UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2017March 31, 2018 

OR

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)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

Indicate by check mark whether the registrant has submitted electronically 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 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.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes ☐    No ☒

The number of outstanding shares of Liberty Interactive Corporation'sQurate Retail, Inc.'s common stock as of October 31, 2017April 30, 2018 was:

Table of Contents

LIBERTY INTERACTIVE CORPORATIONQURATE RETAIL, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(unaudited)

LIBERTY INTERACTIVE CORPORATIONQURATE RETAIL, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Continued)

(unaudited)

LIBERTY INTERACTIVE CORPORATIONQURATE RETAIL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements Of Operations

(unaudited)

LIBERTY INTERACTIVE CORPORATIONQURATE RETAIL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements Of Operations (Continued)

(unaudited)

LIBERTY INTERACTIVE CORPORATIONQURATE RETAIL, INC. AND SUBSIDIARIES

Condensed Consolidated Statements Of Comprehensive Earnings (Loss)

(unaudited)

Condensed Consolidated Statements Of Cash Flows

(unaudited)

(1)   Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of Qurate Retail, Inc. (formerly named Liberty Interactive Corporation, prior to the Transactions defined and described below, or “Liberty”) and its controlled subsidiaries (collectively, "Liberty,"Qurate Retail," the "Company," “Consolidated Liberty,Qurate Retail,” “us,” “we,” or “our” unless the context otherwise requires). All significant intercompany accounts and transactions have been eliminated in consolidation. Qurate Retail is made up of wholly-owned subsidiaries QVC, Inc. (“QVC”), zulily, llc (“zulily”), and HSN, Inc. (“HSNi” which includes its televised shopping business “HSN” and its catalog retail business “Cornerstone”), an equity investment in FTD Companies, Inc. (“FTD”) and an investment in ILG, Inc. (“ILG”).

Liberty, through its ownership of interests in subsidiaries and other companies,Qurate Retail is primarily engaged in the video and online commerce industries in North America, Europe and Asia andAsia. The businesses of the cable industry in North America. The  Company’s wholly-owned subsidiary,subsidiaries, QVC Inc.’s (“QVC”) business isand HSNi, are seasonal due to a higher volume of sales in the fourth calendar quarter related to year-end holiday shopping.

The accompanying (a) condensed consolidated balance sheet as of December 31, 2016,2017, which has been derived from audited financial statements, and (b) the interim unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for such periods have been included. Additionally, certain prior period amounts have been reclassified for comparability with current period presentation. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in Liberty'sQurate Retail's Annual Report on Form 10-K for the year ended December 31, 2016.2017.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. LibertyQurate Retail considers (i) fair value measurement, (ii) accounting for income taxes, (iii) assessments of other-than-temporary declines in fair value of its investments and (iv) estimates of retail-related adjustments and allowances to be its most significant estimates.   

On May 18, 2016,Prior to the Transactions (described and defined below), the Company utilized tracking stocks in its capital structure. A tracking stock is a type of common stock that the issuing company intends to reflect or "track" the economic performance of a particular business or "group," rather than the economic performance of the company as a whole. Qurate Retail had two tracking stocks—QVC Group common stock and Liberty completed a $2.4 billion investmentVentures common stock, which were intended to track and reflect the economic performance of the businesses, assets and liabilities attributed to the QVC Group and the Ventures Group, respectively.  The QVC Group was comprised of the Company’s wholly-owned subsidiaries QVC, zulily and HSNi (as of December 29, 2017), among other assets and liabilities.  The Ventures Group was comprised of businesses not included in the QVC Group including Evite, Inc. (“Evite”) and our interests in Liberty Broadband Corporation (“Liberty Broadband”) (for accounting purposes, a related party of the Company), LendingTree, Inc. (“LendingTree”), FTD, investments in connection with the merger of Charter Communications, Inc. ("Charter"(“Charter”) and Time Warner Cable Inc. ("TWC").ILG, among other assets and liabilities. 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 (“New 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. Liberty's investment in Liberty Broadband was funded using cash on hand and isCompany’s results are attributed to the QVC Group and the Ventures Group (as defined in note 2). See note 8 for additional information related to this investment.

Liberty also exchanged, in a tax-free transaction, its shares of TWC common stock for shares of New 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 New Charter Class A common stock held by Liberty in the exchange.through March 9, 2018.

On July 22, 2016, Liberty completed its previously announced spin-off (the “CommerceHub Spin-Off”)December 29, 2017, Qurate Retail acquired the approximately 62% of its formerHSNi it did not already own in an all-stock transaction making HSNi a wholly-owned subsidiary CommerceHub, Inc. (“CommerceHub”).  The CommerceHub Spin-Off was accomplished by the distribution by Libertysubsidiary. HSNi stockholders (other than Qurate Retail) received fixed consideration of a dividend of (i) 0.1 of a share of CommerceHub’s Series A common stock for each outstanding share 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 common stock for each outstanding share of Liberty’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 share1.65 shares of Series A and Series B Liberty VenturesQVC Group common stock as(“QVCA”) for each share of HSNi common stock. Qurate Retail issued 53.6 million shares QVCA common stock to HSNi stockholders.

On March 9, 2018, Qurate Retail completed the Record Date, in each case, with cash paid in lieutransactions contemplated by the Agreement and Plan of fractional shares. In September 2016,Reorganization (as amended, the Internal“reorganization agreement,” and the transactions contemplated thereby, the “Transactions”)  among General Communication, Inc. (“GCI”), an Alaska corporation, and Liberty Interactive LLC, a

Revenue ServiceDelaware limited liability company and a direct wholly-owned subsidiary of Liberty (“IRS”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”)) completed its review of the CommerceHub Spin-Off and informed Liberty that it agreed with the nontaxable characterization of the transaction. Liberty received an Issue Resolution Agreement from the IRS documenting this conclusion. See the discussion in note 3 regarding discontinued operations treatment for the CommerceHub Spin-Off.

On November 4, 2016, Liberty completed its previously announced split-off (the “Expedia Holdings Split-Off”)effected a reclassification and auto conversion of its former wholly-owned subsidiary Liberty Expedia Holdings, Inc. (“Expedia Holdings”). Atcommon stock. After market close on March 8, 2018, Qurate Retail’s board of directors approved the timereattribution of the Expedia Holdings Split-Off, Expedia Holdingscertain assets and liabilities from Qurate Retail’s Ventures Group to its QVC Group, which was comprised of, among other things, Liberty’s formereffective immediately. The reattributed assets and liabilities included cash, Qurate Retail’s interest in Expedia, Inc. (“Expedia”ILG, FTD, certain green energy investments, LI LLC’s exchangeable debentures, and certain tax benefits. 

Following these events, Qurate Retail acquired GCI (renamed “GCI Liberty”) through a reorganization in which certain Qurate Retail interests, assets and Liberty’s former wholly-owned subsidiary Bodybuilding.com,liabilities attributed to the Ventures Group were contributed (the “contribution”) to GCI Liberty in exchange for a controlling interest in GCI Liberty. Qurate Retail and LI LLC (“Bodybuilding”). On November 2, 2016, Expedia Holdings borrowed $350 million undercontributed 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 new margin loannumber of shares of GCI Liberty Class A Common Stock and distributed $299 million, neta number of certain debt related costs,shares of GCI Liberty Class B Common Stock equal to Liberty on November 4, 2016. The Expedia Holdings Split-Off was accomplished by the redemptionnumber of (i) 0.4outstanding shares 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 0.4on March 9, 2018, respectively, (b) cash and (c) the assumption of certain liabilities by GCI Liberty.

Following the contribution,  Qurate Retail effected a sharetax-free separation of Expedia Holdings Series B common stock onits controlling interest in the Redemption Date, in each case, with cash paid in lieu of any fractional sharescombined company (the “GCI Liberty Split-Off”), GCI Liberty, to the holders of Liberty Ventures common stock or Expedia Holdingsin full redemption of all outstanding shares of such stock, in which each outstanding share of Series A Liberty Ventures common stock (after taking into account allwas 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 shares ownedTransactions, QVC Group common stock became the only outstanding common stock of record by each holder thereof,Qurate Retail, and thus QVC Group common stock ceased to function as applicable).a tracking stock.

As a result of repurchases of Series A QVC Group common stock and the GCI Liberty Split-Off, the Company’s additional paid-in capital balance was in a deficit position as of March 31, 2018.  In February 2017,order to ensure that the IRS completed its reviewadditional paid-in capital account is not negative, we reclassified the amount of the Expedia Holdings Split-Off and informed Libertydeficit ($3.5 billion) at March 31, 2018 to retained earnings.

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

Qurate Retail has entered into certain agreements with Liberty receivedMedia Corporation ("LMC") (for accounting purposes, a related party of the Company), a separate publicly traded company. These agreements include a reorganization agreement, services agreement and facilities sharing agreement. Neither Qurate Retail nor LMC has any stock ownership, beneficial or otherwise, in the other.

The reorganization agreement with LMC provides for, among other things, provisions governing the relationship between Qurate Retail and LMC, including certain cross-indemnities. Pursuant to the services agreement, LMC provides Qurate Retail with certain general and administrative services including legal, tax, accounting, treasury and investor relations support. Qurate Retail reimburses LMC for direct, out-of-pocket expenses incurred by LMC in providing these services and for Qurate Retail's allocable portion of costs associated with any shared services or personnel based on an Issue Resolution Agreement fromestimated percentage of time spent providing services to Qurate Retail. Under the IRS documenting this conclusion. See the discussion in note 3 regarding discontinued operations treatmentfacilities sharing agreement, LMC shares office space and related amenities at its corporate headquarters with Qurate Retail. Under these various agreements, approximately $3 million and $3 million was reimbursable to LMC for the Expedia Holdings Split-Off.three months ended March 31, 2018 and 2017, respectively.    

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

 (2) Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Revenue Recognition.In May 2014, the Financial Accounting Standards Board (the “FASB”) issued new accounting guidance on revenue from contracts with customers.  The new guidance requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In March 2016, the FASB issued additional guidance which clarifies principal versus agent considerations, and in April 2016, the FASB issued further guidance which clarifies the identification of performance obligations and the implementation guidance for licensing. The updated guidance will replace most existingOn January 1, 2018, the Company adopted the 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. The Company has reviewed the applicable Accounting Standard Update (“ASU”) and has selectedaccounting standard using the modified retrospective transition method. In addition,The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company expectsdoes not expect the adoption of the new revenue standard to electhave a material impact to our net income on an ongoing basis. Refer to the practical expedient to not adjust the promised amount of considerationtable below for the effectsadoption of a significant financing component when its payment terms are lessthis guidance.

In accordance with the new revenue standard requirements, the following table illustrates the impact on our reported results in the condensed consolidated statements of operations assuming we did not adopt the new revenue standard on January 1, 2018. Other than one year, as well aspreviously discussed, upon the practical expedient to exclude from the measurementadoption of the transaction price salesnew revenue standard on January 1, 2018, there were no additional material adjustments to our condensed consolidated balance sheet as of March 31, 2018. 

The effect of changes of adoption is primarily due to changes in the timing of revenue recognition and similar taxes collected from customers. To date, the Company has concluded it will recognizeclassification of credit card income for the QVC-branded credit card and the HSN-branded credit card.  Additionally, for the three months ended March 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 recognizesthree months ended March 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. At the current time, the Company is continuing to evaluate the impact of the standard including its determination of whether the Company acts as principal or agent in certain vendor arrangements. The Company is also evaluating the impact of the standard on the presentation and timing ofIn addition, credit card income was recognized as an offset to selling, general and administrative expenses.  The Company also recognized a separate $91 million asset (included in other current assets) relating to the expected return of inventory and a  $204 million liability (included in other current liabilities) relating to its sales return reserve at March 31, 2018, instead of the net presentation that was used at December 31, 2017.