million for the year ended December 31, 2018 primarily related to mark-to-market adjustments on the investments in Charter and ILG. |
|
|
|
|
|
|
|
|
|
|
| Years ended December 31, |
| |||||
|
| 2017 |
| 2016 |
| 2015 |
| |
|
| amounts in millions |
| |||||
Interest expense |
|
|
|
|
|
|
|
|
QVC Group |
| $ | (293) |
| (289) |
| (283) |
|
Ventures Group |
|
| (62) |
| (74) |
| (77) |
|
Consolidated Liberty |
| $ | (355) |
| (363) |
| (360) |
|
|
|
|
|
|
|
|
|
|
Share of earnings (losses) of affiliate, net |
|
|
|
|
|
|
|
|
QVC Group |
| $ | 38 |
| 42 |
| 55 |
|
Ventures Group |
|
| (238) |
| (110) |
| (233) |
|
Consolidated Liberty |
| $ | (200) |
| (68) |
| (178) |
|
|
|
|
|
|
|
|
|
|
Realized and unrealized gains (losses) on financial instruments, net |
|
|
|
|
|
|
|
|
QVC Group |
| $ | — |
| 2 |
| 42 |
|
Ventures Group |
|
| 618 |
| 1,173 |
| 72 |
|
Consolidated Liberty |
| $ | 618 |
| 1,175 |
| 114 |
|
|
|
|
|
|
|
|
|
|
Gains (losses) on transactions, net |
|
|
|
|
|
|
|
|
QVC Group |
| $ | 409 |
| — |
| — |
|
Ventures Group |
|
| 1 |
| 9 |
| 110 |
|
Consolidated Liberty |
| $ | 410 |
| 9 |
| 110 |
|
|
|
|
|
|
|
|
|
|
Other, net |
|
|
|
|
|
|
|
|
QVC Group |
| $ | (3) |
| 42 |
| (6) |
|
Ventures Group |
|
| 10 |
| 89 |
| 20 |
|
Consolidated Liberty |
| $ | 7 |
| 131 |
| 14 |
|
Interest expense. Interest expense decreased $8$7 million and increased $3$26 million for the years ended December 31, 2019 and 2018, respectively, as compared to the corresponding prior year periods. The decrease for the year ended December 31, 2019 is due to lower average debt balances during 2019 compared to the prior year as well as a reduction in the variable interest rate on QVC’s bank credit facilities compared to the prior year. The increase in interest expense for the year ended December 31, 2018 was due to the HSN bank credit facility that was not included during the year ended December 31, 2017, and 2016,higher average debt balances and higher average interest rates on variable rate debt at QVC.
Share of earnings (losses) of affiliates. Share of losses of affiliates decreased $2 million and $38 million during the years ended December 31, 2019 and 2018, respectively, as compared to the corresponding prior year periods. The decrease in interest expense for the year ended December 31, 20172019 is due to higher average debt balances at the corporate levelfact that the prior year included losses related to the Company’s former investment in 2016, and the redemption of the majority of our 0.75% Exchangeable Senior Debentures due 2043 during the second and third quarter of 2016. The increase in interest expense for the year ended December 31, 2016 is due to higher average debt balances at QVC,FTD Companies, Inc. (“FTD”), partially offset by lower interest rates under QVC’s credit facility.
II-12
Share of earnings (losses) of affiliates. The following table presents our share of earnings (losses) of affiliates:
|
|
|
|
|
|
|
|
|
|
| Years ended December 31, |
| |||||
|
| 2017 |
| 2016 |
| 2015 |
| |
|
| amounts in millions |
| |||||
QVC Group |
|
|
|
|
|
|
|
|
HSN |
| $ | 40 |
| 48 |
| 64 |
|
Other |
|
| (2) |
| (6) |
| (9) |
|
Total QVC Group |
|
| 38 |
| 42 |
| 55 |
|
Ventures Group |
|
|
|
|
|
|
|
|
FTD (1) |
|
| (146) |
| (41) |
| (83) |
|
LendingTree |
|
| 7 |
| 12 |
| 2 |
|
Other |
|
| (99) |
| (81) |
| (152) |
|
Total Ventures Group |
|
| (238) |
| (110) |
| (233) |
|
Consolidated Liberty |
| $ | (200) |
| (68) |
| (178) |
|
|
|
The Other category forincreased losses at the Ventures Group is comprised ofCompany’s alternative energy investments and other investments. The alternative energy investments generallysolution entities due to continued investment in such ventures. These entities typically operate at a loss and the Company records its share of such losses but providehave favorable tax attributes and credits, which are recorded through the income tax (expense) benefit line item in the consolidated statementsCompany’s tax accounts. The decrease in 2018 was due to fewer losses at FTD, partially offset by fewer earnings in 2018 due to the Company’s acquisition of operations. During the year ended December 31, 2015, Liberty recorded an impairmentHSN.
II-11
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:
|
|
|
|
|
|
|
|
| ||||||||
|
| Years ended December 31, |
| |||||||||||||
|
| 2017 |
| 2016 |
| 2015 |
| |||||||||
|
| amounts in millions |
| |||||||||||||
Fair Value Option Securities - AFS |
| $ | 434 |
| 723 |
| 84 |
| ||||||||
Fair Value Option Securities - Liberty Broadband |
|
| 473 |
| 761 |
| NA |
| ||||||||
| | | | | | | | | ||||||||
| | Years ended December 31, |
| |||||||||||||
|
| 2019 |
| 2018 |
| 2017 |
| |||||||||
| | amounts in millions |
| |||||||||||||
Equity securities | | $ | (22) |
| 155 |
| 434 | | ||||||||
Exchangeable senior debentures |
|
| (193) |
| (308) |
| 30 |
| |
| (337) |
| (3) |
| (193) | |
Indemnification asset | | | 123 | | (70) | | — | | ||||||||
Other financial instruments |
|
| (96) |
| (1) |
| — |
| |
| (15) |
| (6) |
| (96) | |
|
| $ | 618 |
| 1,175 |
| 114 |
| ||||||||
| | $ | (251) |
| 76 |
| 145 | |
The changes in these accounts are due primarily to market factors and changes in the fair value of the underlying stocks or financial instruments to which these relate. The decrease for the year ended December 31, 20172019 as compared to the corresponding prior year period was primarily due to a decrease in the unrealized gain on the investment in Charter and the contribution of Charter shares to GCI Liberty in the GCI Liberty Split-Off, a decrease in unrealized gains on the investment in ILG due to the purchase of ILG by Marriott Vacations Worldwide during the third quarter of 2018 and subsequent sale of this investment, and an increase in unrealized losses on exchangeable debt, partially offset by an unrealized gain on the indemnification asset as a result of the GCI Liberty Split-Off. The decrease for the year ended December 31, 2018 as compared to the corresponding prior year period was primarily driven by a decrease in the investments in Liberty Broadband and Charter experiencing higher gains during 2016 compared to 2017, as well as the exchange of a majority of our 0.75% Exchangeable Senior Debentures due 2043 during 2016. The increase for the year ended December 31, 2016 as compared to the corresponding prior year period was primarily driven by the investment in Liberty Broadband,unrealized gain on the investment in Charter and the changecontribution of Charter to GCI Liberty in Liberty’s ownership interestthe GCI Liberty Split-Off, a decrease in unrealized gains on the investment in ILG, which resultedand an unrealized loss on the indemnification asset as a result of the GCI Liberty Split-Off, partially offset by an increase in its classification as an available-for-sale security rather than an equity method investment.unrealized gains on exchangeable debt and derivative instruments.
Gains (losses) on transactions, net. Gain on transactions, net, increased $401decreased $2 million and decreased $101$409 million for the years ended December 31, 20172019 and 2016,2018, respectively, as compared to the corresponding prior year periods. The decrease in gain on transactions, net for the year ended December 31, 20172018 is relateddue to the acquisition of HSNi. HSN in 2017. In conjunction with the application of acquisition accounting, we recorded a full step up in basis of HSNiHSN along with a gain between our historical basis and the fair value of our interest in HSNi. The gain on transactions, net,HSN in 2017.
Tax sharing income (expense) with GCI Liberty. Due to the GCI Liberty Split-Off, the Company entered into a tax sharing agreement with GCI Liberty. As a result, the Company recognized tax sharing expense of $26 million and income of $32 million for the yearyears ended December 31, 2016 is primarily the result of the sale of Right Start in January 2016. The gain on transactions,2019 and 2018, respectively.
Other, net. Other, net increased $13 million and decreased $14 million for the yearyears ended December 31, 2015 primarily relates2019 and 2018, respectively, when compared to the sale of Backcountry on June 30, 2015, which resultedcorresponding prior year period. The activity captured in a $105 million gain.
II-13
Other, net. The primary components of other, net areis primarily attributable to gains (losses) on dilutionearly extinguishment of investments in affiliates,debt, foreign exchange gains (losses) and interest income. Other, net decreased $124 million for the year ended December 31, 2017 when compared to the corresponding prior year period primarily due to a change in gain (loss) on dilution of investments of $80 million and a change in foreign exchange gains (losses) of $44 million. Other, net increased $117 million for the year ended December 31, 2016 when compared to the corresponding prior year period primarily due to a change in gain (loss) on dilution of investments in affiliates of $83 million, and a change in foreign exchange gains (losses) of $26 million.
Income taxes. The Company had an income tax benefit of $964$217 million, income tax expense of $60 million and income tax expensebenefit of $598 million and $185$985 million for the years ended December 31, 2019, 2018 and 2017, 2016respectively. Our effective tax rate for the years ended December 31, 2019, 2018 and 2015,2017 was 34.9%, 6.8% and 93.8% respectively. In 2019 the effective tax rate was higher than the U.S. federal tax of 21% primarily due to tax benefits from tax credits and incentives generated by our alternative energy investments and tax benefits from losses generated in 2019 that were eligible for carryback to tax years with federal income tax rates greater than the U.S. statutory tax rate of 21%, partially offset by a goodwill impairment that is not deductible for tax purposes and an increase in the valuation allowance against certain deferred tax assets. In 2018 the effective tax rate was lower than the U.S. federal tax of 21% primarily due to tax benefits from tax credits and incentives generated by our alternative energy investments, a reduction in the Company’s state effective tax rate used to measure deferred taxes resulting from the GCI Liberty Split-Off in March 2018, and a reduction in the Company’s state effective tax rate used to measure deferred taxes resulting from a state law change during the second quarter. In connection with the initial analysis of the impact of the Tax Cuts and Jobs Act (the “Tax Act”), as discussed in note 1210 in the accompanying consolidated financial statements, the Company has recorded a discrete net tax benefit in the period ending December 31, 2017. This net benefit primarily consistsconsisted of a net benefit for the corporate rate reduction. In addition our tax rate was impacted by the consolidation of our equity method investment in HSNiHSN during the year ended December 31, 2017.
Our effective tax rate for the years ended December 31, 2016 and 2015 was 32.3% and 22.7%, respectively. The effective tax rate is less than the U.S. federal tax rateII-12
Net earnings.earnings (loss). We had net losses of $405 million, and net earnings of $2,487 million, $1,274$964 million and $911$2,487 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively. The change in net earnings (loss) was the result of the above-described fluctuations in our revenue, expenses and other gains and losses.
Liquidity and Capital Resources
As of December 31, 20172019 substantially all of our cash and cash equivalents are invested in U.S. Treasury securities, other government securities or government guaranteed funds, AAA rated money market funds and other highly rated financial and corporate debt instruments.
The following are potential sources of liquidity: available cash balances, equity issuances, dividend and interest receipts, proceeds from asset sales, monetization of our public investment portfolio, debt (including availability under QVC’s Bank Credit Facilities, (the “Third Amended and Restated Credit Facility”) and HSNi’s Bank Credit Facility,bank credit facilities, as discussed in note 118 of the accompanying consolidated financial statements) and cash generated by the operating activities of our wholly-owned subsidiaries. Cash generated by the operating activities of our subsidiaries is only a source of liquidity to the extent such cash exceeds the working capital needs of the subsidiaries and is not otherwise restricted such as, in the case of QVC zulily and HSNi,Zulily, due to a requirement that a leverage ratio (defined as(calculated in accordance with the ratioterms of subsidiaries’ consolidated total debtthe document governing such indebtedness which is an exhibit to Adjusted OIBDA for the most recent four fiscal quarter period)this Annual Report on Form 10-K) of less than 3.5 to 1.0 must be maintained. maintained.
During the year, there were no changes to our corporate debt credit ratings or our consolidated subsidiaries' debt credit ratings. Liberty, QVCQurate Retail and HSNiits subsidiaries are in compliance with their debt covenants as of December 31, 2017.2019.
As of December 31, 2017, Liberty's2019, Qurate Retail's liquidity position consisted of the following:
|
|
|
|
|
|
|
|
| Cash and cash |
| Available-for- |
| |
|
| equivalents |
| sale securities |
| |
|
| amounts in millions |
| |||
QVC |
| $ | 261 |
| — |
|
HSNi |
|
| 22 |
|
|
|
zulily |
|
| 17 |
| — |
|
Corporate and other |
|
| 30 |
| 3 |
|
Total QVC Group |
|
| 330 |
| 3 |
|
|
|
|
|
|
|
|
Corporate and other |
|
| 573 |
| 2,360 |
|
Total Ventures Group |
|
| 573 |
| 2,360 |
|
Consolidated Liberty |
| $ | 903 |
| 2,363 |
|
| | | | |
| | Cash and cash | | |
| | equivalents | | |
| | amounts in millions | ||
QVC |
| $ | 561 |
|
Zulily | | | 23 | |
Corporate and other |
| | 89 |
|
Total Qurate Retail |
| $ | 673 |
|
| | | | |
To the extent that the Company recognizes any taxable gains from the sale of assets, we may incur tax expense and be required to make tax payments, thereby reducing any cash proceeds. Additionally, we have $877 million$2.4 billion available for
II-14
borrowing under the QVC Bank Credit Facility at December 31, 2017, and $533 million available for borrowing under2019 (which was subsequently reduced to $1.7 billion upon the HSNi Bank Credit Facility asreduction of December 31, 2017.the revolving credit facility, effective February 4, 2020). As of December 31, 2017,2019, QVC had approximately $204$280 million of cash and cash equivalents held in foreign subsidiaries that is available for domestic purposes with no significant tax consequences upon repatriation to the U.S. QVC accrues taxes on the unremitted earnings of its international subsidiaries. Approximately 79%66% of this foreign cash balance was that of QVC-Japan.QVC Japan. QVC owns 60% of QVC-JapanQVC Japan and shares all profits and losses with the 40% minority interest holder, Mitsui & Co, LTD. QVC believes that it currently has appropriate legal structures in place to repatriate foreign cash as tax efficiently as possible and meet the business needs of QVC.
Additionally, our operating businesses have generated, on average, more than $1 billion in annual cash provided by operating activities over the prior three years and we do not anticipate any significant reductions in that amount in future periods.
| | | | | | | | |
| | Years ended December 31, |
| |||||
|
| 2019 |
| 2018 |
| 2017 |
| |
Cash Flow Information | | amounts in millions |
| |||||
Net cash provided (used) by operating activities | | $ | 1,284 |
| 1,273 |
| 1,490 | |
Net cash provided (used) by investing activities | | $ | (600) |
| 47 |
| (391) | |
Net cash provided (used) by financing activities | | $ | (661) |
| (1,574) |
| (1,036) | |
|
|
|
|
|
|
|
|
|
|
| Years ended December 31, |
| |||||
|
| 2017 |
| 2016 |
| 2015 |
| |
Cash Flow Information |
| amounts in millions |
| |||||
QVC Group cash provided (used) by operating activities |
| $ | 1,222 |
| 1,273 |
| 1,005 |
|
Ventures Group cash provided (used) by operating activities |
|
| 270 |
| 170 |
| 57 |
|
Net cash provided (used) by operating activities |
| $ | 1,492 |
| 1,443 |
| 1,062 |
|
QVC Group cash provided (used) by investing activities |
| $ | (229) |
| (238) |
| (909) |
|
Ventures Group cash provided (used) by investing activities |
|
| (162) |
| (1,254) |
| 121 |
|
Net cash provided (used) by investing activities |
| $ | (391) |
| (1,492) |
| (788) |
|
QVC Group cash provided (used) by financing activities |
| $ | (1,014) |
| (1,103) |
| (89) |
|
Ventures Group cash provided (used) by financing activities |
|
| (22) |
| (469) |
| (33) |
|
Net cash provided (used) by financing activities |
| $ | (1,036) |
| (1,572) |
| (122) |
|
II-13
QVC Group
During the year ended December 31, 2017, the QVC Group2019, Qurate Retail's primary uses of cash were primarily therepurchases of Series A Qurate Retail common stock of $392 million, capital expenditures of $325 million, investments in and loans to cost and equity investments of $141 million, and net repaymentrepayments of certain debt obligations of $149 million and repurchase of Series A QVC Group common stock of $765 million. Additionally, the QVC Group had approximately $201 million of capital expenditures during the year ended December 31, 2017.
In 2018, the projected uses of QVC Group cash are the cost to service outstanding debt, approximately$280 million in interest payments on QVC and corporate level debt, anticipated capital improvement spending of approximately $290 million and the continued buyback of QVC Group common stock under the approved share buyback program.
Ventures Group
During the year ended December 31, 2017, the Ventures Group uses of cash were primarily the repayment of certain debt obligations of $13 million and the purchase of additional cost and equity investments of $159$113 million.
The projected uses of Ventures Group cash are approximately $58 million in interest payments to service outstanding debt, and further investments in existing or new businesses through continued investment activity.
Consolidated
During the year ended December 31, 2017, Liberty's primary uses of cash were $162 million of net repayments on outstanding debt, repurchases of Series A QVC Group common stock of $765 million, purchase of additional cost and equity investments of $159 million and capital expenditures of $204 million.
The projected uses of Liberty’sQurate Retail’s cash, outside of normal operating expenses (inclusive of tax payments), are the costs to service outstanding debt, approximately $338$350 million for interest payments on outstanding debt, including corporate level and other subsidiary debt, anticipated capital improvement spending at the QVC Group of approximately $290$320 million, the repayment of certain debt obligations, andthe potential buyback of common stock under the approved share buyback program and additional investments in existing or new businesses. WeThe Company also may be required to make net payments of income tax liabilities to settle items under discussion with tax authorities. We expectThe Company expects that cash on hand and cash provided by operating activities in future periods and outstanding borrowing capacity will be sufficient to fund projected uses of cash.
II-15
Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
In connection with agreements for the sale of assets by our company, we may retain liabilities that relate to events occurring prior to the sale, such as tax, environmental, litigation and employment matters. We generally indemnify the purchaser in the event that a third party asserts a claim against the purchaser that relates to a liability retained by us. These types of indemnification obligations may extend for a number of years. We are unable to estimate the maximum potential liability for these types of indemnification obligations as the sale agreements may not specify a maximum amount and the amounts are dependent upon the outcome of future contingent events, the nature and likelihood of which cannot be determined at this time. Historically, we have not made any significant indemnification payments under such agreements and no amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification obligations.
We have contingent liabilities related to legal and tax proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible we 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 consolidated financial statements.
Information concerning the amount and timing of required payments, both accrued and off-balance sheet, under our contractual obligations, excluding uncertain tax positions as it is undeterminable when payments will be made, is summarized below.
| | | | | | | | | | | | |
| | Payments due by period |
| |||||||||
| | | | | Less than | | | | | | After |
|
| | Total | | 1 year | | 2 - 3 years | | 4 - 5 years | | 5 years |
| |
| | amounts in millions |
| |||||||||
Consolidated contractual obligations | | | | | | | | | | | | |
Long-term debt (1) |
| $ | 7,348 |
| 11 |
| 523 |
| 2,609 |
| 4,205 | |
Interest payments (2) | |
| 4,885 |
| 358 |
| 716 |
| 558 |
| 3,253 | |
Finance and operating lease obligations | |
| 780 |
| 107 |
| 178 |
| 163 |
| 332 | |
Purchase orders and other obligations (3) | |
| 2,469 |
| 2,357 |
| 68 |
| 28 |
| 16 | |
Total | | $ | 15,482 |
| 2,833 |
| 1,485 |
| 3,358 |
| 7,806 | |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| Payments due by period |
| |||||||||||
|
|
|
|
| Less than |
|
|
|
|
| After |
| ||
|
| Total |
| 1 year |
| 2 - 3 years |
| 4 - 5 years |
| 5 years |
| |||
|
| amounts in millions |
| |||||||||||
Consolidated contractual obligations |
|
|
|
|
|
|
|
|
|
|
|
| ||
Long-term debt (1) |
| $ | 8,594 |
| 24 |
| 448 |
| 2,766 |
| 5,356 |
| ||
Interest payments (2) |
|
| 5,743 |
| 338 |
| 667 |
| 580 |
| 4,158 |
| ||
Operating lease obligations |
|
| 413 |
| 73 |
| 116 |
| 81 |
| 143 |
| ||
Build to suit lease |
|
| 87 |
| 5 |
| 12 |
| 12 |
| 58 |
| ||
Purchase orders and other obligations |
|
| 1,756 |
| 1,688 |
| 64 |
| 4 |
| — |
| ||
Total |
| $ | 16,593 |
| 2,128 |
| 1,307 |
| 3,443 |
| 9,715 |
|
(1) | Amounts are reflected in the table at the outstanding principal amount, assuming the debt instruments will remain outstanding until the stated maturity date, and may differ from the amounts stated in our consolidated balance sheet to the extent debt instruments (i) were issued at a discount or premium or (ii) have elements which are reported at fair value in our consolidated balance sheets. Amounts |
II-14
(2) | Amounts (i) are based on our outstanding debt at December 31, |
(3) | Amounts include open purchase orders for inventory and non-inventory purchases along with other contractual obligations. |
Critical Accounting Estimates
The preparation of our financial statements in conformity with GAAP requires us 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. Listed below are the accounting estimates that we believe are critical to our financial statements due to the degree of uncertainty regarding the estimates or assumptions involved and the magnitude of the asset, liability, revenue or expense being reported. All of these accounting estimates and assumptions, as well as the resulting impact to our financial statements, have been discussed with the audit committee of our board of directors.
II-16
Fair Value Measurements
Financial Instruments. We record a number of assets and liabilities in our consolidated balance sheets at fair value on a recurring basis, including available-for-sale ("AFS")equity securities, our investment in Liberty Broadband, financial instruments and our exchangeable senior debentures. 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. We use quoted market prices, or Level 1 inputs, to value our Fair Value Option (as defined below) securities and our investment in Liberty Broadband.securities. As of December 31, 20172019 and 2016, the carrying value of our2018, we had no Level 1 Fair Value Option securities was $2,275 million and $1,846 million, respectively. As of December 31, 2017, the carrying value of our investment in Liberty Broadband was $3,635 million.securities.
Level 2 inputs, other than quoted market prices included within Level 1, are observable for the asset or liability, either directly or indirectly. We use quoted market prices to determine the fair value of our exchangeable senior debentures. However, these debentures are not traded on active markets as defined in GAAP, so these liabilities fall in Level 2. As of December 31, 2017 and 2016,2019, the principal amount and carrying value of our exchangeable debentures were $1,947$1,447 million and $1,846$1,557 million, respectively.
Level 3 inputs are unobservable inputs for an asset or liability. We currently have no Level 3 financial instrument assets or liabilities.
Non-Financial Instruments. Our non-financial instrument valuations are primarily comprised of our annual assessment of the recoverability of our goodwill and other nonamortizable intangible assets, such as trademarkstradenames and our evaluation of the recoverability of our other long-lived assets upon certain triggering events, and our determination of the estimated fair value allocation of net tangible and identifiable intangible assets acquired in business combinations. If the carrying value of our long-lived assets exceeds their undiscounted cash flows, we are required to write the carrying value down to fair value. Any such writedown is included in impairment of long-lived assets in our consolidated statements of operations. A high degree of judgment is required to estimate the fair value of our long-lived assets. We may use quoted market prices, prices for similar assets, present value techniques and other valuation techniques to prepare these estimates. We may need to make estimates of future cash flows and discount rates as well as other assumptions in order to implement these valuation techniques. Due to the high degree of judgment involved in our estimation techniques, any value ultimately derived from our long-lived assets may differ from our estimate of fair value. As each of our operating segments has long-lived assets, this critical accounting policy affects the financial position and results of operations of each segment.
II-15
As of December 31, 2017,2019, the intangible assets not subject to amortization for each of our significant reportable segments were as follows:
|
|
|
|
|
|
|
|
|
|
| Goodwill |
| Trademarks |
| Total |
| |
|
| amounts in millions |
| |||||
QVC |
| $ | 5,190 |
| 2,428 |
| 7,618 |
|
HSNi |
|
| 933 |
| 627 |
| 1,560 |
|
zulily |
|
| 917 |
| 870 |
| 1,787 |
|
Corporate and other |
|
| 42 |
| 4 |
| 46 |
|
|
| $ | 7,082 |
| 3,929 |
| 11,011 |
|
| | | | | | | | |
| | Goodwill | | Tradenames | | Total |
| |
| | amounts in millions |
| |||||
QxH |
| $ | 5,228 |
| 2,878 |
| 8,106 | |
QVC International | | | 859 | | — | | 859 | |
Zulily | | | 477 | | 290 | | 767 | |
Corporate and other | |
| 12 |
| — |
| 12 | |
| | $ | 6,576 |
| 3,168 |
| 9,744 | |
We perform our annual assessment of the recoverability of our goodwill and other non-amortizable intangible assets during the fourth quarter of each year.year, or more frequently, if events or circumstances indicate impairment may have occurred. We utilize a qualitative assessment for determining whether a quantitative goodwill and other non-amortizable intangible asset impairment analysis is necessary. The accounting guidance permits entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the quantitative goodwill impairment test. In evaluating goodwill on a qualitative basis the Company reviews the business performance of each reporting unit and evaluates other relevant factors as identified in the relevant accounting guidance to determine whether it is more likely than not that an indicated impairment exists for any of our reporting units. The Company considers whether there are any negative macroeconomic conditions, industry specific conditions, market changes, increased competition, increased costs in doing business,
II-17
management challenges, the legal environments and how these factors might impact company specific performance in future periods. As part of the analysis the Company also considers fair value determinations for certain reporting units that have been made at various points throughout the current and prior years for other purposes. In 2019, an impairment of $440 million was recorded to Zulily’s goodwill. There were no goodwill impairments in 2018 and 2017. In 2019 and 2018, impairments of $147 million and $30 million, respectively, were recorded to HSN’s tradenames. Also in 2019, an impairment of $580 million was recorded to Zulily’s tradename. There were no impairments of other intangible impairmentsassets in 2017, 20162017. Based on the quantitative assessments performed during the third and 2015.fourth quarters of 2019 and the resulting impairment losses recorded, the estimated fair values of the Zulily and HSN tradenames and the Zulily reporting unit do not significantly exceed their carrying values as of December 31, 2019.
Retail Related Adjustments and Allowances. QVC records adjustments and allowances for sales returns, inventory obsolescence and uncollectible receivables. Each of these adjustments is estimated based on historical experience. Sales returns are calculated as a percent of sales and are netted against revenue in our consolidated statements of operations. For the years ended December 31, 2017, 20162019, 2018 and 2015,2017, sales returns represented 18.1%17.3%, 18.3%17.4% and 19.1%18.1% of QVC's gross product revenue, respectively. The inventory obsolescence reserve is calculated as a percent of QVC's inventory at the end of a reporting period based on, among other factors, the average inventory balance for the preceding 12 months and historical experience with liquidated inventory. The change in the reserve is included in cost of retail sales in our consolidated statements of operations. AtAs of December 31, 2017,2019, QVC's inventory was $1,019$1,214 million, which was net of the obsolescence adjustmentreserve of $92$145 million. AtAs of December 31, 2016,2018, inventory was $950$1,280 million, which was net of the obsolescence adjustmentreserve of $76$143 million. QVC's allowance for doubtful accounts is calculated as a percent of accounts receivable at the end of a reporting period, and the change in such allowance is recorded as a provision for doubtful accounts in Selling, general, and administrative (“SG&A”) expenses in our consolidated statements of operations. AtAs of December 31, 2017,2019, QVC's trade accounts receivable were $1,388$1,813 million, net of the allowance for doubtful accounts of $91$123 million. AtAs of December 31, 2016,2018, trade accounts receivable were $1,246$1,787 million, net of the allowance for doubtful accounts of $97$112 million. Each of these estimates requires management judgment and may not reflect actual results.
Income Taxes. We are required to estimate the amount of tax payable or refundable for the current year and the deferred income tax liabilities and assets for the future tax consequences of events that have been reflected in our financial statements or tax returns for each taxing jurisdiction in which we operate. This process requires our management to make judgments regarding the timing and probability of the ultimate tax impact of the various agreements and transactions that we enter into. Based on these judgments we may record tax reserves or adjustments to valuation allowances on deferred tax assets to reflect the expected realizability of future tax benefits. Actual income taxes could vary from these estimates due to future changes in income tax law, significant changes in the jurisdictions in which we operate,
II-16
our inability to generate sufficient future taxable income or unpredicted results from the final determination of each year's liability by taxing authorities. These changes could have a significant impact on our financial position.
Results of Operations—Businesses
QVC
QVC is a retailer of a wide range of consumer products, which are marketed and sold primarily by merchandise-focused televised shopping programs, the Internet and mobile applications.
In the U.S., QVC'sQVC’s televised shopping programs, including live and recorded content, are broadcast across multiple channels nationally on a full-time basis, including QVC, QVC2QVC 2, QVC 3, HSN and HSN2. During the first quarter of 2019, QVC transitioned its Beauty iQ broadcast channel to QVC 3 and Beauty iQ. The Company's U.S.iQ content was moved to a digital only platform. QxH programming is also available on QVC.com, QVC's U.S. website; mobileits websites (QVC.com and HSN.com); applications via streaming video; over-the-air broadcasters; and over-the-top content platforms (Roku,video (Facebook Live, Roku, Apple TV etc.) (suchand Amazon Fire); mobile applications; social pages and over-the-air broadcasters.
QVC’s digital platforms enable consumers to purchase goods offered on its broadcast programming, along with a wide assortment of products that are available only on QVC’s U.S. operations, “QVC-U.S.”). QVC'swebsites. These websites and QVC’s other digital platforms (including mobile applications, social pages, and others) are natural extensions of its business model, allowing customers to engage in its shopping experience wherever they are, with live or on-demand content customized to the device they are using. In addition to offering video content, QVC’s U.S. websites allow shoppers to browse, research, compare and perform targeted searches for products, read customer reviews, control the order-entry process and conveniently access their account.
QVC’s international televised shopping programs, including live and recorded content, are distributed to households outside of the U.S., primarily in Germany, Austria, Japan, the United Kingdom ("U.K."), the Republic of Ireland Italy and France (such international operations, “QVC-International”).Italy. In some of the countries where QVC operates, QVC'sits televised shopping programs are broadcast across multiple QVC channels: QVC Beauty & Style and QVC2 in Germany and QVC Beauty, QVC Extra, and QVC Style in the U.K. The programming created for most of these markets isSimilar to the U.S., QVC’s international businesses also availableengage customers via streaming video on QVC's digital platforms. QVC'swebsites, mobile applications, and social pages. QVC’s international business employs product sourcing teams who select products tailored to the interests of each local market.
QVC also has a joint venture with CNR Media Group, formerly known as China Broadcasting Corporation, a limited liability company owned by China National Radio (''CNR''). QVC owns a 49% interest in a CNR subsidiary, CNR Home Shopping Co., Ltd. (''CNRS''). CNRS operates a retail business in China through a shopping television channel with an associated website. The CNRS joint venture is accounted for as an equity method investment.
II-18
QVC's operating results were as follows:
| | | | | | | | |
| | Years ended December 31, |
| |||||
| | 2019 | | 2018 | | 2017 |
| |
| | amounts in millions |
| |||||
Net revenue | | $ | 10,986 |
| 11,282 |
| 8,771 | |
Cost of sales | |
| (7,148) |
| (7,248) |
| (5,598) | |
Operating expenses | |
| (768) |
| (881) |
| (601) | |
SG&A expenses (excluding stock-based compensation and transaction related costs) | |
| (1,088) |
| (1,094) |
| (666) | |
Adjusted OIBDA | |
| 1,982 |
| 2,059 |
| 1,906 | |
Impairment of intangible assets | | | (147) | | (30) | | — | |
Stock-based compensation | |
| (39) |
| (46) |
| (39) | |
Depreciation and amortization | |
| (468) |
| (411) |
| (519) | |
Transaction related costs | | | (1) | | (60) | | (39) | |
Operating income | | $ | 1,327 |
| 1,512 |
| 1,309 | |
|
|
|
|
|
|
|
|
|
|
| Years ended December 31, |
| |||||
|
| 2017 |
| 2016 |
| 2015 |
| |
|
| amounts in millions |
| |||||
Net revenue |
| $ | 8,771 |
| 8,682 |
| 8,743 |
|
Cost of sales |
|
| (5,598) |
| (5,540) |
| (5,528) |
|
Operating expenses |
|
| (601) |
| (606) |
| (607) |
|
SG&A expenses (excluding stock-based compensation) |
|
| (675) |
| (696) |
| (714) |
|
Adjusted OIBDA |
|
| 1,897 |
| 1,840 |
| 1,894 |
|
Stock-based compensation |
|
| (31) |
| (32) |
| (31) |
|
Depreciation and amortization |
|
| (519) |
| (605) |
| (588) |
|
Operating income |
| $ | 1,347 |
| 1,203 |
| 1,275 |
|
II-17
Net revenue was generated from the following geographical areas:
|
|
|
|
|
|
|
|
|
|
| Years ended December 31, |
| |||||
|
| 2017 |
| 2016 |
| 2015 |
| |
|
| amounts in millions |
| |||||
QVC-U.S. |
| $ | 6,140 |
| 6,120 |
| 6,257 |
|
QVC-International |
|
| 2,631 |
| 2,562 |
| 2,486 |
|
|
| $ | 8,771 |
| 8,682 |
| 8,743 |
|
| | | | | | | | |
| | Years ended December 31, |
| |||||
| | 2019 | | 2018 | | 2017 |
| |
| | amounts in millions |
| |||||
QxH | | $ | 8,277 |
| 8,544 |
| 6,140 | |
QVC International | |
| 2,709 |
| 2,738 |
| 2,631 | |
| | $ | 10,986 |
| 11,282 |
| 8,771 | |
QVC's consolidated net revenue decreased 2.6% and increased 1.0% and decreased 0.7%28.6% for the years ended December 31, 20172019 and 2016,2018, respectively, as compared to the corresponding prior years. The 2017 increase2019 decrease of $89$296 million in net revenue was primarily comprised of an increase of $405 million due to a 4.2% increase2.7% decrease in units sold. Thissold, $69 million in unfavorable foreign exchange rates and a $41 million decrease in shipping and handling revenue across all markets, which was primarilypartially offset by a 2.3% decrease1% increase in average selling price per unit ("ASP") attributing $237driven by the international markets, and a $49 million $33decrease in estimated product returns, primarily driven by the decrease in sales volume at QxH.
For 2018, the $2,511 million increase in revenue was primarily due to the inclusion of $2,195 million of revenue from HSN in 2018. HSN's results were not included in net revenue during 2017. The remaining increase of $316 million in net revenue was primarily comprised of a 2.7% increase in units sold, $102 million due to unfavorablethe inclusion of Private Label Credit Card ("PLCC") income in the U.S. as a result of the adoption of Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), $83 million in favorable foreign currency exchange rates and a decrease of $27$10 million increase in shipping and handling revenue,revenue. This was primarily offset by a $15 million1.1% decrease in miscellaneous incomeASP and an increase of $4$35 million in estimated product returns. The 2016 decrease of $61 million in net revenue was primarily due to a 3.9% decrease in ASP attributing $393 million and a $17 million decrease in shipping and handling revenue in constant currency. The decrease was offset by a 2.4% increasechanges in units shipped attributing $237 million,sold, foreign exchange rates, ASP and a decrease of $105 million in estimated product returns. returns are partially impacted by the change in the timing of revenue recognition as part of the adoption of ASC 606. The impact of this change was $21 million for the year ended December 31, 2018 in comparison to the year ended December 31, 2018 without the adoption of ASC 606.
During the years ended December 31, 20172019 and 2016,2018, the changes in revenue and expenses were affected by changes in the exchange rates for the Japanese Yen, the Euro and the U.K. Pound Sterling. In the event the U.S. Dollar strengthens against these foreign currencies in the future, QVC's revenue and operating cash flow will be negatively affected. QVC’s product margins may continue to be under pressure due to the devaluation of foreign currencies, and it will attempt to reduce its exposure through pricing and vendor negotiations as Brexit negotiations progress.
In discussing QVC’s operating results, the term “currency exchange rates” refers to the currency exchange rates QVC uses to convert the operating results for all countries where the functional currency is not the U.S. dollar. QVC calculates the effect of changes in currency exchange rates as the difference between current period activity translated using the prior period's currency exchange rates. Throughout our discussion, we refer to the results of this calculation as the impact of currency exchange rate fluctuations. When we refer to “constant currency operating results”, this means operating results without the impact of the currency exchange rate fluctuations. The disclosure of constant currency amounts or results permits investors to understand better QVC’s underlying performance without the effects of currency exchange rate fluctuations.
II-19
The percentage change in net revenue for QVC-U.S. and QVC-InternationalQVC in U.S. Dollars and in constant currency was as follows:
|
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|
| Year ended December 31, 2017 |
| Year ended December 31, 2016 |
| ||||||||||||||
|
| U.S. dollars |
| Foreign Currency Exchange Impact |
| Constant currency |
| U.S. dollars |
| Foreign Currency Exchange Impact |
| Constant currency |
| ||||||
QVC-US |
| 0.3 | % |
| — | % |
| 0.3 | % |
| (2.2) | % |
| — | % |
| (2.2) | % |
|
QVC-International |
| 2.7 | % |
| (1.3) | % |
| 4.0 | % |
| 3.1 | % |
| 0.1 | % |
| 3.0 | % |
|
| | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2019 | | Year ended December 31, 2018 | | ||||||||||||||
|
| U.S. dollars | | Foreign Currency Exchange Impact | | Constant currency | | U.S. dollars | | Foreign Currency Exchange Impact | | Constant currency | | ||||||
QxH |
| (3.1) | % | | — | % | | (3.1) | % | | 39.2 | % | | — | % | | 39.2 | % | |
QVC International |
| (1.1) | % | | (2.6) | % | | 1.5 | % | | 4.1 | % | | 3.2 | % | | 0.9 | % | |
In 2017, QVC-U.S.2019, the QxH net revenue increasedecrease was primarily due to a 3.7% increase2.8% decrease in units shipped, and a decrease in estimated product returns. This increase was offset by a 2.9%0.5% decrease in ASP, a $32and an $18 million decrease in shipping and handling revenue andrevenue. This decrease was partially offset by a $14$65 million decrease in miscellaneous income. QVC-U.S. experienced shipped sales growth in all categories except jewelry. The decrease in estimated product returns, was primarily due to an overall lower return rate acrossdriven by the decrease in sales volume. QxH experienced shipped sales
II-18
decline in all product categories except jewelry.electronics. The decrease in net shipping and handling revenue was a result of a decrease in shipping and handling revenue per unit from promotional offers. QVC-InternationalQVC International net revenue growth in constant currency was primarily due to a 5.0%5.1% increase in ASP, including increases in all markets. The increase was partially offset by a decrease of 2.5% in units shipped, primarily driven by Germany, the U.K., and Italy partially offset by increases in Japan, Germany, France and the U.K. offset by a decrease in units shipped in Italy. There was a $5$22 million increasedecrease in shipping and handling revenue, primarily driven by Japan. This was offset by a decrease of 1.0% in ASP, primarily driven in Japan and Germany offset by increases in Italy and the U.K. and a $20$16 million increase in estimated product returns driven byacross all markets except Japan. QVC-Internationalmarkets. QVC International experienced shipped sales growth in constant currency in all categories except electronics and jewelry. accessories.
In 2016, QVC-U.S.2018, the QxH net revenue declineincrease was primarily due to the inclusion of HSN’s revenue of $2,195 million in 2018 as a 5.5%result of the common control transaction between QVC and Qurate Retail. The remaining QxH increase was driven by QVC U.S., which was a separate reportable segment prior to 2019, primarily due to a 3.8% increase in units shipped, $102 million due to the inclusion of PLCC income and a $14 million increase in shipping and handling revenue. This increase was offset by a 1.7% decrease in ASP and a 4.0% decrease in shipping and handling revenue. The decline was offset by a 2.3%$41 million increase in units shipped and a decrease in estimated product returns. QVC-U.S.QVC U.S. experienced shipped sales declines in jewelry, electronics and beauty with growth in apparel, home and accessories. The decrease in net shipping and handling revenue was primarily due to the decrease in shipping and handling rates per unit from promotional offers. The decrease in estimated product returns was primarily due to a decrease in an overall lower return rate across all categories except jewelry and sales. QVC-Internationalhome. QVC International net revenue growth in constant currency was primarily due to a 2.5%0.9% increase in units shipped, driven mainlyby increases in Germanythe U.K. and the U.K., offset by the increaseJapan and a $6 million decrease in estimated product returns, driven primarily by product returnsJapan. This was offset by a $4 million decrease in Germany. QVC-Internationalshipping and handling revenue and a slight decrease in ASP. QVC International experienced shipped sales growth in constant currency in all categories except jewelryelectronics and apparel.accessories.
QVC's cost of sales as a percentage of net revenue was 63.8%65.1%, 63.8%64.2% and 63.2%63.8% for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively. The slight increase in 2016 wascost of goods sold as a percentage of revenue in 2019 is primarily due to decreasedan increase in product marginsfulfillment costs related to a new fulfillment center in Bethlehem, Pennsylvania and increasedhigher freight costs at QxH. For 2018, the increase in cost of goods sold as a percentage of revenue is primarily due to the U.S. associated with the increasesinclusion of HSN's financial results in units shipped,2018 in addition to higher warehouse and freight costs partially offset by a favorable inventory obsolescence provision in the U.S.inclusion of PLCC income within net revenue, which was previously recorded as an offset to SG&A expenses.
QVC's operatingOperating expenses are principally comprised of commissions, order processing and customer service expenses, credit card processing fees, and telecommunications expenses. Operating expenses decreased $5.0$113 million or 0.8%13% and decreased $1.0increased $280 million or 0.2%47% for the years ended December 31, 20172019 and 2016,2018, respectively. The decrease in 20172019 was primarily due to a $92 million decrease in commissions primarily at QxH, a $13 million decrease in personnel costs, primarily at QxH and to a lesser extent, Italy, Germany and Japan, and a $5 million decrease due to favorable exchange rates. The slight decrease in 2016commissions is primarily due to new longer term television distribution rights agreements entered into at HSN, with similar terms to QVC’s television distribution agreements, which led to increased capitalization of television distribution rights agreements and favorable terms on commissions. The increase in 2018 was primarily due to lower telecommunication expense,the inclusion of HSN operating expenses of $269 million in 2018 in addition to a $10 million increase in credit card fees primarily at QVC U.S. and $6 million due to unfavorable exchange rates, which was partially offset by increased commissions expense. Thea $2 million decrease in telecommunication expense wascommissions primarily due to lower phone and network ratesat QVC U.S., offset by increases in the U.S. The increase in commissions expense wasU.K. and Japan and a $2 million decrease of telephone expenses primarily due to increases internationally offset by a decrease in sales in theat QVC U.S.
QVC's SG&A expenses (excluding stock compensation)compensation and transaction related costs as defined below) include personnel, information technology, provision for doubtful accounts, credit card income, production costs and marketing and advertising expense.expense, and prior to the adoption of ASC 606 on December 1, 2018, credit card income. Such expenses decreased $21$6 million, and remained at 8%were 9.9% of net revenue for the year ended December 31, 20172019 as compared to the prior year and decreased $18increased $428 million and 8%were 9.7% of net revenue for the year ended December 31, 20162018 as compared to the prior year, as a result of a variety of factors.
II-20
year.
The decrease in 20172019 was primarily due to a $43 million decrease in bad debt expense of $35 million, a decrease in severance expense of $13 million, $4 million from favorable foreign currency rates and a $6 million increase in credit card income offset by an increase in bonus expense of $33 million and a $4 million increase in marketing expenses. The decrease in bad debt expense was primarily related to lower default rates associated with the Easy-Pay program in the U.S. The increase in credit card income was due to the favorable economics of the QVC-branded credit card (“Q card”) portfolio in the U.S. The increase in marketing expenses was primarily due to an increase in the investment made to eMarketing partially offset by discontinuing the naming rights to the Chiba Marine Stadium in Japan.
The decrease in 2016 was primarily related to reduced personnel costs of $63 millionprimarily in QxH, France and an increase of credit card income of $8 million which wasthe U.K. partially offset by increases in Japan, Germany and Italy, and an $11 million decrease due to favorable exchange rates. The decreases were partially offset by a $22 million increase in outside services, primarily at QxH and Japan, partially offset by a decrease in Germany, a $12 million increase in bad debt expense, of $25and a $16 million software expense of $13 million, franchise tax expense of $10 million and external services of $8 million.increase in online marketing expenses primarily in QxH. The decrease in personnel costs was primarilyis due to a decrease in bonuses and benefits in the U.S., and severance. The increase in credit card income was due to the favorable economics and usagewages at QxH as a result of the Q card portfolioQRG Initiatives, a decrease in bonus compensation across all markets except for Japan, the U.S.termination of a retirement health plan and the closure of QVC’s operations in France, partially offset by higher severance across all markets. The increase in bad debt expense was primarily related to an increase in U.S. Easy-Pay sales penetration and default rates. The increase in software expense was mainly due to an increase in software licensing and software maintenance. The increase in franchise tax expense was mainly due to a favorable franchise tax reserve adjustment related to an audit settlement in 2015 which was not experienced infor the year ended December 31, 2016. 2019 is primarily due to increased Easy Pay usage and the number of installments taken at QxH.
II-19
The increase in external services2018 was primarily related to the inclusion of $254 million of HSN's SG&A expenses as well as the reclassification of PLCC income, attributing $105 million as a result of the adoption of ASC 606, which was previously recorded as an offset to SG&A expenses for the year ended December 31, 2017. Additionally, there was a $29 million increase in outside services across all markets, a $21 million increase in bad debt expense primarily at QVC U.S. and to a lesser extent, Japan, a $14 million increase in marketing expenses primarily at QVC U.S. and a $12 million increase due to internal control enhancementsunfavorable exchange rates. The increase in bad debt expense is due to favorability in default rates from prior periods, mostly related to the Easy-Pay program at QVC U.S. during the year ended December 31, 2017. These increases were partially offset by an $8 million decrease in personnel costs primarily at QVC U.S. and Germany.
QVC recorded impairment losses of $147 million and $30 million for the establishmentyears ended December 31, 2019 and 2018 related to the decrease in the fair value of the HSN indefinite-lived tradename as a global business serviceresult of the quantitative assessment that was performed by the Company in each of those years (see note 7 to the accompanying consolidated financial statements). There was no impairment loss recorded by QVC for the year ended December 31, 2017.
QVC recorded $1 million, $60 million and $39 million of transaction related costs for the years ended December 31, 2019, 2018 and 2017, respectively. The increase in transaction related costs in 2018 is primarily related to severance payments related to the future closure of QVC's Lancaster, PA fulfillment center locatedand other initiatives to better position its QxH operations as well as the closure of operations in Krakow, Poland.France. The transaction related costs that were incurred in 2017 were primarily attributed to severance at HSN and other integration and advisory costs.
Stock-based compensation includes compensation related to options and restricted stock granted to certain officers and employees. QVC recorded $31$39 million, $32$46 million and $31$39 million of stock-based compensation expense for the years ended December 31, 2019, 2018 and 2017, 2016 and 2015, respectively.
Depreciation and amortization consisted of the following:
|
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|
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|
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|
| ||||||||
|
| Years ended December 31, |
| |||||||||||||
|
| 2017 |
| 2016 |
| 2015 |
| |||||||||
|
| amounts in millions |
| |||||||||||||
| | | | | | | | | ||||||||
| | Years ended December 31, |
| |||||||||||||
|
| 2019 |
| 2018 |
| 2017 |
| |||||||||
| | amounts in millions |
| |||||||||||||
Affiliate agreements |
| $ | 97 |
| 146 |
| 146 |
| | $ | 2 |
| 2 |
| 97 | |
Customer relationships |
|
| 113 |
| 169 |
| 170 |
| |
| 49 |
| 50 |
| 113 | |
Other | | | 15 | | 15 | | — | | ||||||||
Acquisition related amortization |
|
| 210 |
| 315 |
| 316 |
| |
| 66 |
| 67 |
| 210 | |
Property and equipment |
|
| 155 |
| 142 |
| 134 |
| |
| 186 |
| 174 |
| 155 | |
Software amortization |
|
| 93 |
| 100 |
| 93 |
| |
| 85 |
| 95 |
| 93 | |
Channel placement amortization and related expenses |
|
| 61 |
| 48 |
| 45 |
| |
| 131 |
| 75 |
| 61 | |
Total depreciation and amortization |
| $ | 519 |
| 605 |
| 588 |
| | $ | 468 |
| 411 |
| 519 | |
For the year ended December 31, 2017,2019, channel placement amortization expense increased primarily due to new television distribution contracts entered into at HSN and software amortization decreased due to the end of useful lives of certain software additions. For the year ended December 31, 2018, acquisition related amortization expense decreased primarily due to the end of the useful lives of certain affiliate agreements and customer relationships established at the time of Liberty'sQurate Retail's acquisition of QVC in 2003. This was offset by an increase inProperty and equipment depreciation, software and channel placement amortization relatedincreased in 2018 due to the additioninclusion of Beauty iQ in the U.S. and the increase in depreciation related to the additions at the California distribution center. For the year ended December 31, 2016,HSN's depreciation and amortization increased primarily due to expense related to the additions at the California distribution center and new website functionality.amortization.
II-21II-20
Zulily
HSN
On December 29, 2017, Liberty acquired the approximately 62% of HSNi it did not already own in an all-stock transaction making HSNi a wholly-owned subsidiary, attributed to the QVC Group tracking stock group. As HSNi’s Cornerstone operating segment was included in the “Corporate and other” reportable segment (see note 19 in the accompanying consolidated financial statements), the information presented in this section relates to the HSN reportable segment. With the exception of $38 million of severance-related costs incurred on December 30, 2017, HSN’s results of operations are not included in our consolidated operating results for the year ended December 31, 2017, as the final two days of the period were considered immaterial. However, we believe a discussion of HSN’s stand alone results promotes a better understanding of the overall results of its business.
HSN is an interactive entertainment and lifestyle retailer offering a curated assortment of exclusive products and top brand names to its customers primarily through television home shopping programming on the HSN television networks, through its business-to-consumer digital commerce site HSN.com, through mobile applications, through outlet stores and through wholesale distribution of certain proprietary products to other retailers. HSN incorporates entertainment, inspiration and personalities to provide an entirely unique shopping experience. HSN’s live programming is distributed via its nationally televised shopping program seven days a week, 364 days per year.
HSN’s stand-aloneZulily's operating results for the last three years were as follows:
| | | | | | | | |
| | Years ended |
| |||||
| | December 31, | | December 31, | | December 31, | | |
| | 2019 | | 2018 | | 2017 |
| |
| | amounts in millions |
| |||||
Net revenue | | $ | 1,571 |
| 1,817 |
| 1,613 | |
Cost of sales | |
| (1,179) |
| (1,346) |
| (1,195) | |
Operating expenses | |
| (42) |
| (50) |
| (47) | |
SG&A expenses (excluding stock-based compensation and transaction related costs) | |
| (302) |
| (313) |
| (280) | |
Adjusted OIBDA | |
| 48 |
| 108 |
| 91 | |
Stock-based compensation | |
| (15) |
| (17) |
| (18) | |
Depreciation and amortization | |
| (104) |
| (186) |
| (202) | |
Impairment of intangible assets | | | (1,020) | | — | | — | |
Operating income (loss) | | $ | (1,091) |
| (95) |
| (129) | |
|
|
|
|
|
|
|
|
|
|
| Years ended |
| |||||
|
| December 31, |
| December 31, |
| December 31, |
| |
|
| 2017 (3) |
| 2016 (3) |
| 2015 (3) |
| |
|
| amounts in millions |
| |||||
Net revenue |
| $ | 2,343 |
| 2,479 |
| 2,552 |
|
Cost of sales |
|
| (1,533) |
| (1,638) |
| (1,647) |
|
SG&A expenses (excluding stock-based compensation and acquisition related expenses) |
|
| (590) |
| (582) |
| (605) |
|
Adjusted OIBDA |
|
| 220 |
| 259 |
| 300 |
|
Stock-based compensation |
|
| (17) |
| (15) |
| (14) |
|
Depreciation and amortization |
|
| (31) |
| (29) |
| (29) |
|
Acquisition and restructuring related expenses (1) (2) |
|
| (69) |
| — |
| (5) |
|
Operating income (loss) |
| $ | 103 |
| 215 |
| 252 |
|
|
|
|
|
|
|
HSN’s net sales primarily relate to the sale of merchandise, including shipping and handling fees, and are reduced by incentive discounts and actual and estimated sales returns. Sales taxes collected are not included in net sales. Digital sales include sales placed through our websites and our mobile applications, including tablets and smart phones. Revenue is recorded when delivery to the customer has occurred. Delivery is considered to have occurred when the customer takes title and assumes the risks and rewards of ownership, which is on the date of shipment. HSNi’s sales policy allows customers to return virtually all merchandise for a full refund or exchange, subject to pre-established time restrictions.
II-22
HSN's net revenue decreased 5.5% and 2.9% for the years ended December 31, 2017 and December 31, 2016, respectively, as compared to the corresponding prior years. The decrease in net revenue for the year ended December 31, 2017 was primarily attributed to a 3.3% decrease in ASP, a 3.5% decrease in units shipped and a 21.7% decrease in shipping and handling revenue. The decline was partially offset by a 1.4% improvement in the sales return rate from 16.3% to 14.9%. HSN experienced sales declines in all categories. The decrease in net shipping and handling revenue was primarily due to the decrease in shipping and handling rates per unit from promotional offers and due to a reduction in HSN’s standard shipping rates which became effective in August 2016. The decrease in estimated product returns was primarily due to a decrease in return rates experienced across most categories. The decrease in net revenue for the year ended December 31, 2016 was primarily attributed to a 3.4% decrease in ASP and a 20.0% decrease in shipping and handling revenue, partially offset by a 0.8% improvement in the sales return rate from 17.1% to 16.3%. HSN experienced sales declines in all categories with the exception of apparel and electronics. The decrease in net shipping and handling revenue was primarily due to the decrease in shipping and handling rates per unit from promotional offers and due to a reduction in HSN’s standard shipping rates which became effective in August 2016. The decrease in the sales return rate was primarily due to a sales mix shift to categories with lower return rates and an overall lower return rate across all categories. Approximately one-third of the decline in net sales was attributable to a direct-response television marketing campaign that began in 2014 and concluded in the first quarter of 2016.
HSN's cost of sales as a percentage of net revenue was 65.4%, 66.1% and 64.5% for the years ended December 31, 2017, 2016 and 2015 respectively. The decrease for the year ended December 31, 2017, as compared to the prior year, was primarily attributed to increased product margins and a favorable inventory obsolescence provision, partially offset by higher freight costs driven largely by annual rate increases with HSN’s outbound shipping carriers. The increase for the year ended December 31, 2016 was primarily attributed to lower shipping revenues and higher fulfillment and shipping costs resulting from issues with the implementation of HSN’s warehouse automation initiative. Shipping and handling costs were also impacted by changes in product mix and annual rate increases with HSN’s outbound shipping carriers.
HSN’s SG&A expenses (excluding stock-based compensation and acquisition-related costs) include personnel, commissions, information technology, order processing and customer service expenses, credit card processing fees, credit card income, provision for doubtful accounts, productions costs and marketing and advertising expense. These expenses increased $8 million, and as a percentage of net revenue, increased from 23.5% to 25.2% for the year ended December 31, 2017, as compared to the prior year. The increase in SG&A expense was primarily due to higher personnel costs of $8 million and an increase in bad debt expense of $5 million related to HSN’s Flexpay program, partially offset by lower marketing expense of $8 million. The increase in personnel costs was primarily due to higher bonus expense and higher wages driven by annual merit increases. The decrease in marketing expense is due to lower digital marketing costs and due to advertising and media costs incurred in the prior year related to the expansion of HSN’s wholesale business and direct-response television business. The increase in expense as a percentage of net revenue was driven by the deleveraging of fixed costs due to the decrease in net sales and due to the increases in bonus and bad debt expenses.
HSN’s SG&A expenses decreased $23 million, and as a percentage of revenue decreased from 23.7% to 23.5% for the year ended December 31, 2016, as compared to 2015. The SG&A expense decrease was primarily due to a $11 million decline in bad debt expense driven by higher loss rates from HSN's Flexpay program in the prior year. The decrease is also due to decreases in personnel costs, including performance-based incentives of $10 million. There was also a $9 million decrease in media costs related to direct-response television business. These decreases were partially offset by higher commissions expense of $7 million primarily due to expanded coverage of HSN2, an increase in digital marketing and an increase in consulting costs.
Stock-based compensation includes compensation related to stock appreciation rights and restricted stock units granted to certain employees. HSN recorded $17 million, $15 million and $14 million of stock-based compensation expense for the years ended December 31, 2017, 2016 and 2015, respectively. Stock-based compensation in 2017 included the acceleration of vesting of certain awards for employees terminated in connection with the Merger, offset by the cancellation of awards as a result of the resignation of HSN’s former CEO in 2017.
HSN’s depreciation and amortization expense increased $2 million and remained flat for the years ended December 31, 2017 and 2016, respectively, as compared to the corresponding prior years. The increase in 2017 is primarily attributed to additions related to HSN’s warehouse automation initiative.
II-23
Included in HSN’s operating income for the year ended December 31, 2017 are allocated acquisition-related costs of $69 million primarily related to investment banking fees, legal fees and severance-related costs. Of the $38 million of acquisition costs recorded by the Company for the two day period after the acquisition, $30 million related to severance and bonus payments is included in the amount reported by HSN. The additional $8 million recorded by the Company related to accelerated vesting of stock options, was not included in HSN’s acquisition-related costs, and has been included in Selling, general and administrative, including stock-based compensation expense in the accompanying consolidated statements of operations.
zulily
Liberty acquired zulily on October 1, 2015, and zulily’s results are only included in Liberty’s results for periods subsequent to October 1, 2015. We believe a discussion of zulily’s stand alone results, including certain one-time purchase accounting related adjustments detailed below, promotes a better understanding of the overall results of its business.
zulily's operating results for the last three years were as follows:
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|
| Years ended |
| |||||
|
| December 31, |
| December 31, |
| December 31, |
| |
|
| 2017 |
| 2016 |
| 2015 (1) |
| |
|
| amounts in millions |
| |||||
Net revenue |
| $ | 1,613 |
| 1,547 |
| 1,361 |
|
Cost of sales |
|
| (1,195) |
| (1,108) |
| (978) |
|
Operating expenses |
|
| (47) |
| (47) |
| (43) |
|
SG&A expenses (excluding stock-based compensation and acquisition related expenses) |
|
| (280) |
| (280) |
| (269) |
|
Adjusted OIBDA |
|
| 91 |
| 112 |
| 71 |
|
Acquisition related expenses |
|
| — |
| — |
| (30) |
|
Stock-based compensation |
|
| (18) |
| (19) |
| (19) |
|
Depreciation and amortization |
|
| (202) |
| (245) |
| (83) |
|
Deferred revenue adjustment |
|
| — |
| — |
| (17) |
|
Operating income (loss) |
| $ | (129) |
| (152) |
| (78) |
|
|
|
Net revenue consists primarily of sales of women's, children's and men's apparel, children's merchandise and other product categories such as home, accessories and beauty and personalized products. zulilyZulily recognizes product sales at the time all revenue recognition criteria has been met, which is generally at delivery.shipment. Net revenue represents the sales of these items plus shipping and handling charges to customers and PLCC income, net of estimated refunds and returns, store credits, and promotional discounts. Net revenue is primarily driven by growth in zulily’sZulily’s active customers, the frequency with which customers purchase and average order value.
zulily'sZulily's consolidated net revenue decreased 13.5% and increased 4.3% and 13.7%12.6% for the years ended December 31, 20172019 and December 31, 2016,2018, respectively, as compared to the corresponding prior years. The decrease in net revenue for the year ended December 31, 2019 was primarily attributed to a 14.2% decrease in demand. The increase in net revenue for the year ended December 31, 20172018 was primarily attributed to a 5.1%14.4% increase in orders placed drivenpartially offset by a 15.9% increase1.5% decrease in active customersaverage order value year over year, coming from accelerated growth in the fourth quarter. Along with theyear. The increase in orders placed units per order also increased but was offset by lower average sales price per unit. The increase in net revenue for the year ended December 31, 2016 was primarily attributed to an increase in total orders placed of 14.5%, driven by a 14.1%13.8% increase in the number of orders placed per active customer. An active customer is defined as an individual who had purchased at least once in the last twelve months, measured from the last day of the period.customers.
zulily'sZulily's cost of sales as a percentage of net revenue was 74.1%75.0%, 71.6%74.1% and 71.9%74.1% for the years ended December 31, 2019, 2018 and 2017, 2016 and 2015, respectively. The increaseCost of sales as a percentage of net revenue increased for the year ended December 31, 2017 was2019 as compared to the year ended December 31, 2018 primarily attributeddue to higher freeincreased shipping and promotional offers,costs. Cost of sales as well as higher supply chain expenses resulting from an increase in international
II-24
shipping, a shift in product mix, ramping up of zulily’s Pennsylvania fulfillment center and growth of its third-party fulfillment services and higher unit volume at a lower average sales price per unit. The decreasenet revenue remained flat for the year ended December 31, 2016 was primarily attributed2018 as compared to improved operational efficiency, partially offset by higher shipping and handling costs.the year ended December 31, 2017.
zulily’sZulily’s operating expenses are principally comprised of credit card processing fees and customer service expenses. Operating expenses remained flat anddecreased for the year ended December 31, 2019, as compared to the same period in the prior year, due to a decrease in transaction processing fees as a result of decreased net sales. Operating expenses increased $4 million, or 9.3%, for the years ended December 31, 2017 and 2016, respectively. The increase2018, as compared to the same period in operating expenses was primarily attributedthe prior year, due to an increase in credit card processing fees which are driven by higher sales volume.net sales.
zulily’sZulily’s SG&A expenses include personnel related costs for general corporate functions, marketing and advertising expenses and information technology, andtechnology. As a percentage of net revenue, SG&A increased from 17.2% to 19.2% for the costs associated with the use by these functions of facilities and equipment, including rent.year ended December 31, 2019, primarily due to deleveraging personnel-related costs. As a percentage of net revenue, SG&A decreased from 18.1%17.4% to 17.4%17.2% for the year ended December 31, 20172018, primarily due to a shiftleveraging in marketing and advertising spend to promotional offers. fixed costs.
zulily’s SG&A expenses increased $11 million, and as a percentage of net revenue decreased from 19.8% to 18.1% for the year ended December 31, 2016. The SG&A expense increase was primarily due to an increase in overall marketing spend. The decrease in expense as a percentage of net revenue was driven by top line revenue growth over a partially fixed cost base.
zulily’sZulily’s stock-based compensation expense decreased slightly for the year ended December 31, 20172019 as compared to the corresponding period in the prior year primarily due to the transferdepartures of certain senior leadership to QVC. zulily’sincluding the Chief
II-21
Merchant. Zulily’s stock-based compensation expense remained flatdecreased slightly for the year ended December 31, 2016,2018, compared to the corresponding period in the prior year. year, due to the transfer of certain senior leadership to QVC.
zulily’sZulily’s depreciation and amortization expense decreased $43$82 million and increased $162decreased $16 million for the years ended December 31, 20172019 and 2016,2018, respectively, as compared to the corresponding prior years. The decrease for the year ended December 31, 2017 as2019, compared to the same period in the prior year, was primarily attributable to intangible assets recognized in purchase accounting that were fully amortized as of the decelerating amortizationthird quarter of 2018. The decrease for the year ended December 31, 2018, compared to the same period in the prior year, was primarily attributable to fully amortized intangible assets recognized in purchase accounting. The increase for
For discussion of the year ended December 31, 2016 as compared to the prior year was primarily attributed to amortizationimpairment of intangible assets, as a result of purchase accounting. To a lesser extent, the increase in depreciation and amortization was related to additional automation equipment and leasehold improvements in its fulfillment centers.
II-25
zulily’s results for the year ended December 31, 2015, including certain one-time purchase accounting related adjustments, were as follows (amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
| Post-Acquisition: |
|
|
| Pre-Acquisition: |
|
|
| |
|
| October 1, 2015 - December 31, 2015 |
| Deferred Revenue Adjustment |
| December 29, 2014 - September 30, 2015 |
| 2015 Total |
| |
Net revenue |
| $ | 426 |
| 17 |
| 918 |
| 1,361 |
|
Cost of sales |
|
| (318) |
| — |
| (660) |
| (978) |
|
Operating expenses |
|
| (13) |
| — |
| (30) |
| (43) |
|
SG&A expenses (excluding stock-based compensation and acquisition related expenses) |
|
| (74) |
| — |
| (195) |
| (269) |
|
Adjusted OIBDA |
|
| 21 |
| 17 |
| 33 |
| 71 |
|
Acquisition related expenses |
|
| — |
| — |
| (30) |
| (30) |
|
Stock-based compensation |
|
| (5) |
| — |
| (14) |
| (19) |
|
Depreciation and amortization |
|
| (69) |
| — |
| (14) |
| (83) |
|
Deferred revenue adjustment |
|
| — |
| (17) |
| — |
| (17) |
|
Operating income (loss) |
| $ | (53) |
| — |
| (25) |
| (78) |
|
The results of operations for the year ended December 31, 2015 include approximately $30 million in costs associated with the closingsee note 7 of the acquisition. The results of operations for the period October 1, 2015 through December 31, 2015 include approximately $63 million of depreciation and amortization as a result of purchase accounting related to new intangible assets and to a lesser extent stepped up valuation on assets existing prior to the date of the acquisition. Additionally, as a result of our application of purchase accounting, zulily’s deferred revenue was adjusted to fair value, based on a broader market margin, instead of a company specific margin. This adjustment had the one-time impact of lowering revenue and Adjusted OIBDA in the post-acquisition period.accompanying consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
We are exposed to market risk in the normal course of business due to our ongoing investing and financial activities and the conduct of operations by our subsidiaries in different foreign countries. Market risk refers to the risk of loss arising from adverse changes in stock prices, interest rates and foreign currency exchange rates. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. We have established policies, procedures and internal processes governing our management of market risks and the use of financial instruments to manage our exposure to such risks.
We are exposed to changes in interest rates primarily as a result of our borrowing and investment activities, which include investments in fixed and floating rate debt instruments and borrowings used to maintain liquidity and to fund business operations. The nature and amount of our long-term and short-term debt are expected to vary as a result of future requirements, market conditions and other factors. We manage our exposure to interest rates by maintaining what we believe is an appropriate mix of fixed and variable rate debt. We believe this best protects us from interest rate risk. We have achieved this mix by (i) issuing fixed rate debt that we believe has a low stated interest rate and significant term to
II-26
maturity, (ii) issuing variable rate debt with appropriate maturities and interest rates and (iii) entering into interest rate swap arrangements when we deem appropriate. As of December 31, 2017,2019, our debt is comprised of the following amounts:
| | | | | | | | | | | |
| | Variable rate debt | | Fixed rate debt |
| ||||||
| | Principal | | Weighted avg | | Principal | | Weighted avg |
| ||
| | amount | | interest rate | | amount | | interest rate |
| ||
| | dollar amounts in millions |
| ||||||||
QxH and QVC International | | $ | 730 |
| 3.1 | % | $ | 4,250 |
| 5.0 | % |
Zulily | | $ | 130 | | 3.1 | % | $ | — | | — | % |
Corporate and other | | $ | — |
| — | % | $ | 2,238 |
| 5.1 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Variable rate debt |
| Fixed rate debt |
| ||||||
|
| Principal |
| Weighted avg |
| Principal |
| Weighted avg |
| ||
|
| amount |
| interest rate |
| amount |
| interest rate |
| ||
|
| dollar amounts in millions |
| ||||||||
QVC Group |
|
|
|
|
|
|
|
|
|
|
|
QVC |
| $ | 1,496 |
| 3.0 | % | $ | 3,719 |
| 4.6 | % |
HSNi |
| $ | 460 |
| 3.1 | % | $ | — |
| — | % |
zulily |
| $ | 267 |
| 3.0 | % | $ | — |
| — | % |
Corporate and other |
| $ | — |
| — | % | $ | 792 |
| 8.3 | % |
Ventures Group |
|
|
|
|
|
|
|
|
|
|
|
Corporate and other |
| $ | — |
| — | % | $ | 1,947 |
| 3.0 | % |
We are exposed to changes in stock prices primarily as a result of our significant holdings in publicly traded securities. We continually monitor changes in stock markets, in general, and changes in the stock prices of our holdings, specifically. We believe that changes in stock prices can be expected to vary as a result of general market conditions, technological changes, specific industry changes and other factors. We periodically use equity collars and other financial instruments to manage market risk associated with certain investment positions. These instruments, when utilized, are recorded at fair value based on option pricing models.
At December 31, 2017, the fair value of our AFS securities was $2,275 million. Had the market price of such securities been 10% lower at December 31, 2017, the aggregate value of such securities would have been $228 million lower. Our investments in FTD and LendingTree are publicly traded securities and are accounted for as equity method affiliates, which are not reflected at fair value in our balance sheets. The aggregate fair value of such securities was $1,171 million at December 31, 2017 and had the market price of such securities been 10% lower at December 31, 2017, the aggregate value of such securities would have been $117 million lower. These securities are also subject to market risk that is not directly reflected in our statements of operations. At December 31, 2017, the fair value of our investment in Liberty Broadband was $3,635 million. Had the market price of such security been 10% lower at December 31, 2017, the fair value of such security would have been $364 million lower. Additionally, our exchangeable senior debentures are also subject to market risk. Because we mark these instruments to fair value each reporting date, increases in the price of the respective underlying security generally result in higher liabilities and unrealized losses in our statements of operations.
LibertyQurate Retail is exposed to foreign exchange rate fluctuations related primarily to the monetary assets and liabilities and the financial results of QVC's foreign subsidiaries. Assets and liabilities of foreign subsidiaries for which the functional currency is the local currency are translated into U.S. dollars at period-end exchange rates, and the statements of operations are generally translated at the average exchange rate for the period. Exchange rate fluctuations on translating foreign currency financial statements into U.S. dollars that result in unrealized gains or losses are referred to as translation adjustments. Cumulative translation adjustments are recorded in accumulated other comprehensive earnings (loss) as a separate component of stockholders' equity. Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in transaction gains and losses, which are reflected in income as unrealized (based on period-end translations) or realized upon settlement of the transactions. Cash flows from our operations in foreign countries are translated at the average rate for the period. Accordingly, LibertyQurate Retail may experience economic loss and a negative impact on earnings and equity with respect to our holdings solely as a result of foreign currency exchange rate fluctuations. QVC's reported Adjusted OIBDA for the year ended December 31, 20172019 would have been impacted by approximately $5 million for every 1% change in foreign currency exchange rates relative to the U.S. Dollar.
II-22
We periodically assess the effectiveness of our derivative financial instruments. With regard to interest rate swaps, we monitor the fair value of interest rate swaps as well as the effective interest rate the interest rate swap yields, in comparison to historical interest rate trends. We believe that any losses incurred with regard to interest rate swaps would be largely offset by the effects of interest rate movements on the underlying debt facilities. These measures allow our management to evaluate the success of our use of derivative instruments and to determine when to enter into or exit from derivative instruments.
II-27
Item 8. Financial Statements and Supplementary Data.
The consolidated financial statements of LibertyQurate Retail are filed under this Item, beginning on page II-33.II-30. The financial statement schedules required by Regulation S-X are filed under Item 15 of this Annual Report on Form 10‑K.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures. Procedures.
Disclosure Controls and Procedures
In accordance with Rules 13a-15 and 15d-15 underof the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), the Company carried out an evaluation, under the supervision and with the participation of management, including its chief executive officer and its principal accounting and financial officer (the “Executives”), of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Executives concluded that the Company's disclosure controls and procedures were not effective as of December 31, 20172019 because of the material weakness in its internal control over financial reporting that is described below in “Management’s Report on Internal Control Over Financial Reporting.”
However, giving full consideration to provide reasonable assurancethe material weakness, the Company’s management has concluded that information required to bethe consolidated financial statements included in this Annual Report on Form 10-K present fairly, in all material respects, the Company’s financial position, results of operations and cash flows for the periods disclosed in conformity with U.S. generally accepted accounting principles (“GAAP”). The Company’s independent registered accounting firm, KPMG LLP, has issued its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. report dated February 26, 2020, which expressed an unqualified opinion on those consolidated financial statements.
Changes in Internal Control Over Financial Reporting
The Company acquired HSNi in December 2017. As a result of the acquisition, the Company is reviewing the internal controls of HSNi and is making appropriate changes as deemed necessary. Except for the changes in internal control at HSNi,remediation activities described below which occurred throughout the year, including during the fourth quarter, there has been no change in the Company'sCompany’s internal control over financial reporting that occurred during the three monthsCompany’s quarter ended December 31, 20172019, that has materially affected, or is reasonably likely to materially affect, itsthe Company’s internal control over financial reporting.
2019 Remediation Activities
In response to the material weaknesses identified in “Management’s Report on Internal Control Over Financial Reporting” as set forth in Part II, Item 9A in the 2018 Form 10-K, the Company developed a plan with oversight from the Audit Committee of the Board of Directors to remediate the material weaknesses. The remediation efforts implemented include the following:
● | Improved the design and operation of control activities meant to validate the completeness and accuracy of revenue recorded in the UK; |
● | Removed inappropriate IT system access associated with information technology general controls (“ITGC”), with the exception of IT system access control deficiencies that continued to exist in the Company’s German subsidiary as further discussed in “Management’s Report on Internal Control Over Financial Reporting” |
II-23
below; |
● | Enhanced risk assessment procedures by performing investigative procedures around higher risk applications to identify other potential risk areas that could have an impact on financial reporting; |
● | Enhanced change management and computer operation control activities including monitoring of information system user access and program changes; |
● | Delivered training to control operators addressing control operating protocol including ITGCs and policies, and increased communication of expectations for control operators; |
● | Evaluated talent and addressed identified gaps; and |
● | Evaluated the impact of IT application changes on downstream business process controls and enhanced related business process controls as necessary. |
Material Weakness in Internal Control
As described in “Management’s Report on Internal Control Over Financial Reporting” in this Annual Report on Form 10-K, through the execution of the aforementioned remediation activities, the Company identified additional instances where system access was not appropriately restricted in Germany, indicating that the prior year ITGC material weakness has not been fully remediated. As a result, the Company will continue to assess the ITGC risk across the environment and evaluate if the control activities are designed and operating to address the risks identified.
The Company believes the foregoing efforts will effectively remediate the material weakness described in “Management’s Report on Internal Control Over Financial Reporting,” although additional changes and improvements may be identified and adopted as the Company continues to implement its remediation plan related to the German ITGC issue. The Company believes it has properly restricted access to the affected applications during the first two months of 2020. Because the reliability of the internal control process requires repeatable execution, the successful on-going remediation of the material weakness will require on-going review and evidence of effectiveness prior to concluding that the controls are effective. Our remediation efforts are underway, and we expect that the remediation of this material weakness will be completed in 2020.
Management’s Report on Internal Control Over Financial Reporting
See page II-29II-25 for Management's Report on Internal Control Over Financial Reporting.
See page II-30II-26 for KPMG LLP’s attestation report regarding the effectiveness of ourthe Company’s internal control over financial reporting.
None.
II-28II-24
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Liberty Interactive Corporation’s (the “Company”) managementManagement of the Company is responsible for establishing and maintaining adequate internal control over the Company’s financial reporting, as such term is defined in Rule 13a-15(f) of the Securities Exchange Act of 1934.Act. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.GAAP. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
The Company'sCompany’s management assessed the effectiveness of internal control over financial reporting as of December 31, 2017,2019, using the criteria in Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation the Company'sassessment, management believeshas concluded that, as of December 31, 2017,2019, the Company’s internal control over financial reporting is not effective due to the material weakness described below.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.
The Company has identified a material weakness in its internal control over financial reporting is effective. related to ITGCs in its German subsidiary. Specifically, ITGCs were not consistently designed and operated effectively to ensure access to certain financially significant applications and data was adequately restricted to appropriate personnel. Business process controls (automated and manual) that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted.
While the Company believes its risk assessment process has improved in 2019, the aforementioned material weakness was due to previously unidentified risks in the IT environment in Germany and failure to select and apply appropriate ITGCs over those risks.
The Company's assessment of internal control over financial reportingdeficiencies did not include the internal controls of HSN, Inc. (“HSNi”) which the Company acquired on December 29, 2017. The amount of total assets and revenue of HSNi includedresult in our consolidated financial statements as of and for the year ended December 31, 2017 was $3.0 billion and zero, respectively.any identified misstatements.
The Company's independent registered public accounting firm that audited the consolidated financial statements and related disclosures in the Annual Report on Form 10-KKPMG LLP has issuedexpressed an audit reportadverse opinion on the effectiveness of the Company's internal control over financial reporting. ThisTheir report appears on page II-30II-26 of this Annual Report on Form 10-K.
II-29II-25
Report of Independent Registered Public Accounting Firm
TheTo the Stockholders and Board of Directors and Stockholders
Liberty Interactive Corporation:Qurate Retail, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Liberty Interactive CorporationQurate Retail, Inc. and subsidiaries’ (the “Company”)(the Company) internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.Commission. In our opinion, because of the effect of the material weakness, described below, on the achievement of the objectives of the control criteria, the Company has not maintained in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB), the consolidated balance sheets of the Company as of December 31, 20172019 and 2016, and2018, the related consolidated statements of operations, comprehensive earnings (loss), cash flows, and equity for each of the years in the three-year period ended December 31, 2017,2019, and the related notes (collectively, the consolidated financial statements), and our report dated March 1, 2018February 26, 2020 expressed an unqualified opinion on those consolidated financial statements.
The Company acquired HSN, Inc. during 2017, and management excluded from its assessmentA material weakness is a deficiency, or a combination of the effectiveness of the Company’sdeficiencies, in internal control over financial reporting, assuch that there is a reasonable possibility that a material misstatement of December 31, 2017, HSN, Inc.’s internal control overthe company’s annual or interim financial reporting associated with total assets of $3,011 millionstatements will not be prevented or detected on a timely basis. The following material weakness has been identified and total revenues of zero included in management’s assessment:
Information technology general controls (ITGCs) in the Company’s German subsidiary were not consistently designed and operating effectively to ensure access to certain financially significant applications and data was adequately restricted to appropriate personnel. Business process controls (automated and manual) that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted.
The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2019 consolidated financial statements, of the Company as of and for the year ended December 31, 2017. Our audit of internal control overthis report does not affect our report on those consolidated financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of HSN, Inc.statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
II-26
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
II-30
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Denver, ColoradoMarch 1, 2018February 26, 2020
II-31
II-27
Report of Independent Registered Public Accounting Firm
TheTo the Stockholders and Board of Directors and Stockholders
Qurate Retail, Inc.:
Liberty Interactive Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Liberty Interactive CorporationQurate Retail, Inc. and subsidiaries (the “Company”)Company) as of December 31, 20172019 and 2016,2018, the related consolidated statements of operations, comprehensive earnings (loss), cash flows, and equity for each of the years in the three-year period ended December 31, 2017,2019, and the related notes (collectively, the “consolidatedconsolidated financial statements”)statements). In our opinion, based on our audits and the report of the other auditors, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20172019 and 2016,2018, and the results of theirits operations and theirits cash flows for each of the years in the three-year period ended December 31, 2017,2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”)(PCAOB), the Company’s internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2018February 26, 2020 expressed an unqualifiedadverse opinion on the effectiveness of the Company’s internal control over financial reporting.
We did not auditChanges in Accounting Principles
As discussed in Note 9 to the consolidated financial statements, the Company has changed its method of HSN, Inc., a wholly-owned subsidiary, which statements reflect certain assets constituting $786 millionaccounting for leases as of December 31, 2017. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relatesJanuary 1, 2019 due to the amounts includedadoption of Accounting Standard Codification (ASC) Topic 842, Leases. As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for HSN, Inc., is based solely onrevenue recognition as of January 1, 2018 due to the reportadoption of the other auditors.ASC Topic 606, Revenue from Contracts with Customers.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits and the report of the other auditors provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidatedfinancial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidatedfinancial statements and (2) involved our especially challenging, subjective, or complex judgment. The communication of a critical audit matter does not alter in any way our opinion on the consolidatedfinancial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
II-28
Evaluation of impairment of the Zulily and HSN tradenames and the goodwill of the Zulily reporting unit
As discussed in Note 7 to the consolidated financial statements, and disclosed in the consolidated balance sheet, the Company’s tradenames balance as of December 31, 2019 was $3,168 million. Additionally, the Company’s goodwill balance as of December 31, 2019 was $6,576 million. The Company performs tradename and goodwill impairment testing on an annual basis and whenever events or changes in circumstances indicate that the carrying value of a tradename more likely than not exceeds its fair value or the carrying value of a reporting unit more likely than not exceeds its fair value. The Company performed impairment testing of the Zulily tradename and reporting unit, which resulted in a $580 million impairment of the associated tradename and a $440 million impairment of the associated goodwill. The Company performed impairment testing of the HSN tradename, which resulted in a $147 million impairment of the associated tradename.
We identified the evaluation of impairment of the Zulily and HSN tradenames and the goodwill of the Zulily reporting unit as a critical audit matter. There was a high degree of subjective auditor judgment in applying and evaluating the results of our audit procedures over the discounted cash flow model used to calculate the fair values of the Zulily and HSN tradenames and the Zulily reporting unit. Specifically, the forecasted revenue, discount rates, and royalty rate assumptions, which were used to calculate the estimated fair values, involved a high degree of subjectivity. In addition, these fair values were challenging to test due to the sensitivity of the fair value determinations to changes in these assumptions.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s tradenames and goodwill impairment assessment process, including controls related to the determination of the estimated fair value of the Zulily and HSN tradenames and the Zulily reporting unit and the development of the assumptions. We evaluated the Company’s forecasted revenue that was used for the fair value analyses by comparing the revenue growth assumptions to historical actual results and forecasted growth rates of peer companies. We compared the Company’s historical revenue forecasts to actual results to assess the Company’s ability to accurately forecast. We evaluated the revenue projections in consideration of forecasted business initiatives. In addition, we involved valuation professionals with specialized skill and knowledge, who assisted in:
• | evaluating the royalty rates used in the Zulily and HSN tradename valuations, by comparing them to publicly available market data for comparable royalty rates, and considering the rates used in prior year valuations of the tradenames; |
• | evaluating the Zulily and HSN discount rates by comparing them to discount rate ranges that were independently developed using publicly available market data for comparable entities; |
• | assessing the estimates of the Zulily and HSN tradename fair values considering the application of the discounted cash flow method, Zulily and HSN forecasted revenue, and the evaluated royalty and discount rates; and |
• | assessing the estimate of the Zulily reporting unit’s fair value considering the application of the discounted cash flow method, the reporting unit’s cash flow forecast, and the evaluated discount rate. |
/s/ KPMG LLP
We have served as the Company’s auditor since 1995.
Denver, ColoradoMarch 1, 2018February 26, 2020
II-32II-29
LIBERTY INTERACTIVE CORPORATIONQURATE RETAIL, INC. AND SUBSIDIARIES
December 31, 20172019 and 20162018
| | | | | | |
|
| 2019 |
| 2018 |
| |
Assets | | amounts in millions |
| |||
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 673 |
| 653 | |
Trade and other receivables, net | |
| 1,854 |
| 1,835 | |
Inventory, net | |
| 1,413 |
| 1,474 | |
Other current assets | |
| 636 |
| 224 | |
Total current assets | |
| 4,576 |
| 4,186 | |
Investments in equity securities | |
| 76 |
| 96 | |
| | | | | | |
Property and equipment, at cost | |
| 2,806 |
| 2,685 | |
Accumulated depreciation | |
| (1,455) |
| (1,363) | |
| |
| 1,351 |
| 1,322 | |
Intangible assets not subject to amortization (note 7): | | | | | | |
Goodwill | |
| 6,576 |
| 7,017 | |
Tradenames | |
| 3,168 |
| 3,895 | |
| |
| 9,744 |
| 10,912 | |
Intangible assets subject to amortization, net (note 7) | |
| 955 |
| 1,058 | |
Other assets, at cost, net of accumulated amortization | |
| 603 |
| 267 | |
Total assets | | $ | 17,305 |
| 17,841 | |
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| |
Assets |
| amounts in millions |
| |||
Current assets: |
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 903 |
| 825 |
|
Trade and other receivables, net |
|
| 1,726 |
| 1,308 |
|
Inventory, net |
|
| 1,411 |
| 968 |
|
Other current assets |
|
| 125 |
| 68 |
|
Total current assets |
|
| 4,165 |
| 3,169 |
|
Investments in available-for-sale securities and other cost investments (note 8) |
|
| 2,363 |
| 1,922 |
|
Investments in affiliates, accounted for using the equity method (note 9) |
|
| 309 |
| 581 |
|
Investment in Liberty Broadband measured at fair value (note 9) |
|
| 3,635 |
| 3,161 |
|
|
|
|
|
|
|
|
Property and equipment, at cost |
|
| 2,564 |
| 2,163 |
|
Accumulated depreciation |
|
| (1,223) |
| (1,032) |
|
|
|
| 1,341 |
| 1,131 |
|
Intangible assets not subject to amortization (note 10): |
|
|
|
|
|
|
Goodwill |
|
| 7,082 |
| 6,052 |
|
Trademarks |
|
| 3,929 |
| 3,302 |
|
|
|
| 11,011 |
| 9,354 |
|
Intangible assets subject to amortization, net (note 10) |
|
| 1,248 |
| 1,005 |
|
Other assets, at cost, net of accumulated amortization |
|
| 50 |
| 32 |
|
Total assets |
| $ | 24,122 |
| 20,355 |
|
(continued)
II-33II-30
LIBERTY INTERACTIVE CORPORATIONQURATE RETAIL, INC. AND SUBSIDIARIES
Consolidated Balance Sheets (Continued)
December 31, 20172019 and 20162018
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| |
|
| amounts in millions |
| |||
Liabilities and Equity |
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
Accounts payable |
| $ | 1,151 |
| 790 |
|
Accrued liabilities |
|
| 1,125 |
| 706 |
|
Current portion of debt, including $978 million and $862 million measured at fair value (note 11) |
|
| 996 |
| 876 |
|
Other current liabilities |
|
| 169 |
| 162 |
|
Total current liabilities |
|
| 3,441 |
| 2,534 |
|
Long-term debt, including $868 million and $805 million measured at fair value (note 11) |
|
| 7,553 |
| 7,166 |
|
Deferred income tax liabilities (note 12) |
|
| 2,803 |
| 3,636 |
|
Other liabilities |
|
| 242 |
| 158 |
|
Total liabilities |
|
| 14,039 |
| 13,494 |
|
Equity |
|
|
|
|
|
|
Stockholders' equity (note 13): |
|
|
|
|
|
|
Preferred stock, $.01 par value. Authorized 50,000,000 shares; no shares issued |
|
| — |
| — |
|
Series A QVC Group common stock, $.01 par value. Authorized 4,000,000,000 shares; issued and outstanding 449,335,940 shares at December 31, 2017 and 429,005,932 shares at December 31, 2016 |
|
| 5 |
| 5 |
|
Series B QVC Group common stock, $.01 par value. Authorized 150,000,000 shares; issued and outstanding 29,203,895 shares at December 31, 2017 and 29,358,638 shares at December 31, 2016 |
|
| — |
| — |
|
Series A Liberty Ventures common stock, $.01 par value. Authorized 400,000,000 shares at December 31, 2017 and December 31, 2016; issued and outstanding 81,686,659 shares at December 31, 2017 and 81,150,711 shares at December 31, 2016 |
|
| 1 |
| 1 |
|
Series B Liberty Ventures common stock, $.01 par value. Authorized 15,000,000 shares at December 31, 2017 and December 31, 2016; issued and outstanding 4,455,311 shares at December 31, 2017 and 4,271,958 shares at December 31, 2016 |
|
| — |
| — |
|
Additional paid-in capital |
|
| 1,043 |
| — |
|
Accumulated other comprehensive earnings (loss), net of taxes |
|
| (133) |
| (266) |
|
Retained earnings |
|
| 9,068 |
| 7,032 |
|
Total stockholders' equity |
|
| 9,984 |
| 6,772 |
|
Noncontrolling interests in equity of subsidiaries |
|
| 99 |
| 89 |
|
Total equity |
|
| 10,083 |
| 6,861 |
|
Commitments and contingencies (note 18) |
|
|
|
|
|
|
Total liabilities and equity |
| $ | 24,122 |
| 20,355 |
|
| | | | | | |
|
| 2019 |
| 2018 |
| |
| | amounts in millions |
| |||
Liabilities and Equity | | | | | | |
Current liabilities: | | | | | | |
Accounts payable | | $ | 1,091 |
| 1,204 | |
Accrued liabilities | |
| 1,173 |
| 1,182 | |
Current portion of debt, including $1,557 million and $990 million measured at fair value (note 8) | |
| 1,557 |
| 1,410 | |
Other current liabilities | |
| 180 |
| 155 | |
Total current liabilities | |
| 4,001 |
| 3,951 | |
Long-term debt, including $0 and $344 million measured at fair value (note 8) | |
| 5,855 |
| 5,963 | |
Deferred income tax liabilities (note 10) | |
| 1,716 |
| 1,925 | |
Other liabilities | |
| 761 |
| 258 | |
Total liabilities | |
| 12,333 |
| 12,097 | |
Equity | | | | | | |
Stockholders' equity (note 11): | | | | | | |
Preferred stock, $.01 par value. Authorized 50,000,000 shares; 0 shares issued | |
| — |
| — | |
Series A Qurate Retail common stock, $.01 par value. Authorized 4,000,000,000 shares; issued and outstanding 386,691,461 shares at December 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 29,278,424 shares at December 31, 2019 and 29,248,343 shares at December 31, 2018 | |
| — |
| — | |
Additional paid-in capital | |
| — |
| — | |
Accumulated other comprehensive earnings (loss), net of taxes | |
| (55) |
| (55) | |
Retained earnings | |
| 4,891 |
| 5,675 | |
Total stockholders' equity | |
| 4,840 |
| 5,624 | |
Noncontrolling interests in equity of subsidiaries | |
| 132 |
| 120 | |
Total equity | |
| 4,972 |
| 5,744 | |
Commitments and contingencies (note 16) | | | | | | |
Total liabilities and equity | | $ | 17,305 |
| 17,841 | |
See accompanying notes to consolidated financial statements.
II-31
QURATE RETAIL, INC. AND SUBSIDIARIES
Consolidated Statements Of Operations
Years ended December 31, 2019, 2018 and 2017
| | | | | | | | |
| | 2019 | | 2018 | | 2017 | | |
| | amounts in millions, | | |||||
| | except per share amounts | | |||||
Total revenue, net |
| $ | 13,458 |
| 14,070 |
| 10,404 |
|
Operating costs and expenses: | | | | | | | | |
Cost of retail sales (exclusive of depreciation shown separately below) | |
| 8,899 |
| 9,209 |
| 6,789 | |
Operating expense | |
| 844 |
| 970 |
| 659 | |
Selling, general and administrative, including stock-based compensation and transaction related costs | |
| 1,758 |
| 1,897 |
| 1,188 | |
Impairment of intangible assets and long lived assets | | | 1,167 | | 33 | | — | |
Depreciation and amortization | |
| 606 |
| 637 |
| 725 | |
| |
| 13,274 |
| 12,746 |
| 9,361 | |
Operating income | |
| 184 |
| 1,324 |
| 1,043 | |
Other income (expense): | | | | | | | | |
Interest expense | |
| (374) |
| (381) |
| (355) | |
Share of earnings (losses) of affiliates, net | |
| (160) |
| (162) |
| (200) | |
Realized and unrealized gains (losses) on financial instruments, net (note 6) | |
| (251) |
| 76 |
| 145 | |
Gains (losses) on transactions, net | |
| (1) |
| 1 |
| 410 | |
Tax sharing income (expense) with GCI Liberty, Inc. | | | (26) | | 32 | | — | |
Other, net | |
| 6 |
| (7) |
| 7 | |
| |
| (806) |
| (441) |
| 7 | |
Earnings (loss) from continuing operations before income taxes | |
| (622) |
| 883 |
| 1,050 | |
Income tax (expense) benefit (note 10) | |
| 217 |
| (60) |
| 985 | |
Earnings (loss) from continuing operations | |
| (405) |
| 823 |
| 2,035 | |
Earnings (loss) from discontinued operations, net of taxes (note 5) | |
| — |
| 141 |
| 452 | |
Net earnings (loss) | |
| (405) |
| 964 |
| 2,487 | |
Less net earnings (loss) attributable to the noncontrolling interests | |
| 51 |
| 48 |
| 46 | |
Net earnings (loss) attributable to Qurate Retail, Inc. shareholders | | $ | (456) |
| 916 |
| 2,441 | |
Net earnings (loss) attributable to Qurate Retail, Inc. shareholders: | | | | | | | | |
Qurate Retail common stock | |
| (456) |
| 674 |
| 1,208 | |
Liberty Ventures common stock | |
| — |
| 242 |
| 1,233 | |
| | $ | (456) |
| 916 |
| 2,441 | |
| | | | | | | | |
Basic net earnings (loss) from continuing operations attributable to Qurate Retail, Inc. shareholders per common share (note 2): | | | | | | | | |
Series A and Series B Qurate Retail common stock | | $ | (1.08) |
| 1.46 |
| 2.71 | |
Series A and Series B Liberty Ventures common stock | | $ | NA |
| 1.17 |
| 14.34 | |
Diluted net earnings (loss) from continuing operations attributable to Qurate Retail, Inc. shareholders per common share (note 2): | | | | | | | | |
Series A and Series B Qurate Retail common stock | | $ | (1.08) |
| 1.45 |
| 2.70 | |
Series A and Series B Liberty Ventures common stock | | $ | NA |
| 1.16 |
| 14.17 | |
Basic net earnings (loss) attributable to Qurate Retail, Inc. shareholders per common share (note 2): | | | | | | | | |
Series A and Series B Qurate Retail common stock | | $ | (1.08) |
| 1.46 |
| 2.71 | |
Series A and Series B Liberty Ventures common stock | | $ | NA |
| 2.81 |
| 14.34 | |
Diluted net earnings (loss) attributable to Qurate Retail, Inc. shareholders per common share (note 2): | | | | | | | | |
Series A and Series B Qurate Retail common stock | | $ | (1.08) |
| 1.45 |
| 2.70 | |
Series A and Series B Liberty Ventures common stock | | $ | NA |
| 2.78 |
| 14.17 | |
See accompanying notes to consolidated financial statements.
II-34II-32
LIBERTY INTERACTIVE CORPORATIONQURATE RETAIL, INC. AND SUBSIDIARIES
Consolidated Statements Of OperationsComprehensive Earnings (Loss)
Years ended December 31, 2017, 20162019, 2018 and 20152017
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 |
| |
|
| amounts in millions, |
| |||||
|
| except per share amounts |
| |||||
Total revenue, net |
| $ | 10,404 |
| 10,647 |
| 9,989 |
|
Operating costs and expenses: |
|
|
|
|
|
|
|
|
Cost of retail sales (exclusive of depreciation shown separately below) |
|
| 6,789 |
| 6,908 |
| 6,393 |
|
Operating expense |
|
| 659 |
| 707 |
| 699 |
|
Selling, general and administrative, including stock-based compensation (note 3) |
|
| 1,153 |
| 1,190 |
| 1,078 |
|
Acquisition and restructuring charges |
|
| 35 |
| — |
| — |
|
Depreciation and amortization |
|
| 725 |
| 874 |
| 703 |
|
|
|
| 9,361 |
| 9,679 |
| 8,873 |
|
Operating income |
|
| 1,043 |
| 968 |
| 1,116 |
|
Other income (expense): |
|
|
|
|
|
|
|
|
Interest expense |
|
| (355) |
| (363) |
| (360) |
|
Share of earnings (losses) of affiliates, net (note 9) |
|
| (200) |
| (68) |
| (178) |
|
Realized and unrealized gains (losses) on financial instruments, net (note 7) |
|
| 618 |
| 1,175 |
| 114 |
|
Gains (losses) on transactions, net |
|
| 410 |
| 9 |
| 110 |
|
Other, net |
|
| 7 |
| 131 |
| 14 |
|
|
|
| 480 |
| 884 |
| (300) |
|
Earnings (loss) from continuing operations before income taxes |
|
| 1,523 |
| 1,852 |
| 816 |
|
Income tax (expense) benefit (note 12) |
|
| 964 |
| (598) |
| (185) |
|
Earnings (loss) from continuing operations |
|
| 2,487 |
| 1,254 |
| 631 |
|
Earnings (loss) from discontinued operations, net of taxes (note 6) |
|
| — |
| 20 |
| 280 |
|
Net earnings (loss) |
|
| 2,487 |
| 1,274 |
| 911 |
|
Less net earnings (loss) attributable to the noncontrolling interests |
|
| 46 |
| 39 |
| 42 |
|
Net earnings (loss) attributable to Liberty Interactive Corporation shareholders |
| $ | 2,441 |
| 1,235 |
| 869 |
|
Net earnings (loss) attributable to Liberty Interactive Corporation shareholders: |
|
|
|
|
|
|
|
|
QVC Group common stock |
|
| 1,208 |
| 473 |
| 640 |
|
Liberty Ventures common stock |
|
| 1,233 |
| 762 |
| 229 |
|
|
| $ | 2,441 |
| 1,235 |
| 869 |
|
|
|
|
|
|
|
|
|
|
Basic net earnings (loss) from continuing operations attributable to Liberty Interactive Corporation shareholders per common share (note 3): |
|
|
|
|
|
|
|
|
Series A and Series B QVC Group common stock |
| $ | 2.71 |
| 0.99 |
| 1.35 |
|
Series A and Series B Liberty Ventures common stock |
| $ | 14.34 |
| 5.54 |
| (0.36) |
|
Diluted net earnings (loss) from continuing operations attributable to Liberty Interactive Corporation shareholders per common share (note 3): |
|
|
|
|
|
|
|
|
Series A and Series B QVC Group common stock |
| $ | 2.70 |
| 0.98 |
| 1.33 |
|
Series A and Series B Liberty Ventures common stock |
| $ | 14.17 |
| 5.49 |
| (0.36) |
|
Basic net earnings (loss) attributable to Liberty Interactive Corporation shareholders per common share (note 3): |
|
|
|
|
|
|
|
|
Series A and Series B QVC Group common stock |
| $ | 2.71 |
| 0.99 |
| 1.35 |
|
Series A and Series B Liberty Ventures common stock |
| $ | 14.34 |
| 5.69 |
| 1.61 |
|
Diluted net earnings (loss) attributable to Liberty Interactive Corporation shareholders per common share (note 3): |
|
|
|
|
|
|
|
|
Series A and Series B QVC Group common stock |
| $ | 2.70 |
| 0.98 |
| 1.33 |
|
Series A and Series B Liberty Ventures common stock |
| $ | 14.17 |
| 5.64 |
| 1.60 |
|
| | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| |
| | amounts in millions |
| |||||
Net earnings (loss) |
| $ | (405) |
| 964 |
| 2,487 | |
Other comprehensive earnings (loss), net of taxes: | | | | | | | | |
Foreign currency translation adjustments | |
| 1 |
| (48) |
| 134 | |
Recognition of previously unrealized losses (gains) on debt, net | | | (1) | | 16 | | — | |
Share of other comprehensive earnings (loss) of equity affiliates | |
| — |
| (2) |
| 3 | |
Comprehensive earnings (loss) attributable to debt credit risk adjustments (note 8) | | | 1 | | 38 | | — | |
Other comprehensive earnings (loss) | |
| 1 |
| 4 |
| 137 | |
Comprehensive earnings (loss) | |
| (404) |
| 968 |
| 2,624 | |
Less comprehensive earnings (loss) attributable to the noncontrolling interests | |
| 52 |
| 50 |
| 50 | |
Comprehensive earnings (loss) attributable to Qurate Retail, Inc. shareholders | | $ | (456) |
| 918 |
| 2,574 | |
See accompanying notes to consolidated financial statements.
II-35II-33
LIBERTY INTERACTIVE CORPORATIONQURATE RETAIL, INC. AND SUBSIDIARIES
Consolidated Statements Of Comprehensive Earnings (Loss)Cash Flows
Years ended December 31, 2017, 20162019, 2018 and 20152017
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 |
| |
|
| amounts in millions |
| |||||
Net earnings (loss) |
| $ | 2,487 |
| 1,274 |
| 911 |
|
Other comprehensive earnings (loss), net of taxes: |
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
| 134 |
| (84) |
| (101) |
|
Share of other comprehensive earnings (loss) of equity affiliates |
|
| 3 |
| (5) |
| (4) |
|
Other |
|
| — |
| 4 |
| (17) |
|
Other comprehensive earnings (loss) |
|
| 137 |
| (85) |
| (122) |
|
Comprehensive earnings (loss) |
|
| 2,624 |
| 1,189 |
| 789 |
|
Less comprehensive earnings (loss) attributable to the noncontrolling interests |
|
| 50 |
| 40 |
| 41 |
|
Comprehensive earnings (loss) attributable to Liberty Interactive Corporation shareholders |
| $ | 2,574 |
| 1,149 |
| 748 |
|
Comprehensive earnings (loss) attributable to Liberty Interactive Corporation shareholders: |
|
|
|
|
|
|
|
|
QVC Group common stock |
| $ | 1,338 |
| 388 |
| 540 |
|
Liberty Ventures common stock |
|
| 1,236 |
| 761 |
| 208 |
|
|
| $ | 2,574 |
| 1,149 |
| 748 |
|
| | | | | | | | |
| | 2019 | | 2018 | | 2017 |
| |
| | amounts in millions |
| |||||
| | (See note 3) |
| |||||
Cash flows from operating activities: |
| | |
| |
| | |
Net earnings (loss) | | $ | (405) |
| 964 |
| 2,487 | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | | |
(Earnings) loss from discontinued operations | |
| — |
| (141) |
| (452) | |
Depreciation and amortization | |
| 606 |
| 637 |
| 725 | |
Impairment of intangible assets | | | 1,167 | | 33 | | — | |
Stock-based compensation | |
| 71 |
| 88 |
| 123 | |
Noncash interest expense | |
| 5 |
| 6 |
| — | |
Share of (earnings) losses of affiliates, net | |
| 160 |
| 162 |
| 200 | |
Realized and unrealized (gains) losses on financial instruments, net | |
| 251 |
| (76) |
| (145) | |
(Gains) losses on transactions, net | |
| 1 |
| (1) |
| (410) | |
(Gains) losses on extinguishment of debt | |
| (1) |
| 24 |
| — | |
Deferred income tax expense (benefit) | |
| (243) |
| (185) |
| (1,157) | |
Other noncash charges (credits), net | |
| 9 |
| 3 |
| 39 | |
Changes in operating assets and liabilities | | | | | | | | |
Current and other assets | |
| 59 |
| (308) |
| (145) | |
Payables and other liabilities | |
| (396) |
| 67 |
| 225 | |
Net cash provided (used) by operating activities | |
| 1,284 |
| 1,273 |
| 1,490 | |
Cash flows from investing activities: | | | | | | | | |
Cash (paid) for acquisitions, net of cash acquired | | | — | | — | | 22 | |
Cash proceeds from dispositions of investments | |
| — |
| 562 |
| 3 | |
Investment in and loans to cost and equity investees | |
| (141) |
| (100) |
| (159) | |
Capital expenditures | |
| (325) |
| (275) |
| (204) | |
Expenditures for television distribution rights | | | (134) | | (140) | | (51) | |
Other investing activities, net | |
| — |
| — |
| (2) | |
Net cash provided (used) by investing activities | |
| (600) |
| 47 |
| (391) | |
Cash flows from financing activities: | | | | | | | | |
Borrowings of debt | |
| 3,161 |
| 4,221 |
| 2,469 | |
Repayments of debt | |
| (3,274) |
| (4,395) |
| (2,631) | |
Repurchases of Qurate Retail common stock | |
| (392) |
| (988) |
| (765) | |
GCI Liberty Split-Off | | | — | | (475) | | — | |
Withholding taxes on net share settlements of stock-based compensation | |
| (7) |
| (29) |
| (70) | |
Indemnification payment from GCI Liberty, Inc. | | | — | | 133 | | — | |
Other financing activities, net | |
| (149) |
| (41) |
| (39) | |
Net cash provided (used) by financing activities | |
| (661) |
| (1,574) |
| (1,036) | |
Effect of foreign currency exchange rates on cash, cash equivalents and restricted cash | |
| (2) |
| 2 |
| 13 | |
Net increase (decrease) in cash, cash equivalents and restricted cash | |
| 21 |
| (252) |
| 76 | |
Cash, cash equivalents and restricted cash at beginning of period | |
| 660 |
| 912 |
| 836 | |
Cash, cash equivalents and restricted cash at end of period | | $ | 681 |
| 660 |
| 912 | |
See accompanying notes to consolidated financial statements.
II-36II-34
LIBERTY INTERACTIVE CORPORATIONQURATE RETAIL, INC. AND SUBSIDIARIES
Consolidated Statements Of Cash FlowsEquity
Years ended December 31, 2017, 20162019, 2018 and 20152017
|
|
|
|
|
|
|
|
|
|
| 2017 |
| 2016 |
| 2015 |
| |
|
| amounts in millions |
| |||||
|
| (See note 4) |
| |||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net earnings (loss) |
| $ | 2,487 |
| 1,274 |
| 911 |
|
Adjustments to reconcile net earnings to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
(Earnings) loss from discontinued operations |
|
| — |
| (20) |
| (280) |
|
Depreciation and amortization |
|
| 725 |
| 874 |
| 703 |
|
Stock-based compensation |
|
| 123 |
| 97 |
| 127 |
|
Cash payments for stock-based compensation |
|
| — |
| (92) |
| (16) |
|
Noncash interest expense |
|
| — |
| 12 |
| 5 |
|
Share of (earnings) losses of affiliates, net |
|
| 200 |
| 68 |
| 178 |
|
Cash receipts from returns on equity investments |
|
| 29 |
| 31 |
| 32 |
|
Realized and unrealized (gains) losses on financial instruments, net |
|
| (618) |
| (1,175) |
| (114) |
|
(Gains) losses on transactions, net |
|
| (410) |
| (9) |
| (110) |
|
(Gains) losses on extinguishment of debt |
|
| — |
| 6 |
| 21 |
|
Deferred income tax expense (benefit) |
|
| (1,136) |
| 473 |
| (103) |
|
Other noncash charges (credits), net |
|
| 10 |
| (115) |
| (11) |
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
Current and other assets |
|
| (143) |
| 136 |
| (237) |
|
Payables and other liabilities |
|
| 225 |
| (117) |
| (44) |
|
Net cash provided (used) by operating activities |
|
| 1,492 |
| 1,443 |
| 1,062 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Cash (paid) for acquisitions, net of cash acquired |
|
| 22 |
| — |
| (844) |
|
Cash proceeds from dispositions of investments |
|
| 3 |
| 353 |
| 271 |
|
Investment in and loans to cost and equity investees |
|
| (159) |
| (86) |
| (120) |
|
Cash receipts from returns of equity investments |
|
| — |
| — |
| 250 |
|
Capital expended for property and equipment |
|
| (204) |
| (233) |
| (258) |
|
Purchases of short term investments and other marketable securities |
|
| — |
| (264) |
| (1,370) |
|
Sales of short term investments and other marketable securities |
|
| — |
| 1,174 |
| 1,359 |
|
Investment in Liberty Broadband |
|
| — |
| (2,400) |
| — |
|
Other investing activities, net |
|
| (53) |
| (36) |
| (76) |
|
Net cash provided (used) by investing activities |
|
| (391) |
| (1,492) |
| (788) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Borrowings of debt |
|
| 2,469 |
| 3,427 |
| 4,558 |
|
Repayments of debt |
|
| (2,631) |
| (4,498) |
| (3,811) |
|
Repurchases of QVC Group common stock |
|
| (765) |
| (799) |
| (785) |
|
Withholding taxes on net share settlements of stock-based compensation |
|
| (70) |
| (16) |
| (30) |
|
Distribution from Liberty Expedia Holdings |
|
| — |
| 299 |
| — |
|
Other financing activities, net |
|
| (39) |
| 15 |
| (54) |
|
Net cash provided (used) by financing activities |
|
| (1,036) |
| (1,572) |
| (122) |
|
Effect of foreign currency exchange rates on cash |
|
| 13 |
| (20) |
| (3) |
|
Net cash provided (used) by discontinued operations: |
|
|
|
|
|
|
|
|
Cash provided (used) by operating activities |
|
| — |
| 17 |
| 17 |
|
Cash provided (used) by investing activities |
|
| — |
| — |
| (23) |
|
Cash provided (used) by financing activities |
|
| — |
| — |
| — |
|
Change in available cash held by discontinued operations |
|
| — |
| — |
| — |
|
Net cash provided (used) by discontinued operations |
|
| — |
| 17 |
| (6) |
|
Net increase (decrease) in cash and cash equivalents |
|
| 78 |
| (1,624) |
| 143 |
|
Cash and cash equivalents at beginning of period |
|
| 825 |
| 2,449 |
| 2,306 |
|
Cash and cash equivalents at end of period |
| $ | 903 |
| 825 |
| 2,449 |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Stockholders' Equity | | | | |
| |||||||||||||||
| | | | | | | | | Accumulated | | | | | | |
| ||||||
| | | | | QVC | | Liberty | | | | other | | | | Noncontrolling | | |
| ||||
| | | | | Group | | Ventures | | Additional | | comprehensive | | | | interest in | | |
| ||||
| | Preferred | | | | | | | | | | paid-in | | earnings (loss), | | Retained | | equity of | | Total |
| |
| | Stock | | Series A | | Series B | | Series A | | Series B | | capital | | net of taxes | | Earnings | | subsidiaries | | equity |
| |
|
| amounts in millions | | |||||||||||||||||||
Balance at January 1, 2017 | | $ | — | | 5 | | — | | 1 | | — | | — | | (266) | | 7,032 | | 89 | | 6,861 | |
Net earnings (loss) | |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 2,441 |
| 46 |
| 2,487 | |
Other comprehensive earnings (loss) | |
| — |
| — |
| — |
| — |
| — |
| — |
| 133 |
| — |
| 4 |
| 137 | |
Stock-based compensation | |
| — |
| — |
| — |
| — |
| — |
| 123 |
| — |
| — |
| — |
| 123 | |
Series A Qurate Retail stock repurchases | |
| — |
| — |
| — |
| — |
| — |
| (765) |
| — |
| — |
| — |
| (765) | |
Distribution to noncontrolling interest | |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (40) |
| (40) | |
Stock issued upon exercise of stock options | |
| — |
| — |
| — |
| — |
| — |
| 5 |
| — |
| — |
| — |
| 5 | |
Withholding taxes on net share settlements of stock-based compensation | |
| — |
| — |
| — |
| — |
| — |
| (70) |
| — |
| — |
| — |
| (70) | |
Issuance of Series A Qurate Retail stock in connection HSN acquisition (note 4) | |
| — |
| — |
| — |
| — |
| — |
| 1,343 |
| — |
| — |
| — |
| 1,343 | |
Reclassification | | | — |
| — |
| — |
| — |
| — |
| 405 | | — | | (405) | | — | | — | |
Other | | | — | | — | | — | | — | | — | | 2 | | — | | — | | — | | 2 | |
Balance at December 31, 2017 | | $ | — | | 5 | | — | | 1 | | — | | 1,043 | | (133) | | 9,068 | | 99 | | 10,083 | |
Net earnings (loss) | |
| — | | — | | — | | — | | — | | — | | — | | 916 | | 48 | | 964 | |
Other comprehensive earnings (loss) | |
| — |
| — |
| — |
| — |
| — |
| — |
| 2 |
| — |
| 2 |
| 4 | |
Stock-based compensation | |
| — |
| — |
| — |
| — |
| — |
| 88 |
| — |
| — |
| — |
| 88 | |
Series A Qurate Retail stock repurchases | |
| — |
| (1) |
| — |
| — |
| — |
| (987) |
| — |
| — |
| — |
| (988) | |
Distribution to noncontrolling interest | |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (40) |
| (40) | |
Withholding taxes on net share settlements of stock-based compensation | |
| — |
| — |
| — |
| — |
| — |
| (29) |
| — |
| — |
| — |
| (29) | |
Cumulative effect of accounting change (note 2) | |
| — | | — | | — | | — | | — | | — | | 76 | | (70) | | — | | 6 | |
Reattribution of the Ventures Group to Qurate Retail | | | — |
| — |
| — |
| (1) |
| — |
| 1 |
| — |
| — |
| — |
| — | |
GCI Liberty Split-Off | | | — |
| — |
| — |
| — |
| — |
| (4,358) |
| — |
| — |
| 11 |
| (4,347) | |
Other | | | — | | — | | — | | — | | — | | 3 | | — | | — | | — | | 3 | |
Reclassification | | | — |
| — |
| — |
| — |
| — |
| 4,239 | | — | | (4,239) | | — | | — | |
Balance at December 31, 2018 | | $ | — | | 4 | | — | | — | | — | | — | | (55) | | 5,675 | | 120 | | 5,744 | |
Net earnings (loss) | | | — | | — | | — | | — | | — | | — | | — | | (456) | | 51 | | (405) | |
Other comprehensive earnings (loss) | | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 1 |
| 1 | |
Stock-based compensation | | | — |
| — |
| — |
| — |
| — |
| 71 |
| — |
| — |
| — |
| 71 | |
Series A Qurate Retail stock repurchases | | | — |
| — |
| — |
| — |
| — |
| (392) |
| — |
| — |
| — |
| (392) | |
Distribution to noncontrolling interest | | | — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (40) |
| (40) | |
Other | | | — | | — | | — | | — | | — | | (7) | | — | | — | | — | | (7) | |
Reclassification | | | — |
| — |
| — |
| — |
| — |
| 328 | | — | | (328) | | — | | — | |
Balance at December 31, 2019 | | $ | — | | 4 | | — | | — | | — | | — | | (55) | | 4,891 | | 132 | | 4,972 | |
| | | | | | | | | | | | | | | | | | | | | | |
See accompanying notes to consolidated financial statements.
II-37II-35
LIBERTY INTERACTIVE CORPORATIONQURATE RETAIL, INC. AND SUBSIDIARIES
Consolidated Statements Of Equity
Years ended December 31, 2017, 2016 and 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Stockholders' Equity |
|
|
|
|
| |||||||||||||||
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
| ||||||
|
|
|
|
| QVC |
| Liberty |
|
|
| other |
|
|
| Noncontrolling |
|
|
| ||||
|
|
|
|
| Group |
| Ventures |
| Additional |
| comprehensive |
|
|
| interest in |
|
|
| ||||
|
| Preferred |
|
|
|
|
|
|
|
|
| paid-in |
| earnings (loss), |
| Retained |
| equity of |
| Total |
| |
|
| Stock |
| Series A |
| Series B |
| Series A |
| Series B |
| capital |
| net of taxes |
| Earnings |
| subsidiaries |
| equity |
| |
|
| amounts in millions |
| |||||||||||||||||||
Balance at January 1, 2015 |
| $ | — |
| 5 |
| — |
| 1 |
| — |
| 4 |
| (94) |
| 5,757 |
| 107 |
| 5,780 |
|
Net earnings |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 869 |
| 42 |
| 911 |
|
Other comprehensive earnings (loss) |
|
| — |
| — |
| — |
| — |
| — |
| — |
| (121) |
| — |
| (1) |
| (122) |
|
Stock-based compensation |
|
| — |
| — |
| — |
| — |
| — |
| 70 |
| — |
| — |
| — |
| 70 |
|
Minimum withholding taxes on net share settlements of stock-based compensation |
|
| — |
| — |
| — |
| — |
| — |
| (30) |
| — |
| — |
| — |
| (30) |
|
Excess tax benefits on stock-based compensation |
|
| — |
| — |
| — |
| — |
| — |
| 16 |
| — |
| — |
| — |
| 16 |
|
Stock issued upon exercise of stock options |
|
| — |
| — |
| — |
| — |
| — |
| 40 |
| — |
| — |
| — |
| 40 |
|
Series A QVC Group stock repurchases |
|
| — |
| — |
| — |
| — |
| — |
| (785) |
| — |
| — |
| — |
| (785) |
|
Distribution to noncontrolling interest |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (58) |
| (58) |
|
Acquisition of zulily |
|
| — |
| — |
| — |
| — |
| — |
| 1,087 |
| — |
| — |
| — |
| 1,087 |
|
Acquisition of noncontrolling interest |
|
| — |
| — |
| — |
| — |
| — |
| (31) |
| — |
| — |
| (2) |
| (33) |
|
Other |
|
| — |
| — |
| — |
| — |
| — |
| (1) |
| — |
| — |
| — |
| (1) |
|
Balance at December 31, 2015 |
| $ | — |
| 5 |
| — |
| 1 |
| — |
| 370 |
| (215) |
| 6,626 |
| 88 |
| 6,875 |
|
Net earnings |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 1,235 |
| 39 |
| 1,274 |
|
Other comprehensive earnings (loss) |
|
| — |
| — |
| — |
| — |
| — |
| — |
| (86) |
| — |
| 1 |
| (85) |
|
Cumulative effect of accounting change |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 5 |
| — |
| 5 |
|
Stock-based compensation |
|
| — |
| — |
| — |
| — |
| — |
| 89 |
| — |
| — |
| — |
| 89 |
|
Withholding taxes on net share settlements of stock-based compensation |
|
| — |
| — |
| — |
| — |
| — |
| (16) |
| — |
| — |
| — |
| (16) |
|
Stock issued upon exercise of stock options |
|
| — |
| — |
| — |
| — |
| — |
| 24 |
| — |
| — |
| — |
| 24 |
|
Series A QVC Group stock repurchases |
|
| — |
| — |
| — |
| — |
| — |
| (799) |
| — |
| — |
| — |
| (799) |
|
Distribution to noncontrolling interest |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (39) |
| (39) |
|
Distribution of Liberty Expedia Holdings |
|
| — |
| — |
| — |
| — |
| — |
| — |
| 35 |
| (493) |
| — |
| (458) |
|
Reclassification |
|
| — |
| — |
| — |
| — |
| — |
| 341 |
| — |
| (341) |
| — |
| — |
|
Other |
|
| — |
| — |
| — |
| — |
| — |
| (9) |
| — |
| — |
| — |
| (9) |
|
Balance at December 31, 2016 |
| $ | — |
| 5 |
| — |
| 1 |
| — |
| — |
| (266) |
| 7,032 |
| 89 |
| 6,861 |
|
Net earnings |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| 2,441 |
| 46 |
| 2,487 |
|
Other comprehensive earnings (loss) |
|
| — |
| — |
| — |
| — |
| — |
| — |
| 133 |
| — |
| 4 |
| 137 |
|
Stock-based compensation |
|
| — |
| — |
| — |
| — |
| — |
| 123 |
| — |
| — |
| — |
| 123 |
|
Series A QVC Group stock repurchases |
|
| — |
| — |
| — |
| — |
| — |
| (765) |
| — |
| — |
| — |
| (765) |
|
Distribution to noncontrolling interest |
|
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| (40) |
| (40) |
|
Stock issued upon exercise of stock options |
|
| — |
| — |
| — |
| — |
| — |
| 5 |
| — |
| — |
| — |
| 5 |
|
Withholding taxes on net share settlements of stock-based compensation |
|
| — |
| — |
| — |
| — |
| — |
| (70) |
| — |
| — |
| — |
| (70) |
|
Issuance of Series A QVC Group stock in connection HSNi acquisition (note 5) |
|
| — |
| — |
| — |
| — |
| — |
| 1,343 |
| — |
| — |
| ��— |
| 1,343 |
|
Reclassification |
|
| — |
| — |
| — |
| — |
| — |
| 405 |
| — |
| (405) |
| — |
| — |
|
Other |
|
| — |
| — |
| — |
| — |
| — |
| 2 |
| — |
| — |
| — |
| 2 |
|
Balance at December 31, 2017 |
| $ | — |
| 5 |
| — |
| 1 |
| — |
| 1,043 |
| (133) |
| 9,068 |
| 99 |
| 10,083 |
|
See accompanying notes to consolidated financial statements.
II-38
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2018, 2017 2016 and 20152016
The accompanying consolidated financial statements include the accounts of Qurate Retail, Inc. (formerly named Liberty Interactive Corporation (formerly known as Liberty Media Corporation)prior to the Transactions (defined and described below), or “Liberty”) and its controlled subsidiaries (collectively, "Liberty,"Qurate Retail," the "Company," “we,” “us,” and “our”) unless the context otherwise requires). All significant intercompany accounts and transactions have been eliminated in consolidation.
Liberty,Qurate Retail, through its ownership of interests in subsidiaries and other companies, is primarily engaged in the video and online commerce industries in North America, Europe and Asia.
On October 1, 2015,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 2 tracking stocks—QVC Group common stock and Liberty acquired allVentures common stock, which were intended to track and reflect the outstanding shareseconomic performance of zulily, inc. (“zulily”) (now known as zulily, llc). zulily is an online retailer offering customers a funthe businesses, assets and entertaining shopping experience with a fresh selection of new product styles launched every day. zulily isliabilities attributed to the QVC Group. See note 5 for additional information relatedGroup and the Ventures Group, respectively. The QVC Group was comprised of the Company’s wholly-owned subsidiaries QVC, Inc., Zulily, LLC (“Zulily”), HSN, Inc. (“HSN”) and Cornerstone Brands, Inc. (“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 acquisition.QVC Group and the Ventures Group through March 9, 2018.
On July 22, 2016, LibertyDecember 29, 2017, Qurate Retail acquired the approximately 62% of HSN it did not already own in an all-stock transaction making HSN a wholly-owned subsidiary. HSN stockholders (other than Qurate Retail) received fixed consideration of 1.65 shares of Series A QVC Group common stock (“QVCA”) for each share of HSN common stock. Qurate Retail issued 53.6 million shares QVCA common stock to HSN stockholders. 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 annual 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 spin-off (the “CommerceHub Spin-Off”transactions contemplated by the Agreement and Plan of Reorganization (as amended, the “Reorganization Agreement,” and the transactions contemplated thereby, the “Transactions”) among General Communication, Inc. (“GCI”), an Alaska corporation, and Liberty Interactive LLC, a Delaware limited liability company and a direct wholly-owned subsidiary of Qurate Retail (“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 former wholly-owned subsidiary CommerceHub, Inc. (“CommerceHub”).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 CommerceHub Spin-Off was accomplished byreattributed 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 Liberty through a reorganization in which certain Qurate Retail interests, assets and liabilities attributed to the distribution byVentures 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 dividendnumber of (i) 0.1shares of GCI Liberty Class A Common Stock and a sharenumber of CommerceHub’s Series A common stock for eachshares of GCI Liberty Class B Common Stock equal to the number of outstanding shareshares of Liberty’s Series A Liberty Ventures common stock as of 5:00 p.m., New York City time, on July 8, 2016 (such date and time, the “Record Date”), (ii) 0.1 of a share of CommerceHub’s Series B Liberty Ventures
II-36
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
common stock foron March 9, 2018, respectively, (b) cash and (c) the assumption of certain liabilities by GCI Liberty. The following is a reconciliation of the assets and liabilities that were derecognized by the Company (in millions) at the date of the GCI Liberty Split-Off (as defined below):
| | | |
Investment in Liberty Broadband | $ | 3,822 | |
Investment in Charter | | 1,866 | |
Corporate Cash | | 475 | |
Margin Loan | | (996) | |
Deferred Income Tax Liabilities | | (550) | |
Other, net | | (270) | |
| $ | 4,347 | |
| | | |
Following the contribution, Qurate Retail effected a tax-free separation of its controlling interest in the combined company (the “GCI Liberty Split-Off”), GCI Liberty, to the holders of Liberty Ventures common stock in full redemption of all outstanding shares of such stock, in which each outstanding share of Liberty’sSeries A Liberty Ventures common stock was redeemed for 1 share of GCI Liberty Class A common stock and each outstanding share of Series B Liberty Ventures common stock aswas redeemed for 1 share of GCI Liberty Class B common stock. Simultaneous with the closing of the Record DateTransactions, QVC Group common stock became the only outstanding common stock of Qurate Retail, and (iii) 0.2 ofthus 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 CommerceHub’s Series CQVC Group common stock for each outstandinginto 1 share of the corresponding series of new common stock of Qurate Retail. Throughout this annual report, we refer to our Series A and Series B Liberty Ventures common stock as of“Qurate Retail common stock” and “QVC Group common stock.” In July 2018, the Record Date, in each case, with cash paid in lieu of fractional shares. In September 2016, the IRSInternal Revenue Service (“IRS”) completed its review of the CommerceHub Spin-OffGCI Liberty Split-Off and informed LibertyQurate Retail that it agreed with the nontaxable characterization of the transaction. Liberty received an Issue Resolution Agreement from the Internal Revenue Service (“IRS”) documenting this conclusion. CommerceHub is included in Liberty’s Corporate and other segment through July 22, 2016 and is not presented as a discontinued operation as the CommerceHub Spin-Off did not represent a strategic shift that had a major effect on Liberty’s operations and financial results.
On November 4, 2016, Liberty completed the split-off (the “Expedia Holdings Split-Off”) of its former wholly-owned subsidiary Liberty Expedia Holdings, Inc. (“Expedia Holdings”). At the time of the Expedia Holdings Split-Off, Expedia Holdings was comprised of, among other things, Liberty’s former interest in Expedia, Inc. (“Expedia”) and Liberty’s former wholly-owned subsidiary Bodybuilding. On November 2, 2016, Expedia Holdings borrowed $350 million under a new margin loan and distributed $299 million, net of certain debt related costs, to Liberty on November 4, 2016. The Expedia Holdings Split-Off was accomplished by the redemption of (i) 0.4 of each outstanding share of Liberty’s Series A Liberty Ventures common stock for 0.4 of a share of Expedia Holdings Series A common stock at 5:00 p.m., New York City time, on November 4, 2016 (such date and time, the “Redemption Date”) and (ii) 0.4 of each outstanding share of Liberty’s Series B Liberty Ventures common stock for 0.4 of a share of Expedia Holdings Series B common stock on the Redemption Date, in each case, with cash paid in lieu of any fractional shares of Liberty Ventures common stock or Expedia Holdings common stock (after taking into account all of the shares owned of record by each holder thereof, as applicable). In February 2017, the IRS completed its review of the Expedia Holdings Split-Off and informed Liberty that it agreed with the nontaxable characterization of the transaction. Libertytransactions. Qurate Retail received an Issue Resolution Agreement from the IRS documenting this conclusion.
Liberty viewed ExpediaOn October 17, 2018, Qurate Retail announced a series of initiatives designed to better position its HSN and Bodybuilding as separate components and evaluated them separately for discontinued operations presentation. Based on a quantitative analysis, the split-off of Liberty’s interest in Expedia represented a strategic shift that had a major effect on Liberty’s operations, primarily due to one-time gains on transactions recognized by Expedia in 2015. Accordingly, the consolidated financial statements of Liberty have been prepared to reflect Liberty’s interest in Expedia as a discontinued operation. The disposition of Bodybuilding asQVC U.S. businesses (“QRG Initiatives”). As part of the Expedia HoldingsQRG Initiatives, QVC will close its fulfillment centers in Lancaster, Pennsylvania and Roanoke, Virginia and leased a new fulfillment center in Bethlehem, Pennsylvania, that commenced in 2019 (see note 9). Qurate Retail recorded transaction related costs of $41 million during the year ended December 31, 2018 related to the QRG Initiatives, which primarily related to severance costs. Also, 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.”
Qurate Retail and GCI Liberty (for accounting purposes a related party of Qurate Retail) entered into a tax sharing agreement. Pursuant to that 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 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).
II-39II-37
LIBERTY INTERACTIVE CORPORATIONQURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 20162019, 2018 and 20152017
does not have a major effect on Liberty’s historical results nor is it expected to have a major effect on Liberty’s future operations. The disposition of Bodybuilding did not represent a strategic shift in Liberty’s operations. Accordingly, Bodybuilding is not presented as a discontinued operation in the consolidated financial statements of Liberty. Bodybuilding is included in the Corporate and other segment through November 4, 2016.
Pursuant to a reimbursement agreement entered into in connection with the Expedia Holdings Split-Off, Liberty reimbursed Expedia, a related party prior to the Expedia Holdings Split-Off, $4 million during October 2016, thereby settling the reimbursement agreement.
LibertyQurate Retail and Liberty Media Corporation (“LMC”) (for accounting purposes a related party of Liberty)Qurate Retail) entered into certain agreements in order to govern certain of the ongoing relationships between the two companies. These agreements include a reorganization agreement, a services agreement (the “Services Agreement”), a facilities sharing agreement (the “Facilities Sharing Agreement”) and a tax sharing agreement.
agreement (the “Tax Sharing Agreement”). The Tax Sharing Agreement provides for the allocation and indemnification of tax liabilities and benefits between LibertyQurate Retail and LMC and other agreements related to tax matters. LibertyQurate Retail is party to on-going discussions with the IRS under the Compliance Assurance Process audit program. The IRS may propose adjustments that relate to tax attributes allocated to and income allocable to LMC. Any potential outcome associated with any proposed adjustments would be covered by the Tax Sharing Agreement and are not expected to have any impact on Liberty'sQurate Retail's financial position. Pursuant to the Services Agreement, LMC will provide Libertyprovides Qurate Retail with general and administrative services including legal, tax, accounting, treasury and investor relations support. Liberty will reimburseSee below for a description of an amendment to the services agreement entered into in December 2019. Qurate Retail reimburses LMC for direct, out-of-pocket expenses incurred by LMC in providing these services and for Liberty'sQurate Retail's allocable portion of costs associated with any shared services or personnel based on an estimated percentage of time spent providing services to Liberty.Qurate Retail. Under the Facilities Sharing Agreement, Liberty will shareQurate Retail shares office space with LMC and related amenities at LMC's corporate headquarters. Under these various agreements approximately $11$8 million, $10$8 million and $13$11 million of these allocated expenses were reimbursedreimbursable from LibertyQurate Retail to LMC for the years ended December 31, 2019, 2018 and 2017, 2016respectively. Qurate Retail had a tax sharing payable of approximately $95 million and 2015, respectively.
(2) Tracking Stocks
Tracking stocks are a type$114 million as 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. Liberty has two tracking stocks—QVC Group common stockDecember 31, 2019 and Liberty Ventures common stock, which are intended to track and reflect the economic performance of Liberty’s QVC Group and Ventures Group, respectively. While the QVC Group and the Ventures Group have separate collections of businesses, assets and liabilities attributed to them, no group is a separate legal entity and therefore cannot own assets, issue securities or enter into legally binding agreements. Holders of tracking stock have no direct claim to the group's stock or assets and are not represented by separate boards of directors. Instead, holders of tracking stock are stockholders of the parent corporation, with a single board of directors and subject to all of the risks and liabilities of the parent corporation.
The term "Ventures Group" does not represent a separate legal entity, rather it represents those businesses, assets and liabilities that have been attributed to that group. The Ventures Group consists of our businesses not2018, respectively, 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 Communications, Inc.”) and ILG, Inc. (“ILG”), as well as cashOther liabilities in the amount of approximately $573 million (atconsolidated balance sheets.
In December 31, 2017), including subsidiary cash. The Ventures Group also has attributed to it certain liabilities related to our Exchangeable Debentures and certain deferred tax liabilities. The Ventures Group is primarily focused on the maximization of the value of these investments and investing in new business opportunities.
On April 4, 2017, Liberty entered into an Agreement and Plan of Reorganization (as amended, the “GCI Reorganization Agreement” and the transactions contemplated thereby, the “Transactions”) with General
II-40
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
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”), whereby Liberty will acquire GCI through a reorganization in which certain Ventures Group assets and liabilities will be contributed to GCI Liberty (as defined below) in exchange for a controlling interest in GCI Liberty. Liberty and LI LLC will contribute to GCI Liberty its entire equity interest in Liberty Broadband and Charter, along with, subject to certain exceptions, Liberty’s entire equity interests in LendingTree, together with the Evite operating business and certain other assets and liabilities, in exchange for (i) the issuance to LI LLC of a number of shares of new GCI Liberty Class A Common Stock and a number of shares of new 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 outstanding on the closing date of the Contribution, respectively, (ii) cash and (iii) the assumption of certain liabilities by GCI Liberty (the “Contribution”).
Liberty will then effect a tax-free separation of its controlling interest in the combined company (which has since been renamed GCI Liberty, Inc. (“GCI Liberty”)) to the holders of Liberty Ventures common stock, distributing one share of the corresponding class of new GCI Liberty common stock for each share of Liberty Ventures common stock held, in full redemption of all outstanding shares of such stock, leaving QVC Group common stock as the only outstanding common stock of Liberty. On the business day prior to the Contribution, holders of reclassified GCI Class A Common Stock and reclassified GCI Class B Common Stock each will receive (i) 0.63 of a share of new GCI Liberty Class A Common Stock and (ii) 0.20 of a share of new GCI Liberty Series A Cumulative Redeemable Preferred Stock (the “GCI Liberty preferred stock”) in exchange for each share of their reclassified GCI stock. The exchange ratios were determined based on total consideration of $32.50 per share for existing GCI common stock, comprised of $27.50 per share in new GCI Liberty Class A Common Stock and $5.00 per share in newly issued GCI Liberty preferred stock, and a Liberty Ventures reference price of $43.65 (with no additional premium paid for shares of reclassified GCI Class B Common Stock). The GCI Liberty Series A preferred stock will accrue dividends at an initial rate of 5% per annum (which would increase to 7% in connection with a future reincorporation of GCI Liberty in Delaware) and will be redeemable upon the 21st anniversary of the closing of the Transactions.
At the closing of the Transactions, Liberty will reattribute certain assets and liabilities from the Ventures Group to the QVC Group (the “Reattribution”). The reattributed assets and liabilities are expected to include cash, Liberty’s interest in ILG, FTD, certain green energy investments, LI LLC’s exchangeable debentures, and certain tax benefits. Pursuant to a recent amendment to the GCI Reorganization Agreement, LI LLC’s 1.75% Exchangeable Debentures due 2046 (the “1.75% Exchangeable Debentures”) will not be subject to a pre-closing exchange offer and will instead be reattributed to the QVC Group, along with (i) an amount of cash equal to the net present value of the adjusted principal amount of such 1.75% Exchangeable Debentures (determined as if paid on October 5, 2023) and stated interest payments on the 1.75% Exchangeable Debentures to October 5, 2023 and (ii) an indemnity obligation from GCI Liberty with respect to any payments made by LI LLC in excess of stated principal and interest to any holder that exercises its exchange right under the terms of the debentures through October 5, 2023. The cash reattributed to the QVC Group will be funded by available cash attributed to Liberty’s Ventures Group and the proceeds of a margin loan facility attributed to the Ventures Group in an initial principal amount of $1 billion. Within six months of the closing, Liberty, LI LLC and GCI Liberty will cooperate with, and reasonably assist each other with respect to, the commencement and consummation of a purchase offer (the “Purchase Offer”) whereby LI LLC will offer to purchase, either pursuant to privately negotiated transactions or a tender offer, the 1.75% Exchangeable Debentures on terms and conditions (including maximum offer price) reasonably acceptable to GCI Liberty. GCI Liberty will indemnify LI LLC for each 1.75% Exchangeable Debenture repurchased by LI LLC in the Purchase Offer in an amount equal to the difference between (x) the purchase price paid by LI LLC to acquire such 1.75% Exchangeable Debenture in the Purchase Offer and (y) the sum of the amount of cash reattributed with respect to such purchased 1.75% Exchangeable Debenture in the Reattribution plus the amount of certain tax benefits attributable to such 1.75% Exchangeable Debenture so purchased. GCI Liberty’s indemnity obligation with respect to payments made upon a holder’s exercise of its exchange right will be eliminated as to any 1.75% Exchangeable Debentures purchased in the Purchase Offer.
II-41
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
On December 29, 2017, Broadband Holdco, LLC, a wholly owned subsidiary of2019, the Company entered into a margin loan agreement with an availability of $1 billion with various lender parties. Approximately 42.7 million shares of Liberty Broadband series C common stock held by the Company with a value of $3.6 billion were pledged by Broadband Holdco, LLC as collateralamendment to the loan as of December 31, 2017. This margin loan has a term of two years and bears interest at a rate of LIBOR plus 1.85% and contains an undrawn commitment fee of 0.75% per annum. As of December 31, 2017 there were no outstanding borrowings on the margin loan.
Liberty will complete the Reattribution using similar valuation methodologies to those usedServices Agreement in connection with its previous reattributions, including takingLMC’s entry into accounta new employment arrangement with Gregory B. Maffei, the adviceCompany’s Chairman of its financial advisor. The Transactions are expectedthe Board (the “Chairman”). Under the amended Services Agreement, components of his compensation will either be paid directly to be consummated on March 9, 2018him by each of the Company, Liberty TripAdvisor Holdings, Inc., subject to the satisfaction of customary closing conditions. Simultaneous with that closing, QVC Group common stock will become the only outstanding common stock ofGCI Liberty, and thus QVC Group common stock will cease to function as a tracking stock and will effectively become regular common stock,Inc., and Liberty will be renamed Qurate Retail Group, Inc., with QVC, HSNiBroadband Corporation. (collectively, the “Service Companies”) or reimbursed to LMC, in each case, based on allocations among LMC and zulily as wholly-owned subsidiaries.
The term "QVC Group" does not represent a separate legal entity, rather it represents those businesses, assets and liabilities that have been attributed to that group. The QVC Group is primarily comprised of our merchandise-focused televised-shopping programs, Internet and mobile application businesses. The QVC Group has attributed to it the remainder of our businesses and assets not attributed to the Ventures Group, including our wholly-owned subsidiaries QVC and zulily (as of October 1, 2015) and HSN, Inc. (“HSNi”) (as of December 29, 2017) as well as cashService Companies set forth in the amount of approximately $330 million (atamended Services Agreement, currently set at 19% for the Company. The new agreement provides for a five year employment term which began on January 1, 2020 and ends December 31, 2017)2024, with an aggregate annual base salary of $3 million (with no contracted increase), including subsidiary cash.
On May 18, 2016, Liberty completed a $2.4 billion investment in Liberty Broadband (for accounting purposes a related partyan aggregate one-time cash commitment bonus of the Company)$5 million, an aggregate annual target cash performance bonus of $17 million, aggregate annual equity awards of $17.5 million and aggregate equity awards granted in connection with the mergerhis entry into his new agreement of Charter and Time Warner Cable Inc. ("TWC"$90 million (the “upfront awards”). The proceedsA portion of this investment were used by Liberty Broadbandthe grants made to fund, in part, its acquisition of $5 billion of stockour Chairman in the new public parent company (“Charter”) of the combined enterprises. Liberty, along with third party investors, all of whom invested on the same terms as Liberty, purchased newly issued shares of Liberty Broadband Series C common stock at a per share price of $56.23, which was determined based upon the fair value of Liberty Broadband's net assets on a sum-of-the-parts basis at the time the investment agreements were executed (May 2015). Liberty's investment in Liberty Broadband was funded using cash on hand and is attributed to the Ventures Group. See note 9 for additional informationyear ended December 31, 2019 related to this investment.our Company’s allocable portion of these upfront awards.
Liberty, as part of the merger of Charter and TWC described above, exchanged, in a tax-free transaction, its shares of TWC common stock for shares of Charter Class A common stock, on a one-for-one basis, and Liberty has granted to Liberty Broadband a proxy and a right of first refusal with respect to the shares of Charter Class A common stock held by Liberty in the exchange.
See Exhibit 99.1 to this Annual Report on Form 10-K for unaudited attributed financial information for Liberty's tracking stock groups.
(3)(2) Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash equivalents consist of investments which are readily convertible into cash and have maturities of three months or less at the time of acquisition.
II-42
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
Receivables
Receivables are reflected net of an allowance for doubtful accounts and sales returns. A provision for bad debts is provided as a percentage of accounts receivable based on historical experience in the period of sale and included in selling, general and administrative expense. A provision for vendor receivables are determined based on an estimate of probable expected losses and included in cost of retail sales.
II-38
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
A summary of activity in the allowance for doubtful accounts is as follows:
| | | | | | | | | | | | | | |
| | Balance | | Additions | | | | | Balance |
| ||||
| | beginning | | Charged | | | | | Deductions- | | end of |
| ||
| | of year | | to expense | | Other | | write-offs | | year |
| |||
| | amounts in millions |
| |||||||||||
2019 |
| $ | 117 |
| 130 |
| 4 |
|
| (122) |
|
| 129 | |
2018 | | $ | 92 |
| 123 |
| 3 |
|
| (101) |
|
| 117 | |
2017 |
| $ | 99 |
| 73 |
| (1) |
|
| (79) |
|
| 92 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance |
| Additions |
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| Balance |
| ||||
|
| beginning |
| Charged |
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|
|
| Deductions- |
| end of |
| ||
|
| of year |
| to expense |
| Other |
| write-offs |
| year |
| |||
|
| amounts in millions |
| |||||||||||
2017 |
| $ | 99 |
| 73 |
| (1) |
|
| (79) |
|
| 92 |
|
2016 |
| $ | 87 |
| 109 |
| (1) |
|
| (96) |
|
| 99 |
|
2015 |
| $ | 92 |
| 84 |
| (1) |
|
| (88) |
|
| 87 |
|
Inventory
Inventory, consisting primarily of products held for sale, is stated at the lower of cost or market. Cost is determined by the average cost method, which approximates the first-in, first-out method. Assessments about the realizability of inventory require the Company to make judgments based on currently available information about the likely method of disposition including sales to individual customers, returns to product vendors, liquidations and the estimated recoverable values of each disposition category. Inventory is stated net of inventory obsolescence reserves of $93$152 million and $76$151 million for the years ended December 31, 20172019 and 2016,2018, respectively.
In July 2015, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance that changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. The new principle is part of the FASB’s simplification initiative and applies to entities that measure inventory using a method other than last-in, first-out or the retail inventory method. The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2016. The Company has determined there is no significant effect of the standard on its ongoing financial reporting.
Investments
All marketable equity and debt securities held by the Company are classified as available-for-sale ("AFS") and are carried at fair value, generally based on quoted market prices. United States (“U.S.”) generally accepted accounting principles ("GAAP") permit entities to choose to measure many financial instruments, such as AFS securities,prices and certain other items at fair value and to recognize the changes in fair value of such instruments in the entity's statements of operations (the "fair value option"). Liberty had previously entered into economic hedges for certain of its non-strategic AFS securities (although such instruments were not accounted for as fair value hedges by the Company). Changes in the fair value of these economic hedges were reflected in Liberty's statements of operations as unrealized gains (losses). In order to better match the changes in fair value of the subject AFS securities and the changes in fair value of the corresponding economic hedges in the Company's financial statements, Liberty has elected the fair value option for those of its AFS securities which it considers to be non-strategic ("Fair Value Option Securities"). Accordingly, changes in the fair value of Fair Value Option Securities, as determined by quoted market prices,such securities are reported in realized and unrealized gainsgain (losses) on financial instruments in the accompanying consolidated statements of operations. The totalCompany elected the measurement alternative (defined as the cost of the security, adjusted for changes in fair value of AFSwhen there are observable prices, less impairments) for its equity securities without readily determinable fair values. The Company had 0 equity securities for which the Company hasit elected the fair value option aggregated $2,275 million and $1,846 million as of December 31, 20172019 and 2016, respectively.
II-43
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
Other investments in which the Company's ownership interest is less than 20%, unless the Company has the ability to exercise significant influence, and that are not considered marketable securities are carried at cost.
2018.
For those investments in affiliates in which the Company has the ability to exercise significant influence, the equity method of accounting is used, except in situations where the fair value option has been selected. Under the equity method of accounting, the investment, originally recorded at cost, is adjusted to recognize the Company's share of net earnings or losses of the affiliate as they occur rather than as dividends or other distributions are received. Losses are limited to the extent of the Company's investment in, advances to and commitments for the investee. In the event the Company is unable to obtain accurate financial information from an equity affiliate in a timely manner, the Company records its share of earnings or losses of such affiliate on a lag.
Changes in the Company's proportionate share of the underlying equity of an equity method investee, which result from the issuance of additional equity securities by such equity investee, are recognized in the statements of operations through the Other, net line item. To the extent there is a difference between our ownership percentage in the underlying equity of an equity method investee and our carrying value, such difference is accounted for as if the equity method investee were a consolidated subsidiary.
The Company continually reviewsperforms a qualitative assessment each reporting period for its equity investments and its AFS securities which are not Fair Value Option Securitieswithout readily determinable fair values to determineidentify whether a decline in fair value below the carrying value is other than temporary. The primary factors the Company considers in its determination are the length of timean equity security could be impaired. When our qualitative assessment indicates that an impairment could exist, we estimate the fair value of the investment is below the Company's carrying value; the severity of the decline; and the financial condition, operating performance and near term prospects of the investee. In addition, the Company considers the reason for the decline in fair value, be it general market conditions, industry specific or investee specific; analysts' ratings and estimates of 12 month share price targets for the investee; changes in stock price or valuation subsequent to the balance sheet date; andextent the Company's intent and ability to hold the investment for a period of time sufficient to allow for a recovery in fair value. If the decline in fair value is deemed to be otherless than temporary, the carrying value, ofwe record the security is written down to fair value. In situations where the fair value ofdifference as an investment is not evident due to a lack of a public market price or other factors, the Company uses its best estimates and assumptions to arrive at the estimated fair value of such investment. The Company's assessment of the foregoing factors involves considerable management judgment and accordingly, actual results may differ materially from the Company's estimates and judgments. Writedowns for AFS securities which are not Fair Value Option Securities would be includedimpairment in the consolidated statements of operations as other than temporary declines in fair values of investments. Writedowns for equity method investments would be included in share of earnings (losses) of affiliates.operations.
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 new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2017, with early adoption permitted under certain circumstances. The Company plans to adopt this standard during the first quarter of 2018 and does not expect that the adoption will have a material effect on its consolidated financial statements.
Derivative Instruments and Hedging Activities
All of the Company's derivatives, whether designated in hedging relationships or not, are recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive earnings
II-39
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
and are recognized in the statements of operations when the hedged item affects earnings. Ineffective portions of changes
II-44
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
in the fair value of cash flow hedges are recognized in earnings. If the derivative is not designated as a hedge, changes in the fair value of the derivative are recognized in earnings.
The Company generally enters into derivative contracts that it intends to designate as a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). For all hedging relationships, the Company formally documents the hedging relationship and its risk management objective and strategy for undertaking the hedge, the hedging instrument, the hedged item, the nature of the risk being hedged, how the hedging instrument's effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method of measuring ineffectiveness. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting cash flows of hedged items. Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash flow hedge are recorded in accumulated other comprehensive income to the extent that the derivative is effective as a hedge, until earnings are affected by the variability in cash flows of the designated hedged item. The ineffective portion of the change in fair value of a derivative instrument that qualifies as a cash flow hedge is reported in earnings.
Property and Equipment
Property and equipment consisted of the following:
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| December 31, |
| December 31, |
| |||||||
|
| 2017 |
| 2016 |
| |||||||
|
| amounts in millions |
| |||||||||
| | | | | | | ||||||
| | December 31, | | December 31, |
| |||||||
| | 2019 | | 2018 | | |||||||
| | amounts in millions |
| |||||||||
Land |
| $ | 108 |
| 81 |
|
| $ | 128 |
| 128 | |
Buildings and improvements |
|
| 1,165 |
| 1,016 |
| |
| 1,204 |
| 1,194 | |
Support equipment |
|
| 1,240 |
| 1,034 |
| |
| 1,023 |
| 1,302 | |
Projects in progress |
|
| 51 |
| 32 |
| |
| 169 |
| 61 | |
Finance lease right-of-use ("ROU") assets | | | 282 | | — | | ||||||
Total property and equipment |
| $ | 2,564 |
| 2,163 |
| | $ | 2,806 |
| 2,685 | |
Property and equipment, including significant improvements, is stated at cost.amortized cost, less impairment losses, if any. Depreciation is computed using the straight-line method using estimated useful lives of 2 to 15 years for support equipment and 83 to 2039 years for buildings and improvements. Depreciation expense for the years ended December 31, 2019, 2018 and 2017 2016was $220 million, $211 million and 2015 was $176 million, $171 million and $153 million, respectively.
Intangible Assets
Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment upon certain triggering events. Goodwill and other intangible assets with indefinite useful lives (collectively, "indefinite lived intangible assets") are not amortized, but instead are tested for impairment at least annually. Our annual impairment assessment of our indefinite-lived intangible assets is performed during the fourth quarter of each year.
In January 2017, the FASB issued new accounting guidance to simplify the measurement of goodwill impairment. Under the new guidance, an entity no longer performs a hypothetical purchase price allocation to measure goodwill
II-40
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
impairment. Instead, a goodwill impairment is measured using the difference between the carrying value and the fair value of the reporting unit. The Company early adopted this guidance during the fourth quarter of 2017.
In evaluating goodwill on a qualitative basis, the Company reviews the business performance of each reporting unit and evaluates other relevant factors as identified in the relevant accounting guidance to determine whether it was more likely than not that an indicated impairment exists for any of our reporting units. The Company considers whether there
II-45
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
are any negative macroeconomic conditions, industry specific conditions, market changes, increased competition, increased costs in doing business, management challenges, the legal environments and how these factors might impact company specific performance in future periods. As part of the analysis the Company also considers fair value determinations for certain reporting units that have been made at various points throughout the current year and prior year for other purposes. If based on the qualitative analysis it is more likely than not that an impairment exists, the Company performs the quantitative impairment test.
The quantitative goodwill impairment test compares the estimated fair value of a reporting unit to its carrying value. Developing estimates of fair value requires significant judgments, including making assumptions about appropriate discount rates, perpetual growth rates, relevant comparable market multiples, public trading prices and the amount and timing of expected future cash flows. The cash flows employed in Liberty'sQurate Retail's valuation analyses are based on management's best estimates considering current marketplace factors and risks as well as assumptions of growth rates in future years. There is no assurance that actual results in the future will approximate these forecasts.
The accounting guidance also permits entities to first perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset, other than goodwill, is impaired. The accounting guidance also allows entities the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to the quantitative impairment test. The entity may resume performing the qualitative assessment in any subsequent period. If the qualitative assessment supports that it is more likely than not that the carrying value of the Company’s indefinite-lived intangible assets, other than goodwill, exceeds its fair value, then a quantitative assessment is performed. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
Impairment of Long-lived Assets
The Company periodically reviews the carrying amounts of its property and equipment and its intangible assets (other than goodwill and indefinite-lived intangible assets) to determine whether current events or circumstances indicate that such carrying amounts may not be recoverable. If the carrying amount of the asset group is greater than the expected undiscounted cash flows to be generated by such asset group, including its ultimate disposition, an impairment adjustment is to be recognized. Such adjustment is measured by the amount that the carrying value of such asset groups exceeds their fair value. The Company generally measures fair value by considering sale prices for similar asset groups or by discounting estimated future cash flows using an appropriate discount rate. Considerable management judgment is necessary to estimate the fair value of asset groups. Accordingly, actual results could vary significantly from such estimates. Asset groups to be disposed of are carried at the lower of their financial statement carrying amount or fair value less costs to sell.
Noncontrolling Interests
The Company reports noncontrolling interests of subsidiaries within equity in the balance sheet and the amount of consolidated net income attributable to the parent and to the noncontrolling interest is presented in the statements of operations. Also, changes in ownership interests in subsidiaries in which the Company maintains a controlling interest are recorded in equity.
II-41
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
Foreign Currency Translation
The functional currency of the Company is the U.S. Dollar. The functional currency of the Company's foreign operations generally is the applicable local currency for each foreign subsidiary. Assets and liabilities of foreign subsidiaries are translated at the spot rate in effect at the applicable reporting date, and the consolidated statements of operations are translated at the average exchange rates in effect during the applicable period. The resulting unrealized cumulative translation adjustment, net of applicable income taxes, is recorded as a component of accumulated other comprehensive earnings in stockholders' equity.
II-46
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in transaction gains and losses which are reflected in the accompanying consolidated statements of operations and comprehensive earnings (loss) as unrealized (based on the applicable period-end exchange rate) or realized upon settlement of the transactions. These realized and unrealized gains and losses are reported in the Other, net line item in the consolidated statements of operations.
Revenue Recognition
RetailOn January 1, 2018, the Company adopted the revenue is recognized ataccounting standard (“ASC 606”) using the time of delivery to customers.modified retrospective method. The revenue for shipments in-transit is recorded as deferred revenue and included in other current liabilities. Additionally, service revenue, which is less than one percent of overall revenue, is recognized when the applicable criteria are met: persuasive evidence of an arrangement exists, services have been rendered, the price is fixed and determinable and collectability is reasonably assured.
An allowance for returned merchandise is provided as a percentage of sales based on historical experience. The total reduction in sales due to returns for the years ended December 31, 2017, 2016 and 2015 aggregated $1,861 million, $1,865 million and $2,037 million, respectively. Sales tax collected from customers on retail sales is recorded on a net basis and is not included in revenue.
A summary of activity in the allowance for sales returns, is as follows:
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|
|
| Balance beginning of year |
| Additions - charged to earnings |
| Deductions |
| Balance end of year |
|
| in millions | ||||||
2017 | $ | 98 |
| 1,027 |
| (1,023) |
| 102 |
2016 | $ | 106 |
| 1,051 |
| (1,060) |
| 98 |
2015 | $ | 109 |
| 1,213 |
| (1,216) |
| 106 |
In May 2014, 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. The updated guidance will replace most existing revenue recognition guidance in GAAP when it becomes effective and permits the use of either a full retrospective or modified retrospective transition method. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, and early adoption is permitted only for fiscal years beginning after December 15, 2016. The Company willrecognized the cumulative effect of initially applying the 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.
In accordance with the revenue standard requirements, the following table illustrates the impact on our reported results in the consolidated statements of operations assuming we did not adopt the accounting guidance effectivenew revenue standard on January 1, 2018. Other than as previously discussed, upon the adoption of the new revenue standard on January 1, 2018, with an immaterial adjustmentthere were no additional material adjustments to retained earnings usingour consolidated balance sheet as of December 31, 2018.
| | | | | | | |
| | As reported | | | | Balance without | |
| | Year ended | | | | adoption of | |
| | December 31, 2018 | | Impact of ASC 606 | | ASC 606 | |
| | in millions | | ||||
Net revenue | $ | 14,070 | | (154) | | 13,916 | |
| | | | | | | |
Cost of retail sales | $ | 9,209 | | (13) | | 9,196 | |
Selling, general and administrative expenses, including stock-based compensation and transaction related costs | $ | 1,897 | | (126) | | 1,771 | |
Operating expense | $ | 970 | | (2) | | 968 | |
Income tax (expense) benefit | $ | (60) | | 2 | | (58) | |
Net income | $ | 916 | | (11) | | 905 | |
II-42
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
The effect of changes of adoption is primarily due to changes in the modified transition method. The Company has completed our reviewtiming of revenue recognition and the applicable ASUclassification of credit card income for the QVC-branded credit card and has concluded it will recognizethe HSN-branded credit card. For the year ended December 31, 2018, revenue is recognized at the time of shipment to itsour customers consistent with when title passes. Thiscontrol passes and credit card income is a change fromrecognized in revenue. For the current practice whereby the Company recognizesyear ended December 31, 2017, revenue was recognized at the time of delivery to the customers and deferred revenue, isas well as inventory and related expenses, were recorded to account for the shipments in-transit. The Company has also concluded that it will continue to act as principal in certain vendor arrangements and will recognizeIn addition, credit card income for its QVC-branded credit card as part of net revenue. At the current time, the credit card income is includedwas recognized as an offset to selling, general and administrative expenses. In addition,The Company recognized a separate $124 million and $121 million asset (included in other current assets) relating to the Company’s balance sheet presentationexpected return of inventory and a $261 million and $266 million liability (included in other current liabilities) relating to its sales return reserve will change to present a separate return assetat December 31, 2019 and liability,2018, respectively, instead of the net presentation currently used. The Company will also electthat was used at December 31, 2017.
Disaggregated revenue by segment and product category consisted of the practical expedient to not adjustfollowing:
| | | | | | | | | | | |
| Year ended | | |||||||||
| December 31, 2019 | | |||||||||
| | QxH | | QVC Int'l | | Zulily | | Corp and other | | Total | |
| in millions | | |||||||||
Home | $ | 3,047 | | 905 | | 422 | | 729 | | 5,103 | |
Beauty | | 1,299 | | 659 | | 53 | | — | | 2,011 | |
Apparel | | 1,289 | | 422 | | 582 | | 172 | | 2,465 | |
Accessories | | 918 | | 376 | | 416 | | — | | 1,710 | |
Electronics | | 1,141 | | 107 | | 15 | | — | | 1,263 | |
Jewelry | | 402 | | 226 | | 54 | | — | | 682 | |
Other revenue | | 181 | | 14 | | 29 | | — | | 224 | |
Total Revenue | $ | 8,277 | | 2,709 | | 1,571 | | 901 | | 13,458 | |
| | | | | | | | | | | |
| Year ended | | |||||||||
| December 31, 2018 | | |||||||||
| | QxH | | QVC Int'l | | Zulily | | Corp and other | | Total | |
| in millions | | |||||||||
Home | $ | 3,175 | | 1,023 | | 511 | | 791 | | 5,500 | |
Beauty | | 1,326 | | 640 | | 50 | | — | | 2,016 | |
Apparel | | 1,323 | | 453 | | 684 | | 180 | | 2,640 | |
Accessories | | 933 | | 273 | | 472 | | — | | 1,678 | |
Electronics | | 1,129 | | 119 | | 18 | | — | | 1,266 | |
Jewelry | | 473 | | 213 | | 53 | | — | | 739 | |
Other revenue | | 185 | | 17 | | 29 | | — | | 231 | |
Total Revenue | $ | 8,544 | | 2,738 | | 1,817 | | 971 | | 14,070 | |
Consumer Product Revenue and Other Revenue. Qurate Retail's revenue includes sales of consumer products in the promised amount of consideration for the effects of a significant financing component when its payment termsfollowing categories: home, apparel, beauty, accessories, electronics and jewelry, which are less than one year, as wellprimarily sold through live merchandise-focused televised shopping programs and via our websites and other interactive media, including catalogs.
II-47II-43
LIBERTY INTERACTIVE CORPORATIONQURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 20162019, 2018 and 20152017
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.
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 that occur after the customer obtains control of the goods as a fulfillment cost and not as a promised good or service. Accordingly, the Company accrues the related shipping costs and recognizes revenue upon delivery of goods to the shipping carrier. In electing this accounting policy, all shipping and handling activities are treated as fulfillment costs.
The Company generally has payment terms with its customers of one year or less and has elected the practical expedient applicable to exclude fromsuch contracts not to consider the measurementtime value of money.
Significant Judgments. Qurate Retail’s products are generally sold with a right of return and we may provide other credits or incentives, which are accounted for as variable consideration when estimating the transaction priceamount 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.
An allowance for returned merchandise is provided as a percentage of sales based on historical experience. The total reduction in sales due to returns for the years ended December 31, 2019, 2018 and similar taxes2017 aggregated $2,336 million, $2,434 million and $1,861 million, respectively. Sales tax collected from customers.customers on retail sales is recorded on a net basis and is not included in revenue.
A summary of activity in the allowance for sales returns, is as follows:
| | | | | | | | | | |
| | Balance beginning of year | | Additions - charged to earnings | | Deductions | | Acquisition of HSN | | Balance end of year |
| | in millions | ||||||||
2019 | $ | 266 | | 2,336 | | (2,341) | | - | | 261 |
2018 (1) | $ | 267 | | 2,434 | | (2,435) | | - | | 266 |
2017 | $ | 98 | | 1,027 | | (1,023) | | 35 | | 137 |
(1) | Amounts in 2018 and 2019 include the impact of adoption of ASC 606. |
II-44
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
Cost of Sales
Cost of sales primarily includes actual product cost, provision for obsolete inventory, buying allowances received from suppliers, shipping and handling costs and warehouse costs.
Advertising Costs
Advertising costs generally are expensed as incurred. Advertising expense aggregated $217 million, $231 million and $154 million for the years ended December 31, 2017, 2016 and 2015, respectively. Advertising costs are reflected in the selling, general and administrative, including stock-based compensation line item in our consolidated statements of operations.
Stock-Based Compensation
As more fully described in note 15,13, the Company has granted to its directors, employees and employees of its subsidiaries options, restricted stock and stock appreciation rights relating to shares of QVC GroupQurate Retail and/or Liberty Ventures common stock ("LibertyQurate Retail common stock") (collectively, "Awards"). The Company measures the cost of employee services received in exchange for an Award of equity instruments (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 an Award of liability instruments (such as stock appreciation rights that will be settled in cash) based on the current fair value of the Award, and remeasures the fair value of the Award at each reporting date.
Stock compensation expense was $123$71 million, $97$88 million and $127$123 million for the years ended December 31, 2017, 20162019, 2018 and 2015,2017, respectively, included in selling, general and administrative expense in the accompanying consolidated statements of operations.
In March 2016, the FASB issued new guidance which simplifies several aspects of the accounting for share-based payment award transactions, including the income tax consequences, forfeitures, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new standard is effective for the Company for fiscal years and interim periods beginning after December 15, 2016, with early application permitted. The Company adopted this guidance in the third quarter of 2016. In accordance with the new guidance, excess tax benefits and tax deficiencies are recognized as income tax benefit or expense rather than as additional paid-in capital. The Company has elected to recognize forfeitures as they occur rather than continue to estimate expected forfeitures. In addition, pursuant to the new guidance, excess tax benefits are classified as an operating activity on the consolidated statements of cash flows. The recognition of excess tax benefits and deficiencies are applied prospectively from January 1, 2016. For tax benefits that were not previously recognized and for adjustments to compensation cost based on actual forfeitures, the Company has recorded a cumulative-effect adjustment in retained earnings as of January 1, 2016. The presentation changes for excess tax benefits have been applied retrospectively in the consolidated statements of cash flows, resulting in $33 million of excess tax benefits for the year ended December 31, 2015 reclassified from cash flows from financing activities to cash flows from operating activities.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying value amounts and income tax bases of assets and liabilities and the expected benefits of utilizing net operating loss and tax credit carryforwards. The deferred tax assets and liabilities are calculated using enacted tax rates in effect for each taxing jurisdiction in which the Company operates for the year in which those temporary differences are expected to be recovered
II-48
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
or settled. Net deferred tax assets are then reduced by a valuation allowance if the Company believes it more likely than not such net deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of an enacted change in tax rates is recognized in income in the period that includes the enactment date.
When the tax law requires interest to be paid on an underpayment of income taxes, the Company recognizes interest expense from the first period the interest would begin accruing according to the relevant tax law. Such interest expense is included in interest expense in the accompanying consolidated statements of operations. Any accrual of penalties related to underpayment of income taxes on uncertain tax positions is included in other income (expense) in the accompanying consolidated statements of operations.
II-45
In October 2016, the FASB issued new guidance amending the accounting for income taxes associated with intra-entity transfers of assets other than inventory. This accounting update, which is part of the FASB's simplification initiative, is intendedQURATE RETAIL, INC. AND SUBSIDIARIES
Notes to reduce diversity in practiceConsolidated Financial Statements (Continued)
December 31, 2019, 2018 and the complexity of tax accounting, particularly for those transfers involving intellectual property. This new guidance requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The new standard is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 with early adoption permitted. We anticipate an immaterial retained earnings decrease upon adoption related to the unrecognized income tax effects of asset transfers that occurred prior to adoption.
Earnings (Loss) Attributable to LibertyQurate Retail Stockholders and Earnings (Loss) Per Common Share
Net earnings (loss) attributable to LibertyQurate Retail stockholders is comprised of the following (amounts in millions):
|
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|
|
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|
|
| ||||||||
|
| Years ended December 31, |
| |||||||||||||
|
| 2017 |
| 2016 |
| 2015 |
| |||||||||
QVC Group |
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| ||||||||
| | | | | | | | | ||||||||
| | Years ended December 31, | | |||||||||||||
| | 2019 | | 2018 | | 2017 | | |||||||||
Qurate Retail |
| | |
| |
| |
| ||||||||
Net earnings (loss) from continuing operations |
| $ | 1,208 |
| 473 |
| 640 |
| | $ | (456) | | 674 | | 1,208 | |
Net earnings (loss) from discontinued operations |
| $ | NA |
| NA |
| NA |
| | $ | NA | | NA | | NA | |
Liberty Ventures |
|
|
|
|
|
|
|
| | | | | | | | |
Net earnings (loss) from continuing operations |
| $ | 1,233 |
| 742 |
| (51) |
| | $ | NA | | 101 | | 781 | |
Net earnings (loss) from discontinued operations |
| $ | — |
| 20 |
| 280 |
| | $ | NA | | 141 | | 452 | |
Basic earnings (loss) per common share ("EPS") is computed by dividing net earnings (loss) attributable to such common stock 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.
II-49
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
Series A and Series B QVC GroupQurate Retail Common Stock
EPS for all periods through December 31, 2017,2019, is based on the following weighted average shares outstanding. Excluded from diluted EPS for the years ended December 31, 2017, 20162019, 2018 and 20152017 are approximately 2022 million, 1325 million and 620 million potential common shares, respectively, because their inclusion would be antidilutive.
| | | | | | | | |
| | | Years ended December 31, |
| ||||
|
| | 2019 |
| 2018 |
| 2017 |
|
| | | number of shares in millions |
| ||||
Basic WASO | | | 424 | | 462 | | 445 | |
Potentially dilutive shares | | | — | | 3 | | 3 | |
Diluted WASO | | | 424 | | 465 | | 448 | |
|
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|
|
|
|
|
|
|
|
| Years ended December 31, |
| ||||
|
|
| 2017 |
| 2016 |
| 2015 |
|
|
|
| number of shares in millions |
| ||||
Basic WASO |
|
| 445 |
| 476 |
| 475 |
|
Potentially dilutive shares |
|
| 3 |
| 5 |
| 6 |
|
Diluted WASO |
|
| 448 |
| 481 |
| 481 |
|
Series A and Series B Liberty Ventures Common Stock
EPS for all periods through December 31, 2017,2019, is based on the following weighted average shares outstanding. Excluded from diluted EPS for the years ended December 31, 2017, 2016,2018 and 20152017 are less than a million potential common shares because their inclusion would be antidilutive.
II-46
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
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| Years ended December 31, |
| ||||
|
|
| 2017 |
| 2016 |
| 2015 |
|
|
|
| number of shares in millions |
| ||||
Basic WASO |
|
| 86 |
| 134 |
| 142 |
|
Potentially dilutive shares |
|
| 1 |
| 1 |
| 1 |
|
Diluted WASO |
|
| 87 |
| 135 |
| 143 |
|
| | | | | | | | |
| |
| Years ended December 31, |
| ||||
|
| | 2019 |
| 2018 (1) |
| 2017 |
|
| | | number of shares in millions |
| ||||
Basic WASO | |
| NA | | 86 | | 86 | |
Potentially dilutive shares | |
| NA | | 1 | | 1 | |
Diluted WASO | |
| NA | | 87 | | 87 | |
(1) | All of the outstanding shares of Liberty Ventures Series A and B common stock were redeemed for GCI Liberty Series A and B common stock as a result of the GCI Liberty Split-Off on March 9, 2018. |
Reclasses and adjustments
Certain prior period amounts have been reclassified for comparability with the current year presentation.
As a result of repurchases of Series A QVC GroupQurate Retail common stock, the Company’s additional paid-in capital balance was in a deficit position in certain quarterly periods during the year ended December 31, 2017.2019. In order to maintain a zero balance in the additional paid-in capital account, we reclassified the amount of the deficit ($405328 million) at December 31, 20172019 to retained earnings.
Estimates
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. LibertyQurate Retail considers (i) recurring and non-recurring fair value measurements, (ii) accounting for income taxes (iii) assessments of other-than-temporary declines in fair value of its investments and (iv)(iii) estimates of retail-related adjustments and allowances to be its most significant estimates.
Liberty holds investments that are accounted for using the equity method. Liberty does not control the decision making process or business management practices of these affiliates. Accordingly, Liberty relies on management of these affiliates to provide it with accurate financial information prepared in accordance with GAAP that Liberty uses in the application of the equity method. In addition, Liberty relies on audit reports that are provided by the affiliates' independent auditors on
II-50
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
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 Liberty's consolidated financial statements.
New Accounting Pronouncements Not Yet Adopted
Internal-Use Software. In February 2016,August 2018, the FASB issued new guidance which revisesaligns the accountingrequirements for leases. Undercapitalizing implementation costs incurred in a hosting arrangement that is a service contract with the newrequirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The guidance lessees will be required to recognize a lease liability and a right-of-use asset for all leases. The new guidance also simplifies the accounting for sale and leaseback transactions. The new standard, to be applied via a modified retrospective transition approach, is effective for the Company for fiscal years and interim periods beginning after December 15, 2018,in the first quarter of 2020 with early adoption permitted. The Company has not yet determinedis currently assessing the effect of theimpact that adopting this new accounting standard will have on its ongoing financial reporting. The Company is currently working with its consolidated subsidiaries to evaluate the impact of the adoption of this new guidance on our consolidated financial statements, including identifying the populationstatements.
II-47
Table of leases, evaluating technology solutionsContents
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and collecting lease data.2017
(4) (3) Supplemental Disclosures to Consolidated Statements of Cash Flows
| | | | | | | | |
| | Years ended December 31, |
| |||||
| | 2019 | | 2018 | | 2017 |
| |
| | amounts in millions |
| |||||
Cash paid for acquisitions: | | | | | | | | |
Fair value of assets acquired | | $ | — |
| (11) |
| 956 | |
Intangible assets not subject to amortization | |
| — |
| — |
| 1,577 | |
Intangible assets subject to amortization | |
| — |
| (4) |
| 651 | |
Net liabilities assumed | |
| — |
| 10 |
| (977) | |
Deferred tax assets (liabilities) | |
| — |
| 5 |
| (281) | |
Fair value of equity consideration | |
| — |
| — |
| (1,948) | |
Cash paid (received) for acquisitions, net of cash acquired | | $ | — |
| — |
| (22) | |
| | | | | | | | |
Cash paid for interest | | $ | 360 |
| 362 |
| 343 | |
| | | | | | | | |
Cash paid for income taxes | | $ | 175 |
| 226 |
| 158 | |
| | | | | | | | |
Non-cash capital additions obtained in exchange for liabilities | | $ | 36 |
| — |
| — | |
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| Years ended December 31, |
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| 2017 |
| 2016 |
| 2015 |
| |
|
| amounts in millions |
| |||||
Cash paid for acquisitions: |
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|
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|
|
|
Fair value of assets acquired |
| $ | 956 |
| — |
| 154 |
|
Intangible assets not subject to amortization |
|
| 1,577 |
| 7 |
| 1,791 |
|
Intangible assets subject to amortization |
|
| 651 |
| (40) |
| 837 |
|
Net liabilities assumed |
|
| (977) |
| — |
| (214) |
|
Deferred tax assets (liabilities) |
|
| (281) |
| 33 |
| (637) |
|
Fair value of equity consideration |
|
| (1,948) |
| — |
| (1,087) |
|
Cash paid (received) for acquisitions, net of cash acquired |
| $ | (22) |
| — |
| 844 |
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Cash paid for interest |
| $ | 343 |
| 354 |
| 374 |
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Cash paid for income taxes |
| $ | 158 |
| 204 |
| 318 |
|
0
(5)
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 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 consolidated balance sheets to the total amount presented in our consolidated statements of cash flows:
| | | | | |
| | December 31, | | December 31, | |
| | 2019 | | 2018 | |
| | in millions | | ||
Cash and cash equivalents | $ | 673 | | 653 | |
Restricted cash included in other current assets | | 8 | | 7 | |
Total cash, cash equivalents and restricted cash in the consolidated statement of cash flows | $ | 681 | | 660 | |
II-48
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
(4) Acquisitions
On December 29, 2017, LibertyQurate Retail acquired the approximately 62% of HSNiHSN it did not already own in an all-stock transaction making HSNiHSN a wholly-owned subsidiary, attributed to the QVC Group. HSNiHSN shareholders (other than Liberty)Qurate Retail) received fixed consideration of 1.65 shares of Series A QVC Group common stock (“QVCA”) for each share of HSNiHSN common stock. LibertyQurate Retail issued 53.6 million shares of QVCA common stock to HSNiHSN shareholders. In conjunction with application of acquisition accounting, we recorded a full step up in basis of HSNiHSN which resulted in a $409 million gain. The fair market value of our ownership interest previously held in HSNiHSN ($605 million) was determined based on the trading price of QVCA common stock on the date of the acquisition (Level 1) less a control premium. The market value of the shares of QVCA common stock issued to HSNiHSN shareholders ($1.3 billion) was determined based on the trading price of QVCA common stock on the date of the acquisition. The total equity value of the transaction was $1.9 billion. With the exception of $43 million of severance-related costs incurred on December 30, 2017, HSNi’s results of operations
II-51
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
are not included in our consolidated operating results for the year ended December 31, 2017, as the final two days of the period were considered immaterial.
The preliminary purchase price allocation for HSNi is as follows (amounts in millions):
|
|
|
|
|
Cash and cash equivalents |
| $ | 22 |
|
Property and equipment |
|
| 214 |
|
Other assets |
|
| 752 |
|
Goodwill |
|
| 950 |
|
Trademarks |
|
| 676 |
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Intangible assets subject to amortization |
|
| 602 |
|
Accounts payable & accrued liabilities |
|
| (515) |
|
Debt |
|
| (460) |
|
Other liabilities assumed |
|
| (12) |
|
Deferred tax liabilities |
|
| (281) |
|
|
| $ | 1,948 |
|
|
|
|
|
|
Goodwill is calculated as the excess of the consideration transferred over the identifiable net assets acquired and represents the future economic benefits expected to arise from other intangible assets acquired that do not qualify for separate recognition, including assembled workforce, value associated with future customers, continued innovation and noncontractual relationships. Intangible assets acquired during 2017 were comprised of customer relationships of $425 million with a weighted average life of approximately 9 years, capitalized software of $16 million with a weighted average life of approximately 1 year, and technology of $161 million with a weighted average life of approximately 7 years. None of the acquired goodwill is expected to be deductible for tax purposes. As of December 31, 2017, the valuation related to the purchase is not final and the purchase price allocation is preliminary and subject to revision. The primary areas of the purchase price allocation that are not yet finalized are related to certain fixed and intangible assets, liabilities and tax balances.
Included in net earnings (loss) from continuing operations for the year ended December 31, 2017 is $43 million related to HSNi’sHSN’s operations since the date of acquisition, which is primarily related to severance cost post acquisition. Of the $43 million, $38 million related to HSN ($8 million of which related to stock-based compensation expense and is included in Selling, general and administrative, including stock-based compensation expense in the consolidated statements of operations) and $5 million related to Cornerstone. With the exception of the $43 million of severance-related costs incurred on December 30, 2017, HSN’s results of operations are not included in our consolidated operating results for the year ended December 31, 2017, as the final two days of the period were considered immaterial.
The pro forma revenue and net earnings from continuing operations of Liberty,Qurate Retail, prepared utilizing the historical financial statements of HSNi,HSN, giving effect to purchase accounting related adjustments made at the time of acquisition, as if the transaction discussed above occurred on January 1, 2016, are as follows:
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| Years Ended December 31, |
| |||||||
|
|
| 2017 |
| 2016 |
| |||||
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| amounts in millions |
| |||||||
|
|
| (unaudited) |
| |||||||
| | | | | | ||||||
| | | Year Ended December 31, | | |||||||
| | | 2017 | | | ||||||
| | | amounts in millions | | |||||||
| | | (unaudited) | | |||||||
Revenue |
| $ | 13,791 |
| 14,220 |
| | $ | 13,791 | | |
Net earnings (loss) from continuing operations |
|
| 2,200 |
| 1,258 |
| | $ | 2,200 | | |
II-52
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
The pro forma information is not representative of Liberty’sQurate Retail’s future financial position, future results of operations or future cash flows nor does it reflect what Liberty’sQurate Retail’s financial position, results of operations or cash flows would have been as if the transaction had happened previously and LibertyQurate Retail controlled HSNiHSN during the periods presented. The pro forma information includes a nonrecurring adjustment for transactionstransaction costs incurred as a result of the acquisition.
On October 1, 2015, Liberty acquired zulily for consideration of approximately $2.3 billion, comprised of $9.375 of cash and 0.3098 newly issued shares of QVCA for each zulily share, with cash paid in lieu of any fractional shares. The fair value of the issued shares was determined based on the trading price of QVCA shares on the last trading day prior to the acquisition. Funding for the $1.2 billion cash portion of the consideration came from cash on hand at zulily and a distribution from QVC funded by a drawdown under its revolving credit facility (see note 11). zulily is attributed to the QVC Group.
The final purchase price allocation for zulily is as follows (amounts in millions):(5) Disposals
|
| |||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
| ||||
|
Intangible assets acquired during 2015 were comprised of customer relationships of $490 million with a weighted average life of approximately 4 years, email lists of $250 million with a weighted average life of approximately 2 years, and capitalized software of $50 million with a weighted average life of approximately 3 years. None of the acquired goodwill is deductible for tax purposes. Subsequent to December 31, 2015, the preliminary purchase price allocation was adjusted, resulting in decreases of $50 million to trademarks, $40 million to intangible assets subject to amortization and $33 million to deferred tax liabilities and a corresponding increase of $57 million to goodwill. If these adjustments had been recorded as of the acquisition date, amortization expense would have been approximately $3 million lower for the period ended December 31, 2015. There have been no other significant changes to our purchase price allocation since December 31, 2015.
Included in net earnings (loss) from continuing operations for the year ended December 31, 2015 is $34 million related to zulily’s operations since the date of acquisition.
(6) Disposals
Disposals - Presented as Discontinued Operations
On November 4, 2016,Investment in Liberty Broadband
$
3,822
Investment in Charter
1,866
Corporate Cash
475
Margin Loan
(996)
Deferred Income Tax Liabilities
(550)
Other, net
(270)
$
4,347
Following the contribution, Qurate Retail effected a tax-free separation of its controlling interest in the combined company (the “GCI Liberty Split-Off”), GCI Liberty, to the holders of Liberty Ventures common stock in full redemption of all outstanding shares of such stock, in which each outstanding share of Series A Liberty Ventures common stock was redeemed for 1 share of GCI Liberty Class A common stock and each outstanding share of Series B Liberty Ventures common stock was redeemed for 1 share of GCI Liberty Class B common stock. Simultaneous with the closing of the Transactions, QVC Group common stock became the only outstanding common stock of Qurate Retail, and thus QVC Group common stock ceased to function as a tracking stock. On April 9, 2018, Liberty Interactive Corporation was renamed Qurate Retail, Inc. On May 23, 2018, Qurate Retail amended its charter to eliminate the tracking stock capitalization structure and reclassify each share of QVC Group common stock into 1 share of the corresponding series of new common stock of Qurate Retail. Throughout this annual report, we refer to our Series A and Series B common stock as “Qurate Retail common stock” and “QVC Group 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 centers in Lancaster, Pennsylvania and Roanoke, Virginia and leased a new fulfillment center in Bethlehem, Pennsylvania, that commenced in 2019 (see note 9). Qurate Retail recorded transaction related costs of $41 million during the year ended December 31, 2018 related to the QRG Initiatives, which primarily related to severance costs. Also, 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.”
Qurate Retail and GCI Liberty (for accounting purposes a related party of Qurate Retail) entered into a tax sharing agreement. Pursuant to that 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 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).
II-37
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
Qurate Retail and Liberty Media Corporation (“LMC”) (for accounting purposes a related party of Qurate Retail) entered into certain agreements in order to govern certain of the ongoing relationships between the two companies. These agreements include a reorganization agreement, a services agreement (the “Services Agreement”), a facilities sharing agreement (the “Facilities Sharing Agreement”) and a tax sharing agreement (the “Tax Sharing Agreement”). The Tax Sharing Agreement provides for the allocation and indemnification of tax liabilities and benefits between Qurate Retail and LMC and other agreements related to tax matters. Qurate Retail is party to on-going discussions with the IRS under the Compliance Assurance Process audit program. The IRS may propose adjustments that relate to tax attributes allocated to and income allocable to LMC. Any potential outcome associated with any proposed adjustments would be covered by the Tax Sharing Agreement and are not expected to have any impact on Qurate Retail's financial position. Pursuant to the Services Agreement, LMC provides Qurate Retail with general and administrative services including legal, tax, accounting, treasury and investor relations support. See below for a description of an amendment to the services agreement entered into in December 2019. 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, Qurate Retail shares office space with LMC and related amenities at LMC's corporate headquarters. Under these various agreements approximately $8 million, $8 million and $11 million of these allocated expenses were reimbursable from Qurate Retail to LMC for the years ended December 31, 2019, 2018 and 2017, respectively. Qurate Retail had a tax sharing payable of approximately $95 million and $114 million as of December 31, 2019 and 2018, respectively, included in Other liabilities in the consolidated balance sheets.
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, Inc., 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 new agreement provides for a five year employment term which began on January 1, 2020 and ends December 31, 2024, with an aggregate annual base salary of $3 million (with no contracted increase), an aggregate one-time cash commitment bonus of $5 million, an aggregate annual target cash performance bonus of $17 million, aggregate annual equity awards of $17.5 million and aggregate equity awards granted in connection with his entry into his new agreement of $90 million (the “upfront awards”). A portion of the grants made to our Chairman in the year ended December 31, 2019 related to our Company’s allocable portion of these upfront awards.
(2) Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash equivalents consist of investments which are readily convertible into cash and have maturities of three months or less at the time of acquisition.
Receivables
Receivables are reflected net of an allowance for doubtful accounts and sales returns. A provision for bad debts is provided as a percentage of accounts receivable based on historical experience in the period of sale and included in selling, general and administrative expense. A provision for vendor receivables are determined based on an estimate of probable expected losses and included in cost of retail sales.
II-38
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
A summary of activity in the allowance for doubtful accounts is as follows:
| | | | | | | | | | | | | | |
| | Balance | | Additions | | | | | Balance |
| ||||
| | beginning | | Charged | | | | | Deductions- | | end of |
| ||
| | of year | | to expense | | Other | | write-offs | | year |
| |||
| | amounts in millions |
| |||||||||||
2019 |
| $ | 117 |
| 130 |
| 4 |
|
| (122) |
|
| 129 | |
2018 | | $ | 92 |
| 123 |
| 3 |
|
| (101) |
|
| 117 | |
2017 |
| $ | 99 |
| 73 |
| (1) |
|
| (79) |
|
| 92 | |
Inventory
Inventory, consisting primarily of products held for sale, is stated at the lower of cost or market. Cost is determined by the average cost method, which approximates the first-in, first-out method. Assessments about the realizability of inventory require the Company to make judgments based on currently available information about the likely method of disposition including sales to individual customers, returns to product vendors, liquidations and the estimated recoverable values of each disposition category. Inventory is stated net of inventory obsolescence reserves of $152 million and $151 million for the years ended December 31, 2019 and 2018, respectively.
Investments
All marketable equity and debt securities held by the Company are carried at fair value, generally based on quoted market prices and changes in the fair value of such securities are reported in realized and unrealized gain (losses) on financial instruments in the accompanying consolidated statements of operations. The Company elected the measurement alternative (defined as the cost of the security, adjusted for changes in fair value when there are observable prices, less impairments) for its equity securities without readily determinable fair values. The Company had 0 equity securities for which it elected the fair value option as of December 31, 2019 and 2018.
For those investments in affiliates in which the Company has the ability to exercise significant influence, the equity method of accounting is used, except in situations where the fair value option has been selected. Under the equity method of accounting, the investment, originally recorded at cost, is adjusted to recognize the Company's share of net earnings or losses of the affiliate as they occur rather than as dividends or other distributions are received. Losses are limited to the extent of the Company's investment in, advances to and commitments for the investee. In the event the Company is unable to obtain accurate financial information from an equity affiliate in a timely manner, the Company records its share of earnings or losses of such affiliate on a lag.
The Company performs a qualitative assessment each reporting period for its equity securities without readily determinable fair values to identify whether an equity security could be impaired. When our qualitative assessment indicates that an impairment could exist, we estimate the fair value of the investment and to the extent the fair value is less than the carrying value, we record the difference as an impairment in the consolidated statements of operations.
Derivative Instruments and Hedging Activities
All of the Company's derivatives, whether designated in hedging relationships or not, are recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive earnings
II-39
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
and are recognized in the statements of operations when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. If the derivative is not designated as a hedge, changes in the fair value of the derivative are recognized in earnings.
The Company generally enters into derivative contracts that it intends to designate as a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). For all hedging relationships, the Company formally documents the hedging relationship and its risk management objective and strategy for undertaking the hedge, the hedging instrument, the hedged item, the nature of the risk being hedged, how the hedging instrument's effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method of measuring ineffectiveness. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting cash flows of hedged items. Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash flow hedge are recorded in accumulated other comprehensive income to the extent that the derivative is effective as a hedge, until earnings are affected by the variability in cash flows of the designated hedged item. The ineffective portion of the change in fair value of a derivative instrument that qualifies as a cash flow hedge is reported in earnings.
Property and Equipment
Property and equipment consisted of the following:
| | | | | | |
| | December 31, | | December 31, |
| |
| | 2019 | | 2018 | | |
| | amounts in millions |
| |||
Land |
| $ | 128 |
| 128 | |
Buildings and improvements | |
| 1,204 |
| 1,194 | |
Support equipment | |
| 1,023 |
| 1,302 | |
Projects in progress | |
| 169 |
| 61 | |
Finance lease right-of-use ("ROU") assets | | | 282 | | — | |
Total property and equipment | | $ | 2,806 |
| 2,685 | |
Property and equipment, including significant improvements, is stated at amortized cost, less impairment losses, if any. Depreciation is computed using the straight-line method using estimated useful lives of 2 to 15 years for support equipment and 3 to 39 years for buildings and improvements. Depreciation expense for the years ended December 31, 2019, 2018 and 2017 was $220 million, $211 million and $176 million, respectively.
Intangible Assets
Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment upon certain triggering events. Goodwill and other intangible assets with indefinite useful lives (collectively, "indefinite lived intangible assets") are not amortized, but instead are tested for impairment at least annually. Our annual impairment assessment of our indefinite-lived intangible assets is performed during the fourth quarter of each year.
In January 2017, the FASB issued new accounting guidance to simplify the measurement of goodwill impairment. Under the new guidance, an entity no longer performs a hypothetical purchase price allocation to measure goodwill
II-40
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
impairment. Instead, a goodwill impairment is measured using the difference between the carrying value and the fair value of the reporting unit. The Company early adopted this guidance during the fourth quarter of 2017.
In evaluating goodwill on a qualitative basis, the Company reviews the business performance of each reporting unit and evaluates other relevant factors as identified in the relevant accounting guidance to determine whether it was more likely than not that an indicated impairment exists for any of our reporting units. The Company considers whether there are any negative macroeconomic conditions, industry specific conditions, market changes, increased competition, increased costs in doing business, management challenges, the legal environments and how these factors might impact company specific performance in future periods. As part of the analysis the Company also considers fair value determinations for certain reporting units that have been made at various points throughout the current year and prior year for other purposes. If based on the qualitative analysis it is more likely than not that an impairment exists, the Company performs the quantitative impairment test.
The quantitative goodwill impairment test compares the estimated fair value of a reporting unit to its carrying value. Developing estimates of fair value requires significant judgments, including making assumptions about appropriate discount rates, perpetual growth rates, relevant comparable market multiples, public trading prices and the amount and timing of expected future cash flows. The cash flows employed in Qurate Retail's valuation analyses are based on management's best estimates considering current marketplace factors and risks as well as assumptions of growth rates in future years. There is no assurance that actual results in the future will approximate these forecasts.
The accounting guidance also permits entities to first perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset, other than goodwill, is impaired. The accounting guidance also allows entities the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to the quantitative impairment test. The entity may resume performing the qualitative assessment in any subsequent period. If the qualitative assessment supports that it is more likely than not that the carrying value of the Company’s indefinite-lived intangible assets, other than goodwill, exceeds its fair value, then a quantitative assessment is performed. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
Impairment of Long-lived Assets
The Company periodically reviews the carrying amounts of its property and equipment and its intangible assets (other than goodwill and indefinite-lived intangible assets) to determine whether current events or circumstances indicate that such carrying amounts may not be recoverable. If the carrying amount of the asset group is greater than the expected undiscounted cash flows to be generated by such asset group, including its ultimate disposition, an impairment adjustment is to be recognized. Such adjustment is measured by the amount that the carrying value of such asset groups exceeds their fair value. The Company generally measures fair value by considering sale prices for similar asset groups or by discounting estimated future cash flows using an appropriate discount rate. Considerable management judgment is necessary to estimate the fair value of asset groups. Accordingly, actual results could vary significantly from such estimates. Asset groups to be disposed of are carried at the lower of their financial statement carrying amount or fair value less costs to sell.
Noncontrolling Interests
The Company reports noncontrolling interests of subsidiaries within equity in the balance sheet and the amount of consolidated net income attributable to the parent and to the noncontrolling interest is presented in the statements of operations. Also, changes in ownership interests in subsidiaries in which the Company maintains a controlling interest are recorded in equity.
II-41
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
Foreign Currency Translation
The functional currency of the Company is the U.S. Dollar. The functional currency of the Company's foreign operations generally is the applicable local currency for each foreign subsidiary. Assets and liabilities of foreign subsidiaries are translated at the spot rate in effect at the applicable reporting date, and the consolidated statements of operations are translated at the average exchange rates in effect during the applicable period. The resulting unrealized cumulative translation adjustment, net of applicable income taxes, is recorded as a component of accumulated other comprehensive earnings in stockholders' equity.
Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in transaction gains and losses which are reflected in the accompanying consolidated statements of operations and comprehensive earnings (loss) as unrealized (based on the applicable period-end exchange rate) or realized upon settlement of the transactions. These realized and unrealized gains and losses are reported in the Other, net line item in the consolidated statements of operations.
Revenue Recognition
On January 1, 2018, the Company adopted the revenue accounting standard (“ASC 606”) using the modified retrospective method. The 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 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. The Company recognized the cumulative effect of initially applying the 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.
In accordance with the revenue standard requirements, the following table illustrates the impact on our reported results in the 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 consolidated balance sheet as of December 31, 2018.
| | | | | | | |
| | As reported | | | | Balance without | |
| | Year ended | | | | adoption of | |
| | December 31, 2018 | | Impact of ASC 606 | | ASC 606 | |
| | in millions | | ||||
Net revenue | $ | 14,070 | | (154) | | 13,916 | |
| | | | | | | |
Cost of retail sales | $ | 9,209 | | (13) | | 9,196 | |
Selling, general and administrative expenses, including stock-based compensation and transaction related costs | $ | 1,897 | | (126) | | 1,771 | |
Operating expense | $ | 970 | | (2) | | 968 | |
Income tax (expense) benefit | $ | (60) | | 2 | | (58) | |
Net income | $ | 916 | | (11) | | 905 | |
II-42
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
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. For the year ended December 31, 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 year ended December 31, 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 recognized a separate $124 million and $121 million asset (included in other current assets) relating to the expected return of inventory and a $261 million and $266 million liability (included in other current liabilities) relating to its sales return reserve at December 31, 2019 and 2018, respectively, instead of the net presentation that was used at December 31, 2017.
Disaggregated revenue by segment and product category consisted of the following:
| | | | | | | | | | | |
| Year ended | | |||||||||
| December 31, 2019 | | |||||||||
| | QxH | | QVC Int'l | | Zulily | | Corp and other | | Total | |
| in millions | | |||||||||
Home | $ | 3,047 | | 905 | | 422 | | 729 | | 5,103 | |
Beauty | | 1,299 | | 659 | | 53 | | — | | 2,011 | |
Apparel | | 1,289 | | 422 | | 582 | | 172 | | 2,465 | |
Accessories | | 918 | | 376 | | 416 | | — | | 1,710 | |
Electronics | | 1,141 | | 107 | | 15 | | — | | 1,263 | |
Jewelry | | 402 | | 226 | | 54 | | — | | 682 | |
Other revenue | | 181 | | 14 | | 29 | | — | | 224 | |
Total Revenue | $ | 8,277 | | 2,709 | | 1,571 | | 901 | | 13,458 | |
| | | | | | | | | | | |
| Year ended | | |||||||||
| December 31, 2018 | | |||||||||
| | QxH | | QVC Int'l | | Zulily | | Corp and other | | Total | |
| in millions | | |||||||||
Home | $ | 3,175 | | 1,023 | | 511 | | 791 | | 5,500 | |
Beauty | | 1,326 | | 640 | | 50 | | — | | 2,016 | |
Apparel | | 1,323 | | 453 | | 684 | | 180 | | 2,640 | |
Accessories | | 933 | | 273 | | 472 | | — | | 1,678 | |
Electronics | | 1,129 | | 119 | | 18 | | — | | 1,266 | |
Jewelry | | 473 | | 213 | | 53 | | — | | 739 | |
Other revenue | | 185 | | 17 | | 29 | | — | | 231 | |
Total Revenue | $ | 8,544 | | 2,738 | | 1,817 | | 971 | | 14,070 | |
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.
II-43
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
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.
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 that occur after the customer obtains control of the goods as a fulfillment cost and not as a promised good or service. Accordingly, the Company accrues the related shipping costs and recognizes revenue upon delivery of goods to the shipping carrier. In electing this accounting policy, all shipping and handling activities are treated as fulfillment costs.
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 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.
An allowance for returned merchandise is provided as a percentage of sales based on historical experience. The total reduction in sales due to returns for the years ended December 31, 2019, 2018 and 2017 aggregated $2,336 million, $2,434 million and $1,861 million, respectively. Sales tax collected from customers on retail sales is recorded on a net basis and is not included in revenue.
A summary of activity in the allowance for sales returns, is as follows:
| | | | | | | | | | |
| | Balance beginning of year | | Additions - charged to earnings | | Deductions | | Acquisition of HSN | | Balance end of year |
| | in millions | ||||||||
2019 | $ | 266 | | 2,336 | | (2,341) | | - | | 261 |
2018 (1) | $ | 267 | | 2,434 | | (2,435) | | - | | 266 |
2017 | $ | 98 | | 1,027 | | (1,023) | | 35 | | 137 |
(1) | Amounts in 2018 and 2019 include the |
II-44
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
Cost of Sales
Cost of sales primarily includes actual product cost, provision for obsolete inventory, buying allowances received from suppliers, shipping and handling costs and warehouse costs.
Stock-Based Compensation
As more fully described in note 13, the Company has granted to its directors, employees and employees of its subsidiaries options, restricted stock and stock appreciation rights relating to shares of Qurate Retail and/or Liberty Ventures common stock ("Qurate Retail common stock") (collectively, "Awards"). The Company measures the cost of employee services received in exchange for an Award of equity instruments (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 an Award of liability instruments (such as stock appreciation rights that will be settled in cash) based on the current fair value of the Award, and remeasures the fair value of the Award at each reporting date.
Stock compensation expense was $71 million, $88 million and $123 million for the years ended December 31, 2019, 2018 and 2017, respectively, included in selling, general and administrative expense in the accompanying consolidated statements of operations.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying value amounts and income tax bases of assets and liabilities and the expected benefits of utilizing net operating loss and tax credit carryforwards. The deferred tax assets and liabilities are calculated using enacted tax rates in effect for each taxing jurisdiction in which the Company operates for the year in which those temporary differences are expected to be recovered or settled. Net deferred tax assets are then reduced by a valuation allowance if the Company believes it more likely than not such net deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of an enacted change in tax rates is recognized in income in the period that includes the enactment date.
When the tax law requires interest to be paid on an underpayment of income taxes, the Company recognizes interest expense from the first period the interest would begin accruing according to the relevant tax law. Such interest expense is included in interest expense in the accompanying consolidated statements of operations. Any accrual of penalties related to underpayment of income taxes on uncertain tax positions is included in other income (expense) in the accompanying consolidated statements of operations.
II-45
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
Earnings (Loss) Attributable to Qurate Retail Stockholders and Earnings (Loss) Per Common Share
Net earnings (loss) attributable to Qurate Retail stockholders is comprised of the following (amounts in millions):
| | | | | | | | |
| | Years ended December 31, | | |||||
| | 2019 | | 2018 | | 2017 | | |
Qurate Retail |
| | |
| |
| |
|
Net earnings (loss) from continuing operations | | $ | (456) | | 674 | | 1,208 | |
Net earnings (loss) from discontinued operations | | $ | NA | | NA | | NA | |
Liberty Ventures | | | | | | | | |
Net earnings (loss) from continuing operations | | $ | NA | | 101 | | 781 | |
Net earnings (loss) from discontinued operations | | $ | NA | | 141 | | 452 | |
Basic earnings (loss) per common share ("EPS") is computed by dividing net earnings (loss) attributable to such common stock 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.
Series A and Series B Qurate Retail Common Stock
EPS for all periods through December 31, 2019, is based on the following weighted average shares outstanding. Excluded from diluted EPS for the years ended December 31, 2019, 2018 and 2017 are approximately 22 million, 25 million and 20 million potential common shares, respectively, because their inclusion would be antidilutive.
| | | | | | | | |
| | | Years ended December 31, |
| ||||
|
| | 2019 |
| 2018 |
| 2017 |
|
| | | number of shares in millions |
| ||||
Basic WASO | | | 424 | | 462 | | 445 | |
Potentially dilutive shares | | | — | | 3 | | 3 | |
Diluted WASO | | | 424 | | 465 | | 448 | |
Series A and Series B Liberty Ventures Common Stock
EPS for all periods through December 31, 2019, is based on the following weighted average shares outstanding. Excluded from diluted EPS for the years ended December 31, 2018 and 2017 are less than a million potential common shares because their inclusion would be antidilutive.
II-46
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
| | | | | | | | |
| |
| Years ended December 31, |
| ||||
|
| | 2019 |
| 2018 (1) |
| 2017 |
|
| | | number of shares in millions |
| ||||
Basic WASO | |
| NA | | 86 | | 86 | |
Potentially dilutive shares | |
| NA | | 1 | | 1 | |
Diluted WASO | |
| NA | | 87 | | 87 | |
(1) | All of the
March 9, 2018. |
Reclasses and adjustments
Certain prior period amounts have been reclassified for comparability with the current year presentation.
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 in certain quarterly periods during the year ended December 31, 2019. In order to maintain a zero balance in the additional paid-in capital account, we reclassified the amount of the deficit ($328 million) at December 31, 2019 to retained earnings.
Estimates
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) recurring and non-recurring fair value measurements, (ii) accounting for income taxes and (iii) estimates of retail-related adjustments and allowances to be its most significant estimates.
New Accounting Pronouncements Not Yet Adopted
Internal-Use Software. In August 2018, the 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.
II-47
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
(3) Supplemental Disclosures to Consolidated Statements of Cash Flows
| | | | | | | | |
| | Years ended December 31, |
| |||||
| | 2019 | | 2018 | | 2017 |
| |
| | amounts in millions |
| |||||
Cash paid for acquisitions: | | | | | | | | |
Fair value of assets acquired | | $ | — |
| (11) |
| 956 | |
Intangible assets not subject to amortization | |
| — |
| — |
| 1,577 | |
Intangible assets subject to amortization | |
| — |
| (4) |
| 651 | |
Net liabilities assumed | |
| — |
| 10 |
| (977) | |
Deferred tax assets (liabilities) | |
| — |
| 5 |
| (281) | |
Fair value of equity consideration | |
| — |
| — |
| (1,948) | |
Cash paid (received) for acquisitions, net of cash acquired | | $ | — |
| — |
| (22) | |
| | | | | | | | |
Cash paid for interest | | $ | 360 |
| 362 |
| 343 | |
| | | | | | | | |
Cash paid for income taxes | | $ | 175 |
| 226 |
| 158 | |
| | | | | | | | |
Non-cash capital additions obtained in exchange for liabilities | | $ | 36 |
| — |
| — | |
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 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 consolidated balance sheets to the total amount presented in our consolidated statements of cash flows:
| | | | | |
| | December 31, | | December 31, | |
| | 2019 | | 2018 | |
| | in millions | | ||
Cash and cash equivalents | $ | 673 | | 653 | |
Restricted cash included in other current assets | | 8 | | 7 | |
Total cash, cash equivalents and restricted cash in the consolidated statement of cash flows | $ | 681 | | 660 | |
II-48
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
(4) Acquisitions
On December 29, 2017, Qurate Retail acquired the approximately 62% of HSN it did not already own in an all-stock transaction making HSN a wholly-owned subsidiary, attributed to the QVC Group. HSN shareholders (other than Qurate Retail) received fixed consideration of 1.65 shares of Series A QVC Group common stock (“QVCA”) for each share of HSN common stock. Qurate Retail issued 53.6 million shares of QVCA common stock to HSN shareholders. In conjunction with application of acquisition accounting, we recorded a full step up in basis of HSN which resulted in a $409 million gain. The fair market value of our ownership interest previously held in HSN ($605 million) was determined based on the trading price of QVCA common stock on the date of the acquisition (Level 1) less a control premium. The market value of the shares of QVCA common stock issued to HSN shareholders ($1.3 billion) was determined based on the trading price of QVCA common stock on the date of the acquisition. The total equity value of the transaction was $1.9 billion. Included in net earnings (loss) from continuing operations for the year ended December 31, 2017 is $43 million related to HSN’s operations since the date of acquisition, which is primarily related to severance cost post acquisition. Of the $43 million, $38 million related to HSN ($8 million of which related to stock-based compensation expense and is included in Selling, general and administrative, including stock-based compensation expense in the consolidated statements of operations) and $5 million related to Cornerstone. With the exception of the $43 million of severance-related costs incurred on December 30, 2017, HSN’s results of operations are not included in our consolidated operating results for the year ended December 31, 2017, as the final two days of the period were considered immaterial.
The pro forma revenue and net earnings from continuing operations of Qurate Retail, prepared utilizing the historical financial statements of HSN, giving effect to purchase accounting related adjustments made at the time of acquisition, as if the transaction discussed above occurred on January 1, 2016, are as follows:
Year Ended December 31, 2017 amounts in millions (unaudited) Revenue $ 13,791 Net earnings (loss) from continuing operations $ 2,200 The pro forma information is not representative of Qurate Retail’s future financial position, future results of operations or future cash flows nor does it reflect what Qurate Retail’s financial position, results of operations or cash flows would have been as if the transaction had happened previously and Qurate Retail controlled HSN during the periods presented. The pro forma information includes a nonrecurring adjustment for transaction costs incurred as a result of the acquisition. (5) Disposals | ||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||
|
|
II-54
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
Certain financial information for Liberty’s investment in Expedia, which is included in earnings (loss) from discontinued operations, is as follows (amounts in millions):
|
|
|
|
|
|
|
|
| Years ended December 31, |
| |||
|
|
| 2016 |
| 2015 |
|
Earnings (loss) before income taxes |
| $ | 24 |
| 437 |
|
Income tax (expense) benefit |
| $ | (4) |
| (157) |
|
The combined impact from discontinued operations, discussed above, is as follows:
|
|
|
|
|
|
|
|
| Years ended December 31, |
| |||
|
|
| 2016 |
| 2015 |
|
Basic earnings (loss) from discontinued operations attributable to Liberty shareholders per common share (note 3): |
|
|
|
|
|
|
Series A and Series B QVC Group common stock |
| $ | NA |
| NA |
|
Series A and Series B Liberty Ventures common stock |
| $ | 0.15 |
| 1.97 |
|
Diluted earnings (loss) from discontinued operations attributable to Liberty shareholders per common share (note 3): |
|
|
|
|
|
|
Series A and Series B QVC Group common stock |
| $ | NA |
| NA |
|
Series A and Series B Liberty Ventures common stock |
| $ | 0.15 |
| 1.96 |
|
Disposals – Not Presented as Discontinued Operations
On June 30, 2015, Liberty sold Backcountry for aggregate consideration, including assumption of debt, amounts held in escrow, and a noncontrolling interest, of approximately $350 million. The sale resulted in a $105 million gain, which is included in Gains (losses) on transactions, net in the accompanying consolidated statements of operations. Backcountry is not presented as a discontinued operation as the sale did not represent a strategic shift that has a major effect on Liberty’s operations and financial results. Included in Total revenue, net in the accompanying consolidated statements of operations is $227 million for the year ended December 31, 2015, related to Backcountry. Included in Net earnings (loss) in the accompanying consolidated statements of operations are losses of $3 million for the year ended December 31, 2015, related to Backcountry.
On July 22, 2016, Liberty completed the CommerceHub Spin-Off. CommerceHub is included in the Corporate and other segment through July 22, 2016 and is not presented as a discontinued operation as the CommerceHub Spin-Off did not represent a strategic shift that had a major effect on Liberty’s operations and financial results. Included in Total revenue, net in the accompanying consolidated statements of operations is $51 million and $89 million for the years ended December 31, 2016 and 2015, respectively, related to CommerceHub. Included in Net earnings (loss) in the accompanying consolidated statements of operations are earnings of $5 million and losses of $10 million for the years ended December 31, 2016 and 2015, respectively, related to CommerceHub. Included in Total assets in the accompanying consolidated balance sheets as of December 31, 2015 is $115 million related to CommerceHub.
As discussed above, on November 4, 2016, Liberty completed the Expedia Holdings Split-Off. Although Liberty’s interest in Expedia has been presented as a discontinued operation, Bodybuilding is not presented as a discontinued operation in the consolidated financial statements of Liberty. Bodybuilding is included in the Corporate and other segment through November 4, 2016. Included in Total revenue, net in the accompanying consolidated statements of operations is
II-55
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
$355 million and $464 million for the years ended December 31, 2016 and 2015, respectively, related to Bodybuilding. Included in Net earnings (loss) in the accompanying consolidated statements of operations are earnings of $6 million and $3 million for the years ended December 31, 2016 and 2015, respectively, related to Bodybuilding. Included in Total assets in the accompanying consolidated balance sheets as of December 31, 2015 is $198 million related to Bodybuilding.
(7) 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, other than quoted market prices included within Level 1, are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. The Company does not have any recurring assets or liabilities measured at fair value that would be considered Level 3.
The Company's assets and liabilities measured at fair value are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2017 |
| December 31, 2016 |
| |||||||||
|
|
|
|
| Quoted prices |
|
|
|
|
| Quoted prices |
|
|
|
|
|
|
|
| in active |
| Significant |
|
|
| in active |
| Significant |
|
|
|
|
|
| markets |
| other |
|
|
| markets |
| other |
|
|
|
|
|
| for identical |
| observable |
|
|
| for identical |
| observable |
|
|
|
|
|
| assets |
| inputs |
|
|
| assets |
| inputs |
|
Description |
| Total |
| (Level 1) |
| (Level 2) |
| Total |
| (Level 1) |
| (Level 2) |
| |
|
| amounts in millions |
| |||||||||||
Cash equivalents |
| $ | 655 |
| 655 |
| — |
| 625 |
| 625 |
| — |
|
Available-for-sale securities |
| $ | 2,275 |
| 2,275 |
| — |
| 1,846 |
| 1,846 |
| — |
|
Investment in Liberty Broadband |
| $ | 3,635 |
| 3,635 |
| — |
| 3,161 |
| 3,161 |
| — |
|
Debt |
| $ | 1,846 |
| — |
| 1,846 |
| 1,667 |
| — |
| 1,667 |
|
The majority of the Company's Level 2 financial assets and liabilities are debt instruments with quoted market prices that are not considered to be traded on "active markets," as defined in GAAP. Accordingly, the debt instruments are reported in the foregoing table as Level 2 fair value.
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:
|
|
|
|
|
|
|
|
|
|
| Years ended December 31, |
| |||||
|
| 2017 |
| 2016 |
| 2015 |
| |
|
| amounts in millions |
| |||||
Fair Value Option Securities - AFS |
| $ | 434 |
| 723 |
| 84 |
|
Fair Value Option Securities - Liberty Broadband |
|
| 473 |
| 761 |
| NA |
|
Exchangeable senior debentures |
|
| (193) |
| (308) |
| 30 |
|
Other financial instruments |
|
| (96) |
| (1) |
| — |
|
|
| $ | 618 |
| 1,175 |
| 114 |
|
II-56
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
(8) Investments in Available-for-Sale Securities and Other Cost Investments
All marketable equity and debt securities held by the Company are classified as AFS and are carried at fair value generally based on quoted market prices. GAAP permits entities to choose to measure many financial instruments, such as AFS securities, and certain other items at fair value and to recognize the changes in fair value of such instruments in the entity's statements of operations (the "fair value option"). Liberty has elected the fair value option for its AFS securities ("Fair Value Option Securities"). Accordingly, changes in the fair value of Fair Value Option Securities, as determined by quoted market prices, are reported in realized and unrealized gains (losses) on financial instruments in the accompanying consolidated statements of operations.
Investments in AFS securities, the majority of which are considered Fair Value Option Securities and other cost investments, are summarized as follows:
|
|
|
|
|
|
|
|
| December 31, |
| December 31, |
| |
|
| 2017 |
| 2016 |
| |
|
| amounts in millions |
| |||
QVC Group |
|
|
|
|
|
|
Other investments |
| $ | 3 |
| 4 |
|
Total attributed QVC Group |
|
| 3 |
| 4 |
|
Ventures Group |
|
|
|
|
|
|
Charter |
|
| 1,800 |
| 1,543 |
|
ILG |
|
| 474 |
| 302 |
|
Other investments |
|
| 86 |
| 73 |
|
Total attributed Ventures Group |
|
| 2,360 |
| 1,918 |
|
Consolidated Liberty |
| $ | 2,363 |
| 1,922 |
|
(9) Investments in Affiliates Accounted for Using the Equity Method
Liberty has various investments accounted for using the equity method. The following table includes Liberty's carrying amount and percentage ownership of the more significant investments in affiliates at December 31, 2017 and the carrying amount at December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, 2017 |
| December 31, 2016 |
| ||||||
|
| Percentage |
| Market |
| Carrying |
| Carrying |
| ||
|
| ownership |
| value |
| amount |
| amount |
| ||
|
|
|
| dollars in millions |
| ||||||
QVC Group |
|
|
|
|
|
|
|
|
|
|
|
HSNi (1) |
| 100 | % | $ | NA |
| $ | NA |
| 184 |
|
Other |
| various |
|
| NA |
|
| 40 |
| 40 |
|
Total QVC Group |
|
|
|
|
|
|
| 40 |
| 224 |
|
Ventures Group |
|
|
|
|
|
|
|
|
|
|
|
FTD (2) |
| 37 | % | $ | 73 |
|
| 73 |
| 216 |
|
LendingTree (3) |
| 27 | % |
| 1,098 |
|
| 115 |
| 31 |
|
Other (4) |
| various |
|
| NA |
|
| 81 |
| 110 |
|
Total Ventures Group |
|
|
|
|
|
|
| 269 |
| 357 |
|
Consolidated Liberty |
|
|
|
|
|
| $ | 309 |
| 581 |
|
II-57
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
The following table presents Liberty's share of earnings (losses) of affiliates:
|
|
|
|
|
|
|
|
|
|
| Years ended December 31, |
| |||||
|
| 2017 |
| 2016 |
| 2015 |
| |
|
| amounts in millions |
| |||||
QVC Group |
|
|
|
|
|
|
|
|
HSNi (1) |
| $ | 40 |
| 48 |
| 64 |
|
Other |
|
| (2) |
| (6) |
| (9) |
|
Total QVC Group |
|
| 38 |
| 42 |
| 55 |
|
Ventures Group |
|
|
|
|
|
|
|
|
FTD (2) |
|
| (146) |
| (41) |
| (83) |
|
LendingTree (3) |
|
| 7 |
| 12 |
| 2 |
|
Other (4) |
|
| (99) |
| (81) |
| (152) |
|
Total Ventures Group |
|
| (238) |
| (110) |
| (233) |
|
Consolidated Liberty |
| $ | (200) |
| (68) |
| (178) |
|
|
|
|
|
|
|
|
|
II-58
LIBERTY INTERACTIVE CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2017, 2016 and 2015
Investment in Liberty Broadband
$
3,822
Investment in Charter
1,866
Corporate Cash
475
Margin Loan
(996)
Deferred Income Tax Liabilities
(550)
Other, net
(270)
$
4,347
Following the contribution, Qurate Retail effected a tax-free separation of its controlling interest in the combined company (the “GCI Liberty Split-Off”), GCI Liberty, to the holders of Liberty Ventures common stock in full redemption of all outstanding shares of such stock, in which each outstanding share of Series A Liberty Ventures common stock was redeemed for 1 share of GCI Liberty Class A common stock and each outstanding share of Series B Liberty Ventures common stock was redeemed for 1 share of GCI Liberty Class B common stock. Simultaneous with the closing of the Transactions, QVC Group common stock became the only outstanding common stock of Qurate Retail, and thus QVC Group common stock ceased to function as a tracking stock. On April 9, 2018, Liberty Interactive Corporation was renamed Qurate Retail, Inc. On May 23, 2018, Qurate Retail amended its charter to eliminate the tracking stock capitalization structure and reclassify each share of QVC Group common stock into 1 share of the corresponding series of new common stock of Qurate Retail. Throughout this annual report, we refer to our Series A and Series B common stock as “Qurate Retail common stock” and “QVC Group 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 centers in Lancaster, Pennsylvania and Roanoke, Virginia and leased a new fulfillment center in Bethlehem, Pennsylvania, that commenced in 2019 (see note 9). Qurate Retail recorded transaction related costs of $41 million during the year ended December 31, 2018 related to the QRG Initiatives, which primarily related to severance costs. Also, 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.”
Qurate Retail and GCI Liberty (for accounting purposes a related party of Qurate Retail) entered into a tax sharing agreement. Pursuant to that 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 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).
II-37
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
Qurate Retail and Liberty Media Corporation (“LMC”) (for accounting purposes a related party of Qurate Retail) entered into certain agreements in order to govern certain of the ongoing relationships between the two companies. These agreements include a reorganization agreement, a services agreement (the “Services Agreement”), a facilities sharing agreement (the “Facilities Sharing Agreement”) and a tax sharing agreement (the “Tax Sharing Agreement”). The Tax Sharing Agreement provides for the allocation and indemnification of tax liabilities and benefits between Qurate Retail and LMC and other agreements related to tax matters. Qurate Retail is party to on-going discussions with the IRS under the Compliance Assurance Process audit program. The IRS may propose adjustments that relate to tax attributes allocated to and income allocable to LMC. Any potential outcome associated with any proposed adjustments would be covered by the Tax Sharing Agreement and are not expected to have any impact on Qurate Retail's financial position. Pursuant to the Services Agreement, LMC provides Qurate Retail with general and administrative services including legal, tax, accounting, treasury and investor relations support. See below for a description of an amendment to the services agreement entered into in December 2019. 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, Qurate Retail shares office space with LMC and related amenities at LMC's corporate headquarters. Under these various agreements approximately $8 million, $8 million and $11 million of these allocated expenses were reimbursable from Qurate Retail to LMC for the years ended December 31, 2019, 2018 and 2017, respectively. Qurate Retail had a tax sharing payable of approximately $95 million and $114 million as of December 31, 2019 and 2018, respectively, included in Other liabilities in the consolidated balance sheets.
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, Inc., 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 new agreement provides for a five year employment term which began on January 1, 2020 and ends December 31, 2024, with an aggregate annual base salary of $3 million (with no contracted increase), an aggregate one-time cash commitment bonus of $5 million, an aggregate annual target cash performance bonus of $17 million, aggregate annual equity awards of $17.5 million and aggregate equity awards granted in connection with his entry into his new agreement of $90 million (the “upfront awards”). A portion of the grants made to our Chairman in the year ended December 31, 2019 related to our Company’s allocable portion of these upfront awards.
(2) Summary of Significant Accounting Policies
Cash and Cash Equivalents
Cash equivalents consist of investments which are readily convertible into cash and have maturities of three months or less at the time of acquisition.
Receivables
Receivables are reflected net of an allowance for doubtful accounts and sales returns. A provision for bad debts is provided as a percentage of accounts receivable based on historical experience in the period of sale and included in selling, general and administrative expense. A provision for vendor receivables are determined based on an estimate of probable expected losses and included in cost of retail sales.
II-38
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
A summary of activity in the allowance for doubtful accounts is as follows:
| | | | | | | | | | | | | | |
| | Balance | | Additions | | | | | Balance |
| ||||
| | beginning | | Charged | | | | | Deductions- | | end of |
| ||
| | of year | | to expense | | Other | | write-offs | | year |
| |||
| | amounts in millions |
| |||||||||||
2019 |
| $ | 117 |
| 130 |
| 4 |
|
| (122) |
|
| 129 | |
2018 | | $ | 92 |
| 123 |
| 3 |
|
| (101) |
|
| 117 | |
2017 |
| $ | 99 |
| 73 |
| (1) |
|
| (79) |
|
| 92 | |
Inventory
Inventory, consisting primarily of products held for sale, is stated at the lower of cost or market. Cost is determined by the average cost method, which approximates the first-in, first-out method. Assessments about the realizability of inventory require the Company to make judgments based on currently available information about the likely method of disposition including sales to individual customers, returns to product vendors, liquidations and the estimated recoverable values of each disposition category. Inventory is stated net of inventory obsolescence reserves of $152 million and $151 million for the years ended December 31, 2019 and 2018, respectively.
Investments
All marketable equity and debt securities held by the Company are carried at fair value, generally based on quoted market prices and changes in the fair value of such securities are reported in realized and unrealized gain (losses) on financial instruments in the accompanying consolidated statements of operations. The Company elected the measurement alternative (defined as the cost of the security, adjusted for changes in fair value when there are observable prices, less impairments) for its equity securities without readily determinable fair values. The Company had 0 equity securities for which it elected the fair value option as of December 31, 2019 and 2018.
For those investments in affiliates in which the Company has the ability to exercise significant influence, the equity method of accounting is used, except in situations where the fair value option has been selected. Under the equity method of accounting, the investment, originally recorded at cost, is adjusted to recognize the Company's share of net earnings or losses of the affiliate as they occur rather than as dividends or other distributions are received. Losses are limited to the extent of the Company's investment in, advances to and commitments for the investee. In the event the Company is unable to obtain accurate financial information from an equity affiliate in a timely manner, the Company records its share of earnings or losses of such affiliate on a lag.
The Company performs a qualitative assessment each reporting period for its equity securities without readily determinable fair values to identify whether an equity security could be impaired. When our qualitative assessment indicates that an impairment could exist, we estimate the fair value of the investment and to the extent the fair value is less than the carrying value, we record the difference as an impairment in the consolidated statements of operations.
Derivative Instruments and Hedging Activities
All of the Company's derivatives, whether designated in hedging relationships or not, are recorded on the balance sheet at fair value. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in earnings. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in other comprehensive earnings
II-39
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
and are recognized in the statements of operations when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in earnings. If the derivative is not designated as a hedge, changes in the fair value of the derivative are recognized in earnings.
The Company generally enters into derivative contracts that it intends to designate as a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). For all hedging relationships, the Company formally documents the hedging relationship and its risk management objective and strategy for undertaking the hedge, the hedging instrument, the hedged item, the nature of the risk being hedged, how the hedging instrument's effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method of measuring ineffectiveness. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting cash flows of hedged items. Changes in the fair value of a derivative that is highly effective and that is designated and qualifies as a cash flow hedge are recorded in accumulated other comprehensive income to the extent that the derivative is effective as a hedge, until earnings are affected by the variability in cash flows of the designated hedged item. The ineffective portion of the change in fair value of a derivative instrument that qualifies as a cash flow hedge is reported in earnings.
Property and Equipment
Property and equipment consisted of the following:
| | | | | | |
| | December 31, | | December 31, |
| |
| | 2019 | | 2018 | | |
| | amounts in millions |
| |||
Land |
| $ | 128 |
| 128 | |
Buildings and improvements | |
| 1,204 |
| 1,194 | |
Support equipment | |
| 1,023 |
| 1,302 | |
Projects in progress | |
| 169 |
| 61 | |
Finance lease right-of-use ("ROU") assets | | | 282 | | — | |
Total property and equipment | | $ | 2,806 |
| 2,685 | |
Property and equipment, including significant improvements, is stated at amortized cost, less impairment losses, if any. Depreciation is computed using the straight-line method using estimated useful lives of 2 to 15 years for support equipment and 3 to 39 years for buildings and improvements. Depreciation expense for the years ended December 31, 2019, 2018 and 2017 was $220 million, $211 million and $176 million, respectively.
Intangible Assets
Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment upon certain triggering events. Goodwill and other intangible assets with indefinite useful lives (collectively, "indefinite lived intangible assets") are not amortized, but instead are tested for impairment at least annually. Our annual impairment assessment of our indefinite-lived intangible assets is performed during the fourth quarter of each year.
In January 2017, the FASB issued new accounting guidance to simplify the measurement of goodwill impairment. Under the new guidance, an entity no longer performs a hypothetical purchase price allocation to measure goodwill
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QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
impairment. Instead, a goodwill impairment is measured using the difference between the carrying value and the fair value of the reporting unit. The Company early adopted this guidance during the fourth quarter of 2017.
In evaluating goodwill on a qualitative basis, the Company reviews the business performance of each reporting unit and evaluates other relevant factors as identified in the relevant accounting guidance to determine whether it was more likely than not that an indicated impairment exists for any of our reporting units. The Company considers whether there are any negative macroeconomic conditions, industry specific conditions, market changes, increased competition, increased costs in doing business, management challenges, the legal environments and how these factors might impact company specific performance in future periods. As part of the analysis the Company also considers fair value determinations for certain reporting units that have been made at various points throughout the current year and prior year for other purposes. If based on the qualitative analysis it is more likely than not that an impairment exists, the Company performs the quantitative impairment test.
The quantitative goodwill impairment test compares the estimated fair value of a reporting unit to its carrying value. Developing estimates of fair value requires significant judgments, including making assumptions about appropriate discount rates, perpetual growth rates, relevant comparable market multiples, public trading prices and the amount and timing of expected future cash flows. The cash flows employed in Qurate Retail's valuation analyses are based on management's best estimates considering current marketplace factors and risks as well as assumptions of growth rates in future years. There is no assurance that actual results in the future will approximate these forecasts.
The accounting guidance also permits entities to first perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset, other than goodwill, is impaired. The accounting guidance also allows entities the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to the quantitative impairment test. The entity may resume performing the qualitative assessment in any subsequent period. If the qualitative assessment supports that it is more likely than not that the carrying value of the Company’s indefinite-lived intangible assets, other than goodwill, exceeds its fair value, then a quantitative assessment is performed. If the carrying value of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
Impairment of Long-lived Assets
The Company periodically reviews the carrying amounts of its property and equipment and its intangible assets (other than goodwill and indefinite-lived intangible assets) to determine whether current events or circumstances indicate that such carrying amounts may not be recoverable. If the carrying amount of the asset group is greater than the expected undiscounted cash flows to be generated by such asset group, including its ultimate disposition, an impairment adjustment is to be recognized. Such adjustment is measured by the amount that the carrying value of such asset groups exceeds their fair value. The Company generally measures fair value by considering sale prices for similar asset groups or by discounting estimated future cash flows using an appropriate discount rate. Considerable management judgment is necessary to estimate the fair value of asset groups. Accordingly, actual results could vary significantly from such estimates. Asset groups to be disposed of are carried at the lower of their financial statement carrying amount or fair value less costs to sell.
Noncontrolling Interests
The Company reports noncontrolling interests of subsidiaries within equity in the balance sheet and the amount of consolidated net income attributable to the parent and to the noncontrolling interest is presented in the statements of operations. Also, changes in ownership interests in subsidiaries in which the Company maintains a controlling interest are recorded in equity.
II-41
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
Foreign Currency Translation
The functional currency of the Company is the U.S. Dollar. The functional currency of the Company's foreign operations generally is the applicable local currency for each foreign subsidiary. Assets and liabilities of foreign subsidiaries are translated at the spot rate in effect at the applicable reporting date, and the consolidated statements of operations are translated at the average exchange rates in effect during the applicable period. The resulting unrealized cumulative translation adjustment, net of applicable income taxes, is recorded as a component of accumulated other comprehensive earnings in stockholders' equity.
Transactions denominated in currencies other than the functional currency are recorded based on exchange rates at the time such transactions arise. Subsequent changes in exchange rates result in transaction gains and losses which are reflected in the accompanying consolidated statements of operations and comprehensive earnings (loss) as unrealized (based on the applicable period-end exchange rate) or realized upon settlement of the transactions. These realized and unrealized gains and losses are reported in the Other, net line item in the consolidated statements of operations.
Revenue Recognition
On January 1, 2018, the Company adopted the revenue accounting standard (“ASC 606”) using the modified retrospective method. The 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 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. The Company recognized the cumulative effect of initially applying the 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.
In accordance with the revenue standard requirements, the following table illustrates the impact on our reported results in the 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 consolidated balance sheet as of December 31, 2018.
| | | | | | | |
| | As reported | | | | Balance without | |
| | Year ended | | | | adoption of | |
| | December 31, 2018 | | Impact of ASC 606 | | ASC 606 | |
| | in millions | | ||||
Net revenue | $ | 14,070 | | (154) | | 13,916 | |
| | | | | | | |
Cost of retail sales | $ | 9,209 | | (13) | | 9,196 | |
Selling, general and administrative expenses, including stock-based compensation and transaction related costs | $ | 1,897 | | (126) | | 1,771 | |
Operating expense | $ | 970 | | (2) | | 968 | |
Income tax (expense) benefit | $ | (60) | | 2 | | (58) | |
Net income | $ | 916 | | (11) | | 905 | |
II-42
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
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. For the year ended December 31, 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 year ended December 31, 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 recognized a separate $124 million and $121 million asset (included in other current assets) relating to the expected return of inventory and a $261 million and $266 million liability (included in other current liabilities) relating to its sales return reserve at December 31, 2019 and 2018, respectively, instead of the net presentation that was used at December 31, 2017.
Disaggregated revenue by segment and product category consisted of the following:
| | | | | | | | | | | |
| Year ended | | |||||||||
| December 31, 2019 | | |||||||||
| | QxH | | QVC Int'l | | Zulily | | Corp and other | | Total | |
| in millions | | |||||||||
Home | $ | 3,047 | | 905 | | 422 | | 729 | | 5,103 | |
Beauty | | 1,299 | | 659 | | 53 | | — | | 2,011 | |
Apparel | | 1,289 | | 422 | | 582 | | 172 | | 2,465 | |
Accessories | | 918 | | 376 | | 416 | | — | | 1,710 | |
Electronics | | 1,141 | | 107 | | 15 | | — | | 1,263 | |
Jewelry | | 402 | | 226 | | 54 | | — | | 682 | |
Other revenue | | 181 | | 14 | | 29 | | — | | 224 | |
Total Revenue | $ | 8,277 | | 2,709 | | 1,571 | | 901 | | 13,458 | |
| | | | | | | | | | | |
| Year ended | | |||||||||
| December 31, 2018 | | |||||||||
| | QxH | | QVC Int'l | | Zulily | | Corp and other | | Total | |
| in millions | | |||||||||
Home | $ | 3,175 | | 1,023 | | 511 | | 791 | | 5,500 | |
Beauty | | 1,326 | | 640 | | 50 | | — | | 2,016 | |
Apparel | | 1,323 | | 453 | | 684 | | 180 | | 2,640 | |
Accessories | | 933 | | 273 | | 472 | | — | | 1,678 | |
Electronics | | 1,129 | | 119 | | 18 | | — | | 1,266 | |
Jewelry | | 473 | | 213 | | 53 | | — | | 739 | |
Other revenue | | 185 | | 17 | | 29 | | — | | 231 | |
Total Revenue | $ | 8,544 | | 2,738 | | 1,817 | | 971 | | 14,070 | |
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.
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QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
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.
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 that occur after the customer obtains control of the goods as a fulfillment cost and not as a promised good or service. Accordingly, the Company accrues the related shipping costs and recognizes revenue upon delivery of goods to the shipping carrier. In electing this accounting policy, all shipping and handling activities are treated as fulfillment costs.
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 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.
An allowance for returned merchandise is provided as a percentage of sales based on historical experience. The total reduction in sales due to returns for the years ended December 31, 2019, 2018 and 2017 aggregated $2,336 million, $2,434 million and $1,861 million, respectively. Sales tax collected from customers on retail sales is recorded on a net basis and is not included in revenue.
A summary of activity in the allowance for sales returns, is as follows:
| | | | | | | | | | |
| | Balance beginning of year | | Additions - charged to earnings | | Deductions | | Acquisition of HSN | | Balance end of year |
| | in millions | ||||||||
2019 | $ | 266 | | 2,336 | | (2,341) | | - | | 261 |
2018 (1) | $ | 267 | | 2,434 | | (2,435) | | - | | 266 |
2017 | $ | 98 | | 1,027 | | (1,023) | | 35 | | 137 |
(1) | Amounts in 2018 and 2019 include the impact of adoption of ASC 606. |
II-44
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
Cost of Sales
Cost of sales primarily includes actual product cost, provision for obsolete inventory, buying allowances received from suppliers, shipping and handling costs and warehouse costs.
Stock-Based Compensation
As more fully described in note 13, the Company has granted to its directors, employees and employees of its subsidiaries options, restricted stock and stock appreciation rights relating to shares of Qurate Retail and/or Liberty Ventures common stock ("Qurate Retail common stock") (collectively, "Awards"). The Company measures the cost of employee services received in exchange for an Award of equity instruments (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 an Award of liability instruments (such as stock appreciation rights that will be settled in cash) based on the current fair value of the Award, and remeasures the fair value of the Award at each reporting date.
Stock compensation expense was $71 million, $88 million and $123 million for the years ended December 31, 2019, 2018 and 2017, respectively, included in selling, general and administrative expense in the accompanying consolidated statements of operations.
Income Taxes
The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying value amounts and income tax bases of assets and liabilities and the expected benefits of utilizing net operating loss and tax credit carryforwards. The deferred tax assets and liabilities are calculated using enacted tax rates in effect for each taxing jurisdiction in which the Company operates for the year in which those temporary differences are expected to be recovered or settled. Net deferred tax assets are then reduced by a valuation allowance if the Company believes it more likely than not such net deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of an enacted change in tax rates is recognized in income in the period that includes the enactment date.
When the tax law requires interest to be paid on an underpayment of income taxes, the Company recognizes interest expense from the first period the interest would begin accruing according to the relevant tax law. Such interest expense is included in interest expense in the accompanying consolidated statements of operations. Any accrual of penalties related to underpayment of income taxes on uncertain tax positions is included in other income (expense) in the accompanying consolidated statements of operations.
II-45
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
Earnings (Loss) Attributable to Qurate Retail Stockholders and Earnings (Loss) Per Common Share
Net earnings (loss) attributable to Qurate Retail stockholders is comprised of the following (amounts in millions):
| | | | | | | | |
| | Years ended December 31, | | |||||
| | 2019 | | 2018 | | 2017 | | |
Qurate Retail |
| | |
| |
| |
|
Net earnings (loss) from continuing operations | | $ | (456) | | 674 | | 1,208 | |
Net earnings (loss) from discontinued operations | | $ | NA | | NA | | NA | |
Liberty Ventures | | | | | | | | |
Net earnings (loss) from continuing operations | | $ | NA | | 101 | | 781 | |
Net earnings (loss) from discontinued operations | | $ | NA | | 141 | | 452 | |
Basic earnings (loss) per common share ("EPS") is computed by dividing net earnings (loss) attributable to such common stock 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.
Series A and Series B Qurate Retail Common Stock
EPS for all periods through December 31, 2019, is based on the following weighted average shares outstanding. Excluded from diluted EPS for the years ended December 31, 2019, 2018 and 2017 are approximately 22 million, 25 million and 20 million potential common shares, respectively, because their inclusion would be antidilutive.
| | | | | | | | |
| | | Years ended December 31, |
| ||||
|
| | 2019 |
| 2018 |
| 2017 |
|
| | | number of shares in millions |
| ||||
Basic WASO | | | 424 | | 462 | | 445 | |
Potentially dilutive shares | | | — | | 3 | | 3 | |
Diluted WASO | | | 424 | | 465 | | 448 | |
Series A and Series B Liberty Ventures Common Stock
EPS for all periods through December 31, 2019, is based on the following weighted average shares outstanding. Excluded from diluted EPS for the years ended December 31, 2018 and 2017 are less than a million potential common shares because their inclusion would be antidilutive.
II-46
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
| | | | | | | | |
| |
| Years ended December 31, |
| ||||
|
| | 2019 |
| 2018 (1) |
| 2017 |
|
| | | number of shares in millions |
| ||||
Basic WASO | |
| NA | | 86 | | 86 | |
Potentially dilutive shares | |
| NA | | 1 | | 1 | |
Diluted WASO | |
| NA | | 87 | | 87 | |
(1) | All of the outstanding shares of Liberty Ventures Series A and B common stock were redeemed for GCI Liberty Series A and B common stock as a result of the GCI Liberty Split-Off on March 9, 2018. |
Reclasses and adjustments
Certain prior period amounts have been reclassified for comparability with the current year presentation.
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 in certain quarterly periods during the year ended December 31, 2019. In order to maintain a zero balance in the additional paid-in capital account, we reclassified the amount of the deficit ($328 million) at December 31, 2019 to retained earnings.
Estimates
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) recurring and non-recurring fair value measurements, (ii) accounting for income taxes and (iii) estimates of retail-related adjustments and allowances to be its most significant estimates.
New Accounting Pronouncements Not Yet Adopted
Internal-Use Software. In August 2018, the 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.
II-47
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
(3) Supplemental Disclosures to Consolidated Statements of Cash Flows
| | | | | | | | |
| | Years ended December 31, |
| |||||
| | 2019 | | 2018 | | 2017 |
| |
| | amounts in millions |
| |||||
Cash paid for acquisitions: | | | | | | | | |
Fair value of assets acquired | | $ | — |
| (11) |
| 956 | |
Intangible assets not subject to amortization | |
| — |
| — |
| 1,577 | |
Intangible assets subject to amortization | |
| — |
| (4) |
| 651 | |
Net liabilities assumed | |
| — |
| 10 |
| (977) | |
Deferred tax assets (liabilities) | |
| — |
| 5 |
| (281) | |
Fair value of equity consideration | |
| — |
| — |
| (1,948) | |
Cash paid (received) for acquisitions, net of cash acquired | | $ | — |
| — |
| (22) | |
| | | | | | | | |
Cash paid for interest | | $ | 360 |
| 362 |
| 343 | |
| | | | | | | | |
Cash paid for income taxes | | $ | 175 |
| 226 |
| 158 | |
| | | | | | | | |
Non-cash capital additions obtained in exchange for liabilities | | $ | 36 |
| — |
| — | |
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 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 consolidated balance sheets to the total amount presented in our consolidated statements of cash flows:
| | | | | |
| | December 31, | | December 31, | |
| | 2019 | | 2018 | |
| | in millions | | ||
Cash and cash equivalents | $ | 673 | | 653 | |
Restricted cash included in other current assets | | 8 | | 7 | |
Total cash, cash equivalents and restricted cash in the consolidated statement of cash flows | $ | 681 | | 660 | |
II-48
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
(4) Acquisitions
On December 29, 2017, Qurate Retail acquired the approximately 62% of HSN it did not already own in an all-stock transaction making HSN a wholly-owned subsidiary, attributed to the QVC Group. HSN shareholders (other than Qurate Retail) received fixed consideration of 1.65 shares of Series A QVC Group common stock (“QVCA”) for each share of HSN common stock. Qurate Retail issued 53.6 million shares of QVCA common stock to HSN shareholders. In conjunction with application of acquisition accounting, we recorded a full step up in basis of HSN which resulted in a $409 million gain. The fair market value of our ownership interest previously held in HSN ($605 million) was determined based on the trading price of QVCA common stock on the date of the acquisition (Level 1) less a control premium. The market value of the shares of QVCA common stock issued to HSN shareholders ($1.3 billion) was determined based on the trading price of QVCA common stock on the date of the acquisition. The total equity value of the transaction was $1.9 billion. Included in net earnings (loss) from continuing operations for the year ended December 31, 2017 is $43 million related to HSN’s operations since the date of acquisition, which is primarily related to severance cost post acquisition. Of the $43 million, $38 million related to HSN ($8 million of which related to stock-based compensation expense and is included in Selling, general and administrative, including stock-based compensation expense in the consolidated statements of operations) and $5 million related to Cornerstone. With the exception of the $43 million of severance-related costs incurred on December 30, 2017, HSN’s results of operations are not included in our consolidated operating results for the year ended December 31, 2017, as the final two days of the period were considered immaterial.
The pro forma revenue and net earnings from continuing operations of Qurate Retail, prepared utilizing the historical financial statements of HSN, giving effect to purchase accounting related adjustments made at the time of acquisition, as if the transaction discussed above occurred on January 1, 2016, are as follows:
| | | | | |
| | | Year Ended December 31, | | |
| | | 2017 | | |
| | | amounts in millions | | |
| | | (unaudited) | | |
Revenue | | $ | 13,791 | | |
Net earnings (loss) from continuing operations | | $ | 2,200 | | |
The pro forma information is not representative of Qurate Retail’s future financial position, future results of operations or future cash flows nor does it reflect what Qurate Retail’s financial position, results of operations or cash flows would have been as if the transaction had happened previously and Qurate Retail controlled HSN during the periods presented. The pro forma information includes a nonrecurring adjustment for transaction costs incurred as a result of the acquisition.
(5) Disposals
Disposals - Presented as Discontinued Operations
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 an available for sale investment it did not meet the definition of a component for discontinued operation presentation. The disposition of Liberty Broadband
II-49
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
was considered significant to the overall financial statements. Accordingly, the accompanying consolidated financial statements of Qurate Retail have been prepared to reflect Qurate Retail’s interest in Liberty Broadband as a discontinued operation for the years ended December 31, 2018 and 2017. 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 consolidated financial statements of Qurate Retail. LendingTree and Evite are included in the Corporate and other segment through March 8, 2018. See “Disposals – Not Presented as Discontinued Operations” below for additional information regarding Evite and LendingTree.
Certain financial information for Qurate Retail’s investment in Liberty Broadband, which is included in earnings (loss) from discontinued operations, is as follows (amounts in millions):
| | | | | | | | |
| | Years ended December 31, | | |||||
| | | 2019 | | 2018 | | 2017 | |
Earnings (loss) before income taxes | | $ | NA | | 187 | | 473 | |
Income tax (expense) benefit | | $ | NA | | (46) | | (21) | |
The combined impact from discontinued operations, discussed above, is as follows:
| | | | | | | | |
| | Years ended December 31, | | |||||
| | | 2019 | | 2018 | | 2017 | |
Basic earnings (loss) from discontinued operations attributable to Qurate Retail shareholders per common share (note 2): | | | | | | | | |
Series A and Series B Qurate Retail common stock | | $ | NA | | NA | | NA | |
Series A and Series B Liberty Ventures common stock | | $ | NA | | 1.64 | | 5.26 | |
Diluted earnings (loss) from discontinued operations attributable to Qurate Retail shareholders per common share (note 2): | | | | | | | | |
Series A and Series B Qurate Retail common stock | | $ | NA | | NA | | NA | |
Series A and Series B Liberty Ventures common stock | | $ | NA | | 1.62 | | 5.20 | |
Prior to the GCI Liberty Split-Off, Qurate Retail accounted for the investment in Liberty Broadband at its fair value. Accordingly, Liberty Broadband’s assets, liabilities and results of operations were not included in Qurate Retail’s consolidated financial statements. Summary financial information for Liberty Broadband for the periods prior to the GCI Liberty Split-Off is as follows:
| | | | | |
| | Year ended December 31, | | | |
|
| | 2017 |
| |
| | amounts in millions | | ||
Operating income | | $ | (25) |
| |
Share of earnings (loss) of affiliate | | $ | 2,509 | | |
Gain (loss) on dilution of investment in affiliate | | $ | (18) |
| |
Income tax (expense) benefit | | $ | (417) |
| |
Net earnings (loss) attributable to Liberty Broadband shareholders | | $ | 2,034 |
| |
II-50
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
Disposals – Not Presented as Discontinued Operations
As discussed above, on March 9, 2018, Qurate Retail completed the GCI Liberty Split-Off. Although Liberty Broadband has been presented as a discontinued operation, Evite and LendingTree are not presented as discontinued operations. Included in revenue in the accompanying consolidated statements of operations is $3 million and $24 million for the years ended December 31, 2018 and 2017, respectively, related to Evite. Included in net earnings (loss) in the accompanying consolidated statements of operations are losses of $2 million and $3 million, for the years ended December 31, 2018 and 2017, respectively, related to Evite. Included in net earnings (loss) in the accompanying consolidated statements of operations are earnings of less than a million and $6 million for the years ended December 31, 2018 and 2017, respectively, related to LendingTree.
(6) 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, other than quoted market prices included within Level 1, are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability. The Company does not have any recurring assets or liabilities measured at fair value that would be considered Level 3.
The Company's assets and liabilities measured at fair value are as follows:
| | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| |||||||||
| | | | | Quoted prices | | | | | | Quoted prices | | |
|
| | | | | in active | | Significant | | | | in active | | Significant |
|
| | | | | markets | | other | | | | markets | | other |
|
| | | | | for identical | | observable | | | | for identical | | observable |
|
| | | | | assets | | inputs | | | | assets | | inputs |
|
Description | | Total | | (Level 1) | | (Level 2) | | Total | | (Level 1) | | (Level 2) |
| |
| | amounts in millions |
| |||||||||||
Cash equivalents |
| $ | 339 |
| 339 |
| — |
| 310 |
| 310 |
| — | |
Indemnification asset (1) | | $ | 202 | | — | | 202 | | 79 | | — | | 79 | |
Debt | | $ | 1,557 |
| — |
| 1,557 |
| 1,334 |
| — |
| 1,334 | |
(1) | The indemnification asset is included in Other current assets on the consolidated balance sheets as of December 31, 2019 and 2018. |
The majority of the Company's Level 2 financial assets and liabilities are debt instruments with quoted market prices that are not considered to be traded on "active markets," as defined in GAAP. Accordingly, the debt instruments are reported in the foregoing table as Level 2 fair value.
II-51
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
Pursuant to an indemnification agreement, GCI Liberty has agreed to indemnify LI LLC for certain payments made to a holder of LI LLC’s 1.75% Exchangeable Debentures due 2046 (the “1.75% Exchangeable Debentures”). An indemnity asset in the amount of $281 million was recorded upon completion of the GCI Liberty Split-Off. In June 2018, Qurate Retail repurchased 417,759 of the 1.75% Exchangeable Debentures for approximately $457 million, including accrued interest, and GCI Liberty made a payment under the indemnification agreement to Qurate Retail in the amount of $133 million. The remaining indemnification to LI LLC for certain payments made to a holder of the 1.75% Exchangeable Debentures pertains to the holder’s ability to exercise its 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 consolidated balance sheets as of December 31, 2019 represents the fair value of the estimated exchange feature included in the 1.75% Exchangeable Debentures primarily based on observable market data as significant inputs (Level 2). As of December 31, 2019, a holder of the 1.75% Exchangeable Debentures does have the ability to exchange and, accordingly, such indemnification asset is included as a current asset in our consolidated balance sheet as of that date. Additionally, as of December 31, 2019, 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:
| | | | | | | | |
| | Years ended December 31, |
| |||||
|
| 2019 |
| 2018 |
| 2017 |
| |
| | amounts in millions |
| |||||
Equity securities | | $ | (22) |
| 155 |
| 434 | |
Exchangeable senior debentures | |
| (337) |
| (3) |
| (193) | |
Indemnification asset | | | 123 | | (70) | | — | |
Other financial instruments | |
| (15) |
| (6) |
| (96) | |
| | $ | (251) |
| 76 |
| 145 | |
II-52
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
December 31, 2019, 2018 and 2017
(7) Goodwill and Other Intangible Assets
Goodwill
Changes in the carrying amount of goodwill are as follows:
| | | | | | | | | | | | |
|
| QxH | | QVC International | | Zulily | | Corporate and Other |
| Total |
| |
| | amounts in millions |
| |||||||||
Balance at January 1, 2018 | | $ | 5,238 | | 885 | | 917 | | 42 | | 7,082 | |
Foreign currency translation adjustments | | | — | | (25) | | — | | — | | (25) | |
Disposition (1) | | | — | | — | | — | | (26) | | (26) | |
Other (2) | | | (10) | | — | | — | | (4) | | (14) | |
Balance at December 31, 2018 | | | 5,228 | | 860 | | 917 | | 12 | | 7,017 | |
Foreign currency translation adjustments | | | — | | (1) | | — | | — | | (1) | |
Impairment (3) | | | — | | — | | (440) | | — | | (440) | |
Balance at December 31, 2019 | | $ | 5,228 | | 859 | | 477 | | 12 | | 6,576 | |
(1) | As a result of the GCI Liberty Split-Off on March 9, 2018, the Company disposed of its wholly-owned subsidiary Evite, resulting in a $26 million decrease to goodwill. |
(2) | As discussed in note
Goodwill recognized from acquisitions primarily relates to assembled workforces, website community and other intangible assets that do not qualify for separate recognition. As presented in the accompanying consolidated balance sheets, tradenames is the other significant indefinite lived intangible asset. Intangible Assets Subject to Amortization Intangible assets subject to amortization are comprised of the following:
II-53 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 The weighted average life of these amortizable intangible assets was approximately 9 years at the time of acquisition. However, amortization is expected to match the usage of the related asset and will be on an accelerated basis as demonstrated in table below. Amortization expense for intangible assets with finite useful lives was $386 million, $426 million and $549 million for the years ended December 31, 2019, 2018 and 2017, respectively. Based on its amortizable intangible assets as of December 31, 2019, Qurate Retail expects that amortization expense will be as follows for the next five years (amounts in millions):
Impairments As a result of Zulily’s deteriorating financial performance, Zulily initiated a process to evaluate its current business model and long-term business strategy in light of the challenging retail environment. Upon completing the evaluation of Zulily’s model and long-term strategy, it was determined during the third quarter of 2019 that an indication of impairment existed for the Zulily reporting unit related to its tradename and goodwill. With the assistance of a third party specialist, the fair value of the tradename was determined using the relief from royalty method (Level 3), and an impairment in the amount of $580 million was recorded during the third quarter of 2019, in the impairment of intangible assets line item in the consolidated statements of operations. With the assistance of a third party specialist, the fair value of the Zulily reporting unit was determined using a discounted cash flow method (Level 3), and a goodwill impairment in the amount of $440 million was recorded during the third quarter of 2019, in the Impairment of intangible assets line item in the consolidated statements of operations. As of December 31, 2019, the Zulily reporting unit has accumulated goodwill impairment losses of $440 million. Based on the quantitative assessment performed during the third quarter of 2019 and the resulting impairment losses recorded, the estimated fair values of the tradename and the Zulily reporting unit do not significantly exceed their carrying values as of December 31, 2019. The Company performed a qualitative goodwill impairment analysis during the fourth quarter of 2019 and 2018 and determined that triggering events existed at the HSN reporting unit in both periods due to a variety of factors, primarily HSN’s inability to meet its 2019 and 2018 revenue projections. With the assistance of an external valuation expert, the Company determined the estimated business enterprise value of HSN, including its intangible assets and goodwill as of December 31, 2018, and the estimated value of its tradename intangible asset as of December 31, 2019 and December 31, 2018. In 2018 the business enterprise valuation was performed using a combination of a discounted cash flow model using HSN’s projections of future operating performance (income approach) and market multiples (market approach) (Level 3). In both periods the tradename valuation was performed using a relief from royalties method, primarily using a discounted cash flow model using HSN’s projections of future operating performance (income approach) and applying a royalty rate (market approach) (Level 3). As a result of the analysis, HSN recorded a $147 million and a $30 million impairment to its tradename intangible asset as of December 31, 2019 and December 31, 2018, respectively. NaN impairment of HSN’s goodwill was necessary in 2018. As of December 31, 2019 the Company had accumulated goodwill impairment losses of $440 million. II-54 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 (8) Debt Debt is summarized as follows:
Exchangeable Senior Debentures Each $1,000 debenture of Liberty Interactive LLC’s (“LI LLC”) 4% Exchangeable Senior Debentures is exchangeable at the holder's option for the value of 3.2265 shares of Sprint Corporation (“Sprint”) common stock and 0.7860 shares of CenturyLink, Inc. ("CenturyLink") common stock. LI LLC may, at its election, pay the exchange value in cash, Sprint and CenturyLink common stock or a combination thereof. LI LLC, at its option, may redeem the debentures, in whole or in part, for cash generally equal to the face amount of the debentures plus accrued interest. Each $1,000 debenture of LI LLC's 3.75% Exchangeable Senior Debentures is exchangeable at the holder's option for the value of 2.3578 shares of Sprint common stock and 0.5746 shares of CenturyLink common stock. LI LLC may, at its election, pay the exchange value in cash, Sprint and CenturyLink common stock or a combination thereof. Qurate Retail, at its option, may redeem the debentures, in whole or in part, for cash equal to the face amount of the debentures plus accrued interest. II-55 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 Each $1,000 debenture of LI LLC's 3.5% Exchangeable Senior Debentures (the "Motorola Exchangeables") is exchangeable at the holder's option for the value of 5.2598 shares of Motorola Solutions, Inc. (“MSI”). The remaining exchange value is payable, at Qurate Retail's option, in cash or MSI stock or a combination thereof. LI LLC, at its option, may redeem the debentures, in whole or in part, for cash generally equal to the adjusted principal amount of the debentures plus accrued interest. As a result of various principal payments made to holders of the Motorola Exchangeables, the adjusted principal amount of each $1,000 debenture is $514 as of December 31, 2019. During the year ended December 31, 2019, holders exchanged, under the terms of the Motorola Exchangeables, approximately $58 million principal of the Motorola Exchangeables and Qurate Retail made cash payments of approximately $99 million to settle the obligations. Each $1,000 original principal amount of the 0.75% Exchangeable Senior Debentures due 2043 is exchangeable for a basket of 3.1648 shares of common stock of Charter and 7.4199 shares of common stock of AT&T Inc., which may change over time to include other publicly traded common equity securities that may be distributed on or in respect of those shares of Charter and Time Warner (or into which any of those securities may be converted or exchanged). This basket of shares for which each Debenture in the original principal amount of $1,000 may be exchanged is referred to as the Reference Shares attributable to such Debenture, and to each issuer of Reference Shares as a reference company. Each Debenture is exchangeable at the option of the holder at any time, upon which they will be entitled to receive the Reference Shares attributable to such Debenture or, at the election of LI LLC, cash or a combination of Reference Shares and cash having a value equal to such Reference Shares. Upon exchange, holders will not be entitled to any cash payment representing accrued interest or outstanding additional distributions. Subsequent to December 31, 2017, an extraordinary additional distribution was made to the holders of the 0.75% Exchangeable Senior Debentures due 2043 in the amount of $11.9399 per $1,000 original principal of the debentures, which is attributable to the cash consideration of $18.50 per share paid to former holders of common stock of Time Inc. on January 31, 2018, in connection with the acquisition of Time Inc. by Meredith Corporation. The Company paid the extraordinary additional distribution on March 1, 2018, to holders of record of the 0.75% Exchangeable Senior Debentures due 2043 on February 14, 2018, the special record date for the extraordinary additional distribution. In August 2016, Qurate Retail issued $750 million principal amount of new senior exchangeable debentures due September 2046 which bear interest at an annual rate of 1.75%. Each $1,000 debenture is exchangeable at the holder’s option for the value of 2.9317 shares of Charter Class A common stock. Qurate Retail may, at its election, pay the exchange value in cash, Charter Class A common stock or a combination thereof. The number of shares of Charter Class A common stock attributable to a debenture represents an initial exchange price of approximately $341.10 per share. On October 5, 2023, Qurate Retail, at its option, may redeem the debentures, in whole or in part, for cash generally equal to the face amount of the debentures plus accrued interest. See note 6 for additional information about these debentures. Qurate Retail has elected to account for all of its Exchangeables 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. Qurate Retail will review the triggering events on a quarterly basis to determine whether a triggering event has occurred to require current classification of certain Exchangeables, see additional discussion below. Qurate Retail has sold, split-off or otherwise disposed of all of its shares of MSI, Sprint, Charter and CenturyLink common stock which underlie the respective exchangeable senior debentures. Because such exchangeable debentures are exchangeable at the option of the holder at any time and Qurate Retail can no longer use owned shares to redeem the debentures, Qurate Retail has classified for financial reporting purposes the debentures that could be redeemed for cash as a current liability. Exchangeable senior debentures classified as current totaled $1,557 million at December 31, 2019. Although such amount has been classified as a current liability for financial reporting purposes, the Company believes the probability that the holders of such instruments will exchange a significant principal amount of the debentures prior to maturity is unlikely. II-56 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 Interest on the Company's exchangeable debentures is payable semi-annually based on the date of issuance. At maturity, all of the Company's exchangeable debentures are payable in cash. In January 2016, the FASB issued new accounting guidance that is intended to improve the recognition and measurement of financial instruments. The Company adopted this guidance during the first quarter of 2018. 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 on the consolidated statements of comprehensive income.
Senior Debentures Interest on the 8.5% Senior Debentures due 2029 and the 8.25% Senior Debentures due 2030 QVC Senior Secured Notes On March 18, 2014, QVC issued $400 million principal amount of 3.125% Senior Secured Notes due 2019 at an issue price of 99.828% and $600 million principal amount of 4.85% Senior Secured Notes due 2024 at an issue price of 99.927% (collectively, the “March Notes”). The March Notes due 2019. On August 21, 2014, QVC issued $600 million principal amount of 4.45% Senior Secured Notes due 2025 at an issue price of 99.860% and $400 million principal amount 5.45% Senior Secured Notes due 2034 at an issue price of 99.784% (collectively, the “August Notes”). The August Notes are secured by the capital stock of QVC and certain of QVC’s subsidiaries and have equal priority to QVC’s senior secured credit facility. During prior years, QVC issued In September 2018, QVC completed a registered debt offering for $225 million of 6.375% Senior Notes due 2067 (the “2067 Notes”). QVC has the option to call the 2067 Notes after 5 years at par value, plus accrued and unpaid interest. On On February 4, 2020,
August, with payments commencing on August 15, 2020. QVC Bank Credit Facilities On II-57 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 reduced to $2.95 billion, effective February 4, 2020 upon the closing of QVC’s offering of the 2027 Notes) revolving credit facility, with a
The payment and performance of the borrowers’ obligations (including The The interest rate on borrowings outstanding under the
Arrangements During the year ended December 31, 2016, QVC entered into a three-year interest rate swap arrangement with a notional amount of $125 million to mitigate the interest rate risk associated with interest payments related to its variable rate debt. The swap arrangement
II-58 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 the fair value of the Other Subsidiary Debt Other subsidiary debt at December 31, Debt Covenants
2019. Five Year Maturities The annual principal maturities of
Fair Value of Debt
Due to the variable rate nature,
II-59 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 (9) Leases In February 2016 and subsequently, the FASB issued new guidance which revises the accounting for leases. Under the new guidance, entities that lease assets are required to recognize assets and liabilities on the balance sheet related to the rights and obligations created by those leases regardless of whether they are classified as finance or operating leases. In addition, new disclosures are required to meet the objective of enabling users of the financial statements to better understand the amount, timing, and uncertainty of cash flows arising from leases. The Company adopted this guidance, which established Accounting Standards Codification Topic 842 (“ASC 842”), on January 1, 2019 and elected the optional transition method that allowed for a cumulative-effect adjustment in the period of adoption. Results for reporting periods beginning after January 1, 2019 are presented under the new guidance, while prior period amounts were not adjusted and continue to be reported under the accounting standards in effect for those periods. The Company elected certain of the available transition practical expedients, including those that permit it to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) any initial direct costs for any existing leases as of the effective date. The Company did not elect the hindsight practical expedient, which permits entities to use hindsight in determining the lease term and assessing impairment. The most significant impact of the new guidance was the recognition of ROU assets and lease liabilities for operating leases. In addition, the Company elected the practical expedient to account for the lease and non-lease components as a single lease component and will not recognize right-of-use assets or lease liabilities for short-term leases, which are those leases with a term of twelve months or less at the lease commencement date. The Company recognized $287 million of operating lease ROU assets, $51 million of short term operating lease liabilities and $259 million of long term operating lease liabilities on the consolidated balance sheet upon adoption of the new standard. The operating lease liabilities were determined based on the present value of the remaining rental payments and the operating lease ROU asset was determined based on the value of the lease liabilities, adjusted primarily for deferred rent, net of prepaid rent of $23 million. The Company has finance lease agreements with transponder and transmitter network suppliers for the right to transmit its signals in the U.S. and Germany. The Company is also party to a finance lease agreement for data processing hardware and a warehouse. The Company also leases data processing equipment, facilities, office space, retail space and land. These leases are classified as operating leases. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future lease payments using our incremental borrowing rate. Our leases have remaining leaseterms of less than one year to 15 years some of which may include the option to extend for up to 14 years, and some of which include options to terminate the leases within less than one year. II-60 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 The components of lease cost during the year ended December 31, 2019 were as follows:
Prior to the adoption of ASC 842, rental expense under lease arrangements amounted to $80 million and $45 million for the years ended December 31, 2018 and 2017, respectively. The remaining weighted-average lease term and the weighted-average discount rate were as follows:
II-61 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 Supplemental balance sheet information related to leases was as follows:
Supplemental cash flow information related to leases was as follows:
II-62 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 Future lease payments under finance leases and operating leases with initial terms of one year or more at December 31, 2019 consisted of the following:
On October 5, 2018, QVC entered into a lease (“ECDC Lease”) for an East Coast distribution center. The 1.7 million square foot rental building is located in Bethlehem, Pennsylvania and will be leased to QVC for an initial term of 15 years. QVC obtained initial access to a portion of the ECDC Lease during March 2019 and obtained access to the remaining portion during September 2019. In total, QVC recorded a ROU asset of $141 million and an operating lease liability of $131 million relating to the ECDC Lease, with the difference attributable to prepaid rent. QVC is required to pay an initial base rent of $10 million per year, with payments that began in the third quarter of 2019, and increasing to $14 million per year, as well as all real estate taxes and other building operating costs. QVC also has the option to extend the term of the ECDC Lease for up to 2 consecutive terms of 5 years each and one final term of 4 years. II-63 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 (10) Income Taxes On December 22, 2017, the U.S. government enacted The corporate rate reduction was applied to our inventory of deferred tax assets and deferred tax liabilities which resulted in the net tax benefit in the period ended December 31, 2017.
Income tax benefit (expense) consists of:
The following table presents a summary of our domestic and foreign earnings from continuing operations before income taxes:
II-64 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 Income tax benefit (expense) differs from the amounts computed by applying the U.S. federal income tax rate of 21% in 2019 and 2018 and 35% in 2017 as a result of the following:
For the year ended December 31, For the year ended December 31, 2018 income tax expense was lower than the U.S. statutory rate of 21% due to tax benefits from tax credits and incentives generated by our alternative energy investments, a reduction in the Company’s state effective tax rate used to measure deferred taxes resulting from the GCI Liberty Split-Off in March 2018, and a reduction in the Company’s state effective tax rate used to measure deferred taxes resulting from a state law change during the second quarter. For the year ended December 31, 2017 the significant reconciling items II-65
Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and
The tax effects of temporary differences that give rise to significant portions of the deferred income tax assets and deferred income tax liabilities are presented below:
The Company's valuation allowance increased
expense. At December 31, At December 31, 2019, the Company had a deferred tax asset of $154 million for foreign tax credit carryforwards. If not utilized to reduce income tax liabilities in future periods, these foreign tax credits II-66 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 A reconciliation of unrecognized tax benefits is as follows:
As of December 31, As of December 31, any foreign tax jurisdictions. The Company recorded
Preferred Stock
resolutions providing for the issue of such preferred stock adopted by Common Stock Series A II-67 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 At the Annual Meeting of Stockholders held on June 2, 2015, the Company’s stockholders approved an amendment to the Restated Certificate of Incorporation that increased (i) the total number of shares of the Company’s capital stock which the Company will have the authority to issue to 9,015 million shares, (ii) the number of shares of the Company’s capital stock designated as “Common Stock” to 8,965 million shares and (iii) the number of shares of Common Stock designated as “Series A Liberty Ventures Common Stock,” “Series B Liberty Ventures Common Stock” and “Series C Liberty Ventures Common Stock” to 400 million shares, 15 million shares and 400 million shares, respectively. At the Annual Meeting of Stockholders held on May 23, 2018, the Company’s stockholders approved an amendment to the Restated Certificate of Incorporation, which (i) eliminated the tracking stock capitalization structure of the Company and (ii) reclassified each outstanding share of Series A and Series B QVC Group common stock into one share of our Series A and Series B common stock, respectively. In addition, the amendment to the Restated Certificate of Incorporation changed (i) the total number of shares of the Company’s capital stock which the Company will have the authority to issue to 8,200 million shares, (ii) the number of shares of the Company’s capital stock designated as “Common Stock” to 8,150 million shares, (ii) the number of shares of Common Stock designated as “Series A Common Stock,” “Series B Common Stock” and “Series C Common Stock” to 4,000 million shares, 150 million shares and 4,000 million shares, respectively, and (iii) the number of shares of the Company’s capital stock designated as “Preferred Stock” to 50 million shares. As of December 31, In addition to the Series A and Series B
Purchases of Common Stock
During the year ended December 31, 2017, the Company repurchased 34,765,751 shares of Series A
During the year ended December 31, During the year ended December 31, 2019, the Company repurchased 24,329,610 shares of Series A Qurate Retail common stock for aggregate cash consideration of $392 million. All of the foregoing shares were repurchased pursuant to a previously announced share repurchase program and have been retired and returned to the status of authorized and available for issuance.
QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and
In December 2014, the Compensation Committee of Pursuant to the See discussion in note 1 regarding the new compensation
Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 CEO Compensation Agreement On September 27, 2015, the Compensation Committee of Qurate Retail approved a compensation arrangement for our current CEO. The arrangement provides for a five year employment term beginning December 16, 2015 and ending December 31, 2020, with an annual base salary of $1.25 million and an annual target cash bonus equal to 100% of the CEO’s annual base salary. The arrangement also provides the CEO with the opportunity to earn annual performance-based equity incentive awards during the employment term. Beginning in 2016, the CEO received an annual $4.125 million grant of performance-based RSUs with respect to QRTEA. Also, on September 27, 2015, in connection with the approval of his compensation arrangement, the CEO received a one-time grant of 1,680,065 stock options to purchase shares of QRTEA with an exercise price of $26.00 per share. 50% of such options vested on December 31, 2019 and In connection with the CEO’s appointment to this position on March 9, 2018, the Compensation Committee of Qurate Retail approved a one-time grant of stock options and performance-based RSUs to the CEO on August 13, 2018. The options consist of 577,358 options to purchase shares of QRTEA with an exercise price of $22.18. 50% of such options vested on December 15, 2019 and the remaining 50% will vest on December 15, 2020, and have a seven year term. The RSUs consist of 182,983 performance-based RSUs with respect to QRTEA which vest on December 21, 2020 based on performance of the Company and the personal performance of the CEO, and at the sole discretion of the Compensation Committee.
Pursuant to the In connection with the
Notes to Consolidated Financial Statements (Continued) December 31,
The following table presents the number and weighted average
In addition to the stock option grants to the Qurate Retail Chairman of the Board, and in connection with his employment agreement, Qurate Retail granted time-based and performance-based restricted stock units ("RSUs"). During the year ended December 31, 2019, Qurate Retail granted 19 thousand time-based RSUs of Series B Qurate Retail common stock. Such RSUs had a GDFV of $17.90 per share at the time they were granted and cliff vested on March 11, 2019. During the years ended December 31, 2019, 2018 and 2017, Qurate Retail granted 194 thousand, 124 thousand and 115 thousand performance-based RSUs, respectively, of Series B Qurate Retail common stock. Such RSUs had a fair value of $17.90, $27.56 and $19.90 per share, respectively, at the time they were granted. Also during the year ended December 31, 2019, Qurate Retail granted approximately 191 thousand performance-based RSUs of Series A Qurate Retail common stock to its President and CEO. The Series A RSUs had a GDFV of $17.90 per share at the time they were granted. The 2019, 2018 and 2017 performance-based RSUs cliff vest one year from the month of grant, subject to the satisfaction of certain performance objectives and based on an amount determined by the compensation committee. Performance objectives, which are subjective, are considered in determining the timing and amount of the compensation expense recognized. As the satisfaction of the performance objectives becomes probable, the Company records compensation expense. The value of the grant is remeasured at each reporting period. This grant includes the first upfront option grant related to the Chairman’s new employment agreement. See discussion in note 1 regarding the new compensation agreement with the Company’s Chairman. II-71 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 In connection with the Option Exchange in 2017 (see below),
During the fourth quarter of 2017, the Company entered into a series of transactions with certain officers of
Eligible Optionholder exercised, on a net settled basis, all of his outstanding in-the-money vested and unvested options to acquire
The Option Exchange was considered a modification under ASC 718 – Stock Compensation, with the following impacts on compensation expense. The unamortized value of the unvested Eligible Options that were exercised, which was $14 million for LVNTA and LVNTB combined, will be expensed over the vesting period of the Restricted Shares attributable to the exercise of those II-72 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 The Company has calculated the GDFV for all of its equity classified awards using the Black-Scholes-Merton Model. The Company estimates the expected term of the Awards based on historical exercise and forfeiture data. For grants made in
The following table presents the range of volatilities used by
The following table presents the number and weighted average exercise price ("WAEP") of
As of December 31, As of December 31, 2019, Qurate Retail reserved 25.1 million shares of Series A and Series B common stock for issuance under exercise privileges of outstanding stock Awards. II-73
Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 Qurate Retail - Exercises The aggregate intrinsic value of all options exercised during the years ended December 31, 2019, 2018 and 2017
The Company had approximately The aggregate fair value of all restricted shares of
Subsidiaries of
Accumulated other comprehensive earnings (loss) included in
Notes to Consolidated Financial Statements (Continued) December 31, The change in the components of accumulated other comprehensive earnings (loss), net of taxes ("AOCI"), is summarized as follows:
The components of other comprehensive earnings (loss) are reflected in
Notes to Consolidated Financial Statements (Continued) December 31,
Litigation
During the first quarter of 2019 the Company changed its reportable segments to combine HSN and QVC U.S. into one reportable segment called “QxH,” and presented prior period information to conform with this change. As a result of the QRG Initiatives and additional integration activities to drive synergies between HSN and QVC U.S., the chief operating decision maker began reviewing HSN and QVC U.S. information as one business unit during the first quarter of 2019. II-76 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 For the year ended December 31,
Performance Measures
Other Information
II-77 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 The following table provides a reconciliation of consolidated segment Adjusted OIBDA to operating income and earnings (loss) from continuing operations before income taxes:
Qurate Retail's preferred stock is issuable, from time to time, with such designations, preferences and relative participating, optional or other rights, qualifications, limitations or restrictions thereof, as shall be stated and expressed in a resolution or resolutions providing for the issue of such preferred stock adopted by
Series A Qurate Retail common stock has 1 vote per share, and Series B Qurate Retail common stock has 10 votes per share. Each share of the Series B common stock is exchangeable at the option of the holder for 1 share of Series A common stock of the same group. The Series A and Series B common stock participate on
an equal basis with respect to dividends and distributions.
Notes to Consolidated Financial Statements (Continued) December 31, At the Annual Meeting of Stockholders held on June 2, 2015, the Company’s stockholders approved an amendment to the Restated Certificate of Incorporation that increased (i) the total number of shares of the Company’s capital stock which the Company will have the authority to issue to 9,015 million shares, (ii) the number of shares of the Company’s capital stock designated as “Common Stock” to 8,965 million shares and (iii) the number of shares of Common Stock designated as “Series A Liberty Ventures Common Stock,” “Series B Liberty Ventures Common Stock” and “Series C Liberty Ventures Common Stock” to 400 million shares, 15 million shares and 400 million shares, respectively.
As of December 31, 2019, Qurate Retail reserved for issuance upon exercise of outstanding stock options approximately 23.2 million shares of Series A Qurate Retail common stock and approximately 1.8 million shares of Series B Qurate Retail common stock. In addition to the Series A and Series B Qurate Retail common stock, there are 4 billion shares of Series C Qurate Retail common stock authorized for issuance, respectively. As of December 31, 2019, 0 shares of any Series C Qurate Retail common stock were issued or outstanding. On December 29, 2017, in conjunction with the acquisition of HSN, Qurate Retail issued 53.6 million shares of Series A Qurate Retail common stock. See additional discussion about the acquisition in note 4. As discussed in note Purchases of Common Stock During the year ended December 31, 2017, the Company During the During the year ended December 31, 2019, the Company All of the
Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 (12) Related Party Transactions with Officers and Directors Chairman Compensation Arrangement In December 2014, the Compensation Committee of Qurate Retail approved a compensation arrangement, including term options discussed in note 13, for its current Chairman. The arrangement provides for a five year employment term beginning January 1, 2015 and ending December 31, 2019, with an annual base salary of $960,750, increasing annually by 5% of the prior year's base salary, and an annual target cash bonus equal to 250% of the applicable year's annual base salary. The arrangement also provides that, in the event the Chairman is terminated for "cause," he will be entitled only to his accrued base salary and any amounts due under applicable law and he will forfeit all rights to his unvested term options. If, however, the Chairman was terminated by Qurate Retail without cause or if he terminated his employment for “good reason,” the arrangement provided for him to receive his accrued base salary, his accrued but unpaid bonus and any amounts due under applicable law, a severance payment of 1.5 times his base salary during the year of his termination, a payment equal to $11.75 million pro rated based upon the elapsed number of days in the calendar year of termination, a payment equal to $17.5 million, and for his unvested term options to generally vest pro rata based on the portion of the term elapsed through the termination date plus 18 months and for all vested and accelerated options to remain exercisable until their respective expiration dates. If the Chairman terminated his employment without “good reason,” he would have been entitled to his accrued base salary, his accrued but unpaid bonus and any amounts due under applicable law, a payment equal to $11.75 million pro rated based upon the elapsed number of days in the calendar year of termination, and for his unvested term options to generally vest pro rata based on the portion of the term elapsed through the termination date and all vested and accelerated options to remain exercisable until their respective expiration dates. Lastly, in the case of the Chairman's death or his disability, the arrangement provided that he would have been entitled only to his accrued base salary and any amounts due under applicable law, a payment of 1.5 times his base salary during that year, a payment equal to $11.75 million pro rated based upon the elapsed number of days in the calendar year of termination, a payment equal to $17.5 million and for his unvested term options to fully vest and for his vested and accelerated term options to remain exercisable until their respective expiration dates. Pursuant to the Chairman’s compensation arrangement, he received aggregate target equity awards allocated between Qurate Retail and Liberty Media in the amounts of $16 million with respect to calendar year 2015, $17 million with respect to calendar year 2016, $18 million with respect to calendar year 2017, See discussion in note 1 regarding the new compensation agreement with the Company’s Chairman effective January 1, 2020. II-69
QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 CEO Compensation Agreement On September 27, 2015, the Compensation Committee of Qurate Retail approved a compensation arrangement for our current CEO. The arrangement provides for a five year employment term beginning December 16, 2015 and ending December 31, 2020, with an annual base salary of $1.25 million and an annual target cash bonus equal to 100% of the CEO’s annual base salary. The arrangement also provides the CEO with the opportunity to earn annual performance-based equity incentive awards during the employment term. Beginning in 2016, the CEO received an annual $4.125 million grant of performance-based RSUs with respect to QRTEA. Also, on September 27, 2015, in connection with the approval of his compensation arrangement, the CEO received a one-time grant of 1,680,065 stock options to purchase shares of QRTEA with an exercise price of $26.00 per share. 50% of such options vested on December 31, 2019 and the remaining 50% will vest on December 31, 2020, with an expiration date of December 31, 2022. In connection with the CEO’s appointment to this position on March 9, 2018, the Compensation Committee of Qurate Retail approved a one-time grant of stock options and performance-based RSUs to the CEO on August 13, 2018. The options consist of 577,358 options to purchase shares of QRTEA with an exercise price of $22.18. 50% of such options vested on December 15, 2019 and the remaining 50% will vest on December 15, 2020, and have a seven year term. The RSUs consist of 182,983 performance-based RSUs with respect to QRTEA which vest on December 21, 2020 based on performance of the Company and the personal performance of the CEO, and at the sole discretion of the Compensation Committee. (13) Stock-Based Compensation Qurate Retail - Incentive Plans Pursuant to the Qurate Retail, Inc. 2016 Omnibus Incentive Plan (the “2016 Plan”), as amended, the Company may grant stock options (“Awards”) to be made in respect of a maximum of 39.9 million shares of Series A and Series B Qurate Retail common stock. Awards generally vest over 4-5 years and have a term of 7-10 years. Qurate Retail issues new shares upon exercise of equity awards. In connection with the HSN acquisition in December 2017 (see note 4), outstanding awards to purchase shares of HSN common stock (an “HSN Award”) were exchanged for awards to purchase shares of Series A Qurate Retail common stock (a “QRTEA Award”). The exercise prices and number of shares subject to the QRTEA Award were determined based on (1) the exercise prices and number of shares subject to the HSN Award and (2) the acquisition exchange ratio. The exchange of such awards was considered a modification under ASC 805 – Business Combinations. A portion of the fair value of the replacement QRTEA Awards was attributed to the consideration paid in the acquisition. The remaining portion of the fair value will be recognized in the consolidated financial statements over the remaining vesting period of each individual award. II-70 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 Qurate Retail – Grants The following
In addition to the stock option grants to the Qurate Retail Chairman of the Board, and in connection with his employment agreement, Qurate Retail granted time-based and performance-based restricted stock units ("RSUs"). During the year ended December 31, 2019, Qurate Retail granted 19 thousand time-based RSUs of Series B Qurate Retail common stock. Such RSUs had a GDFV of $17.90 per share at the time they were granted and cliff vested on March 11, 2019. During the years ended December 31, 2019, 2018 and 2017, Qurate Retail granted 194 thousand, 124 thousand and 115 thousand performance-based RSUs, respectively, of Series B Qurate Retail common stock. Such RSUs had a fair value of $17.90, $27.56 and $19.90 per share, respectively, at the time they were granted. Also during the year ended December 31, 2019, Qurate Retail granted approximately 191 thousand performance-based RSUs of Series A Qurate Retail common stock to its President and CEO. The Series A RSUs had a GDFV of $17.90 per share at the time they were granted. The 2019, 2018 and 2017 performance-based RSUs cliff vest one year from the month of grant, subject to the satisfaction of certain performance objectives and based on an amount determined by the compensation committee. Performance objectives, which are subjective, are considered in determining the timing and amount of the compensation expense recognized. As the satisfaction of the performance objectives becomes probable, the Company records compensation expense. The value of the grant is II-71 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 In connection with the Option Exchange in 2017 (see below), Qurate Retail granted 5.9 million, 946 thousand and 1.1 million options to purchase shares of During the
The Option Exchange was considered a modification under ASC 718 – Stock Compensation, with the following impacts on compensation expense. The unamortized value of the unvested Eligible Options that were exercised, which was $14 million for LVNTA and LVNTB combined, will be expensed over the vesting period of the Restricted Shares attributable to the exercise of those options; of this amount, $6 million of expense was assumed by GCI Liberty as a result of the GCI Liberty Split-Off. The grant of new vested options resulted in incremental compensation expense in the fourth quarter of 2017 of $30 million for QRTEA, LVNTA and LVNTB combined. The grant of Unvested New Options resulted in incremental compensation expense totaling $6 million for LVNTA and LVNTB combined, which will be amortized over the vesting periods of those options; of this amount, $5.8 million of incremental compensation expense was assumed by GCI Liberty as a result of the GCI Liberty Split-Off.
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017
The following table presents the range of volatilities used by Qurate Retail in the Black-Scholes-Merton Model for the 2019, 2018 and 2017 Qurate Retail and Liberty Ventures grants.
Qurate Retail - Outstanding Awards The following table presents the number and weighted average exercise price ("WAEP") of 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.
As of December 31, 2019, Qurate Retail reserved 25.1 million shares of Series A and II-73 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 Qurate Retail - Exercises The aggregate intrinsic value of all options exercised during the years Qurate Retail - Restricted Stock The Company had approximately 5.4 million unvested restricted shares of Qurate Retail common stock, held by certain directors, officers and The aggregate fair value of all restricted shares of Qurate Retail common stock that vested during the (14) Employee Benefit Plans Subsidiaries of Qurate Retail sponsor 401(k) plans, which provide their employees an opportunity to make contributions to a trust for investment in
(15) Other Comprehensive Earnings (Loss) Accumulated other comprehensive earnings (loss) included in the Company’s consolidated balance sheets and
QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 The change in the components of accumulated other comprehensive earnings (loss), net of taxes ("AOCI"), is summarized as follows:
The components of other comprehensive earnings (loss) are reflected in Qurate Retail's consolidated statements of comprehensive earnings (loss) net of taxes. The following table summarizes the tax effects related to each component of other comprehensive earnings (loss).
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QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 (16) Commitments and Contingencies Litigation Qurate Retail 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 (17) Information About Qurate Retail's Operating Segments Qurate Retail, through its ownership interests in subsidiaries and 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, number of units shipped and revenue or sales per customer equivalent. In addition, Qurate Retail reviews nonfinancial measures such as unique website visitors, conversion rates and active customers, as appropriate. For segment reporting purposes, 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,”
QURATE RETAIL, INC. AND SUBSIDIARIES
For the year ended December 31,
Qurate Retail's operating segments are strategic business units that offer different products and services. They are managed separately because each segment requires different technologies, distribution channels and marketing strategies. The accounting policies of the segments that are also consolidated subsidiaries are the same as those described in the
Other Information
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to
Consolidated Financial Statements (Continued)
December 31,
consolidated segment Adjusted OIBDA to operating income and earnings (loss) from continuing operations before income taxes:
Preferred Stock
Common Stock
QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 At the Annual Meeting of Stockholders held on June 2, 2015, the Company’s stockholders approved an amendment to the Restated Certificate of Incorporation that increased (i) the total number of shares of the Company’s capital stock which the Company will have the authority to issue to 9,015 million shares, (ii) the number of shares of the Company’s capital stock designated as “Common Stock” to 8,965 million shares and (iii) the number of shares of Common Stock designated as “Series A Liberty Ventures Common Stock,” “Series B Liberty Ventures Common Stock” and “Series C Liberty Ventures Common Stock” to 400 million shares, 15 million shares and 400 million shares, respectively. At the Annual Meeting of Stockholders held on May 23, 2018, the Company’s stockholders approved an amendment to the Restated Certificate of Incorporation, which (i) eliminated the tracking stock capitalization structure of the Company and (ii) reclassified each outstanding share of Series A and Series B QVC Group common stock into one share of our Series A and Series B common stock, respectively. In addition, the amendment to the Restated Certificate of Incorporation changed (i) the total number of shares of the Company’s capital stock which the Company will have the authority to issue to 8,200 million shares, (ii) the number of shares of the Company’s capital stock designated as “Common Stock” to 8,150 million shares, (ii) the number of shares of Common Stock designated as “Series A Common Stock,” “Series B Common Stock” and “Series C Common Stock” to 4,000 million shares, 150 million shares and 4,000 million shares, respectively, and (iii) the number of shares of the Company’s capital stock designated as “Preferred Stock” to 50 million shares. As of December 31, In addition to the Series A and Series B Qurate Retail common stock, On December 29, 2017, in conjunction with the acquisition of HSN, Qurate Retail issued 53.6 million shares of Series A Qurate Retail common stock. See additional discussion about the acquisition in note 4. As discussed in note 1, on March 9, 2018, Qurate Retail completed the GCI Liberty Split-Off. As part of the GCI Liberty Split-Off, all outstanding shares of Series A Liberty Ventures common stock Purchases of Common Stock
During the year ended December 31, 2018, the Company repurchased 43,080,787 shares of Series A Qurate Retail common stock for aggregate cash consideration of $988 million. During the year ended December 31, 2019, the Company repurchased 24,329,610 shares of Series A Qurate Retail common stock for aggregate cash consideration of $392 million. All of the foregoing shares were repurchased pursuant to a previously announced share repurchase program and have been retired and returned to the status of authorized and available for issuance. II-68 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 (12) Related Party Transactions with Officers and Directors Chairman Compensation Arrangement In December 2014, the Compensation Committee of Qurate Retail approved a compensation arrangement, including term options discussed in note 13, for its current Chairman. The arrangement provides for a five year employment term beginning January 1, 2015 and ending December 31, 2019, with an annual base salary of $960,750, increasing annually by 5% of the prior year's base salary, and an annual target cash bonus equal to 250% of the applicable year's annual base salary. The arrangement also provides that, in the event the Chairman is terminated for "cause," he will be entitled only to his accrued base salary and any amounts due under applicable law and he will forfeit all rights to his unvested term options. If, however, the Chairman was terminated by Qurate Retail without cause or if he terminated his employment for “good reason,” the arrangement provided for him to receive his accrued base salary, his accrued but unpaid bonus and any amounts due under applicable law, a severance payment of 1.5 times his base salary during the year of his termination, a payment equal to $11.75 million pro rated based upon the elapsed number of days in the calendar year of termination, a payment equal to $17.5 million, and for his unvested term options to generally vest pro rata based on the portion of the term elapsed through the termination date plus 18 months and for all vested and accelerated options to remain exercisable until their respective expiration dates. If the Chairman terminated his employment without “good reason,” he would have been entitled to his accrued base salary, his accrued but unpaid bonus and any amounts due under applicable law, a payment equal to $11.75 million pro rated based upon the elapsed number of days in the calendar year of termination, and for his unvested term options to generally vest pro rata based on the portion of the term elapsed through the termination date and all vested and accelerated options to remain exercisable until their respective expiration dates. Lastly, in the case of the Chairman's death or his disability, the arrangement provided that he would have been entitled only to his accrued base salary and any amounts due under applicable law, a payment of 1.5 times his base salary during that year, a payment equal to $11.75 million pro rated based upon the elapsed number of days in the calendar year of termination, a payment equal to $17.5 million and for his unvested term options to fully vest and for his vested and accelerated term options to remain exercisable until their respective expiration dates. Pursuant to the Chairman’s compensation arrangement, he received aggregate target equity awards allocated between Qurate Retail and Liberty Media in the amounts of $16 million with respect to calendar year 2015, $17 million with respect to calendar year 2016, $18 million with respect to calendar year 2017, $19 million with respect to calendar year 2018 and $20 million with respect to calendar year 2019. In addition, Qurate Retail and Liberty Media’s compensation committees could have granted additional equity awards each year up to a maximum of 50% of the target amount allocated to Qurate Retail for the relevant year. See discussion in note 1 regarding the new compensation agreement with the Company’s Chairman effective January 1, 2020. II-69 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 CEO Compensation Agreement On September 27, 2015,
(13) Stock-Based Compensation Qurate Retail - Incentive Plans Pursuant to the
II-70 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 Qurate Retail – Grants The following table presents the number and weighted average GDFV of options granted by Qurate Retail during the years ended December 31, 2019, 2018 and 2017:
In addition to the stock option grants to the Qurate Retail Chairman of the Board, and in connection with his employment agreement, Qurate Retail granted time-based and performance-based restricted stock units ("RSUs"). During the year ended December 31, 2019, Qurate Retail granted 19 thousand time-based RSUs of Series B Qurate Retail common stock. Such RSUs had a GDFV of $17.90 per share at the time they were granted and cliff vested on March 11, 2019. During the years ended December 31, 2019, 2018 and 2017, II-71 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 In connection with the Option Exchange in 2017 (see below), Qurate Retail granted 5.9 million, 946 thousand and 1.1 million options to purchase shares of Series A Qurate Retail common stock, During the
The Option Exchange was considered a modification under ASC 718 – Stock Compensation, with the following impacts on compensation expense. The unamortized value of the unvested Eligible Options that were exercised, which was $14 million for LVNTA and LVNTB combined, will be expensed over the vesting period of the Restricted Shares attributable to the exercise of those options; of this amount, $6 million of expense was assumed by GCI Liberty as a result of the GCI Liberty Split-Off. The grant of new vested options resulted in incremental compensation expense in the fourth quarter of 2017 of $30 million for QRTEA, LVNTA and LVNTB combined. The grant of Unvested New Options resulted in incremental compensation expense totaling $6 million for LVNTA and LVNTB combined, which will be amortized over the vesting periods of those options; of this amount, $5.8 million of incremental compensation expense was assumed by GCI Liberty as a result of the GCI Liberty Split-Off. II-72 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 The Company has calculated the GDFV for all of its equity classified awards
volatilities used by Qurate Retail in the Black-Scholes-Merton Model for the 2019, 2018 and 2017 Qurate Retail and Liberty Ventures grants.
Qurate Retail - Outstanding Awards The following table presents the number and weighted average exercise price
As of December 31, As of December 31,
QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 Qurate Retail - Exercises The aggregate intrinsic value of all options exercised during the years ended December 31, 2019, 2018 and 2017
The aggregate
Qurate Retail - Restricted Stock
Subsidiaries of Qurate Retail sponsor 401(k) plans, which provide their employees an opportunity to make contributions to a trust for investment in Qurate Retail common stock, as well as other mutual funds. The Company's subsidiaries make matching contributions to their plans based on a percentage of the amount contributed by employees. Employer cash contributions to all plans aggregated $25 million, $26 million and
(15) Other Comprehensive Earnings (Loss) Accumulated other comprehensive earnings (loss) included in the Company’s consolidated balance sheets and II-74 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 The change in the components of accumulated other comprehensive earnings (loss), net of taxes ("AOCI"), is summarized as follows:
The components of other comprehensive earnings (loss) are reflected in Qurate Retail's consolidated statements of comprehensive earnings (loss) net of taxes. The following table summarizes the tax effects related to each component of other comprehensive earnings (loss).
II-75 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 (16) Commitments and Contingencies Litigation
pursuant to GAAP. Accordingly, Adjusted OIBDA should be considered in addition to, but not as a substitute for, operating income, net During the first quarter of 2019 the Company changed its reportable segments to combine HSN and QVC U.S. into one reportable segment called “QxH,” and presented prior period information to conform with this change. As a result of the QRG Initiatives and additional integration activities to drive synergies between HSN and QVC U.S., the chief operating decision maker began reviewing HSN and QVC U.S. information as one business unit during the first quarter of 2019. II-76 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 For the year ended December 31,
Performance Measures
Other Information
QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 The following table provides a reconciliation of consolidated segment Adjusted OIBDA to
Revenue by Geographic Area Revenue by geographic area based on the location of customers is as follows:
Long-lived Assets by Geographic Area
II-78 QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017 (18) Quarterly Financial Information (Unaudited)
As discussed in note 5, on March 9, 2018, Qurate Retail completed the GCI Liberty Split-Off. The unaudited quarterly information below for 2018 reflects Qurate Retail’s interest in Liberty Broadband as a discontinued operation for all periods presented.
QURATE RETAIL, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements (Continued) December 31, 2019, 2018 and 2017
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PART III The following required information is incorporated by reference to our definitive proxy statement for our 2020 Annual Meeting of Stockholders presently scheduled to be held in the second quarter of 2020:
We expect to file our definitive proxy statement for our 2020 Annual Meeting of Stockholders with the Securities and Exchange Commission on or before April 29, 2020. III-1 PART IV. Item 15. Exhibits and Financial Statement Schedules. (a)(1) Financial Statements Included in Part II of this report:
(a)(2) Financial Statement Schedules
(a)(3) Exhibits Listed below are the exhibits which are filed as a part of this Report (according to the number assigned to them in Item 601 of Regulation S-K):
IV-1
IV-2
IV-3
IV-4
IV-5
IV-6
IV-7
* Filed herewith. ** Furnished herewith. + This document has been identified as a management contract or compensatory plan or arrangement. Item 16. Form 10-K Summary. Not applicable. IV-8 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
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