UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
| |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 20212022
OR
| |
| |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-33982
QURATE RETAIL, INC.
(Exact name of Registrant as specified in its charter)
| |
State of Delaware (State or other jurisdiction of | 84-1288730 (I.R.S. Employer |
| |
12300 Liberty Boulevard (Address of principal executive offices) | 80112 (Zip Code) |
Registrant's telephone number, including area code: (720) 875-5300
Securities registered pursuant to Section 12(b) of the Act:
| | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Series A common stock | QRTEA | The Nasdaq Stock Market LLC |
Series B common stock | QRTEB | The Nasdaq Stock Market LLC |
8.0% Series A Cumulative Redeemable Preferred Stock | QRTEP | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | |
Large Accelerated Filer ☒ | Accelerated Filer ☐ | Non-accelerated Filer ☐ | Smaller Reporting Company ☐ | Emerging Growth Company ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act. Yes ☐ No ☒
The number of outstanding shares of Qurate Retail, Inc.'s common stock as of October 31, 20212022 was:
| | | |
Series A common stock | |
| |
Series B common stock | |
| |
Table of Contents
I-2
QURATE RETAIL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(unaudited)
| | | | | | |
|
| September 30, |
| December 31, |
| |
| | 2021 | | 2020 | | |
| | amounts in millions | | |||
Assets | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 798 |
| 806 | |
Trade and other receivables, net of allowance for doubtful accounts of $103 million and $132 million, respectively | |
| 1,185 |
| 1,640 | |
Inventory, net | |
| 1,742 |
| 1,301 | |
Indemnification agreement receivable | | | 394 | | 345 | |
Other current assets | |
| 418 |
| 473 | |
Total current assets | |
| 4,537 |
| 4,565 | |
Property and equipment, net | |
| 1,196 |
| 1,300 | |
Intangible assets not subject to amortization (note 5): | | | | | | |
Goodwill | |
| 6,592 |
| 6,638 | |
Trademarks | |
| 3,168 |
| 3,168 | |
| |
| 9,760 |
| 9,806 | |
Intangible assets subject to amortization, net (note 5) | |
| 794 |
| 779 | |
Other assets, at cost, net of accumulated amortization | |
| 673 |
| 549 | |
Total assets | | $ | 16,960 |
| 16,999 | |
| | | | | | |
|
| September 30, |
| December 31, |
| |
| | 2022 | | 2021 | | |
| | amounts in millions | | |||
Assets | | | | | | |
Current assets: | | | | | | |
Cash and cash equivalents | | $ | 624 |
| 587 | |
Trade and other receivables, net of allowance for credit losses of $107 million and $107 million, respectively | |
| 1,027 |
| 1,679 | |
Inventory, net | |
| 1,737 |
| 1,623 | |
Indemnification agreement receivable | | | — | | 324 | |
Other current assets | |
| 189 |
| 235 | |
Total current assets | |
| 3,577 |
| 4,448 | |
Property and equipment, net | |
| 594 |
| 1,030 | |
Intangible assets not subject to amortization (note 5): | | | | | | |
Goodwill | |
| 3,430 |
| 6,339 | |
Trademarks | |
| 2,718 |
| 3,038 | |
| |
| 6,148 |
| 9,377 | |
Intangible assets subject to amortization, net (note 5) | |
| 645 |
| 745 | |
Other assets, at cost, net of accumulated amortization | |
| 832 |
| 602 | |
Total assets | | $ | 11,796 |
| 16,202 | |
(continued)
See accompanying notes to condensed consolidated financial statements.
I-3
QURATE RETAIL, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Continued)
(unaudited)
| | | | | | | | | | | | |
| | September 30, | | December 31, |
| | September 30, | | December 31, |
| ||
| | 2021 | | 2020 |
| | 2022 | | 2021 |
| ||
| | amounts in millions, |
| | amounts in millions, |
| ||||||
| | except share amounts |
| | except share amounts |
| ||||||
Liabilities and Equity |
| |
|
|
| |
| |
|
|
| |
Current liabilities: | | | | | | | | | | | | |
Accounts payable | | $ | 1,238 |
| 1,305 | | | $ | 977 |
| 1,429 | |
Accrued liabilities | |
| 1,034 |
| 1,418 | | |
| 940 |
| 1,236 | |
Current portion of debt, $1,983 million and $1,750 million measured at fair value (note 6) | |
| 1,983 |
| 1,750 | | ||||||
Current portion of debt, $389 million and $1,315 million measured at fair value (note 6) | |
| 603 |
| 1,315 | | ||||||
Other current liabilities | |
| 190 |
| 231 | | |
| 214 |
| 244 | |
Total current liabilities | |
| 4,445 |
| 4,704 | | |
| 2,734 |
| 4,224 | |
Long-term debt (note 6) | |
| 5,311 |
| 5,186 | | ||||||
Long-term debt, $310 million and zero measured at fair value (note 6) | |
| 5,303 |
| 5,674 | | ||||||
Deferred income tax liabilities | |
| 1,318 |
| 1,359 | | |
| 1,447 |
| 1,350 | |
Preferred stock (note 7) | | | 1,260 | | 1,249 | | | | 1,266 | | 1,261 | |
Other liabilities | |
| 712 |
| 768 | | |
| 698 |
| 707 | |
Total liabilities | |
| 13,046 |
| 13,266 | | |
| 11,448 |
| 13,216 | |
Equity | | | | | | | | | | | | |
Stockholders' equity: | | | | | | | | | | | | |
Series A common stock, $.01 par value. Authorized 4,000,000,000 shares; issued and outstanding 391,202,469 shares at September 30, 2021 and 382,165,550 shares at December 31, 2020 | |
| 4 |
| 4 | | ||||||
Series B common stock, $.01 par value. Authorized 150,000,000 shares; issued and outstanding 8,177,190 shares at September 30, 2021 and 29,366,492 shares at December 31, 2020 | |
| — |
| — | | ||||||
Series C common stock, $.01 par value. Authorized 400,000,000 shares; 0 shares issued | | | — | | — | | ||||||
Series A common stock, $.01 par value. Authorized 4,000,000,000 shares; issued and outstanding 373,833,469 shares at September 30, 2022 and 371,132,684 shares at December 31, 2021 | |
| 4 |
| 4 | | ||||||
Series B common stock, $.01 par value. Authorized 150,000,000 shares; issued and outstanding 8,373,512 shares at September 30, 2022 and 8,163,190 shares at December 31, 2021 | |
| — |
| — | | ||||||
Series C common stock, $.01 par value. Authorized 400,000,000 shares; no shares issued | | | — | | — | | ||||||
Additional paid-in capital | |
| — |
| — | | |
| 38 |
| — | |
Accumulated other comprehensive earnings (loss), net of taxes | |
| (60) |
| 72 | | |
| (194) |
| (79) | |
Retained earnings | |
| 3,822 |
| 3,522 | | |
| 387 |
| 2,925 | |
Total stockholders' equity | |
| 3,766 |
| 3,598 | | |
| 235 |
| 2,850 | |
Noncontrolling interests in equity of subsidiaries | |
| 148 |
| 135 | | |
| 113 |
| 136 | |
Total equity | |
| 3,914 |
| 3,733 | | |
| 348 |
| 2,986 | |
Commitments and contingencies (note 9) | | | | | | | ||||||
Commitments and contingencies (note 8) | | | | | | | ||||||
Total liabilities and equity | | $ | 16,960 |
| 16,999 | | | $ | 11,796 |
| 16,202 | |
See accompanying notes to condensed consolidated financial statements.
I-4
QURATE RETAIL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(unaudited)
| | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| ||||||
| | September 30, | | September 30, |
| ||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||
| | amounts in millions, except per share amounts |
| ||||||||
Total revenue, net | | $ | 3,144 |
| 3,383 |
| | 9,985 |
| 9,725 | |
Operating costs and expenses: | | | | | | | | | | | |
Cost of retail sales (exclusive of depreciation shown separately below) | |
| 2,069 |
| 2,178 |
| | 6,504 |
| 6,328 | |
Operating expense | |
| 204 |
| 203 |
| | 627 |
| 605 | |
Selling, general and administrative, including stock-based compensation (note 2) | |
| 458 |
| 455 |
| | 1,378 |
| 1,323 | |
Depreciation and amortization | |
| 139 |
| 141 |
| | 396 |
| 427 | |
| |
| 2,870 |
| 2,977 |
| | 8,905 |
| 8,683 | |
Operating income (loss) | |
| 274 |
| 406 |
| | 1,080 |
| 1,042 | |
Other income (expense): | | | | | | | | | | | |
Interest expense | |
| (121) |
| (98) |
| | (356) |
| (290) | |
Share of earnings (losses) of affiliates, net | |
| (24) |
| (32) |
| | (78) |
| (96) | |
Realized and unrealized gains (losses) on financial instruments, net (note 4) | |
| 41 |
| (12) |
| | 101 |
| (127) | |
Gains (losses) on transactions, net | | | — | | 223 | | | — | | 224 | |
Other, net | |
| — |
| (65) |
| | (10) |
| (65) | |
| |
| (104) |
| 16 |
| | (343) |
| (354) | |
Earnings (loss) before income taxes | |
| 170 |
| 422 |
| | 737 |
| 688 | |
Income tax (expense) benefit | |
| (20) |
| (70) |
| | (113) |
| (111) | |
Net earnings (loss) | | | 150 | | 352 | | | 624 | | 577 | |
Less net earnings (loss) attributable to the noncontrolling interests | |
| 23 |
| 14 |
| | 69 |
| 39 | |
Net earnings (loss) attributable to Qurate Retail, Inc. shareholders | | $ | 127 |
| 338 | | | 555 |
| 538 | |
| | | | | | | | | | | |
Basic net earnings (loss) attributable to Series A and Series B Qurate Retail, Inc. shareholders per common share (note 3): | | $ | 0.31 |
| 0.81 | | | 1.36 | | 1.29 | |
Diluted net earnings (loss) attributable to Series A and Series B Qurate Retail, Inc. shareholders per common share (note 3): | | $ | 0.31 |
| 0.80 | | | 1.32 | | 1.28 | |
| | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| ||||||
| | September 30, | | September 30, |
| ||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||
| | amounts in millions, except per share amounts |
| ||||||||
Total revenue, net | | $ | 2,744 |
| 3,144 |
| | 8,580 |
| 9,985 | |
Operating costs and expenses: | | | | | | | | | | | |
Cost of goods sold (exclusive of depreciation shown separately below) | |
| 1,905 |
| 2,069 |
| | 5,885 |
| 6,504 | |
Operating expense | |
| 205 |
| 204 |
| | 599 |
| 627 | |
Selling, general and administrative, including stock-based compensation (note 2) | |
| 464 |
| 458 |
| | 1,370 |
| 1,378 | |
Restructuring and fire related costs, net of (recoveries) (note 8) | | | (134) | | — | | | (123) | | — | |
Depreciation and amortization | |
| 107 |
| 139 |
| | 371 |
| 396 | |
Impairment of intangible assets (note 5) | | | 3,081 | | — | | | 3,081 | | — | |
(Gains) losses on sales of fixed assets, net (note 8) | | | (277) | | — | | | (520) | | — | |
| |
| 5,351 |
| 2,870 |
| | 10,663 |
| 8,905 | |
Operating income (loss) | |
| (2,607) |
| 274 |
| | (2,083) |
| 1,080 | |
Other income (expense): | | | | | | | | | | | |
Interest expense | |
| (107) |
| (121) |
| | (343) |
| (356) | |
Share of earnings (losses) of affiliates, net | |
| — |
| (24) |
| | (1) |
| (78) | |
Realized and unrealized gains (losses) on financial instruments, net (note 4) | |
| (8) |
| 41 |
| | 29 |
| 101 | |
Tax sharing income (expense) with Liberty Broadband | | | 36 | | (3) | | | 78 | | (16) | |
Other, net | |
| 37 |
| 3 |
| | 83 |
| 6 | |
| |
| (42) |
| (104) |
| | (154) |
| (343) | |
Earnings (loss) before income taxes | |
| (2,649) |
| 170 |
| | (2,237) |
| 737 | |
Income tax (expense) benefit | |
| (87) |
| (20) |
| | (265) |
| (113) | |
Net earnings (loss) | | | (2,736) | | 150 | | | (2,502) | | 624 | |
Less net earnings (loss) attributable to the noncontrolling interests | |
| 11 |
| 23 |
| | 41 |
| 69 | |
Net earnings (loss) attributable to Qurate Retail, Inc. shareholders | | $ | (2,747) |
| 127 | | | (2,543) |
| 555 | |
| | | | | | | | | | | |
Basic net earnings (loss) attributable to Series A and Series B Qurate Retail, Inc. shareholders per common share (note 3): | | $ | (7.21) |
| 0.31 | | | (6.69) | | 1.36 | |
Diluted net earnings (loss) attributable to Series A and Series B Qurate Retail, Inc. shareholders per common share (note 3): | | $ | (7.21) |
| 0.31 | | | (6.69) | | 1.32 | |
See accompanying notes to condensed consolidated financial statements.
I-5
QURATE RETAIL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Earnings (Loss)
(unaudited)
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | Three months ended | | Nine months ended |
| ||||||||||
| | September 30, | | September 30, |
| | September 30, | | September 30, |
| ||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||
| | amounts in millions |
| | amounts in millions |
| ||||||||||||||
Net earnings (loss) | | $ | 150 |
| 352 |
| 624 |
| 577 | | | $ | (2,736) |
| 150 |
| (2,502) |
| 624 | |
Other comprehensive earnings (loss), net of taxes: | | | | | | | | | | | | | | | | | | | | |
Foreign currency translation adjustments | |
| (28) |
| 49 |
| (92) |
| 45 | | |
| (127) |
| (28) |
| (330) |
| (92) | |
Recognition of previously unrealized losses (gains) on debt, net | |
| — |
| — |
| — |
| (1) | | | | (14) | | — | | (14) | | — | |
Comprehensive earnings (loss) attributable to debt credit risk adjustments | | | (13) | | (68) | | (50) | | 31 | | | | 30 | | (13) | | 204 | | (50) | |
Other comprehensive earnings (loss) | |
| (41) |
| (19) |
| (142) |
| 75 | | |
| (111) |
| (41) |
| (140) |
| (142) | |
Comprehensive earnings (loss) | |
| 109 |
| 333 |
| 482 |
| 652 | | |
| (2,847) |
| 109 |
| (2,642) |
| 482 | |
Less comprehensive earnings (loss) attributable to the noncontrolling interests | |
| 22 |
| 16 |
| 59 |
| 43 | | |
| 5 |
| 22 |
| 16 |
| 59 | |
Comprehensive earnings (loss) attributable to Qurate Retail, Inc. shareholders | | $ | 87 |
| 317 |
| 423 |
| 609 | | | $ | (2,852) |
| 87 |
| (2,658) |
| 423 | |
See accompanying notes to condensed consolidated financial statements.
I-6
QURATE RETAIL, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(unaudited)
| | | | | | |
| | Nine months ended |
| |||
| | September 30, |
| |||
|
| 2021 |
| 2020 |
| |
| | amounts in millions |
| |||
Cash flows from operating activities: | | | | | | |
Net earnings (loss) | | $ | 624 |
| 577 | |
Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | |
| 396 |
| 427 | |
Stock-based compensation | |
| 54 |
| 46 | |
Share of (earnings) losses of affiliates, net | |
| 78 |
| 96 | |
Realized and unrealized (gains) losses on financial instruments, net | |
| (101) |
| 127 | |
(Gains) losses on transactions, net | | | — | | (224) | |
Deferred income tax expense (benefit) | |
| (35) |
| 19 | |
Other, net | |
| 15 |
| 52 | |
Changes in operating assets and liabilities | | | | | | |
Decrease (increase) in accounts receivable | |
| 439 |
| 720 | |
Decrease (increase) in inventory | | | (453) | | (63) | |
Decrease (increase) in prepaid expenses and other assets | | | 85 | | 69 | |
(Decrease) increase in trade accounts payable | | | (48) | | 52 | |
(Decrease) increase in accrued and other liabilities | | | (339) | | (43) | |
Net cash provided (used) by operating activities | |
| 715 |
| 1,855 | |
Cash flows from investing activities: | | | | | | |
Investments in and loans to cost and equity investees | |
| (177) |
| (88) | |
Capital expenditures | |
| (169) |
| (165) | |
Expenditures for television distribution rights | | | (184) | | (41) | |
Cash proceeds from dispositions of investments | | | 10 | | 269 | |
Proceeds from sale of fixed assets | | | 40 | | — | |
Other investing activities, net | | | (3) | | — | |
Net cash provided (used) by investing activities | |
| (483) |
| (25) | |
Cash flows from financing activities: | | | | | | |
Borrowings of debt | |
| 394 |
| 1,300 | |
Repayments of debt | |
| (284) |
| (2,077) | |
Repurchases of Qurate Retail common stock | |
| (216) |
| — | |
Withholding taxes on net settlements of stock-based compensation | |
| (25) |
| (3) | |
Payments for issuances of financial instruments | | | (107) | | (25) | |
Proceeds from settlements of financial instruments | | | 88 | | 31 | |
Dividends paid to noncontrolling interest | | | (46) | | (46) | |
Dividends paid to common shareholders | | | (14) | | (626) | |
Other financing activities, net | |
| (9) |
| (18) | |
Net cash provided (used) by financing activities | |
| (219) |
| (1,464) | |
Effect of foreign currency exchange rates on cash, cash equivalents and restricted cash | |
| (20) |
| 5 | |
Net increase (decrease) in cash, cash equivalents and restricted cash | |
| (7) |
| 371 | |
Cash, cash equivalents and restricted cash at beginning of period | |
| 814 |
| 681 | |
Cash, cash equivalents and restricted cash at end of period | | $ | 807 |
| 1,052 | |
| | | | | | |
| | Nine months ended |
| |||
| | September 30, |
| |||
|
| 2022 |
| 2021 |
| |
| | amounts in millions |
| |||
Cash flows from operating activities: | | | | | | |
Net earnings (loss) | | $ | (2,502) |
| 624 | |
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | |
| 371 |
| 396 | |
Impairment of intangible assets | | | 3,081 | | — | |
Stock-based compensation | |
| 46 |
| 54 | |
Share of (earnings) losses of affiliates, net | |
| 1 |
| 78 | |
Realized and unrealized (gains) losses on financial instruments, net | |
| (29) |
| (101) | |
(Gains) losses on sales of fixed assets, net | | | (520) | | — | |
Gain on insurance proceeds | | | (139) | | — | |
Insurance proceeds received for operating losses | | | 96 | | — | |
Deferred income tax expense (benefit) | |
| 45 |
| (35) | |
Other, net | |
| (68) |
| 15 | |
Changes in operating assets and liabilities | | | | | | |
Decrease (increase) in accounts receivable | |
| 483 |
| 439 | |
Decrease (increase) in inventory | | | (163) | | (453) | |
Decrease (increase) in prepaid expenses and other assets | | | 98 | | 85 | |
(Decrease) increase in trade accounts payable | | | (418) | | (48) | |
(Decrease) increase in accrued and other liabilities | | | (419) | | (339) | |
Net cash provided (used) by operating activities | |
| (37) |
| 715 | |
Cash flows from investing activities: | | | | | | |
Investments in and loans to cost and equity investees | |
| (7) |
| (177) | |
Capital expenditures | |
| (171) |
| (169) | |
Expenditures for television distribution rights | | | (36) | | (184) | |
Cash proceeds from dispositions of investments | | | 12 | | 10 | |
Proceeds from sale of fixed assets | | | 701 | | 40 | |
Insurance proceeds | | | 184 | | — | |
Other investing activities, net | | | 21 | | (3) | |
Net cash provided (used) by investing activities | |
| 704 |
| (483) | |
Cash flows from financing activities: | | | | | | |
Borrowings of debt | |
| 2,069 |
| 394 | |
Repayments of debt | |
| (2,577) |
| (284) | |
Repurchases of Qurate Retail common stock | |
| — |
| (216) | |
Withholding taxes on net settlements of stock-based compensation | |
| (7) |
| (25) | |
Payments for issuances of financial instruments | | | — | | (107) | |
Proceeds from settlements of financial instruments | | | — | | 88 | |
Dividends paid to noncontrolling interest | |
| (39) |
| (46) | |
Dividends paid to common shareholders | | | (11) | | (14) | |
Other financing activities, net | | | (6) | | (9) | |
Net cash provided (used) by financing activities | |
| (571) |
| (219) | |
Effect of foreign currency exchange rates on cash, cash equivalents and restricted cash | |
| (59) |
| (20) | |
Net increase (decrease) in cash, cash equivalents and restricted cash | |
| 37 |
| (7) | |
Cash, cash equivalents and restricted cash at beginning of period | |
| 596 |
| 814 | |
Cash, cash equivalents and restricted cash at end of period | | $ | 633 |
| 807 | |
The following table reconciles cash, cash equivalents and restricted cash reported in our condensed consolidated balance sheets to the total amount presented in our condensed consolidated statements of cash flows:
| | | | | | | | | | |
| | | September 30, | | December 31, | | | September 30, | | December 31, |
| | | 2021 | | 2020 | | | 2022 | | 2021 |
| | in millions | | in millions | ||||||
Cash and cash equivalents | | $ | 798 | | 806 | | $ | 624 | | 587 |
Restricted cash included in other current assets | | | 9 | | 8 | | | 9 | | 9 |
Total cash, cash equivalents and restricted cash in the condensed consolidated statement of cash flows | | $ | 807 | | 814 | | $ | 633 | | 596 |
See accompanying notes to condensed consolidated financial statements.
I-7
QURATE RETAIL, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Equity
(unaudited)
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Stockholders' Equity | | | | | | |||||||||||
| | | | | | | | | | | Accumulated | | | | | | | |
| | | | | | | | | Additional | | other | | | | Noncontrolling | | |
|
| | Preferred | | Common stock | | paid-in | | comprehensive | | Retained | | interest in equity | | Total |
| |||
|
| stock |
| Series A |
| Series B |
| capital |
| earnings (loss) |
| earnings |
| of subsidiaries |
| equity |
| |
| | amounts in millions |
| |||||||||||||||
Balance at January 1, 2022 | | $ | — | | 4 | | — | | — | | (79) | | 2,925 | | 136 | | 2,986 | |
Net earnings (loss) | |
| — | | — | | — | | — | | — | | (2,543) | | 41 | | (2,502) | |
Other comprehensive earnings (loss) | |
| — | | — | | — | | — | | (115) | | — | | (25) | | (140) | |
Stock-based compensation | | | — | | — | | — | | 44 | | — | | — | | — | | 44 | |
Distribution to noncontrolling interest | | | — | | — | | — | | — | | — | | — | | (39) | | (39) | |
Withholding taxes on net share settlements of stock-based compensation | | | — | | — | | — | | (7) | | — | | — | | — | | (7) | |
Other | | | — | | — | | — | | 1 | | — | | 5 | | — | | 6 | |
Balance at September 30, 2022 | | $ | — | | 4 | | — | | 38 | | (194) | | 387 | | 113 | | 348 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Stockholders' Equity | | | | | | |||||||||||
| | | | | | | | | | | Accumulated | | | | | | | |
| | | | | | | | | Additional | | other | | | | Noncontrolling | | |
|
| | Preferred | | Common stock | | paid-in | | comprehensive | | Retained | | interest in equity | | Total |
| |||
|
| stock |
| Series A |
| Series B |
| capital |
| earnings (loss) |
| earnings |
| of subsidiaries |
| equity |
| |
| | amounts in millions |
| |||||||||||||||
Balance at January 1, 2021 | | $ | — | | 4 | | — | | — | | 72 | | 3,522 | | 135 | | 3,733 | |
Net earnings (loss) | |
| — | | — | | — | | — | | — | | 555 | | 69 | | 624 | |
Other comprehensive earnings (loss) | |
| — | | — | | — | | — | | (132) | | — | | (10) | | (142) | |
Stock compensation | | | — | | — | | — | | 51 | | — | | — | | — | | 51 | |
Series A Qurate Retail stock repurchases | |
| — | | — | | — | | (239) | | — | | — | | — | | (239) | |
Distribution to noncontrolling interest | | | — | | — | | — | | — | | — | | — | | (46) | | (46) | |
Withholding taxes on net share settlements of stock-based compensation | | | — | | — | | — | | (25) | | — | | — | | — | | (25) | |
Other | | | — | | — | | — | | (46) | | — | | 4 | | — | | (42) | |
Reclassification | | | — | | — | | — | | 259 | | — | | (259) | | — | | — | |
Balance at September 30, 2021 | | $ | — | | 4 | | — | | — | | (60) | | 3,822 | | 148 | | 3,914 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Stockholders' Equity | | | | | | |||||||||||
| | | | | | | | | | | Accumulated | | | | | | | |
| | | | | | | Additional | | other | | | | Noncontrolling | | | | ||
| | Preferred | | Common stock | | paid-in | | comprehensive | | Retained | | interest in equity | | Total | | |||
|
| stock |
| Series A |
| Series B |
| capital |
| earnings (loss) |
| earnings |
| of subsidiaries |
| equity | | |
| | amounts in millions | | |||||||||||||||
Balance at June 30, 2022 | | $ | — | | 4 | | — | | 23 | | (89) | | 3,134 | | 119 | | 3,191 | |
Net earnings (loss) | |
| — | | — | | — | | — | | — | | (2,747) | | 11 | | (2,736) | |
Other comprehensive earnings (loss) | |
| — | | — | | — | | — | | (105) | | — | | (6) | | (111) | |
Stock-based compensation | | | — | | — | | — | | 14 | | — | | — | | — | | 14 | |
Distribution to noncontrolling interest | | | — | | — | | — | | — | | — | | — | | (11) | | (11) | |
Withholding taxes on net share settlements of stock-based compensation | | | — | | — | | — | | 1 | | — | | — | | — | | 1 | |
Other | | | — | | — | | — | | — | | — | | — | | — | | — | |
Balance at September 30, 2022 | | $ | — | | 4 | | — | | 38 | | (194) | | 387 | | 113 | | 348 | |
I-8
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Stockholders' Equity | | | | | | |||||||||||
| | | | | | | | | | | Accumulated | | | | | | | |
| | | | | | | Additional | | other | | | | Noncontrolling | | | | ||
| | Preferred | | Common stock | | paid-in | | comprehensive | | Retained | | interest in equity | | Total | | |||
|
| stock |
| Series A |
| Series B |
| capital |
| earnings (loss) |
| earnings |
| of subsidiaries |
| equity | | |
| | amounts in millions | | |||||||||||||||
Balance at June 30, 2021 | | $ | — | | 4 | | — | | — | | (20) | | 3,787 | | 141 | | 3,912 | |
Net earnings (loss) | |
| — | | — | | — | | — | | — | | 127 | | 23 | | 150 | |
Other comprehensive earnings (loss) | |
| — | | — | | — | | — | | (40) | | — | | (1) | | (41) | |
Stock compensation | | | — | | — | | — | | 18 | | — | | — | | — | | 18 | |
Series A Qurate Retail stock repurchases | | | — | | — | | — | | (134) | | — | | — | | — | | (134) | |
Distribution to noncontrolling interest | | | — | | — | | — | | — | | — | | — | | (15) | | (15) | |
Withholding taxes on net share settlements of stock-based compensation | | | — | | — | | — | | (1) | | — | | — | | — | | (1) | |
Other | | | — | | — | | — | | 24 | | — | | 1 | | — | | 25 | |
Reclassification | | | — | | — | | — | | 93 | | — | | (93) | | — | | — | |
Balance at September 30, 2021 | | $ | — | | 4 | | — | | — | | (60) | | 3,822 | | 148 | | 3,914 | |
I-8
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Stockholders' Equity | | | | | | |||||||||||
| | | | | | | | | | | Accumulated | | | | | | | |
| | | | | | | Additional | | other | | | | Noncontrolling | | | | ||
| | Preferred | | Common stock | | paid-in | | comprehensive | | Retained | | interest in equity | | Total | | |||
|
| stock |
| Series A |
| Series B |
| capital |
| earnings (loss) |
| earnings |
| of subsidiaries |
| equity | | |
| | amounts in millions | | |||||||||||||||
Balance at January 1, 2020 | | $ | — | | 4 | | — | | — | | (55) | | 4,891 | | 132 | | 4,972 | |
Net earnings (loss) | |
| — | | — | | — | | — | | — | | 538 | | 39 | | 577 | |
Other comprehensive earnings (loss) | |
| — | | — | | — | | — | | 71 | | — | | 4 | | 75 | |
Stock compensation | | | — | | — | | — | | 44 | | — | | — | | — | | 44 | |
Distribution to noncontrolling interest | | | — | | — | | — | | — | | — | | — | | (46) | | (46) | |
Distribution of dividends to common shareholders | | | — | | — | | — | | — | | — | | (1,898) | | — | | (1,898) | |
Other | | | — | | — | | — | | (17) | | — | | — | | — | | (17) | |
Balance at September 30, 2020 | | $ | — |
| 4 |
| — |
| 27 |
| 16 |
| 3,531 |
| 129 |
| 3,707 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Stockholders' Equity | | | | | | |||||||||||
| | | | | | | | | | | Accumulated | | | | | | | |
| | | | | | | Additional | | other | | | | Noncontrolling | | | | ||
| | Preferred | | Common stock | | paid-in | | comprehensive | | Retained | | interest in equity | | Total | | |||
|
| stock |
| Series A |
| Series B |
| capital |
| earnings (loss) |
| earnings |
| of subsidiaries |
| equity | | |
| | amounts in millions | | |||||||||||||||
Balance at January 1, 2021 | | $ | — | | 4 | | — | | — | | 72 | | 3,478 | | 135 | | 3,689 | |
Net earnings (loss) | |
| — | | — | | — | | — | | — | | 555 | | 69 | | 624 | |
Other comprehensive income (loss) | |
| — | | — | | — | | — | | (132) | | — | | (10) | | (142) | |
Stock-based compensation | | | — | | — | | — | | 51 | | — | | — | | — | | 51 | |
Series A Qurate Retail stock repurchases | | | — | | — | | — | | (239) | | — | | — | | — | | (239) | |
Distribution to noncontrolling interest | | | — | | — | | — | | — | | — | | — | | (46) | | (46) | |
Withholding taxes on net share settlements of stock-based compensation | | | — | | — | | — | | (25) | | — | | — | | — | | (25) | |
Other | | | — | | — | | — | | (46) | | — | | 4 | | — | | (42) | |
Reclassification | | | — | | — | | — | | 259 | | — | | (259) | | — | | — | |
Balance at September 30, 2021 | | $ | — |
| 4 |
| — |
| — |
| (60) |
| 3,778 |
| 148 |
| 3,870 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Stockholders' Equity | | | | | | |||||||||||
| | | | | Common stock | | | | | | | | Accumulated | | | | ||
| | | | | Qurate | | Additional | | other | | | | Noncontrolling | | | | ||
| | Preferred | | Retail | | paid-in | | comprehensive | | Retained | | interest in equity | | Total | | |||
|
| stock |
| Series A |
| Series B |
| capital |
| earnings (loss) |
| earnings |
| of subsidiaries |
| equity | | |
| | amounts in millions | | |||||||||||||||
Balance at June 30, 2020 | | $ | — | | 4 | | — | | 25 | | 37 | | 5,091 | | 129 | | 5,286 | |
Net earnings (loss) | |
| — | | — | | — | | — | | — | | 338 | | 14 | | 352 | |
Other comprehensive income (loss) | |
| — | | — | | — | | — | | (21) | | — | | 2 | | (19) | |
Stock compensation | | | — | | — | | — | | 17 | | — | | — | | — | | 17 | |
Distribution to noncontrolling interest | | | — | | — | | — | | — | | — | | — | | (16) | | (16) | |
Distribution of dividends to common shareholders | | | — | | — | | — | | — | | — | | (1,898) | | — | | (1,898) | |
Other | | | — | | — | | — | | (15) | | — | | — | | — | | (15) | |
Balance at September 30, 2020 | | $ | — | | 4 | | — | | 27 | | 16 | | 3,531 | | 129 | | 3,707 | |
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| | Stockholders' Equity | | | | | | |||||||||||
| | | | | Common stock | | | | | | | | Accumulated | | | | ||
| | | | | Qurate | | Additional | | other | | | | Noncontrolling | | | | ||
| | Preferred | | Retail | | paid-in | | comprehensive | | Retained | | interest in equity | | Total | | |||
|
| stock |
| Series A |
| Series B |
| capital |
| earnings (loss) |
| earnings |
| of subsidiaries |
| equity | | |
| | amounts in millions | | |||||||||||||||
Balance at June 30, 2021 | | $ | — | | 4 | | — | | — | | (20) | | 3,743 | | 141 | | 3,868 | |
Net earnings (loss) | |
| — | | — | | — | | — | | — | | 127 | | 23 | | 150 | |
Other comprehensive income (loss) | |
| — | | — | | — | | — | | (40) | | — | | (1) | | (41) | |
Stock-based compensation | | | — | | — | | — | | 18 | | — | | — | | — | | 18 | |
Series A Qurate Retail stock repurchases | | | — | | — | | — | | (134) | | — | | — | | — | | (134) | |
Distribution to noncontrolling interest | | | — | | — | | — | | — | | — | | — | | (15) | | (15) | |
Withholding taxes on net share settlements of stock-based compensation | | | — | | — | | — | | (1) | | — | | — | | — | | (1) | |
Other | | | — | | — | | — | | 24 | | — | | 1 | | — | | 25 | |
Reclassification | | | — | | — | | — | | 93 | | — | | (93) | | — | | — | |
Balance at September 30, 2021 | | $ | — | | 4 | | — | | — | | (60) | | 3,778 | | 148 | | 3,870 | |
See accompanying notes to condensed consolidated financial statements.
I-9
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(unaudited)
(1) Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of Qurate Retail, Inc. and its controlled subsidiaries (collectively, "Qurate Retail," the "Company," “Consolidated Qurate Retail,” “us,” “we,” or “our” unless the context otherwise requires). All significant intercompany accounts and transactions have been eliminated in consolidation. Qurate Retail is made up of wholly-owned subsidiaries QVC, Inc. (“QVC”), which includes HSN, Inc. (“HSN”), Cornerstone Brands, Inc. (“Cornerstone”), Zulily, LLC (“Zulily”), and other cost and equity method investments.
Qurate Retail is primarily engaged in the video and online commerce industries in North America, Europe and Asia. The businesses of the Company’s wholly-owned subsidiaries, QVC, Cornerstone and Zulily, are seasonal due to a higher volume of sales in the fourth calendar quarter related to year-end holiday shopping.
The accompanying (a) condensed consolidated balance sheet as of December 31, 2020,2021, which has been derived from audited financial statements, and (b) the interim unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X as promulgated by the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the results for such periods have been included. Additionally, certain prior period amounts have been reclassified for comparability with current period presentation. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in Qurate Retail's Annual Report on Form 10-K for the year ended December 31, 20202021 (the “2020“2021 10-K”).
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Qurate Retail considers (i) fair value measurements, (ii) accounting for income taxes, and (iii) estimates of retail-related adjustments and allowances to be its most significant estimates.
In December 2019, a new coronavirus (“COVID-19”) was reported to have surfaced in Wuhan, China and has subsequently spread across the globe causing a global pandemic, impacting all countries where Qurate Retail operates. As a result of the spread of COVID-19, certain local governmental agencies have imposed travel restrictions, local quarantines or stay at home restrictions to contain the spread, which has caused a significant disruption to most sectors of the economy.
Management is not presently aware of any events or circumstances arising from COVID-19 that would require the Company to update the estimates, judgments or revise the carrying value of our assets or liabilities. Management's estimates may change, however, as new events occur and additional information is obtained, and any such changes will be recognized in the consolidated financial statements. Actual results could differ from estimates, and any such differences may be material to our financial statements.
As a result of repurchases of Series A Qurate Retail common stock (“QRTEA”) and other equity transactions, the Company’s additional paid-in capital balance was in a deficit position as of September 30, 2021. In order to ensure that the additional paid-in capital account is not negative, we reclassified the amount of the deficit ($259 million) at September 30, 2021 to retained earnings.
Qurate Retail has entered into certain agreements with Liberty Media Corporation ("LMC") (for accounting purposes, a related party of the Company), a separate publicly traded company. These agreements include a reorganization agreement, services agreement and facilities sharing agreement. As a result of certain corporate transactions, LMC and Qurate Retail may have obligations to each other for certain tax related matters. Neither Qurate Retail nor LMC has any stock ownership, beneficial or otherwise, in the other. In connection with a split-off transaction that occurred in the first quarter of 2018 (the “GCI Liberty Split-Off”), Qurate Retail and GCI Liberty, Inc. (“GCI Liberty”) entered into a tax sharing agreement. Pursuant to the tax sharing agreement, GCI Liberty agreed to indemnify Qurate Retail for taxes and tax-related losses
I-10
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
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-percent50-
I-10
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
percent or greater interest (measured by vote or value) in the stock of GCI Liberty (or any successor corporation). Following a merger between Liberty Broadband Corporation (“Liberty Broadband”) and GCI Liberty, Liberty Broadband (for accounting purposes, a related party of the Company) has assumed the tax sharing agreement.
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” or “Mr. Maffei”). 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., and 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 17%13% for the Company.
The reorganization agreement with LMC provides for, among other things, provisions governing the relationship between Qurate Retail and LMC, including certain cross-indemnities. Pursuant to the services agreement, LMC provides Qurate Retail with certain general and administrative services including legal, tax, accounting, treasury and investor relations support. Qurate Retail reimburses LMC for direct, out-of-pocket expenses incurred by LMC in providing these services and for Qurate Retail's allocable portion of costs associated with any shared services or personnel based on an estimated percentage of time spent providing services to Qurate Retail. Under the facilities sharing agreement, LMC shares office space and related amenities at its corporate headquarters with Qurate Retail. Under these various agreements, approximately $1 million and $2 million was reimbursable to LMC for both of the three months ended September 30, 2022 and 2021, respectively, and 2020,$6 million and $8 million and $7 million was reimbursable to LMC for the nine months ended September 30, 20212022 and 2020,2021, respectively. Qurate Retail had a tax sharing payable to LMC and Liberty Broadband in the amount of approximately $122$18 million and $129$96 million as of September 30, 20212022 and December 31, 2020,2021, respectively, included in Other liabilities in the condensed consolidated balance sheets.
Revision of Prior Period Financial InformationOn November 4,
The Company has revised its condensed consolidated financial statements and related notes included herein to correct immaterial errors in depreciation expense reported in periods prior to 2021, Qurate Retail announced that its Board of Directors declared a special cash dividendalong with deferred tax adjustments. Revisions have been reflected in the amount of $1.25 per common share for an aggregate cash dividend of approximately $495comparative 2021 financial statements to reduce property and equipment, net by $47 million, based on shares outstandingreduce deferred income tax liabilities by $3 million and reduce retained earnings by $44 million, including the opening balance as of October 31, 2021 (to be updated for actual shares outstanding as of the record date). The dividend is payable on November 22, 2021 to stockholders of record of Qurate Retail’s Series A and Series B common stock as of the close of business on November 15,January 1, 2021.
(2) Stock-Based Compensation
The Company has granted to certain of its directors, employees and employees of its subsidiaries, restricted stock (“RSAs”), restricted stock units (“RSUs”) and options to purchase shares of the Company’s common stock (collectively, "Awards"). The Company measures the cost of employee services received in exchange for an equity classified Award (such as stock options and restricted stock) based on the grant-date fair value (“GDFV”) of the Award, and recognizes that cost over the period during which the employee is required to provide service (usually the vesting period of the Award). The Company measures the cost of employee services received in exchange for a liability classified Award based on the current fair value of the Award, and remeasures the fair value of the Award at each reporting date.
Included in selling, general and administrative expenses in the accompanying condensed consolidated statements of operations are $15 million and $19 million of stock-based compensation during both of the three months ended September 30, 2022 and 2021, respectively, and 2020,$46 million and $54 million and $46 million of stock-based compensation during the nine months ended September 30, 20212022 and 2020,2021, respectively.
I-11
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Qurate Retail—RSUs
The following table presents the number and weighted average GDFV of optionsRSUs granted by the Company during the nine months ended September 30, 2021:2022:
| | | | | | | | | | | | |
| | Nine months ended | | | Nine months ended | | ||||||
| | September 30, 2021 | | | September 30, 2022 | | ||||||
| | Options Granted (000's) | | Weighted Average GDFV | | | RSUs Granted (000's) | | Weighted Average GDFV | | ||
| | | | | | | | | | | | |
Series A Qurate Retail common stock, QVC and HSN employees (1) | | 895 | | $ | 6.75 | | ||||||
Series A Qurate Retail common stock, Zulily employees (1) | | 79 | | $ | 6.74 | | ||||||
Series A Qurate Retail common stock, Qurate Retail employees (2) | | 63 | | $ | 6.18 | | ||||||
Series A Qurate Retail common stock, David Rawlinson II (3) | | 1,185 | | $ | 5.02 | | ||||||
Series A Qurate Retail common stock, subsidiary employees (1) | | 11,101 | | $ | 4.82 | | ||||||
Series A Qurate Retail common stock, Qurate Retail employees and directors (2) | | 217 | | $ | 4.91 | | ||||||
Series A Qurate Retail common stock, Qurate Retail President and CEO (3) | | 596 | | $ | 4.91 | | ||||||
Series B Qurate Retail common stock, Qurate Retail Chairman of the Board (4) | | 327 | | $ | 4.95 | |
(1) | Grants mainly vest |
(2) | Grants mainly vest |
(3) | Grant vests |
(4) | Grant vests one year from the month of grant, subject to the |
During the nine months ended September 30, 2021, Qurate Retail granted to employees and directors 4.9 million RSUs of QRTEA, which RSUs have a GDFV of $12.87 per share and generally vest annually over four years. In connection with Gregory B. Maffei’s employment agreement, during the nine months ended September 30, 2021, Qurate Retail granted 229 thousand
For awards that are performance-based, RSUs of QRTEA to Mr. Maffei. The Series A RSUs had a GDFV of $12.90 per share at the time they were granted and will cliff vest one year from the month of grant, subject to the satisfaction of certain performance objectives. As a result of the Letter Agreement discussed in Note 8, during the nine months ended September 30, 2021, Qurate Retail granted 1.1 million time-based RSAs of Series B Qurate Retail common stock (“QRTEB”) to Mr. Maffei, which RSAs have a GDFV of $13.65 per share and vest in 2 equal tranches on December 10, 2024 and June 3, 2026, subject to earlier vesting under certain circumstances. During the nine months ended September 30, 2021, Qurate Retail also granted 423 thousand performance-based RSUs and 423 thousand time-based RSUs of QRTEA to Mike George, the former Chief Executive Officer (see note 8). Both the performance-based and time-based Series A RSUs had a GDFV of $12.90 per share at the time they were granted. The time-based RSUs vest on December 10, 2021, and the performance-based RSUs will cliff vest one year from the month of grant, subject to the satisfaction of certain performance objectives. Also during the nine months ended September 30, 2021, Qurate Retail granted 143 thousand performance-based RSUs and 509 thousand time-based RSUs of QRTEA to Mr. Rawlinson in connection with his employment agreement. Both the performance-based and time-based Series A RSUs had a GDFV of $10.50 per share at the time they were granted. The time-based RSUs vest over three years, and the performance-based RSUs cliff vest in March 2022, subject to the satisfaction of certain performance objectives. Performance objectives, which are subjective, are considered in determining the timing and amount of compensation expense recognized. When the satisfaction of the performance objectives becomes probable, the Company records compensation expense. The probability of satisfying the performance objectives is assessed at the end of each reporting period.
The Company has calculatedPursuant to the GDFV for all of its equity classified Awards and any subsequent remeasurement of its liability classified Awards using the Black-Scholes-Merton Model. The Company estimates the expected termterms of the Awards basedStock Exchange Agreement, dated as of June 3, 2021, by and between Mr. Maffei and the Company, on historical exercise and forfeiture data. The volatility used inMarch 25, 2022, Mr. Maffei transferred to the calculation for Awards is based on the historical volatilityCompany an aggregate of 229,022 shares of Series A common stock of Qurate Retail'sRetail (“QRTEA”) received by Mr. Maffei upon vesting of the performance-based restricted stock unit award granted to Mr. Maffei on March 10, 2021 and in exchange, the implied volatilityCompany issued to Mr. Maffei an equivalent number of publicly tradedshares of Series B common stock of Qurate Retail options. The Company uses a 0 dividend rate and(“QRTEB”). Each share of QRTEB stock is convertible, at the risk-free rate for Treasury Bonds with a term similar to thatoption of the subject options.holder, into one share of QRTEA.
Qurate Retail—Outstanding Awards
The following tables present the number and weighted average exercise price ("WAEP") of the Awardsoptions 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.options.
| | | | | | | | | | | | |
| | | | |||||||||
|
| |
| | |
| Weighted |
| Aggregate |
| ||
| | | | | | | average | | intrinsic | | ||
| | Series A | | | | | remaining | | value | | ||
| | (000's) | | WAEP | | life | | (millions) | | |||
Options outstanding at January 1, 2022 |
| 42,110 | | $ | 9.23 | | | | | | | |
Granted |
| — | | $ | — | | | | | | | |
Exercised |
| (392) | | $ | 2.26 | | | | | | | |
Forfeited/Cancelled |
| (4,705) | | $ | 10.70 | | | | | | | |
Options outstanding at September 30, 2022 |
| 37,013 | | $ | 9.12 |
| 2.8 | years | | $ | — | |
Options exercisable at September 30, 2022 |
| 25,260 | | $ | 10.81 |
| 2.0 | years | | $ | — | |
I-12
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
| | | | | | | | | | | | |
| | | | |||||||||
|
| |
| | |
| Weighted |
| Aggregate |
| ||
| | | | | | | average | | intrinsic | | ||
| | Series A | | | | | remaining | | value | | ||
| | (000's) | | WAEP | | life | | (millions) | | |||
Outstanding at January 1, 2021 |
| 40,553 | | $ | 10.61 | | | | | | | |
Granted |
| 2,222 | | $ | 11.63 | | | | | | | |
Exercised |
| (2,304) | | $ | 5.94 | | | | | | | |
Forfeited/Cancelled |
| (3,210) | | $ | 12.96 | | | | | | | |
Outstanding at September 30, 2021 |
| 37,261 | | $ | 10.76 |
| 3.7 | years | | $ | 79 | |
Exercisable at September 30, 2021 |
| 22,420 | | $ | 13.65 |
| 2.5 | years | | $ | 17 | |
| | | | | | | | | | | | |
| | | | |||||||||
|
| |
| | |
| Weighted |
| Aggregate |
| ||
| | | | | | | average | | intrinsic | | ||
| | Series B | | | | | remaining | | value | | ||
| | (000's) | | WAEP | | life | | (millions) | | |||
Options outstanding at January 1, 2022 |
| 2,221 | | $ | 12.25 | | | | | | | |
Granted |
| — | | $ | — | | | | | | | |
Exercised |
| — | | $ | — | | | | | | | |
Forfeited/Cancelled | | — | | $ | — | | | | | | | |
Options outstanding at September 30, 2022 |
| 2,221 | | $ | 12.25 |
| 1.0 | year | | $ | — | |
Options exercisable at September 30, 2022 |
| 2,221 | | $ | 12.25 |
| 1.0 | year | | $ | — | |
| | | | | | | | | | | | |
| | | | |||||||||
|
| |
| | |
| Weighted |
| Aggregate |
| ||
| | | | | | | average | | intrinsic | | ||
| | Series B | | | | | remaining | | value | | ||
| | (000's) | | WAEP | | life | | (millions) | | |||
Outstanding at January 1, 2021 |
| 3,243 | | $ | 15.39 | | | | | | | |
Granted |
| — | | $ | — | | | | | | | |
Exercised |
| — | | $ | — | | | | | | | |
Forfeited/Cancelled | | (1,335) | | $ | 16.93 | | | | | | | |
Outstanding at September 30, 2021 |
| 1,908 | | $ | 14.31 |
| 2.0 | years | | $ | — | |
Exercisable at September 30, 2021 |
| 1,908 | | $ | 14.31 |
| 2.0 | years | | $ | — | |
The following table presents the number and weighted average GDFV of RSUs granted to certain officers, employees and directors of the Company.
| | | | | | | | | | | |
| | | | Weighted | | | | Weighted | | ||
| | Series A | | Average | | Series B | | Average | | ||
| | (000's) | | GDFV | | (000's) | | GDFV | | ||
RSUs outstanding at January 1, 2022 |
| 12,905 | | $ | 9.38 | | — | | $ | — | |
Granted |
| 11,914 | | $ | 4.83 | | 327 | | $ | 4.95 | |
Vested |
| (3,859) | | $ | 10.02 | | — | | $ | — | |
Forfeited/Cancelled |
| (3,479) | | $ | 7.54 | | — | | $ | — | |
RSUs outstanding at September 30, 2022 |
| 17,481 | | $ | 6.50 | | 327 | | $ | 4.95 |
|
As of September 30, 2021,2022, Qurate Retail also had 12.9 million QRTEA RSUs and 1.1 million QRTEB RSAs outstanding withand 95 thousand Qurate Retail 8.0% Series A Cumulative Redeemable Preferred Stock RSAs and RSUs outstanding. The QRTEB unvested RSAs had a weighted average GDFV of $9.76 and $13.65 per share, respectively.and 82 thousand of the Qurate Retail 8.0% Series A Cumulative Redeemable Preferred Stock unvested RSUs had an incremental cost of $49.50 per share.
As of September 30, 2021,2022, the total unrecognized compensation cost related to unvested Awards was approximately $121$105 million. Such amount will be recognized in the Company's consolidated statements of operations over a weighted average period of approximately 2.62.3 years.
As of September 30, 2021,2022, Qurate Retail reserved for issuance upon exercise of outstanding stock options approximately 37.337.0 million shares of QRTEA and 1.92.2 million shares of QRTEB common stock.
(3) Earnings (Loss) Per Common Share
Basic earnings (loss) per common share ("EPS") is computed by dividing net earnings (loss) by the weighted average number of common shares outstanding ("WASO") for the period. Diluted EPS presents the dilutive effect on a per share basis of potential common shares as if they had been converted at the beginning of the periods presented. Potentially dilutive shares are excluded from the computation of diluted EPS during periods in which losses are reported since the result would be antidilutive.
Excluded from diluted EPS for the three months ended September 30, 2021 and 2020 are 22 million and 29 million potential common shares, respectively, because their inclusion would have been antidilutive. Excluded from diluted EPS for the nine months ended September 30, 2021 and 2020 are 22 million and 29 million potential common shares, respectively, because their inclusion would have been antidilutive.
| | | | | | | | | |
| | Qurate Retail Common Stock | | ||||||
|
| Three months ended |
| Nine months ended | | ||||
| | September 30, | | September 30, | | ||||
| | 2021 | | 2020 | | 2021 | | 2020 | |
| | number of shares in millions | | ||||||
Basic WASO |
| 404 | | 417 |
| 408 |
| 417 | |
Potentially dilutive shares |
| 12 | | 4 |
| 12 |
| 3 | |
Diluted WASO |
| 416 | | 421 |
| 420 |
| 420 | |
I-13
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Excluded from diluted EPS for the three months ended September 30, 2022 and 2021 are 34 million and 22 million potential common shares, respectively, because their inclusion would have been antidilutive. Excluded from diluted EPS for the nine months ended September 30, 2022 and 2021 are 32 million and 22 million potential common shares, respectively, because their inclusion would have been antidilutive.
| | | | | | | | | |
| | Qurate Retail Common Stock | | ||||||
|
| Three months ended |
| Nine months ended | | ||||
| | September 30, | | September 30, | | ||||
| | 2022 | | 2021 | | 2022 | | 2021 | |
| | number of shares in millions | | ||||||
Basic WASO |
| 381 | | 404 |
| 380 |
| 408 | |
Potentially dilutive shares |
| 1 | | 12 |
| 3 |
| 12 | |
Diluted WASO |
| 382 | | 416 |
| 383 |
| 420 | |
(4) Assets and Liabilities Measured at Fair Value
For assets and liabilities required to be reported at fair value, GAAP provides a hierarchy that prioritizes inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted market prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs, other than quoted market prices included within Level 1, that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs for the asset or liability.
The Company's assets and liabilities measured at fair value are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at | | Fair Value Measurements at |
| | Fair Value Measurements at | | Fair Value Measurements at |
| ||||||||||||||||||
| | September 30, 2021 | | December 31, 2020 |
| | September 30, 2022 | | December 31, 2021 |
| ||||||||||||||||||
|
| | |
| Quoted |
| |
| |
| Quoted |
| |
|
| | |
| Quoted |
| |
| |
| Quoted |
| |
|
| | | | | prices | | | | | | prices | | |
| | | | | prices | | | | | | prices | | |
|
| | | | | in active | | Significant | | | | in active | | Significant |
| | | | | in active | | Significant | | | | in active | | Significant |
|
| | | | | markets for | | other | | | | markets for | | other |
| | | | | markets for | | other | | | | markets for | | other |
|
| | | | | identical | | observable | | | | identical | | observable |
| | | | | identical | | observable | | | | identical | | observable |
|
| | | | | assets | | inputs | | | | assets | | inputs |
| | | | | assets | | inputs | | | | assets | | inputs |
|
Description | | Total | | (Level 1) | | (Level 2) | | Total | | (Level 1) | | (Level 2) |
| | Total | | (Level 1) | | (Level 2) | | Total | | (Level 1) | | (Level 2) |
| ||
| | amounts in millions |
| | amounts in millions |
| ||||||||||||||||||||||
Cash equivalents | | $ | 260 |
| 260 |
| — |
| 290 |
| 290 |
| — | | | $ | 314 |
| 314 |
| — |
| 149 |
| 149 |
| — | |
Indemnification asset | | $ | 394 | | — | | 394 | | 345 | | — | | 345 | | | $ | 35 | | — | | 35 | | 324 | | — | | 324 | |
Financial instrument asset | | $ | 92 | | — | | 92 | | 23 | | — | | 23 | | ||||||||||||||
Debt | | $ | 1,983 |
| — |
| 1,983 |
| 1,750 |
| — |
| 1,750 | | | $ | 699 |
| — |
| 699 |
| 1,315 |
| — |
| 1,315 | |
The majority of the Company's Level 2 financial assets and liabilities are primarily debt instruments and derivative instruments with quoted market prices that are not considered to be traded on "active markets," as defined in GAAP. The fair values for such instruments are derived from a typical model using observable market data as the significant inputs.
The indemnification asset relates to Liberty Broadband’s agreement to indemnify Liberty Interactive LLC (“LI LLC”) and pertains to the ability of holders of LI LLC’s 1.75% exchangeable debentures due 2046 (the “1.75% Exchangeable Debentures”) to exercise their exchange right according to the terms of the debentures on or before October 5, 2023. Such amount will equal the difference between the exchange value and par value of the 1.75% Exchangeable Debentures at the time the exchange occurs. The indemnification asset recorded in the condensed consolidated balance sheets as of September 30, 20212022 represents the fair value of the estimated exchange feature included in the 1.75% Exchangeable Debentures primarily based on market observable inputs (Level 2). As of September 30, 2021,2022, a holder of the 1.75% Exchangeable Debentures hasdoes not have the ability to exchange and, accordingly, such indemnification asset is included as a currentlong-term asset in our condensed consolidated balance sheet as of that date.
Realized and Unrealized Gains (Losses) on Financial Instruments
Realized and unrealized gains (losses) on financial instruments are comprised of changes in the fair value of the following:
| | | | | | | | | | |
| | Three months ended | | Nine months ended |
| |||||
| | September 30, | | September 30, |
| |||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| |
| | amounts in millions |
| |||||||
Equity securities | | | 48 | | 2 | | 98 | | (2) | |
Exchangeable senior debentures | |
| (50) |
| (145) |
| (183) |
| (225) | |
Indemnification asset | | | 8 | | 94 | | 49 | | 107 | |
Other financial instruments | | | 35 | | 37 | | 137 | | (7) | |
| | $ | 41 |
| (12) |
| 101 |
| (127) | |
I-14
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Realized and Unrealized Gains (Losses) on Financial Instruments
Realized and unrealized gains (losses) on financial instruments are comprised of changes in the fair value of the following:
| | | | | | | | | | |
| | Three months ended | | Nine months ended |
| |||||
| | September 30, | | September 30, |
| |||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| |
| | amounts in millions |
| |||||||
Equity securities | | | — | | 48 | | (5) | | 98 | |
Exchangeable senior debentures | |
| 130 |
| (50) |
| 320 |
| (183) | |
Indemnification asset | | | (138) | | 8 | | (287) | | 49 | |
Other financial instruments | | | — | | 35 | | 1 | | 137 | |
| | $ | (8) |
| 41 |
| 29 |
| 101 | |
The Company has elected to account for its exchangeable debt using the fair value option. Changes in the fair value of the exchangeable senior debentures recognized in the condensed consolidated statement of operations are primarily due to market factors primarily driven by changes in the fair value of the underlying shares into which the debt is exchangeable. The Company isolates the portion of the unrealized gain (loss) attributable to the change in the instrument specific credit risk and recognizes such amount in other comprehensive earnings (loss). The change in the fair value of the exchangeable senior debentures attributable to changes in the instrument specific credit risk was a lossgain of $16$22 million and a loss of $90$16 million for the three months ended September 30, 2022 and 2021, respectively, and 2020, respectively,a gain of $246 million and a loss of $60 million and a gain of $39 million for the nine months ended September 30, 20212022 and 2020,2021, respectively. The cumulative change was a gain of $133$394 million as of September 30, 2021.2022, net of the recognition of previously unrecognized gains and losses.
(5) Intangible Assets
Goodwill
Changes in the carrying amount of goodwill are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Corporate and | | | | | | | | | | | | Corporate and | | | |
|
| QxH | | QVC Int'l | | Zulily |
| Other |
| Total |
|
| QxH | | QVC Int'l | | Zulily |
| Other |
| Total |
| ||
| | amounts in millions |
| | amounts in millions |
| ||||||||||||||||||
Balance at January 1, 2021 | | $ | 5,228 | | 921 | | 477 |
| 12 |
| 6,638 | | ||||||||||||
Balance at January 1, 2022 | | $ | 5,228 | | 855 | | 244 |
| 12 |
| 6,339 | | ||||||||||||
Impairments | | | (2,535) | | — | | (226) | | — | | (2,761) | | ||||||||||||
Foreign currency translation adjustments | |
| — | | (46) | | — |
| — |
| (46) | | |
| — | | (148) | | — |
| — |
| (148) | |
Balance at September 30, 2021 | | $ | 5,228 | | 875 | | 477 |
| 12 |
| 6,592 | | ||||||||||||
Balance at September 30, 2022 | | $ | 2,693 | | 707 | | 18 |
| 12 |
| 3,430 | |
Intangible Assets SubjectAs a result of recent financial performance of certain subsidiary businesses, macroeconomic conditions including inflation and higher interest rates and a decline in the Company’s stock price, the Company initiated a process to Amortization
Amortization expenseevaluate those subsidiaries’ current business models and long-term business strategies. It was determined during the third quarter of 2022 that an indication of impairment existed for the QxH and Zulily reporting units related to their tradenames and goodwill. With the assistance of a third party specialist, the fair value of the tradenames was determined using the relief from royalty method, primarily using a discounted cash flow model using QxH’s and Zulily’s projections of future operating performance (income approach) and applying a royalty rate (market approach) (Level 3), and impairments in the amounts of $180 million and $140 million for QxH (related to the HSN tradename) and Zulily, respectively, were recorded during the third quarter of 2022, in the impairment of intangible assets with finite useful livesline item in the consolidated statements of operations. With the assistance of a third party specialist, the fair value of the QxH and Zulily reporting units was $94determined using a discounted cash flow method (Level 3), and goodwill impairments in the amounts of $2,535 million and $89$226 million for QxH and Zulily, respectively, were recorded during the three months ended September 30, 2021 and 2020, respectively, and $261 million and $274 million forthird quarter of 2022, in the nine months ended September 30, 2021 and 2020, respectively. Based on its amortizableimpairment of intangible assets asline item in the consolidated statements of September 30, 2021, Qurate Retail expects that amortization expense will be as follows for the next five years (amounts in millions):
| | | | |
Remainder of 2021 |
| $ | 97 | |
2022 | | $ | 303 | |
2023 | | $ | 179 | |
2024 | | $ | 103 | |
2025 | | $ | 51 | |
operations.
I-15
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
As of September 30, 2022 the Company had accumulated goodwill impairment losses of $899 million attributed to the Zulily reporting unit, and goodwill impairment losses of $2,535 million attributed to the QxH reporting unit.
Based on the quantitative assessment performed during the third quarter and the resulting impairment losses recorded, the estimated fair values of the HSN and Zulily tradenames and the QxH and Zulily reporting units equal their carrying values as of September 30, 2022.
Intangible Assets Subject to Amortization
Amortization expense for intangible assets with finite useful lives was $81 million and $94 million for the three months ended September 30, 2022 and 2021, respectively, and $241 million and $261 million for the nine months ended September 30, 2022 and 2021, respectively. Based on its amortizable intangible assets as of September 30, 2022, Qurate Retail expects that amortization expense will be as follows for the next five years (amounts in millions):
| | | | |
Remainder of 2022 |
| $ | 87 | |
2023 | | $ | 254 | |
2024 | | $ | 165 | |
2025 | | $ | 79 | |
2026 | | $ | 50 | |
(6) Long-Term Debt
Debt is summarized as follows:
| | | | | | | | | | | | | | | | | | |
| | Outstanding | | | | | |
| | Outstanding | | | | | |
| ||
| | principal at | | Carrying value |
| | principal at | | Carrying value |
| ||||||||
|
| September 30, 2021 |
| September 30, 2021 |
| December 31, 2020 |
|
| September 30, 2022 |
| September 30, 2022 |
| December 31, 2021 |
| ||||
| | amounts in millions |
| | amounts in millions |
| ||||||||||||
Corporate level debentures | | | | | | | | | | | | | | | | | | |
8.5% Senior Debentures due 2029 | | $ | 287 |
| | 286 |
| 285 | | | $ | 287 |
| | 286 |
| 286 | |
8.25% Senior Debentures due 2030 | |
| 505 |
| | 502 |
| 502 | | |
| 505 |
| | 503 |
| 503 | |
4% Exchangeable Senior Debentures due 2029 | | | 429 | | | 363 | | 362 | | | | 354 | | | 176 | | 328 | |
3.75% Exchangeable Senior Debentures due 2030 | | | 431 | | | 357 | | 346 | | | | 430 | | | 213 | | 347 | |
1.75% Exchangeable Senior Debentures due 2046 | | | 332 | | | 714 | | 649 | | | | 330 | | | 310 | | 640 | |
Subsidiary level notes and facilities | | | | | | | | | | | | | | | | | | |
QVC 4.375% Senior Secured Notes due 2023 | |
| 750 |
| | 750 |
| 750 | | |
| 214 |
| | 214 |
| 750 | |
QVC 4.85% Senior Secured Notes due 2024 | |
| 600 |
| | 600 |
| 600 | | |
| 600 |
| | 600 |
| 600 | |
QVC 4.45% Senior Secured Notes due 2025 | | | 600 | | | 599 | | 599 | | | | 600 | | | 599 | | 599 | |
QVC 4.75% Senior Secured Notes due 2027 | | | 575 | | | 575 | | 575 | | | | 575 | | | 575 | | 575 | |
QVC 4.375% Senior Secured Notes due 2028 | | | 500 | | | 500 | | 500 | | | | 500 | | | 500 | | 500 | |
QVC 5.45% Senior Secured Notes due 2034 | | | 400 | | | 399 | | 399 | | | | 400 | | | 399 | | 399 | |
QVC 5.95% Senior Secured Notes due 2043 | |
| 300 |
| | 300 |
| 300 | | |
| 300 |
| | 300 |
| 300 | |
QVC 6.375% Senior Secured Notes due 2067 | | | 225 | | | 225 | | 225 | | | | 225 | | | 225 | | 225 | |
QVC 6.25% Senior Secured Notes due 2068 | | | 500 | | | 500 | | 500 | | | | 500 | | | 500 | | 500 | |
3.5% Exchangeable Senior Debentures due 2031 | |
| 210 |
| | 549 |
| 393 | | |||||||||
QVC Senior Secured Credit Facility | | | 120 | | | 120 | | — | | | | 545 | | | 545 | | 481 | |
Deferred loan costs | | | — | | | (45) | | (49) | | | | — | | | (39) | | (44) | |
Total consolidated Qurate Retail debt | | $ | 6,764 |
| | 7,294 |
| 6,936 | | | $ | 6,365 |
| | 5,906 |
| 6,989 | |
Less current classification | | | |
| | (1,983) |
| (1,750) | | | | |
| | (603) |
| (1,315) | |
Total long-term debt | | | | | $ | 5,311 |
| 5,186 | | | | | | $ | 5,303 |
| 5,674 | |
I-16
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
QVC Senior Secured Notes
In June 2022, QVC completed its purchase of $536 million of the outstanding 4.375% Senior Secured Notes due 2023 (the "2023 Notes") pursuant to a cash tender offer to purchase any and all of its outstanding 2023 Notes (the “Tender Offer”). As a result of the Tender Offer, the Company recorded a loss on extinguishment of debt in the condensed consolidated statements of operations of $6 million for the nine months ended September 30, 2022. As of September 30, 2022, the remaining outstanding 4.375% Senior Secured Notes due 2023 are classified within current portion of debt as they mature in less than one year.
QVC Senior Secured Credit Facility
On December 31, 2018,October 27, 2021, QVC enteredamended and restated its latest credit agreement (as amended and restated, the “Fifth Amended and Restated Credit Agreement”) and refinanced QVC’s existing bank credit facility by entering into a fifth amended and restated agreement with QVC, Zulily, Cornerstone, and QVC Global Corporate Holdings, LLC (“QVC Global”), each a direct or indirect wholly owned subsidiary of Qurate Retail, as borrowers (QVC, Zulily, Cornerstone and QVC Global, collectively, the Fourth“Borrowers”), JPMorgan Chase Bank, N.A., as administrative agent, and the other parties named therein.
The Fifth Amended and Restated Credit Agreement with Zulily as co-borrower (collectively, the “Borrowers”) which is a multi-currency facility that providesproviding for a $2.95$3.25 billion revolving credit facility (the “New Credit Facility”), with a $450 million sub-limit for standby letters of credit and $1.5 billionan alternative currency revolving sub-limit equal to 50% of uncommitted incrementalthe revolving loan commitments or incremental term loans.thereunder. The FourthNew Credit Facility may be borrowed by any Borrower, with each Borrower jointly and severally liable for the outstanding borrowings. Borrowings under the Fifth Amended and Restated Credit Agreement includesbear interest at either the alternate base rate (such rate, the “ABR Rate”) or a $400 million tranche that may be borrowed by QVC or Zulily, withLIBOR-based rate (or the applicable non-U.S. Dollar equivalent rate) (such rate, the “Term Benchmark/RFR Rate”) at the applicable Borrower’s election in each case plus a $50 million sub-limit for standby letters of credit. The remaining $2.55 billion and any incremental loans may be borrowed only by QVC.margin. Borrowings that are alternate base rateABR Rate loans will bear interest at a per annum rate equal to the base rate plus a margin that varies between 0.25% to 0.75%and 0.625% depending on the BorrowersBorrowers’ combined ratio of Consolidated Total Debtconsolidated total debt to Consolidatedconsolidated EBITDA (the “Combined Consolidated Leverage Ratio”“consolidated leverage ratio”). Borrowings that are London Interbank OfferedTerm Benchmark/RFR Rate (“LIBOR”) loans will bear interest at a per annum rate equal to the applicable LIBOR rate plus a margin that varies between 1.25% and 1.75%1.625% depending on the Borrowers’ Combined Consolidated Leverage Ratio.consolidated leverage ratio. Each loan may be prepaid at any time and from time to time without penalty other than customary breakage costs. No mandatory prepayments will be required other than when borrowings and letter of credit usage exceed availability; provided that, if Zulily, ceases to be controlled by Qurate Retail,Cornerstone, QVC Global or any other borrower under the New Credit Facility (other than QVC) is removed, at the election of QVC, as a borrower thereunder, all of its loans must be repaid and its letters of credit are terminated or cash collateralized. Any amounts prepaid on the New Credit Facility may be reborrowed.
The facility maturesloans under the New Credit Facility are scheduled to mature on December 31, 2023.October 27, 2026. Payment of the loans may be accelerated following certain customary events of default.
The payment and performance of the Borrowers’ obligations (including Zulily’s obligations) under the FourthFifth Amended and Restated Credit Agreement are guaranteed by each of QVC’s, QVC Global’s, Zulily’s and Cornerstone’s Material Domestic Subsidiaries (as defined in the FourthFifth Amended and Restated Credit Agreement)., if any, and certain other subsidiaries of any Borrower that such Borrower has chosen to provide guarantees. Further, the borrowings under the FourthFifth Amended and Restated
I-16
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Credit Agreement are secured, pari passu with QVC’s existing notes, by a pledge of all of QVC’s equity interests. In addition,The borrowings under the paymentFifth Amended and performance of the Borrowers’ obligations with respect to the $400 million tranche available to both QVC and ZulilyRestated Credit Agreement are also guaranteed by Zulily and secured by a pledge of all of Zulily’s and Cornerstone’s equity interests.
The FourthFifth Amended and Restated Credit Agreement contains certain affirmative and negative covenants, including certain restrictions on QVC and Zulilythe Borrowers and each of their respective restricted subsidiaries (subject to certain exceptions) with respect to, among other things: incurring additional indebtedness; creating liens on property or assets; making certain loans or investments; selling or disposing of assets; paying certain dividends and other restricted payments; dissolving, consolidating or merging; entering into certain transactions with affiliates; entering into sale or leaseback transactions; restricting subsidiary distributions; and limiting QVC’sthe Borrowers’ consolidated leverage ratio, and the Borrowers’ Combined Consolidated Leverage Ratio.ratio.
I-17
QURATE RETAIL, INC. AND SUBSIDIARIES
During the nine months ended September 30, 2021, Zulily borrowed $120 millionNotes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Borrowings under the FourthFifth Amended and Restated Credit Agreement may be used to repay outstanding indebtedness, pay certain fees and expenses, finance working capital needs and general purposes of the interest rate was 1.6% at September 30, 2021. Borrowers and their respective subsidiaries and make certain restricted payments and loans to the Borrowers’ respective parents and affiliates.
Availability under the FourthFifth Amended and Restated Credit Agreement at September 30, 20212022 was $2,808 million, including$2,683 million. The interest rate on the portion available under the $400 million tranche that Zulily may also borrow on.
On October 27, 2021, the FourthFifth Amended and Restated Credit Agreement was further amended to, among other things, extend the maturity date to October 2026, improve the stated interest rates and financial covenants, and upsize the amount from $2.95 billion to $3.25 billion. 4.5% at September 30, 2022.
Exchangeable Senior Debentures
The Company has elected to account for its exchangeable senior debentures using the fair value option. Accordingly, changes in the fair value of these instruments are recognized as unrealized gains (losses) in the statements of operations. See note 4 for information related to unrealized gains (losses) on debt measured at fair value. As of September 30, 20212022 the Company’s exchangeable debentures have been classified as current because the Company does not own shares to exchange the debentures or they are currently exchangeable, with the exception of the 1.75% Exchangeable Senior Debentures due 2046 which are classified as long-term as they are not currently exchangeable. The Company reviews the terms of the debentures on a quarterly basis to determine whether a triggering event has occurred to require current classification of the exchangeables upon a call event. Although we do not own shares underlying certain of the exchangeable senior debentures, the Company has entered into certain derivative transactions in order to hedge against upward price fluctuations on certain shares. Such derivative instruments are recognized in the other current assets line item in the condensed consolidated balance sheets, and are marked to fair value each reporting period. The changes in fair value are recognized in the realized and unrealized gains (losses) on financial instruments, net line item in the condensed statement of operations.
On October 27, 2021, the bondholders of the 3.5% Exchangeable Senior Debentures due 2031 were sent a redemption notice for redemption in full on December 13, 2021, and will have the ability to exchange their debentures through December 10, 2021.
Debt Covenants
Qurate Retail and its subsidiaries are in compliance with all debt covenants at September 30, 2021.2022.
Fair Value of Debt
Qurate Retail estimates the fair value of its debt based on the quoted market prices for the same or similar issues or on the current rate offered to Qurate Retail for debt of the same remaining maturities (Level 2). The QVC 6.375% Senior Secured Notes due 2067 (“2067 Notes”) and the QVC 6.25% Senior Secured Notes Due 2068 (“2068 Notes”) are traded on the New York Stock Exchange, and the Company considers them to be actively traded. As such, the 2067 Notes and 2068 Notes are valued based on their trading price (Level 1). The fair value of Qurate Retail's publicly traded debt securities
I-17
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
that are not reported at fair value in the accompanying condensed consolidated balance sheet at September 30, 20212022 are as follows (amounts in millions):
| | | | | | | | |
Senior debentures | | $ | 889 | | | $ | 547 | |
QVC senior secured notes |
| $ | 4,699 | |
| $ | 3,068 | |
Due to the variable rate nature, Qurate Retail believes that the carrying amount of its other debt, not discussed above, approximated fair value at September 30, 2021.2022.
(7) Preferred Stock
On September 14, 2020, Qurate Retail issued its 8.0% Series A Cumulative Redeemable Preferred Stock, par value $0.01 per share (the “Preferred Stock”). There were 13,500,000 shares of Preferred Stock authorized and 12,624,11012,671,984 shares of Preferred Stock issued and outstanding at September 30, 2021.2022.
Priority. The Preferred Stock ranks senior to the shares of common stock of Qurate Retail, with respect to dividend rights, rights of redemption and rights on the distribution of assets on any voluntary or involuntary liquidation,
I-18
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
dissolution or winding up of Qurate Retail’s affairs. Shares of Preferred Stock are not convertible into shares of common stock of Qurate Retail.
Dividends. Holders of the Preferred Stock are entitled to receive quarterly cash dividends at a rate of 8.0% per annum of the liquidation price (as described below) on a cumulative basis, during the term. If declared, accrued dividends will be payable quarterly on each dividend payment date, beginning December 15, 2020 and thereafter on each March 15, June 15, September 15, and December 15 during the term (or, if such date is not a business day, the next business day after such date). If Qurate Retail fails to pay dividends or the applicable redemption price with respect to any redemption within 30 days after the applicable dividend payment or redemption date, the dividend rate will increase as provided by the Certificate of Designations for the Preferred Stock (the “Certificate of Designations”). Accrued dividends that are not paid within 30 days after the applicable dividend payment date will be added to the liquidation price until paid together with all dividends accrued thereon.
The ability of Qurate Retail to declare or pay any dividend on, or purchase, redeem, or otherwise acquire, any of its common stock or any other stock ranking on parity with the Preferred Stock will be subject to restrictions if Qurate Retail does not pay all dividends and all redemption payments on the Preferred Stock, subject to certain exceptions as set forth in the Certificate of Designations.
Distributions upon Liquidation, Dissolution or Winding Up. Upon Qurate Retail’s liquidation, winding-up or dissolution, each holder of shares of the Preferred Stock will be entitled to receive, before any distribution is made to the holders of Qurate Retail common stock, an amount equal to the liquidation price plus all unpaid dividends (whether or not declared) accrued from the immediately preceding dividend payment date, subject to the prior payment of liabilities owed to Qurate Retail’s creditors and the preferential amounts to which any stock senior to the Preferred Stock is entitled. The Preferred Stock has a liquidation price equal to the sum of (i) $100, plus (ii) all accrued and unpaid dividends (whether or not declared) that have been added to the liquidation price.
Mandatory and Optional Redemption. The Preferred Stock is subject to mandatory redemption on March 15, 2031 at the liquidation price plus all unpaid dividends (whether or not declared) accrued from the most recent dividend payment date. On or after the fifth anniversary of September 14, 2020 (the “Original Issue Date”), Qurate Retail may redeem all or a portion of the outstanding shares of Preferred Stock, at the liquidation price plus all unpaid dividends (whether or not declared) accrued from the most recent dividend payment date plus, if the redemption is (x) on or after the fifth anniversary of the Original Issue Date but prior to its sixth anniversary, 4.00% of the liquidation price, (y) on or after the sixth anniversary of the Original Issue Date but prior to its seventh anniversary, 2.00% of the liquidation price and (z)
I-18
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
on or after the seventh anniversary of the Original Issue Date, 0.zero. Both mandatory and optional redemptions must be paid in cash.
Voting Power. Holders of the Preferred Stock will not have any voting rights or powers, except as specified in the Certificate of Designations or as required by Delaware law.
Preferred Stock Directors. So long as the aggregate liquidation price of the outstanding shares of Preferred Stock exceeds 25% of the aggregate liquidation price of the shares of Preferred Stock issued on the Original Issue Date, holders of Preferred Stock will have certain director election rights as described in the Certificate of Designations whenever dividends on shares of Preferred Stock have not been declared and paid for 2two consecutive dividend periods and whenever Qurate Retail fails to pay the applicable redemption price in full with respect to any redemption of the Preferred Stock or fails to make a payment with respect to the Preferred Stock in connection with a liquidation or Extraordinary Transactions (as defined in the Certificate of Designations).
Recognition. As the Preferred Stock is subject to unconditional mandatory redemption in cash and was issued in the form of a share, the Company concluded the Preferred Stock was a mandatorily redeemable financial instrument and should be classified as a liability in the condensed consolidated balance sheets. The Preferred Stock was initially recorded at its fair value, which was determined to be the liquidation preference of $100 per share. Given the liability classification of the Preferred Stock, all dividends accrued will be classified as interest expense in the condensed consolidated statements of operations.
(8) Related Party Transactions with Officers and Directors
Malone Stock Exchange and Maffei Arrangements
On May 18, 2021, Gregory B. Maffei, the Chairman of the Board and a director of the Company, delivered a written offer (the “Offer”) to John C. Malone, a director of Qurate Retail, to acquire all of the outstanding shares of QRTEB beneficially owned by Mr. Malone, his wife Leslie Malone and certain trusts for the benefit of Mr. Malone, Mrs. Malone and/or their children (the “Malone Group,” and such shares, the “Subject Shares”) at a per share price of $14.00 payable in cash, securities or such other form of consideration as to which Mr. Maffei and Mr. Malone might mutually agree. The transfer by the Malone Group of the Subject Shares was subject to the terms of that certain call agreement, dated February 9, 1998 (the “Call Agreement”), among Qurate Retail, as successor-in-interest to the assignee of Tele-Communications, Inc., a Delaware corporation, Mr. Malone and Mrs. Malone, which provided Qurate Retail with the right to acquire all, but not less than all, of the Subject Shares at a per share price equal to the lower of (x) the Offer price or (y) 110% of the average closing prices of a share of QRTEA for the 30 consecutive trading days ending on May 17, 2021 (with the price calculated pursuant to clause (y) equal to $13.62 per share (the “Call Price”)) (the “Call Right”). As previously disclosed, on May 18, 2021, Mr. Malone provided written notice to Qurate Retail of his desire to accept the Offer, subject to the approval by the Board of Directors of the Company of the transactions contemplated thereby for purposes of Section 203 of the General Corporation Law of the State of Delaware, pursuant to the terms of the Call Agreement. However, in the event the Company determined to exercise the Call Right, Mr. Malone indicated a preference for the payment of the per share price in the form of shares of QRTEA such that he would continue to hold a substantial investment in the Company.
On June 2, 2021, Qurate Retail delivered written notice to Mr. Malone to exercise the Call Right and to pay the per share Call Price required by the Call Agreement in shares of QRTEA. On June 3, 2021, the Company and the Malone Group entered into a Stock Exchange Agreement (the “Malone Stock Exchange Agreement”) to effect the closing of the Call Right exercise, pursuant to which the Malone Group transferred to the Company an aggregate of 27,655,931 shares of QRTEB, and in exchange (the “Malone Exchange”), Qurate Retail issued to the Malone Group an aggregate of 30,421,522 shares of QRTEA. Under the terms of the Call Agreement, the aggregate Call Price converts into an equivalent ratio of 1.1 shares of QRTEA for each share of QRTEB with the aggregate number of shares of QRTEA issued to each member of the Malone Group rounded down to the nearest whole share.
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QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
On June 3, 2021, the Company, LMC and Mr. Maffei entered into a Waiver Letter and Amendment of Employment Agreement (the “Letter Agreement”), pursuant to which, among other things, Mr. Maffei (x) waived his rights to assert that Qurate Retail’s exercise of the Call Right, the transactions to be consummated pursuant to the Malone Stock Exchange Agreement or the resulting reduction in the Malone Group’s voting power with respect to Qurate Retail (collectively, the “Specified Events”) would constitute a “Change in Control” or “Good Reason,” in each case, as defined in the Executive Employment Agreement, dated as of December 13, 2019, by and between LMC and Mr. Maffei (the “Employment Agreement”), with respect to Qurate Retail, and agreed not to terminate his employment with Qurate Retail for “Good Reason” in connection with or arising out of the Option Cancellation (as defined below) or any of the Specified Events, and (y) consented to the cancellation (the “Option Cancellation”) of stock option awards to purchase shares of QRTEB that had been granted to Mr. Maffei on each of December 24, 2014, and March 31, 2015 for 1,137,228 shares at an exercise price of $16.97 per share, and 197,783 shares at an exercise price of $16.71 per share, respectively. In consideration for the foregoing, pursuant to the Letter Agreement, (i) Mr. Maffei received a grant of 1,101,321 restricted shares of QRTEB that are scheduled to vest, subject to Mr. Maffei’s continued employment with the Company, in 2 equal tranches on December 10, 2024 and the fifth anniversary of the grant date, subject to earlier vesting under certain circumstances, and (ii) Qurate Retail agreed that the portion of the Annual Equity Awards (as defined in the Employment Agreement) to be granted by Qurate Retail to Mr. Maffei pursuant to Section 4.11 of the Employment Agreement for calendar years 2022, 2023 and 2024 shall be granted with respect to the QRTEB.
Exchange and Cap. Also, on June 3, 2021, the Company and Mr. Maffei also entered into a Stock Exchange Agreement (the “Maffei Stock Exchange Agreement”) pursuant to which, among other things: (i) on June 3, 2021, Mr. Maffei transferred to Qurate Retail an aggregate of 5,378,308 shares of QRTEA, and in exchange Qurate Retail issued to Mr. Maffei an equivalent number of shares of QRTEB; (ii) Qurate Retail agreed that on the terms and subject to the conditions of the Maffei Stock Exchange Agreement, Mr. Maffei, at his option (during the six-month period following the vesting of the performance-based restricted stock unit award granted to Mr. Maffei on March 10, 2021), may transfer to the Company the number of shares of QRTEA actually received by Mr. Maffei upon vesting of such performance-based restricted stock unit award in exchange for an equivalent number of newly-issued shares of QRTEB (the “Subsequent Exchange”); (iii) Mr. Maffei agreed that until December 31, 2024 (the “Cap Period”), which is also the end of the current term of his employment as set forth in the Employment Agreement, he will not, and will not authorize or permit any of his affiliates that he controls (“Controlled Affiliates”) to, acquire or agree to acquire (or announce publicly an intent to acquire) by purchase or otherwise, beneficial ownership of voting securities of the Company (or direct or indirect rights or options to acquire any such voting securities) if, after giving effect to any such acquisition of securities, the aggregate voting power of the Company’s voting securities beneficially owned by Mr. Maffei and his Controlled Affiliates would exceed 20.0% of the voting power of all of the outstanding voting securities (assuming, for purposes of this calculation that all voting securities beneficially owned by Mr. Maffei which are not outstanding are included in the calculation) (the “Cap”); and (iv) the foregoing transactions by which Mr. Maffei and certain of his related persons became an “interested stockholder” were approved for purposes of Section 203 of the General Corporation Law of the State of Delaware. The Cap is subject to certain terms and exceptions, as described in the Maffei Stock Exchange Agreement. In addition, Mr. Maffei and his Controlled Affiliates may not transfer voting securities of Qurate Retail to any other Controlled Affiliate of Mr. Maffei unless such transferee has agreed to be bound by the terms of the Maffei Stock Exchange Agreement.
CEO Employment Agreement
On July 12, 2021, the compensation committee of the board of directors of Qurate Retail approved the Company’s entry into an employment agreement with David Rawlinson II, effective July 12, 2021. Effective August 1, 2021, Mr. Rawlinson began to serve as President and Chief Executive Officer-Elect of Qurate Retail, with Mike George continuing as Chief Executive Officer, and effective October 1, Mr. Rawlinson began to serve as President and Chief Executive Officer of Qurate Retail, with Mr. George assuming the role of Senior Advisor. Mr. Rawlinson concurrently assumed the same positions with QVC. Mr. George will resign from the board of directors effective January 1, 2022, at which time Mr. Rawlinson is expected to join the Board. With respect to his roles at Qurate Retail and QVC, Mr. George stepped down as President effective August 1, 2021 and as Chief Executive Officer effective October 1, 2021.
I-20
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
(9)(8) Commitments and Contingencies
Litigation
The Company has contingent liabilities related to legal and tax proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible Qurate Retail may incur losses upon conclusion of such matters, an estimate of any loss or range of loss cannot be made. In the opinion of management, it is expected that amounts, if any, which may be required to satisfy such contingencies will not be material in relation to the accompanying condensed consolidated financial statements.
Fire at Rocky Mount Fulfillment Center
On December 18, 2021, QVC experienced a fire at its Rocky Mount, Inc. fulfillment center in North Carolina. Rocky Mount was QVC’s second-largest fulfillment center for the operating segment comprised of QVC U.S. and HSN (“QxH”) and QVC’s primary returns center for hard goods.
QVC maintains property, general liability and business interruption insurance coverage. Based on provisions of QVC's insurance policies, the Company records estimated insurance recoveries for fire related costs for which recovery is deemed probable.
For the year ended December 31, 2021, QVC recorded $250 million of fire related costs and estimated insurance recoveries of $229 million for which recovery was deemed probable. As of December 31, 2021, the Company received $100 million of insurance proceeds and had an insurance receivable of $129 million which was recorded in Trade and other receivables, net in the condensed consolidated balance sheet.
For the nine months ended September 30, 2022, the Company recorded an additional $147 million of fire related costs, including $95 million for the write-down of inventory, and estimated insurance recoveries of $47 million for which recovery was deemed probable. For the nine months ended September 30, 2022, the Company received $280 million of insurance proceeds for inventory, fixed asset losses and other fire related costs and recorded a gain of $139 million in Restructuring and fire related costs, net of (recoveries) in the condensed consolidated statement of operations, representing the proceeds received in excess of losses recognized. The Company recorded an insurance receivable, net of advance proceeds received, for other fire related costs for which recovery was deemed probable of $35 million which was recorded in Trade and other receivables, net in the condensed consolidated balance sheet.
During the nine months ended September 30, 2022, inventory write-downs related to Rocky Mount inventory of $95 million were included in cost of goods sold. Due to the circumstances surrounding the write-downs of inventory, these write-downs have been excluded from Adjusted OIBDA (as defined in note 9). QVC is in the process of submitting its business interruption claim with the insurance company; however, there can be no guarantee that all business interruption losses will be recovered. QVC expects to continue to record additional costs and recoveries until the insurance claim is fully settled.
Zulily Restructuring
In the first quarter of 2022, Zulily began to execute a series of transformation initiatives, beginning with the announcement of the closure of its fulfillment center in Bethlehem, Pennsylvania, and reduction in corporate workforce. These initiatives are consistent with Zulily’s strategy to operate more efficiently as it implements its turnaround plan, and Zulily expects to incur additional expenses related to these transformation initiatives in future periods. Zulily recorded $3 million and $8 million of restructuring charges during the three and nine months ended September 30, 2022, respectively, principally related to its regional office space strategy and expenses associated with the Pennsylvania facility closure. Zulily recorded $3 million of restructuring charges during the nine months ended September 30, 2022 related to its reduction in corporate workforce.
I-20
QURATE RETAIL, INC. AND SUBSIDIARIES
(10)Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Gain on Sale of Fixed Assets
In June 2022, QVC modified the finance lease for its distribution center in Ontario, California which reduced the term of the lease and removed QVC’s ability to take ownership of the distribution center at the end of the lease term. QVC will make annual payments over the modified lease term. Since the lease was modified and removed QVC’s ability to take ownership at the end of the lease term, the Company accounted for the modification similar to a sale and leaseback transaction, and as a result, QVC recognized a $240 million gain on the sale of the distribution center during the second quarter of 2022 calculated as the difference between the aggregate consideration received (including cash and forgiveness of the remaining financing obligation of $84 million) and the carrying value of the distribution center. The gain is included in (gain) loss on sale of fixed assets, net in the condensed consolidated statement of operations. The Company accounted for the modified lease as an operating lease and recorded a $37 million right-of-use asset and a $31 million operating lease liability, with the difference attributable to prepaid rent.
In July 2022, QVC sold five owned and operated properties located in the U.S. to an independent third party and received net cash proceeds of $443 million. Concurrent with the sale, the Company entered into agreements to lease each of the properties back from the purchaser over an initial term of 20 years with the option to extend the terms of the property leases for up to four consecutive terms of five years. QVC recognized a $277 million gain related to the successful sale leaseback for the three and nine months ended September 30, 2022, calculated as the difference between the aggregate consideration received and the carrying value of the properties. The Company accounted for the leases as operating leases and recorded a $207 million right-of-use asset and a $205 million operating lease liability, with the difference attributable to initial direct costs.
On November 2, 2022 and November 3, 2022, QVC entered into agreements to sell two properties located in Germany and the U.K. to an independent third party. Under the terms of the agreements, QVC will receive cash payments of approximately €97 million related to its German facility and approximately £68 million related to its U.K. facility before fees, taxes and other expenses. The sale is expected to close in the first quarter of fiscal year 2023. Contingent on the closing of the sale, the Company entered into agreements to lease each of the properties back from the purchaser over an initial term of 20 years with the option to extend the terms of the property leases for up to four consecutive terms of five years. QVC expects to record a gain in 2023 at the close of the sale leaseback transaction.
(
(9) Information About Qurate Retail's Operating Segments
Qurate Retail, through its ownership interests in subsidiaries and other companies, is primarily engaged in the video and online commerce industries. Qurate Retail identifies its reportable segments as (A) those operating segments that represent 10% or more of its consolidated annual revenue, annual Adjusted OIBDA (as defined below) or total assets and (B) those equity method affiliates whose share of earnings represent 10% or more of Qurate Retail's annual pre-tax earnings.
The Qurate Retail chief operating decision maker primarily evaluates performance and makes decisions about allocating resources to its operating segments based on financial measures such as revenue and Adjusted OIBDA, gross margin, average sales price per unit and revenue or sales per customer equivalent.OIBDA. In addition, Qurate Retail reviews nonfinancial measures such as unique website visitors, number of units shipped, conversion rates and active customers, as appropriate.
For the nine months ended September 30, 2021,2022, Qurate Retail has identified the following operating segments as its reportable segments:
● | QxH |
● | QVC International – QVC International markets and sells a wide variety of consumer products in several foreign countries, primarily by means of its televised shopping programs and via the Internet through its international websites and mobile applications. |
● | Zulily – Zulily markets and sells a wide variety of consumer products in the United States and several foreign |
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QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
countries through flash sales and other curated events, primarily through its app, mobile and desktop experiences. |
Qurate Retail's operating segments are strategic business units that offer different products and services. They are managed separately because each segment requires different technologies, distribution channels and marketing strategies. The accounting policies of the segments are the same as those described in the Company's Summary of Significant Accounting Policies in the 20202021 10-K.
Performance Measures
Disaggregated revenue by segment and product category consisted of the following:
| | | | | | | | | | | | |
| | Three months ended | | |||||||||
| | September 30, 2022 | | |||||||||
| | | QxH | | QVC Int'l | | Zulily | | Corp and other | | Total | |
| in millions | | ||||||||||
Home | | $ | 621 | | 208 | | 53 | | 283 | | 1,165 | |
Apparel | | | 330 | | 100 | | 79 | | 44 | | 553 | |
Beauty | | | 252 | | 129 | | 9 | | — | | 390 | |
Accessories | | | 190 | | 49 | | 47 | | — | | 286 | |
Electronics | | | 152 | | 20 | | 2 | | — | | 174 | |
Jewelry | | | 73 | | 45 | | 6 | | — | | 124 | |
Other revenue | | | 45 | | 3 | | 4 | | — | | 52 | |
Total Revenue | | $ | 1,663 | | 554 | | 200 | | 327 | | 2,744 | |
| | | | | | | | | | | | |
| | Nine months ended | | |||||||||
| | September 30, 2022 | | |||||||||
| | | QxH | | QVC Int'l | | Zulily | | Corp and other | | Total | |
| in millions | | ||||||||||
Home | | $ | 1,950 | | 729 | | 167 | | 825 | | 3,671 | |
Apparel | | | 982 | | 334 | | 265 | | 140 | | 1,721 | |
Beauty | | | 766 | | 419 | | 30 | | — | | 1,215 | |
Accessories | | | 633 | | 162 | | 145 | | — | | 940 | |
Electronics | | | 411 | | 71 | | 5 | | — | | 487 | |
Jewelry | | | 231 | | 139 | | 23 | | — | | 393 | |
Other revenue | | | 128 | | 8 | | 17 | | — | | 153 | |
Total Revenue | | $ | 5,101 | | 1,862 | | 652 | | 965 | | 8,580 | |
I-21I-22
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
| | | | | | | | | | | |
| | Three months ended | |||||||||
| | September 30, 2021 | |||||||||
| | | QxH | | QVC Int'l | | Zulily | | Corp and other | | Total |
| | in millions | |||||||||
Home | | $ | 679 | | 272 | | 93 | | 258 | | 1,302 |
Apparel | | | 336 | | 119 | | 132 | | 46 | | 633 |
Beauty | | | 279 | | 164 | | 15 | | — | | 458 |
Accessories | | | 210 | | 62 | | 66 | | — | | 338 |
Electronics | | | 171 | | 24 | | 3 | | — | | 198 |
Jewelry | | | 95 | | 55 | | 11 | | — | | 161 |
Other revenue | | | 43 | | 3 | | 8 | | — | | 54 |
Total Revenue | | $ | 1,813 | | 699 | | 328 | | 304 | | 3,144 |
| | | | | | | | | | | | |
| | Nine months ended | | |||||||||
| | September 30, 2021 | | |||||||||
| | | QxH | | QVC Int'l | | Zulily | | Corp and other | | Total | |
| in millions | | ||||||||||
Home | | $ | 2,229 | | 905 | | 336 | | 748 | | 4,218 | |
Apparel | | | 985 | | 372 | | 429 | | 133 | | 1,919 | |
Beauty | | | 859 | | 521 | | 50 | | — | | 1,430 | |
Accessories | | | 720 | | 199 | | 218 | | — | | 1,137 | |
Electronics | | | 539 | | 89 | | 10 | | — | | 638 | |
Jewelry | | | 269 | | 169 | | 37 | | — | | 475 | |
Other revenue | | | 137 | | 9 | | 22 | | — | | 168 | |
Total Revenue | | $ | 5,738 | | 2,264 | | 1,102 | | 881 | | 9,985 | |
For segment reporting purposes, Qurate Retail defines Adjusted OIBDA as revenue less cost of goods sold, operating expenses, and selling, general and administrative expenses excluding stock-based compensation and, where applicable, separately identified items impacting comparability. Qurate Retail believes this measure is an important indicator of the operational strength and performance of its businesses by identifying those items that are not directly a reflection of each business’ performance or indicative of ongoing business trends. In addition, this measure allows management to view operating results and perform analytical comparisons and benchmarking between businesses and identify strategies to improve performance. This measure of performance excludes depreciation and amortization, stock-based compensation, and where applicable, separately identified impairments, litigation settlements, restructuring, acquisition-related costs, fire related costs, net (including Rocky Mount inventory losses) and gains (losses) on sales of fixed assets, net, that are included in the measurement of operating income (loss) pursuant to GAAP. Accordingly, Adjusted OIBDA should be considered in addition to, but not as a substitute for, operating income (loss), net earnings (loss), cash flows provided by operating activities and other measures of financial performance prepared in accordance with GAAP. Qurate Retail generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current prices.
I-23
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
Performance Measures
Disaggregated revenue by segment and product category consisted of the following:
���
| | | | | | | | | | | | |
| | Three months ended | | |||||||||
| | September 30, 2021 | | |||||||||
| | | QxH | | QVC Int'l | | Zulily | | Corp and other | | Total | |
| in millions | | ||||||||||
Home | | $ | 679 | | 272 | | 93 | | 258 | | 1,302 | |
Apparel | | | 336 | | 119 | | 132 | | 46 | | 633 | |
Beauty | | | 279 | | 164 | | 15 | | — | | 458 | |
Accessories | | | 210 | | 62 | | 66 | | — | | 338 | |
Electronics | | | 171 | | 24 | | 3 | | — | | 198 | |
Jewelry | | | 95 | | 55 | | 11 | | — | | 161 | |
Other revenue | | | 43 | | 3 | | 8 | | — | | 54 | |
Total Revenue | | $ | 1,813 | | 699 | | 328 | | 304 | | 3,144 | |
| | | | | | | | | | | | |
| | Nine months ended | | |||||||||
| | September 30, 2021 | | |||||||||
| | | QxH | | QVC Int'l | | Zulily | | Corp and other | | Total | |
| in millions | | ||||||||||
Home | | $ | 2,229 | | 905 | | 336 | | 748 | | 4,218 | |
Apparel | | | 985 | | 372 | | 429 | | 133 | | 1,919 | |
Beauty | | | 859 | | 521 | | 50 | | — | | 1,430 | |
Accessories | | | 720 | | 199 | | 218 | | — | | 1,137 | |
Electronics | | | 539 | | 89 | | 10 | | — | | 638 | |
Jewelry | | | 269 | | 169 | | 37 | | — | | 475 | |
Other revenue | | | 137 | | 9 | | 22 | | — | | 168 | |
Total Revenue | | $ | 5,738 | | 2,264 | | 1,102 | | 881 | | 9,985 | |
| | | | | | | | | | | |
| | Three months ended | |||||||||
| | September 30, 2020 | |||||||||
| | | QxH | | QVC Int'l | | Zulily | | Corp and other | | Total |
| | in millions | |||||||||
Home | | $ | 819 | | 286 | | 115 | | 248 | | 1,468 |
Apparel | | | 312 | | 115 | | 147 | | 37 | | 611 |
Beauty | | | 297 | | 168 | | 17 | | — | | 482 |
Accessories | | | 219 | | 67 | | 94 | | — | | 380 |
Electronics | | | 197 | | 25 | | 3 | | — | | 225 |
Jewelry | | | 93 | | 59 | | 12 | | — | | 164 |
Other revenue | | | 43 | | 3 | | 7 | | — | | 53 |
Total Revenue | | $ | 1,980 | | 723 | | 395 | | 285 | | 3,383 |
I-22
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
| | | | | | | | | | | | |
| | Nine months ended | | |||||||||
| | September 30, 2020 | | |||||||||
| | | QxH | | QVC Int'l | | Zulily | | Corp and other | | Total | |
| in millions | | ||||||||||
Home | | $ | 2,303 | | 829 | | 326 | | 631 | | 4,089 | |
Apparel | | | 913 | | 316 | | 411 | | 108 | | 1,748 | |
Beauty | | | 910 | | 499 | | 50 | | — | | 1,459 | |
Accessories | | | 676 | | 188 | | 281 | | — | | 1,145 | |
Electronics | | | 588 | | 78 | | 10 | | — | | 676 | |
Jewelry | | | 273 | | 155 | | 34 | | — | | 462 | |
Other revenue | | | 119 | | 6 | | 21 | | — | | 146 | |
Total Revenue | | $ | 5,782 | | 2,071 | | 1,133 | | 739 | | 9,725 | |
For segment reporting purposes, Qurate Retail defines Adjusted OIBDA as revenue less cost of sales, operating expenses, and selling, general and administrative expenses excluding all stock-based compensation and transaction related costs. Qurate Retail believes this measure is an important indicator of the operational strength and performance of its businesses by identifying those items that are not directly a reflection of each business’ performance or indicative of ongoing business trends. In addition, this measure allows management to view operating results and perform analytical comparisons and benchmarking between businesses and identify strategies to improve performance. This measure of performance excludes depreciation and amortization, stock-based compensation, certain acquisition accounting adjustments, separately reported litigation settlements, transaction related costs (including restructuring, integration, and advisory fees), and impairment charges that are included in the measurement of operating income pursuant to GAAP. Accordingly, Adjusted OIBDA should be considered in addition to, but not as a substitute for, operating income, net income, cash flows provided by operating activities and other measures of financial performance prepared in accordance with GAAP. Qurate Retail generally accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current prices.
Adjusted OIBDA is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | ||
| | Three months ended September 30, | | Nine months ended September 30, | | | Three months ended September 30, | | Nine months ended September 30, | | ||||||||||||
| | | 2021 | | 2020 | | | 2021 | | 2020 | | | | 2022 | | 2021 | | | 2022 | | 2021 | |
| | amounts in millions | | | | | | | amounts in millions | | | | | | ||||||||
QxH | | $ | 325 |
| 380 | | | 1,065 |
| 1,061 | | | $ | 143 |
| 325 | | | 600 |
| 1,065 | |
QVC International | | | 115 | | 132 | | | 402 | | 348 | | | | 62 | | 115 | | | 261 | | 402 | |
Zulily | |
| (17) |
| 27 | | | (2) |
| 74 | | |
| (25) |
| (17) | | | (61) |
| (2) | |
Corporate and other | |
| 9 |
| 27 | | | 65 |
| 32 | | |
| 5 |
| 9 | | | 67 |
| 65 | |
Consolidated Qurate Retail | | $ | 432 |
| 566 | | | 1,530 |
| 1,515 | | | $ | 185 |
| 432 | | | 867 |
| 1,530 | |
Other Information
| | | | | | | | | | | ||
| | September 30, 2021 |
| | September 30, 2022 |
| ||||||
| | Total assets | | Capital expenditures |
| | Total assets | | Capital expenditures |
| ||
| | amounts in millions |
| | amounts in millions |
| ||||||
QxH | | $ | 12,356 |
| 124 | | | $ | 8,929 |
| 116 | |
QVC International | | 2,267 | | 21 | | | 1,767 | | 19 | | ||
Zulily | | 1,010 | | 17 | | | 228 | | 10 | | ||
Corporate and other | |
| 1,327 |
| 7 | | |
| 872 |
| 26 | |
Consolidated Qurate Retail | | $ | 16,960 |
| 169 | | | $ | 11,796 |
| 171 | |
I-23
QURATE RETAIL, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Continued)
(unaudited)
The following table provides a reconciliation of Adjusted OIBDA to Operating income (loss) and Earnings (loss) before income taxes:
| | | | | | | | | | |
| | Three months ended | | Nine months ended |
| |||||
| | September 30, | | September 30, |
| |||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| |
| | amounts in millions |
| |||||||
Adjusted OIBDA | | $ | 432 |
| 566 |
| 1,530 |
| 1,515 | |
Stock-based compensation | |
| (19) |
| (19) |
| (54) |
| (46) | |
Depreciation and amortization | |
| (139) |
| (141) |
| (396) |
| (427) | |
Operating income (loss) | | $ | 274 | | 406 | | 1,080 | | 1,042 | |
Interest expense | |
| (121) |
| (98) |
| (356) |
| (290) | |
Share of earnings (loss) of affiliates, net | |
| (24) |
| (32) |
| (78) |
| (96) | |
Realized and unrealized gains (losses) on financial instruments, net | |
| 41 |
| (12) |
| 101 |
| (127) | |
Gains (losses) on transactions, net | | | — | | 223 | | — | | 224 | |
Other, net | |
| — |
| (65) |
| (10) |
| (65) | |
Earnings (loss) before income taxes | | $ | 170 |
| 422 |
| 737 |
| 688 | |
| | | | | | | | | | |
| | Three months ended | | Nine months ended |
| |||||
| | September 30, | | September 30, |
| |||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| |
| | amounts in millions |
| |||||||
Adjusted OIBDA | | $ | 185 |
| 432 |
| 867 |
| 1,530 | |
Stock-based compensation | |
| (15) |
| (19) |
| (46) |
| (54) | |
Depreciation and amortization | |
| (107) |
| (139) |
| (371) |
| (396) | |
Restructuring and fire related costs, net of recoveries (including Rocky Mount inventory losses, see note 8) | | | 134 | | — | | 28 | | — | |
Impairment of intangible assets | | | (3,081) | | | | (3,081) | | | |
Gains (losses) on sales of fixed assets, net | | | 277 | | — | | 520 | | — | |
Operating income (loss) | | $ | (2,607) | | 274 | | (2,083) | | 1,080 | |
Interest expense | |
| (107) |
| (121) |
| (343) |
| (356) | |
Share of earnings (loss) of affiliates, net | |
| — |
| (24) |
| (1) |
| (78) | |
Realized and unrealized gains (losses) on financial instruments, net | |
| (8) |
| 41 |
| 29 |
| 101 | |
Tax sharing income (expense) with Liberty Broadband | | | 36 | | (3) | | 78 | | (16) | |
Other, net | |
| 37 |
| 3 |
| 83 |
| 6 | |
Earnings (loss) before income taxes | | $ | (2,649) |
| 170 |
| (2,237) |
| 737 | |
I-24
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our business strategies; COVID-19 (as defined below); the impact of the fire at Rocky Mount fulfillment center; the sale leaseback transactions; the remediation of a material weakness; revenue growth at QVC, Inc. ("QVC"); the redemption or exchange of the 3.5% Exchangeable Senior Debentures due 2031; our projected sources and uses of cash; the recoverability of our goodwill and other intangible assets; and fluctuations in interest rates and foreign currency exchange rates. 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:
● | the impact of the novel coronavirus (“COVID-19”) pandemic and local, state and federal governmental responses to the pandemic on the economy, our customers, our vendors and our businesses generally; |
● | customer demand for our products and services and our ability to attract new customers and retain existing customers by anticipating customer demand and adapting to changes in demand; |
● | competitor responses to our products and services; |
● | 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 customers or contributors; |
● | uncertainties inherent in the development and integration of new business lines and business strategies; |
● | our future financial performance, including availability, terms, deployment of capital and our level of indebtedness; |
● | our ability to effectively manage our installment sales plans and revolving credit card programs; |
● | the cost and ability of shipping companies, manufacturers, suppliers, digital marketing channels, and vendors to deliver products, equipment, software and services; |
● | the outcome of any pending or threatened litigation; |
● | availability of qualified personnel; |
● | the impact of the seasonality of our businesses; |
● | changes in, or failure or inability to comply with, government regulations, including, without limitation, regulations of the Federal Communications Commission, 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, including the impact of |
● | changes in the trade policy and trade relations with China; |
● | consumer spending levels, including the availability and amount of individual consumer debt and customer credit losses; |
● | system interruption and the lack of integration and redundancy in the systems and infrastructures of our businesses; |
● | advertising spending levels; |
● | changes in distribution and viewing of television programming, including the expanded deployment of video on demand technologies and Internet protocol television and their impact on home shopping programming; |
● | rapid technological changes; |
● | failure to protect the security of personal information, subjecting us to potentially costly government enforcement actions and/or private litigation and reputational damage; |
● | the regulatory and competitive environment of the industries in which we operate; |
● | natural disasters, public health crises (including COVID-19), political crises, and other catastrophic events or other events outside of our control; |
● | threatened terrorist attacks, political and economic unrest in international markets and ongoing military action around the world; and |
● | fluctuations in foreign currency exchange rates. |
I-25
For additional risk factors, please see Part II, Item 1A. of this Quarterly Report and Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 20202021 (the “2020“2021 10-K”). These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report on Form 10-Q, 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.
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 condensed consolidated financial statements and the notes thereto and the 20202021 10-K.
The information herein relates to Qurate Retail, Inc. and its controlled subsidiaries (collectively “Qurate Retail,” the “Company,” “Consolidated Qurate Retail,” “us,” “we” or “our” unless the context otherwise requires).
Overview
We own controlling and non-controlling interests in a broad range of video and online commerce companies. Our largest businesses and reportable segments are our operating segment comprised of QVC U.S. and HSN (“QxH”) and QVC International. QVC markets and sells a wide variety of consumer products in the United States (“U.S.”) and several foreign countries, primarily by means of its televised shopping programs and the Internet through its domestic and international websites and mobile applications. 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, is a reportable segment.
Our “Corporate and other” category includes our consolidated subsidiary Cornerstone Brands, Inc. (“Cornerstone”), along with various cost and equity method investments.
In December 2019, the COVID-19 pandemic was reported to have surfaced in Wuhan, China and has subsequently spread across the globe causing a global pandemic, impacting all countries where Qurate Retail operates. As a result of the spread of the virus, certain local governmental agencies have imposed travel restrictions, local quarantines or stay at home restrictions to contain the spread, which has caused a significant disruption to most sectors of the economy.
In response
QVC transitioned most administrative employees to these stay at home restrictions, QVC has mandated that non-essentiala hybrid work model and certain employees have moved to permanent work from home and has reduced the number of employees who are allowed on its production set and has implemented increased cleaning protocols, social distancing measures and temperature screenings for those employees who enter into certain facilities. In some cases, the move to a work from home arrangement for QVC’s non-essential employees will be permanent,arrangements which has resulted in the reduction of office space. Due to ongoing staffing issues and labor shortages, QVC has also mandated that all essential employees who do not feel comfortable comingincreased wages and offered incentives, resulting in additional costs to work will not be required to do so.the company. As a result of these resource constraints QVC included fewer hours of live programming on some of its secondary channels and has experienced some delays in shipping at certain fulfillment centers. In certain markets, QVC temporarily increased the wages and salaries for those employees deemed essential who do not have the ability to work from home, including production and fulfillment center employees. The inability to control the spread of COVID-19, or the expansion or extension of these stay at home restrictions could negatively impact QVC’s results in the future.
Zulily has seen increased freight surcharges from China due to COVID-19 and in concert with QVC has made work accommodations in its fulfillment centers which has resulted in an increase in labor expense. Zulily has also incurred additional expenses to clean its fulfillment centers and office buildings. In addition, Zulily management cut travel expenses, and reduced capital expenditures due to uncertainty created by COVID-19.
The stay at home restrictions imposed in response to COVID-19 required many traditional brick and mortar retailers to temporarily close their stores, but allowed distance retailers, including QVC, to continue operating. As a result, beginning atfrom the end of the first quarter of 2020 and continuing through the first quarter of 2021, QVC observed an increase in new customers and an increase in demand for certain categories, such as home. Beginning in the second quarter of 2021 through the third quarter of 2022, QVC observed a decline in new customers and a decline in demand for its home product category, while also seeing an increase in demand for its apparel product category.
I-26
As a result, for the three and nine months ended September 30, 2020, QVC management had increased the amounts of certain estimated reserves including, but not limited to, uncollectible receivables in anticipation of higher defaults by customers billed through QVC’s installment payment option, inventory obsolescence due to decreased demand for certain categories, such as apparel, and sales returns due to QVC’s extended return policy. There were no remaining estimated reserves as of December 31, 2020 and September 30, 2021 as a direct result of COVID-19.
In addition, there are several potential adverse impacts of COVID-19 that could cause a material negative impact to QVC’sthe Company’s financial results, including its capital and liquidity. These include governmental restrictions on QVC’s ability to continue to operate under stay at home restrictions and produce content; reduced demand for products it sells;we sell; decreases in the disposable income of existing and potential new customers; the impacts of any recession and other uncertainties with respect to the continuity of government stimulus programs implemented in responseresponses to COVID-19; increased currency volatility resulting in adverse currency rate fluctuations; higher unemployment; labor shortages; and an adverse impact to QVC’sour supply chain and shipping disruptions for both the products it importswe import and purchasespurchase domestically and the products it sells,we sell, including essential products experiencing higher demand, due to factory closures, labor shortages and other resource constraints. While the future impact is currently uncertain, the inability to control the spread of COVID-19 could cause any one of these adverse impacts, or combination of adverse impacts, to have a material impact on QVC’sour financial results.
Beginning in the second quarter of 2021, QVC saw increased product shortages as a result of high market demand in some product categories such as home and electronics. QVC also experienced escalating shipping disruptions due to challenges in the global supply chain and labor market.market causing extended lead time on inventory orders. As a result, the
I-26
delayed receipt of inventory ordered in prior periods impacted QVC’s ability to have the right products at the right time and has contributed to higher inventory levels as of September 30, 2022. These factors also impacted QVC’s ability to offer certain goods and ship orders timely to its customers. In addition, QVC began to see increasedhas seen increasing inflationary pressures during the period.period including higher wages, freight, and merchandise costs. Russia’s invasion of Ukraine, as well as the related international response, is exacerbating inflationary pressures. If these pressures persist, itinflated costs may result in certain increased costs outpacingcontinue to outpace QVC’s pricing power in the near term.
On June 23, 2016, the U.K. held a referendum in which British citizens approved an exit from the European Union (the “E.U.”), commonly referred to as “Brexit.” 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, and could potentially have a negative impact on QVC’s business. The potential impacts include, but are not limited to, unfavorable new trade agreements, the possible imposition of trade or other regulatory barriers which could result in shipping delays or shortages of products, and a negative impact to the global economy and consumer demand.
Early decisions by the Biden Administration confirm continuity of a bipartisan consensus in the U.S. government favoring increased confrontation of China in trade practices and economic matters, national security and human rights. The imposition of any new U.S. tariffs on Chinese imports or the taking of other actions against China in the future, and any responses by China, could impair QVC’sthe Company’s ability to meet customer demand and could result in lost sales or an increase in QVC’sthe Company’s cost of merchandise, which would have a material adverse impact on QVC’s businessthe Company’s businesses and results of operations.
On December 18, 2021, QVC experienced a fire at its Rocky Mount, Inc. fulfillment center in North Carolina. Rocky Mount was QVC’s second-largest fulfillment center, processing approximately 25% to 30% of volume for QVC U.S., and also served as QVC U.S.’s primary returns center for hard goods. The building was significantly damaged as a result of the fire and related smoke and will not reopen. QVC has made a decision not to rebuild the facility; however, it is still in the process of determining future plans for the property. QVC has taken steps to mitigate disruption to operations including diverting inbound orders, leveraging its existing fulfillment centers and supplementing these facilities with short-term leased space as needed.
Based on the provisions of QVC’s insurance policies and discussions with insurance carriers, QVC determined that recovery of certain fire related costs is probable, and recorded an insurance receivable. For the year ended December 31, 2021, the Company recorded $250 million of fire related costs and estimated insurance recoveries of $229 million for which recovery was deemed probable. For the nine months ended September 30, 2022, the Company recorded $147 million of fire related costs, including $95 million for the write-down of inventory, and estimated insurance recoveries of $47 million for which recovery was deemed probable. For the nine months ended September 30, 2022, QVC received $280 million of insurance proceeds for inventory, fixed asset losses and other fire related costs and recorded a gain of $139 million in Restructuring and fire related costs, net of (recoveries) in the condensed consolidated statement of operations, representing the proceeds received in excess of losses recognized. The Company recorded an insurance receivable, net of advance proceeds received for other fire related costs for which recovery was deemed probable of $35 million in Trade and other receivables, net of allowance for credit losses in the condensed consolidated balance sheet.
During the nine months ended September 30, 2022, inventory write-downs related to Rocky Mount of $95 million were included in cost of goods sold. Due to the circumstances surrounding the write-downs of the inventory, these write-downs have been excluded from Adjusted OIBDA (as defined below). QVC is in the process of submitting its business interruption claim with the insurance company; however, there can be no guarantee that all business interruption losses will be recovered. QVC expects to continue to record additional costs and recoveries until the property damage and inventory recoverability assessment is completed and the insurance claim is fully settled. While QVC has taken steps to minimize the overall impact to the business, it experienced increased warehouse and logistics costs during the nine months ended September 30, 2022 and anticipates these increased warehouse and logistics costs to continue during 2022.
In June 2022, QVC modified the finance lease for its distribution center in Ontario, California which reduced the term of the lease and removed QVC’s ability to take ownership of the distribution center at the end of the lease term. QVC will make annual payments over the modified lease term. Since the lease was modified and removed QVC’s ability to take ownership at the end of the lease term, the Company concluded that a successful sale and leaseback transaction had occurred. QVC recognized a $240 million gain on the sale of the distribution center during the second quarter of 2022 calculated as the difference between the aggregate consideration received (including cash and forgiveness of the remaining financing obligation of $84 million) and the carrying value of the distribution center. The gain is included in (gain) loss on sale of fixed assets, net in the condensed consolidated statement of operations. The Company accounted for the modified lease as an operating lease and recorded a $37 million right-of-use asset and a $31 million operating lease liability, with the difference attributable to prepaid rent.
In July 2022, QVC sold five owned and operated properties located in the U.S. to an independent third party and received net cash proceeds of $443 million. Concurrent with the sale, the Company entered into agreements to lease each
I-27
of the properties back from the purchaser over an initial term of 20 years with the option to extend the terms of the property leases for up to four consecutive terms of five years. QVC will make initial base rent payments of $27 million per year and increasing to $39 million per year. QVC recognized a $277 million gain related to the successful sale leaseback for the three and nine months ended September 30, 2022, calculated as the difference between the aggregate consideration received and the carrying value of the properties. The Company accounted for the leases as operating leases and recorded a $207 million right-of-use asset and a $205 million operating lease liability, with the difference attributable to initial direct costs.
On November 2, 2022 and November 3, 2022, QVC entered into agreements to sell two properties located in Germany and the U.K. to an independent third party. Under the terms of the agreements, QVC will receive cash payments of approximately €97 million related to its German facility and approximately £68 million related to its U.K. facility before fees, taxes and other expenses. The sale is expected to close in the first quarter of fiscal year 2023. Contingent on the closing of the sale, the Company entered into agreements to lease each of the properties back from the purchaser over an initial term of 20 years with the option to extend the terms of the property leases for up to four consecutive terms of five years. QVC expects to record a gain in 2023 at the close of the sale leaseback transaction.
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 reporting segments. The "Corporate and other" category consists of those assets or businesses which we do not disclose separately. For a more detailed discussion and analysis of the financial results of the principal reporting segments, see "Results of Operations—Businesses" below.
Operating Results
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | Three months ended | | Nine months ended |
| ||||||||||
| | September 30, | | September 30, |
| | September 30, | | September 30, |
| ||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||
| | amounts in millions |
| | amounts in millions |
| ||||||||||||||
Revenue | | | | | | | | | | | | | | | | | | | | |
QxH |
| $ | 1,813 | | 1,980 | | 5,738 | | 5,782 | |
| $ | 1,663 | | 1,813 | | 5,101 | | 5,738 | |
QVC International | | | 699 | | 723 | | 2,264 | | 2,071 | | | | 554 | | 699 | | 1,862 | | 2,264 | |
Zulily | | | 328 | | 395 | | 1,102 | | 1,133 | | | | 200 | | 328 | | 652 | | 1,102 | |
Corporate and other | | | 304 | | 285 | | 881 | | 739 | | | | 327 | | 304 | | 965 | | 881 | |
Consolidated Qurate Retail |
| $ | 3,144 | | 3,383 | | 9,985 | | 9,725 | |
| $ | 2,744 | | 3,144 | | 8,580 | | 9,985 | |
| | | | | | | | | | | | | | | | | | | | |
Operating Income (Loss) | | | | | | | | | | | | | | | | | | | | |
QxH |
| $ | 219 | | 274 | | 771 | | 744 | |
| $ | (2,251) | | 219 | | (1,848) | | 771 | |
QVC International | | | 97 | | 114 | | 348 | | 295 | | | | 52 | | 97 | | 221 | | 348 | |
Zulily | | | (40) | | 3 | | (73) | | 3 | | | | (403) | | (40) | | (492) | | (73) | |
Corporate and other | | | (2) | | 15 | | 34 | | — | | | | (5) | | (2) | | 36 | | 34 | |
Consolidated Qurate Retail |
| $ | 274 | | 406 | | 1,080 | | 1,042 | |
| $ | (2,607) | | 274 | | (2,083) | | 1,080 | |
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Adjusted OIBDA | | | | | | | | | | | | | | | | | | | | |
QxH |
| $ | 325 | | 380 | | 1,065 | | 1,061 | |
| $ | 143 | | 325 | | 600 | | 1,065 | |
QVC International | | | 115 | | 132 | | 402 | | 348 | | | | 62 | | 115 | | 261 | | 402 | |
Zulily | | | (17) | | 27 | | (2) | | 74 | | | | (25) | | (17) | | (61) | | (2) | |
Corporate and other | | | 9 | | 27 | | 65 | | 32 | | | | 5 | | 9 | | 67 | | 65 | |
Consolidated Qurate Retail |
| $ | 432 | | 566 | | 1,530 | | 1,515 | |
| $ | 185 | | 432 | | 867 | | 1,530 | |
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Revenue. Consolidated Qurate Retail revenue decreased 7.1%12.7% or $239$400 million and increased 2.7%14.1% or $260$1,405 million for the three and nine months ended September 30, 2021,2022, respectively, as compared to the corresponding periods in the prior year. The decrease in the three months ended September 30, 20212022 was due to decreased revenue at QxH of $167$150 million, decreased revenue at Zulily of $67 million and decreased revenue at QVC International of $24$145 million, and decreased revenue at Zulily of $128 million, partially offset
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by increased revenue in the Corporate and other segment of $19$23 million, compared to the same period in the prior year. The increase in Corporate and other revenue was due to an increase in revenue at Cornerstone due to strong customer demand in the home category. The increasedecrease in the nine months ended September 30, 20212022 was due to increaseddecreased revenue at QxH of $637 million, decreased revenue at Zulily of $450 million, and decreased revenue at QVC International of $193$402 million, andpartially offset by increased revenue in the Corporate and other segment of $142 million, partially offset by decreased revenue at QxH of $44 million and decreased revenue at Zulily of $31$84 million, compared to the same period in the prior year. The increase in Corporate and other revenue was due to an increase in revenue at Cornerstone due to growth in the home category.increased sales across all major product categories. See "Results of Operations—Businesses" below for a more complete discussion of the results of operations of QVC and Zulily.
Stock-based compensation. Stock-based compensation includes compensation primarily related to options, restricted stock awards and restricted stock units for shares of our common stock that are granted to certain of our officers and employees.
We recorded $15 million and $19 million of stock-based compensation for both of the three months ended September 30, 20212022 and 2020,2021, respectively, and $54$46 million and $46$54 million of stock-based compensation for the nine months ended September 30, 20212022 and 2020,2021, respectively. The increasedecrease of $4 million for the three months ended September 30, 2022 was primarily due to decreases at QxH, and the decrease of $8 million for the nine months ended September 30, 20212022 was primarily due
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to increasesdecreases at QxH and at the corporate level.Zulily. As of September 30, 2021,2022, the total unrecognized compensation cost related to unvested Qurate Retail equity awards was approximately $121$105 million. Such amount will be recognized in our condensed consolidated statements of operations over a weighted average period of approximately 2.62.3 years.
Operating income. Our consolidated operating income decreased $132$2,881 million and increased $38$3,163 million for the three and nine months ended September 30, 2021,2022, respectively, as compared to the corresponding periods in the prior year.year, primarily due to impairments recognized at the QxH and Zulily reporting units. The decrease in operating results for the three months ended September 30, 20212022 was primarily due to a decrease in operating income at QxH of $55$2,470 million, a decrease in operating income at Zulily of $43$363 million, a decrease in operating income at QVC International of $17$45 million, and a decrease in operating income at the Corporate and other segment of $17$3 million, compared to the corresponding period in the prior year. Operating income in the Corporate and other segment decreased for the three months ended September 30, 2021,2022, as compared to the corresponding period in the prior year, primarily related to increaseda decrease in operating income at Cornerstone due to higher supply chain costs and digital marketing investments despite revenue growth and product margin expansion, partially offset by fewer expenses at Cornerstone, and an increasethe corporate level.
The decrease in corporate expenses relating to increased legal and professional service expenses and taxes. The increaseoperating results for the nine months ended September 30, 20212022 was primarily due to an increasea decrease in operating income at QxH of $2,619 million, a decrease in operating income at Zulily of $419 million, and a decrease in operating income at QVC International of $53$127 million, an increase in operating income at QxH of $27 million, andpartially offset by an increase in operating income at the Corporate and other segment of $34 million, partially offset by an increase in operating losses at Zulily of $76$2 million, compared to the samecorresponding period in the prior year. Operating income in the Corporate and other segment increased for the nine months ended September 30, 2021,2022, as compared to the corresponding period in the prior year, primarily related to revenue growth across Cornerstone’s portfolio and lower promotional activity resulting in better margin performance,fewer expenses at the corporate level, partially offset by an increasea decrease in corporate expenses relatingoperating income at Cornerstone due to increased legalhigher supply chain costs and professional services expensesdigital marketing investments despite revenue growth and taxes.product margin expansion. See "Results of Operations—Businesses" below for a more complete discussion of the results of operations of QVC and Zulily.
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 operating income (loss) plus depreciation and amortization, stock-based compensation, and where applicable, separately reportedidentified impairments, litigation settlements, restructuring, acquisition and otheracquisition-related costs, fire related costs, net (including Rocky Mount inventory losses), and impairments.(gain) loss on sale of fixed assets, net. 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 by identifying those items that are not directly a reflection of each 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. Accordingly, Adjusted OIBDA should be considered in addition to, but not as a substitute for, operating income, net income,earnings (loss), cash flows provided by operating activities and other measures of financial performance prepared in accordance with U.S. generally accepted accounting principles.
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The following table provides a reconciliation of Operating income (loss) to Adjusted OIBDA:
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Operating income (loss) | | $ | 274 |
| 406 |
| 1,080 |
| 1,042 | |
Depreciation and amortization | |
| 139 | | 141 | | 396 | | 427 | |
Stock-based compensation | |
| 19 | | 19 | | 54 | | 46 | |
Adjusted OIBDA | | $ | 432 | | 566 | | 1,530 | | 1,515 | |
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Operating income (loss) | | $ | (2,607) |
| 274 |
| (2,083) |
| 1,080 | |
Depreciation and amortization | |
| 107 | | 139 | | 371 | | 396 | |
Stock-based compensation | |
| 15 | | 19 | | 46 | | 54 | |
Restructuring and fire related costs, net of (recoveries) (including Rocky Mount inventory losses) | | | (134) | | — | | (28) | | — | |
Impairment of intangible assets | | | 3,081 | | — | | 3,081 | | — | |
(Gains) on sales of fixed assets, net | | | (277) | | — | | (520) | | — | |
Adjusted OIBDA | | $ | 185 | | 432 | | 867 | | 1,530 | |
Consolidated Adjusted OIBDA decreased 23.7%57.2% or $134$247 million and increased 1.0%43.3% or $15$663 million for the three and nine months ended September 30, 2021,2022, respectively, as compared to the corresponding periods in the prior year. The decrease in Adjusted OIBDA for the three months ended September 30, 20212022 was primarily due to a decrease at QxH of $55$182 million, a decrease at QVC International of $53 million, a decrease at Zulily of $44$8 million and a decrease at Corporate and other of $18 million and a decrease at QVC International of $17$4 million, compared to the corresponding period in the prior year. The change in the Corporate and other segment for the three months ended September 30, 20212022 was primarily due to increaseda decrease in Adjusted OIBDA at Cornerstone due to higher supply chain costs and digital marking investments despite revenue growth and product margin expansion, partially offset by fewer expenses at Cornerstone, and an increase inthe corporate expenses relating to increased legal and professional service expenses and taxes.level. The increasedecrease in Adjusted OIBDA for the nine months ended September 30, 20212022 was primarily due to an increasea decrease at QxH of $465 million, a decrease at QVC International of $54$141 million, and a decrease at Zulily of $59 million, partially offset by an increase at Corporate and other of $33 million, and an increase at QxH of $4 million, partially offset by a decrease at Zulily of $76$2 million, compared to the corresponding period in the prior year. The change in the Corporate and other segment for the nine months ended September 30, 20212022 was primarily due to revenue growth across Cornerstone’s portfolio and lower promotional activity resulting in better margin performance,fewer expenses at the corporate level, partially offset by
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an increase a decrease in corporate expenses relatingAdjusted OIBDA at Cornerstone due to increased legalhigher supply chain costs and professional services expensesdigital marketing investments despite revenue growth and taxes.product margin expansion. See "Results of Operations—Businesses" below for a more complete discussion of the results of operations of QVC and Zulily.
Other Income and Expense
Components of Other income (expense) are presented in the table below.
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Interest expense |
| $ | (121) | | (98) | | (356) | | (290) | |
| $ | (107) | | (121) | | (343) | | (356) | |
Share of earnings (losses) of affiliates |
| | (24) | | (32) | | (78) | | (96) | |
| | — | | (24) | | (1) | | (78) | |
Realized and unrealized gains (losses) on financial instruments, net |
| | 41 | | (12) | | 101 | | (127) | |
| | (8) | | 41 | | 29 | | 101 | |
Gains (losses) on transactions, net | | | — | | 223 | | — | | 224 | | ||||||||||
Tax sharing income (expense) with Liberty Broadband | | | 36 | | (3) | | 78 | | (16) | | ||||||||||
Other, net |
| | — | | (65) | | (10) | | (65) | |
| | 37 | | 3 | | 83 | | 6 | |
Other income (expense) |
| $ | (104) | | 16 | | (343) | | (354) | |
| $ | (42) | | (104) | | (154) | | (343) | |
Interest expense. Interest expense increased $23decreased $14 million and $66$13 million for the three and nine months ended September 30, 2021,2022, respectively, as compared to the corresponding periods in the prior year. The increases were primarily related to dividends incurred and paid related to our 8.0% Series A Cumulative Redeemable Preferred Stock, par value $0.01 per share (the “Preferred Stock”) recorded throughdecrease in interest expense for the three and nine months ended September 30, 2022, compared to the same periods in the prior year, is due to the accounting treatment.lower outstanding debt at QVC, including finance lease obligations.
Share of earnings (losses) of affiliates. Share of losses of affiliates decreased $8$24 million and $18$77 million for the three and nine months ended September 30, 2021,2022, respectively, as compared to the corresponding periods in the prior year. The losses decreased during the three and nine months ended September 30, 20212022 due to improved results atthe sale and wind down of the Company’s alternative energy entities. Theseentities as the federal tax credits expire. Historically, the alternative energy entities typically operate
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operated at a loss, and the Company recordsrecorded its share of such losses, but havehad favorable tax attributes and credits, which arewere recorded in the Company’s tax accounts.
Realized and unrealized gains (losses) on financial instruments, net. Realized and unrealized gains (losses) on financial instruments, net are comprised of changes in the fair value of the following:
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Equity securities | | | 48 | | 2 | | 98 | | (2) | | | | — | | 48 | | (5) | | 98 | |
Exchangeable senior debentures | | | (50) | | (145) | | (183) | | (225) | | | | 130 | | (50) | | 320 | | (183) | |
Indemnification asset | | | 8 | | 94 | | 49 | | 107 | | | | (138) | | 8 | | (287) | | 49 | |
Other financial instruments | | | 35 | | 37 | | 137 | | (7) | | | | — | | 35 | | 1 | | 137 | |
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| $ | 41 | | (12) | | 101 | | (127) | |
| $ | (8) | | 41 | | 29 | | 101 | |
The changes in realized and unrealized gains (losses) on financial instruments, net are due to market activity in the applicable period related to the financial instruments that are marked to market on a periodic basis. The increasedecrease in realized and unrealized gains for the three and nine months ended September 30, 2021,2022, compared to the corresponding period in the prior year, was primarily driven by a reduction in unrealized losses on the exchangeable senior debentures driven by less growth in stock prices of the securities underlying the debentures than the prior year, partially offset by a decrease in unrealized gains on the indemnification asset (described in note 4 of the accompanying condensed consolidated financial statements) and, a decrease in unrealized gains related to derivative instruments. The increase in realized and unrealized gains for the nine months ended September 30, 2021, compared to the corresponding period in the prior year, was primarily driven by an increase in unrealized gains related to derivative instruments and a reductiondecrease in unrealized lossesgains related to several of the Company’s equity securities, partially offset by an increase in unrealized gains on the exchangeable senior debentures driven by less growthdeclines in stock prices of the securities underlying the debentures thancompared to the prior year, partially offset by.
Tax sharing income (expense) with Liberty Broadband. The Company has a decrease in unrealized gains on the indemnification asset (described in note 4 of the accompanying condensed consolidated financial statements). In addition,tax sharing agreement with Liberty Broadband. As a result, the Company has several small equity investments in entities that went through initial public offeringsrecognized tax sharing income of $36 million and allowed the investments to be marked to market with unrealized gains recognized, which impacted both$78 million for the three and nine months ended September 30, 2021.
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Gains (losses) on transactions, net. Gains (losses) on transactions, net during$3 million and $16 million for the three and nine months ended September 30, 2020 were the result of the sale of one of the Company’s alternative energy investments during the third quarter of 2020. The Company received total cash consideration of $272 million and recorded a gain of $224 million on the sale of the alternative energy investment.2021, respectively.
Other, net. Other, net loss decreased $65income increased $34 million and $55$77 million for of the three and nine months ended September 30, 2021,2022, respectively, compared to the corresponding periods in the prior year. The decreased losses in both periods were primarily the result of a loss on the early extinguishment of debt in the prior year and no similar loss in the current year, decreased tax sharing expense with Liberty Broadband Corporation (“Liberty Broadband”) and increased interest and dividend income, partially offset by increased foreign exchange losses.
Income taxes. We had income tax expense of $20 million and $70 millionincrease for the three months ended September 30, 20212022, compared to the same period in the prior year, was primarily the result of an increase in foreign currency exchange gains, and 2020, respectively, and income tax expensea gain on early extinguishment of $113 million and $111 milliondebt in the current year. The increase for the nine months ended September 30, 2022, compared to the same period in the prior year, was primarily the result of an increase in foreign currency exchange gains, the sale of warrants at QVC in the current year, and a gain on early extinguishment of debt in the current year.
Income taxes. During the three months ended September 30, 2022 and 2021, we had losses before income taxes of $2,649 million and 2020, respectively. Incomeincome before income taxes of $170 million, respectively, and income tax expense was lower thanof $87 million and $20 million, respectively. The most significant portion of the U.S. statutory tax rate of 21%losses before income taxes during the three months ended September 30, 2022 relate to a goodwill impairment that is not deductible for tax purposes. During the three months ended September 30, 2021, the Company recognized additional tax benefit due to tax benefits from tax credits generated by our alternative energy investments, partially offset by state and foreign income tax expense, and an increase in the valuation allowance against certain deferred taxes. Income tax expense was lower than During the U.S. statutory tax rate of 21% during the threenine months ended September 30, 2020 due2022 and 2021, we had losses before income taxes of $2,237 million and income before income taxes of $737 million, respectively, and income tax expense of $265 million and $113 million, respectively. The most significant portion of the losses before income taxes during the nine months ended September 30, 2022 relate to a goodwill impairment that is not deductible for tax purposes. During the nine months ended September 30, 2021, the Company recognized additional tax benefits from tax credits generated by our alternative energy investments, partially offset by state and foreign income tax expense.Income tax expense was lower than the U.S. statutory tax rate of 21% during the nine months ended September 30, 2021 due to tax benefits from tax credits generated by our alternative energy investments, partially offset by state and foreign income tax expense. Income tax expense was lower than the U.S. statutory tax rate of 21% during the nine months ended September 30, 2020 due to tax benefits from tax credits generated by our alternative energy investments, partially offset by state and foreign income tax expense.
Net earnings. We had net losses of $2,736 million and net earnings of $150 million and $352 million for the three months ended September 30, 2022 and 2021, respectively, and 2020, respectively,net losses of $2,502 million and net earnings of $624 million and $577 million for the nine months ended September 30, 20212022 and 2020,2021, respectively. The change in net earnings (loss) was the result of the above-described fluctuations in our revenue, expenses and other gains and losses.
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Material Changes in Financial Condition
As of September 30, 2021,2022, substantially all of our cash and cash equivalents are invested in U.S. Treasury securities, securities of other government agencies, 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, debt (including availability under QVC’s Senior Secured Credit Facility,bank credit facilities, as discussed in note 6 of the accompanying condensed consolidated financial statements, debt issuances, equity issuances, interest receipts, proceeds from asset sales,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. For example, under QVC’s bond indentures, it is able to pay dividends or make other restricted such as,payments if it is not in default on its senior secured notes and its consolidated leverage ratio is no greater than 3.5 to 1.0. In addition, under QVC’s bank credit facility it is able to pay dividends or make other restricted payments if it is not in default on the casebank credit facility and the consolidated leverage ratio of QVC, QVC Global Corporate Holdings, LLC, Zulily and Zulily, dueCornerstone is no greater than 4.0 to a requirement that a1.0. Further, under QVC’s bond indentures and the bank credit facility credit agreement, unlimited dividends are permitted to service the debt of Qurate Retail so long as there is no default (i.e., no leverage ratio (calculated in accordance with the terms of such indebtedness) of less than 3.5 must be maintained as of September 30, 2021. On October 27, 2021, QVC’s Senior Secured Credit Facility was amended to, among other things, extend the maturity date to October 2026, improve the stated interest rates and financial covenants, and upsize the amount from $2.95 billion to $3.25 billion.
test is needed).
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As of September 30, 2021,2022, Qurate Retail's liquidity position included the following:
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QVC |
| $ | 517 | |
Zulily | | | 5 | |
Corporate and other | | | 102 | |
Total Qurate Retail |
| $ | 624 | |
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| | | Borrowing capacity | |
| | | amount in millions | |
QVC Senior Secured Credit Facility | | $ | 2,683 | |
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. As of September 30, 2021,2022, the Company had approximately $279$219 million of cash, cash equivalents and restricted cash held in foreign subsidiaries that is available for domestic purposes with no significant tax consequences upon repatriation to the United States. QVC accrues foreign taxes on the unremitted earnings of its international subsidiaries. Approximately 73%82% of QVC’s foreign cash balance was that of QVC-Japan (as defined below). QVC owns 60% of QVC-Japan and shares all profits and losses with the 40% minority interest holder, Mitsui & Co., LTD (“Mitsui”).
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 although we do notbelieve our businesses will generate positive cash flow from operations we anticipate any significant reductions in that amount in future periods.from the historical average during 2022.
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Cash Flow Information | | | | | | | | | | | | |
Net cash provided (used) by operating activities |
| $ | 715 | | 1,855 | |
| $ | (37) | | 715 | |
Net cash provided (used) by investing activities |
| $ | (483) | | (25) | |
| $ | 704 | | (483) | |
Net cash provided (used) by financing activities |
| $ | (219) | | (1,464) | |
| $ | (571) | | (219) | |
During the nine months ended September 30, 2021,2022, Qurate Retail's primary usessources of cash were repurchasesproceeds from the sale of Series A Qurate Retail common stockfixed assets of $216 million, expenditures for television distribution rights of $184 million, investments in and loans to cost and equity method investments of $177$701 million and capital expendituresinsurance proceeds related to the Rocky Mount fire of $169$280 million (see note 8 to the accompanying condensed consolidated financial statements), partially offset by net debt borrowingsrepayments of $110$508 million, capital expenditures of $171 million and dividends paid to noncontrolling interests of $38 million. The cash proceeds from
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the sale of fixed assets of $701 million were used to repay amounts outstanding under QVC’s Senior Secured Credit Facility.
The projected uses of Qurate Retail cash for the remainder of 20212022 are continued capital improvement spending between $75$100 million and $105$127 million, debt service payments (including approximately $35$42 million for interest payments on outstanding debt), repayment of debt, payment of dividends to the holders of Qurate Retail 8.0% Series A Cumulative Redeemable Preferred Stock (the “Preferred Stock”), the potential buyback of common stock under the approved share buyback program, payment of dividends to the holders of the Preferred Stock and additional investments in existing or new businesses. We also may be required to make net payments of income tax liabilities to settle items under discussion with tax authorities. We expect that cash on hand and cash provided by operating activities and borrowing capacity in future periods will be sufficient to fund projected uses of cash.
On November 4, 2021, Qurate Retail announced that its BoardIn July 2022, QVC generated cash through a series of Directors declared a specialsale-leaseback transactions (see note 8 to the accompanying condensed consolidated financial statements), and used this cash dividend in the amount of $1.25 per common share for an aggregate cash dividend of approximately $495 million based on sharesto repay amounts outstanding as of October 31, 2021 (to be updated for actual shares outstanding as of the record date). The dividend is payable on November 22, 2021 to stockholders of record of Qurate Retail’s Series A and Series B common stock as of the close of business on November 15, 2021. under QVC’s Senior Secured Credit Facility.
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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’s televised shopping programs, including live and recorded content, are distributedbroadcast across multiple channels nationally on a full-time basis, including QVC, QVC 2, QVC 3, HSN and HSN2. QVC U.S. programming is also available on QVC.com and HSN.com, QVC’s U.S. websites; virtual multichannel video programming distributors (including Hulu + Live TV, AT&T TV, and You Tube TV); applications via streaming video; Facebook Live, Roku, Apple TV, Amazon Fire, Xfinity Flex and Xfinity Flex;Samsung TV Plus; mobile applications; social pages and over-the-air broadcasters.
QVC’s digital platforms enable consumers to purchase goods offered on its televisedbroadcast programming, along with a wide assortment of products that are available only on its U.S. websites. QVC.com and HSN.com. QVC.com and HSN.com and QVC’sits other digital platforms (including its 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.com and HSN.comQVC’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 and Italy. In some of the countries where QVC operates, its televised shopping programs are distributedbroadcast across multiple QVC channels: QVC Style and QVC2 in Germany and QVC Beauty, QVC Extra, and QVC Style in the U.K. Similar to the U.S., QVC’s international businesses also engage customers via websites, 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's Japanese operations (“QVC-Japan”) are conducted through a joint venture with Mitsui. QVC-Japan is owned 60% by QVC and 40% by Mitsui. QVC and Mitsui share in all profits and losses based on their respective ownership interests. During both of the nine months ended September 30, 20212022 and 2020,2021, QVC-Japan paid dividends to Mitsui of $39 million and $46 million.million, respectively.
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QVC's operating results were as follows:
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| $ | 2,512 |
| 2,703 |
| 8,002 |
| 7,853 | |
| $ | 2,217 |
| 2,512 |
| 6,963 |
| 8,002 | |
Cost of sales | | | (1,617) |
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| (5,130) |
| (5,041) | | ||||||||||
Cost of goods sold (excluding depreciation, amortization and Rocky Mount inventory losses shown below) | | | (1,526) |
| (1,617) |
| (4,680) |
| (5,130) | | ||||||||||
Operating expenses | | | (183) |
| (184) |
| (565) |
| (548) | | | | (186) |
| (183) |
| (543) |
| (565) | |
SG&A expenses (excluding stock-based compensation and transaction related costs) | | | (272) |
| (285) |
| (840) |
| (855) | | ||||||||||
SG&A expenses (excluding stock-based compensation) | | | (300) |
| (272) |
| (879) |
| (840) | | ||||||||||
Adjusted OIBDA | | | 440 |
| 512 |
| 1,467 |
| 1,409 | | | | 205 |
| 440 |
| 861 |
| 1,467 | |
Fire related costs, net of (recoveries) (including Rocky Mount inventory losses) | | | 137 | | — | | 39 | | — | | ||||||||||
Gains (losses) on sales of fixed assets, net | | | 277 | | — | | 520 | | — | | ||||||||||
Impairment of intangible assets | | | (2,715) | | | | (2,715) | | | | ||||||||||
Stock-based compensation | | | (13) |
| (10) |
| (33) |
| (26) | | | | (9) |
| (13) |
| (27) |
| (33) | |
Depreciation and amortization | | | (111) |
| (114) |
| (315) |
| (344) | | | | (94) |
| (111) |
| (305) |
| (315) | |
Operating income |
| $ | 316 |
| 388 |
| 1,119 |
| 1,039 | |
| $ | (2,199) |
| 316 |
| (1,627) |
| 1,119 | |
Net revenue was generated in the following geographical areas:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | Three months ended | | Nine months ended |
| ||||||||||||||||
| | September 30, | | September 30, |
| | September 30, | | September 30, |
| ||||||||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||||||
| | amounts in millions |
| | amounts in millions |
| ||||||||||||||||||||
QxH |
| $ | 1,813 |
| | 1,980 |
| | 5,738 |
| | 5,782 | |
| $ | 1,663 |
| | 1,813 |
| | 5,101 |
| | 5,738 | |
QVC International | | | 699 | | | 723 | | | 2,264 | | | 2,071 | | | | 554 | | | 699 | | | 1,862 | | | 2,264 | |
Consolidated QVC |
| $ | 2,512 | | | 2,703 | | | 8,002 | | | 7,853 | |
| $ | 2,217 | | | 2,512 | | | 6,963 | | | 8,002 | |
I-33
QVC's consolidated net revenue decreased 7.1%11.7% and increased 1.9%13.0% for the three and nine months ended September 30, 2021,2022, respectively, as compared to the corresponding periodperiods in the prior year. The three month decrease in net revenue is primarily due to an 8.2%a 6.6% decrease in units shipped, and$113 million in unfavorable foreign exchange rates, a $29$23 million decrease in shipping and handling revenue which was partially offsetdriven by QxH and a 1.5% increaseslight decline in average selling price per unit ("ASP"(“ASP”), primarily at QxH, partially offset by an increase in ASP at QVC-International. These decreases were partially offset by a $30 million decrease in estimated product returns driven by QxHQxH. The nine month decrease in net revenue is primarily due to an 8.5% decrease in units shipped, $256 million in unfavorable foreign exchange rates, a $77 million decrease in shipping and QVC Japanhandling revenue, and a $34slight decline in ASP primarily at QxH, partially offset by an increase in ASP at QVC-International. These declines were partially offset by a $92 million decrease in estimated product returns primarily driven by QxH. The nine month increase in net revenue is primarily due to a 0.8% increase in units shipped, a $74 million decrease in estimated product returns primarily driven by QxH and $92 million in favorable foreign exchange rates, which was partially offset by a 1% decline in ASP, primarily driven by QxH, and a $15 million decrease in shipping and handling revenue.
During the three and nine months ended September 30, 20212022 and 2020,2021, the changes in revenue and expenses were affected by changes in the exchange rates for the U.K. Pound Sterling, the Euro and the Japanese Yen. 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.
In describing 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. QVC refers to the results of this calculation as the impact of currency exchange rate fluctuations. Constant currency operating results refers to operating results without the impact of the currency exchange rate fluctuations. The disclosure of constant currency amounts or results permits investors to better understand QVC’s underlying performance without the effects of currency exchange rate fluctuations.
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The percentage change in net revenue for each of QVC's geographic areas in U.S. Dollars and in constant currency was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended | | Nine months ended |
| | Three months ended | | Nine months ended |
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| | September 30, 2021 | | September 30, 2021 |
| | September 30, 2022 | | September 30, 2022 |
| ||||||||||||||||||||||||||||
|
| U.S. Dollars | | Foreign Currency Exchange Impact | | Constant Currency | | U.S. Dollars | | Foreign Currency Exchange Impact | | Constant currency |
|
| U.S. Dollars | | Foreign Currency Exchange Impact | | Constant Currency | | U.S. Dollars | | Foreign Currency Exchange Impact | | Constant currency |
| ||||||||||||
QxH |
| (8.4) | % | | — | % | | (8.4) | % | | (0.8) | % | | — | % | | (0.8) | % | |
| (8.3) | % | | — | % | | (8.3) | % | | (11.1) | % | | — | % | | (11.1) | % | |
QVC International |
| (3.3) | % | | 0.4 | % | | (3.7) | % | | 9.3 | % | | 4.4 | % | | 4.9 | % | |
| (20.7) | % | | (16.0) | % | | (4.7) | % | | (17.8) | % | | (11.3) | % | | (6.5) | % | |
The decrease in QxH net revenue for the three months ended September 30, 20212022 was primarily due to a 9.4%6.4% decrease in units shipped, a 1.9% decline in ASP and a $25$19 million decrease in shipping and handling revenue, which wasrevenue. These declines were partially offset by a 1.3% increase in ASP and a $29$27 million decrease in estimated product returns. For the three months ended September 30, 2021,2022, QxH experienced shipped sales declines in home, electronics, beauty and accessories with growth inacross all other categories. For the nine months ended September 30, 2021,2022, QxH net revenue decreased due to a 2.5%9.3% decrease in units shipped, a 1.5% decline in ASP, and a $14$61 million decrease in shipping and handling revenue,revenue. These declines were partially offset by a $68an $83 million decrease in estimated product returns and a 0.7% increase in units shipped.returns. For the nine months ended September 30, 2021,2022, QxH experienced shipped sales growth in apparel and accessories with declines inacross all other categories. The decrease in estimated product returns for the three and nine months ended September 30, 20212022 was primarily due to a decrease in sales volume. The decreasedecline in estimated product returnsASP for the three and nine months ended September 30, 20212022 was primarily driven by lower return rates across all categories.due to inventory reduction actions.
QVC International net revenue decline in constant currency for the three months ended September 30, 20212022 was primarily due to a 5.3%7.1% decrease in units shipped driven by decreasesGermany and the U.K. and a $4 million decrease in units shipped across all markets,shipping and handling revenue. These declines were partially offset by a 2.1%3.5% increase in ASP driven by ASP increases in Japan and the U.K.across all markets except Italy. For the three months ended September 30, 2021,2022, QVC International experienced shipped sales growth in constant currency in apparel and jewelry with declines across all product categories except electronics which remained flat. QVC International net revenue decline in constant currency for the nine months ended September 30, 2022 was primarily due to a 6.7% decrease in units shipped across all markets except Japan and a $16 million decrease in shipping and handling revenue. These declines were partially offset by a 1.4% increase in ASP driven by the U.K. and a $10 million decrease in estimated product returns across all markets except the U.K. For the nine months ended September 30, 2022, QVC-International experienced shipped sales decline in constant currency across all product categories except apparel. QVC-International net revenue growth in constant currency for the nine months ended September 30, 2021 was primarily due to a 3.0% increase in ASP, driven by ASP increases across all markets except Germany, and a 0.9% increase in units shipped, driven by increases in units shipped in Germany and Japan. For the nine months ended September 30, 2021, QVC-International experienced shipped sales growth in constant currency across all product categories.
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QVC's future net revenue growth will primarily depend on sales growth from e-commerce, mobile platforms, and applications via streaming video, additions of new customers from households already receiving QVC's televised programming and increased spending from existing customers. QVC's future net revenue may also be affected by (i) the willingness of cable television and direct-to-home satellite system operators to continue carrying QVC's programming service; (ii) 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 video-on-demand technologies and Internet video services; (iv) QVC’s ability to source new and compelling products; and (v) general economic conditions.
QVC's cost of salesgoods sold as a percentage of net revenue was 68.8% and 67.2% for the three and nine months ended September 30, 2022, respectively, compared to 64.4% and 64.1% for the three and nine months ended September 30, 2021, respectively, compared to 63.7% and 64.2%respectively. The increase in cost of goods sold as a percentage of revenue for the three and nine months ended September 30, 2020, respectively.2022 is primarily due to higher fulfillment costs driven by QxH due to increased freight and warehousing costs. QVC also experienced product margin pressure at QxH and increased inventory obsolescence across both segments. The increase in cost of sales as a percentage of revenue for the three months ended September 30, 2021 is primarily due to increased warehouse expenses driven by higher wages at QxH, increased freight costs and lower shipping and handling revenue at QxH. These increases were partially offset by decreased obsolescence as a result of less aged inventory at QxH. The decrease in cost of salesgoods sold as a percentage of revenue for the nine months ended September 30, 20212022 is primarily due to decreased obsolescence as a result of less aged inventory at QxH, and favorable estimated product returns at QxH. These decreases were partially offsethigher fulfillment costs across both segments driven by increased freight charges and warehouse expenseswarehousing costs. The increase in cost of goods sold was also impacted by increased inventory obsolescence at QxH. Higher fulfillment costs at QxH and lower shipping and handling revenue at QxH. Product margin for the three and nine months ended September 30, 2021 was flat2022 were also impacted by strains on our fulfillment network due to margin favorability primarily in Japan,the loss of the Rocky Mount fulfillment center, and rent related to warehouses sold and leased back during the period, partially offset by margin pressure at QxH.efficiencies from fulfillment centers closed in the prior year.
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QVC's operating expenses are principally comprised of commissions, order processing and customer service expenses, credit card processing fees and telecommunications expenses. Operating expenses decreased $1 millionwere 8.4% and increased $17 million7.8% of net revenue for the three and nine months ended September 30, 2021,2022, respectively, as compared to the same periods in the prior year. The nine month increase is primarily due to a $9 million increase in customer service expenses primarily at QxH and a $5 million increase due to unfavorable exchange rates. As a percentage of net revenue, such expenses were 7.3% and 7.1% for the three and nine months ended September 30, 2021, respectively,respectively. Operating expenses increased $3 million and were 6.8% and 7.0%decreased $22 million for the three and nine months ended September 30, 2020, respectively.2022, as compared to the same periods in the prior year. The three month increase is primarily due to a $6 million increase in telecommunications expenses, and a $3 million increase in personnel costs driven by higher wages at QxH. The increase in costs was partially offset by $10 million as a result of favorable exchange rates. The nine month decrease is primarily due to a $22 million decrease as a result of favorable exchange rates.
QVC's SG&A expenses (excluding stock-based compensation) include personnel, information technology, provision for doubtful accounts, production costs, and marketing and advertising expenses. Such expenses decreased $13increased $28 million and $15increased $39 million for the three and nine months ended September 30, 2021,2022, respectively, as compared to the same periods in the prior year, and as a percentage of net revenue, increased from 10.8% to 13.5% and from 10.5% to 10.8% and decreased from 10.9% to 10.5%12.6% for the three and nine months ended September 30, 2021,2022, respectively, as compared to the three and nine months ended September 30, 2020.2021. For the three months ended September 30, 2021,2022, there was a $29$14 million decreaseincrease in personnel costs primarily at QxH. This decrease was partially offset by an $11across both segments, a $14 million increase in online marketing primarily at QxH and to a $3lesser extent QVC International, a $5 million increase in credit lossesconsulting expenses at QxH, and a $4 million increase in rent expense, primarily at QxH. These increases were partially offset by a $17 million decrease due to favorable adjustmentsexchange rates. The increase in personnel costs for the prior year based on actual collections and the release of the credit loss reserve thatthree months ended September 30, 2022 was recorded as a result of the additional risk due to COVID-19.
higher wages across both segments. For the nine months ended September 30, 2021,2022, the decreaseincrease was primarily due to a $43$28 million decreaseincrease in credit losses, and a $34 million decrease in personnel costs, both primarily at QxH.QxH, a $14 million increase in marketing expenses primarily at QxH and to a lesser extent QVC International, a $13 million increase in consulting expenses primarily at QxH, and increases in IT expenses, non-income related taxes and rent expenses. These decreasesincreases were partially offset by a $48$35 million increase in online marketing primarily at QxH, and a $13 million increasedecrease due to unfavorablefavorable exchange rates. The decreaseincrease to estimated credit losses for the nine months ended September 30, 20212022 was due to lower expected collections in the current year compared to favorable adjustments recognized in the prior year based on actual collections and enhanced risk screening. The decreaseexperience.
For the three months ended September 30, 2022, the gain in the fire related costs, net of (recoveries) line primarily related to personnelinsurance proceeds received for inventory and fixed asset losses. For the nine months ended September 30, 2022, the gain primarily related to insurance proceeds received for inventory and fixed asset losses partially offset by write-downs on Rocky Mount inventory. Fire related costs, net of (recoveries) includes expenses directly related to the Rocky Mount fulfillment center fire net of expected and received insurance recoveries. Expenses indirectly related to the Rocky Mount fulfillment center fire, including operational inefficiencies, are primarily included in Cost of goods sold. These indirect expenses will be submitted as part of QVC’s business interruption insurance claim; however, there can be no guarantee they will be recovered.
QVC recorded $277 million and $520 million of gains on sales of fixed assets for the three and nine months ended September 30, 20212022, respectively. For the three months ended September 30, 2022, the gain related to the sale leaseback of five owned and operated U.S. properties. For the nine months ended September 30, 2022, the gain was primarily duerelated to athe sale leaseback of five U.S. properties and the Ontario, California distribution center.
QVC recorded impairment losses of $2,715 million for the three and nine months ended September 30, 2022, related to the decrease in incentive pay for 2021 in addition to severancethe fair value of the HSN indefinite-lived tradename and a work from home allowancethe QxH reporting unit as a result of COVID-19, whichthe quantitative assessments that were both recorded inperformed by the second quarter of 2020.Company (see note 5 to the accompanying consolidated financial statements).
Stock-based compensation includes compensation related to options and restricted stock units granted to certain officers and employees. QVC recorded $13$9 million and $33$27 million of stock-based compensation expense for the three and nine months ended September 30, 2021,2022, respectively, and $10$13 million and $26 million for the three and nine months ended September 30, 2020, respectively. The increase in stock compensation expense for the nine months ended September 30, 2021 is primarily related to certain officers not reaching performance targets for restricted stock units for the nine months ended September 30, 2020.
Depreciation and amortization decreased $3 million and $29$33 million for the three and nine months ended September 30, 2021, respectively. The decrease in stock-compensation expense is primarily due to the retirement of QVC’s former Chief Executive Officer.
Depreciation and amortization decreased $17 million and $10 million for the three and nine months ended September 30, 2022, respectively, and included $15 million and $17 million of acquisition related amortization for both of the three months ended September 30, 20212022 and 2020,2021, respectively, and $46 million for both of the nine months ended September 30, 2022 and $50 million of acquisition2021. The decrease for the three and nine months ended September 30, 2022 was primarily related to a decrease in
I-35I-36
depreciation due to assets disposed of related to the Rocky Mount fulfillment center fire and assets sold as part of the Ontario distribution center and U.S. properties sale leasebacks, partially offset by an increase in software amortization for the nine months ended September 30, 2021associated with QVC’s new enterprise resource planning system and 2020, respectively. Channelincreased channel placement amortization decreased due to certain channel placement agreements becoming fully amortized.and related expenses.
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 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's stand-alone operating results for the three and nine months ended September 30, 20212022 and 20202021 were as follows:
| | | | | | | | | | | | | | | | | | | ||
| | Three months ended | | Nine months ended |
| | Three months ended | | Nine months ended |
| ||||||||||
| | September 30, | | September 30, |
| | September 30, | | September 30, |
| ||||||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
|
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||
| | amounts in millions |
| | amounts in millions |
| ||||||||||||||
Net revenue |
| $ | 328 |
| 395 |
| 1,102 |
| 1,133 | |
| $ | 200 |
| 328 |
| 652 |
| 1,102 | |
Costs of sales | | | (262) |
| (288) |
| (851) |
| (836) | | ||||||||||
Costs of goods sold | | | (160) |
| (262) |
| (508) |
| (851) | | ||||||||||
Operating expenses | | | (10) |
| (11) |
| (30) |
| (31) | | | | (6) |
| (10) |
| (20) |
| (30) | |
SG&A expenses (excluding stock-based compensation) | | | (73) |
| (69) |
| (223) |
| (192) | | | | (59) |
| (73) |
| (185) |
| (223) | |
Adjusted OIBDA | | | (17) |
| 27 |
| (2) |
| 74 | | | | (25) |
| (17) |
| (61) |
| (2) | |
Restructuring charges | | | (3) | | — | | (11) | | — | | ||||||||||
Stock-based compensation | | | (3) |
| (4) |
| (11) |
| (11) | | | | (2) |
| (3) |
| (8) |
| (11) | |
Depreciation and amortization | | | (20) |
| (20) |
| (60) |
| (60) | | | | (7) |
| (20) |
| (46) |
| (60) | |
Impairment of intangible assets | | | (366) | | — | | (366) | | — | | ||||||||||
Operating income (loss) |
| $ | (40) |
| 3 |
| (73) |
| 3 | |
| $ | (403) |
| (40) |
| (492) |
| (73) | |
Zulily's consolidated net revenue decreased 17.0%39.0% and 2.7%40.8% for the three and nine months ended September 30, 2021,2022, respectively, as compared to the corresponding periodperiods in the prior year. The decrease in net revenue for the three and nine months ended September 30, 20212022 was primarily related tothe result of a decrease of 19.2%46.0% and 47.5% decline, respectively, in total units shipped drivenoffset by a 1.3% decrease13.6% and 12.7% increase, respectively, in ASP. The decline in shipped units primarily resulted from a 42.9% decline in active customers coupled withdue to a decreasereduction in new customerstotal marketing spend and lower purchasing frequency from existing customers when compared toproduct scarcity.
Zulily's cost of goods sold as a percentage of net revenue was 80.0% and 79.9% for the surge in the prior year’s demand for online shoppingthree months ended September 30, 2022 and Zulily’s merchandise, partially offset by a 3.7% increase in ASP primarily to offset shipping costs. The decrease in net revenue2021, respectively, and 77.9% and 77.2% for the nine months ended September 30, 2021 was primarily related to a decrease of 5.5% in total units shipped, partially offset by a 4.4% increase is ASP.
Zulily's cost of sales as a percentage of net revenue was 79.9%2022 and 72.9% for the three months ended September 30, 2021, and 2020, respectively, and 77.2% and 73.8% for the nine months ended September 30, 2021 and 2020, respectively. For the three months ended September 30, 2021,2022, the increase was primarily due to higher shipping and fulfillment costs, coupled with unfavorable product margins. Higher fulfillment costs were the result of higher wages and benefits for warehouse employees, and a deleverage on fixed costs at the fulfillment centers. Higher shipping costs were due to higher inbound costs, heavier items, higher fuel costs, truckload volume increases, and higher surcharges.driven mostly by sales deleverage. For the nine months ended September 30, 2021,2022, the increase was primarily due to higher shippingunfavorable fixed costs due to the same factors discussed above.driven mostly by sales deleverage, partially offset by favorable product margin.
Operating expenses are principally comprised of credit card processing fees and customer service expenses. For the three and nine months ended September 30, 2021,2022, operating expenses decreased slightly compared to the corresponding period in the prior year due to decreased sales volumes.
Zulily’s SG&A expenses (excluding stock-based compensation) include personnel related costs for general corporate functions, marketing and advertising expenses, information technology, and the costs associated with the use by these functions of facilities and equipment, including rent. For the three months ended September 30, 2021,2022, as a percentage of net revenue, these expenses increased from 17.5%22.3% to 22.3%29.5% and for the nine months ended September 30, 2021,2022, as a percentage of net revenue, these expenses increased from 16.9%20.2% to 20.2%28.4%. The increases wereFor the three and nine months ended September 30, 2022, the increase was primarily attributable to sales deleverage and an increase in technology spend partially offset by reduced marketing spend, duespend.
Zulily recorded $3 million and $11 million of restructuring charges during the three and nine months ended September 30, 2022, respectively, principally related to higher costs for web-based advertising. its regional office space strategy and expenses associated with its Pennsylvania facility closure, coupled with reduction in corporate workforce.
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Zulily’s total depreciation and amortization expense remained flatdecreased $13 million and $14 million for the three and nine months ended September 30, 2021,2022, respectively, as compared to the corresponding periods in the prior year. The decrease for the three months ended September 30, 2022 was primarily due to amortization of Zulily’s customer relationship asset reaching the end of its useful life on December, 31, 2021. The decrease for the nine months ended September 30, 2022 was primarily due to amortization of Zulily’s customer relationship asset reaching the end of its useful life on December, 31, 2021, partially offset by accelerated depreciation resulting from its Pennsylvania facility closure.
Zulily’s current business trendsZulily recorded impairments of its trademarks and results are making it a challenge forgoodwill in the business to be able to realize its current long-term forecast. Zulily is reevaluating its long term forecastamounts of $140 million and business model due$226 million, respectively, during the three and nine months ended September 30, 2022. See note 5 in the accompanying notes to the impact of supply chain constraints and cooresponding impact to product availability as well as increasing marketing costs. The Company will continue to monitor Zulily’s current business performance versus the current and updated long-term forecasts, among other relevant considerations, to determine if the carrying value of its assets are appropriate. Future outlook declines in revenue, cash flows, or other factors could result in a sustained decrease in fair value that may result in a determination that carrying value adjustments are required, which could be material.condensed consolidated financial statements for additional information.
Item 3. 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 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 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 September 30, 2021,2022, our debt is comprised of the following amounts:
| | | | | | | | | | | | | | | | | | | | | | |
| | Variable rate debt | | Fixed rate debt |
| | Variable rate debt | | Fixed rate debt |
| ||||||||||||
|
| | |
| Weighted |
| | |
| Weighted |
|
| | |
| Weighted |
| | |
| Weighted |
|
| | Principal | | average | | Principal | | average |
| | Principal | | average | | Principal | | average |
| ||||
| | amount | | interest rate | | amount | | interest rate |
| | amount | | interest rate | | amount | | interest rate |
| ||||
| | dollar amounts in millions |
| | dollar amounts in millions |
| ||||||||||||||||
QxH and QVC International |
| $ | NA | | NA | % | $ | 4,660 | | 4.9 | % |
| $ | 244 | | 4.5 | % | $ | 3,914 | | 5.1 | % |
Zulily | | $ | 120 | | 1.6 | % | $ | — | | — | % | | $ | 261 | | 4.5 | % | $ | — | | — | % |
Corporate and other |
| $ | — | | — | % | $ | 1,984 | | 5.3 | % |
| $ | 40 | | 4.5 | % | $ | 1,906 | | 5.4 | % |
Qurate 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, Qurate 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 nine months ended September 30, 20212022 would have been impacted by approximately $4$3 million, for every 1% change in foreign currency exchange rates relative to the U.S. Dollar.
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 of the interest rate swap yields, in
I-37I-38
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.
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Item 4. Controls and Procedures.
Disclosure Controls and Procedures
In accordance with Rules 13a-15 and 15d-15 under the Securities 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 September 30, 20212022 because of the material weakness in its internal control over financial reporting that is described below in “Material Weakness in Internal Control over Financial Reporting.”
However, giving full consideration to provide reasonable assurance that information required to bethe material weakness, the Company’s management believes the consolidated financial statements included in this Quarterly Report on Form 10-Q present fairly, in all material respects, the Company’s financial position, results of operations and cash flows for the periods disclosed in 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.
conformity with U.S. generally accepted accounting principles (“GAAP”).
Changes in Internal Control Over Financial Reporting
In May 2021, QVC completedresponse to the implementationmaterial weakness described below, the Company reviewed the design of Zulily’s and QVC’s controls and began remediation activities to alleviate the initial phase of its new Enterprise Resource Planning (“ERP”) system, which has enabled standardization, modernization and best practice in QVC’s financial processes across its global markets and most brands. As a result of the implementation of phase one of a new ERP system, QVC has continued to refine certain related process-level and information technology general controls.
Except as described above,noted control deficiencies. Other than these items, there has beenwas no change in the Company’s internal control over financial reporting that occurred during the three monthsCompany’s quarter ended September 30, 20212022, that has materially affected, or is reasonably likely to materially affect, itsthe Company’s internal control over financial reporting.
Material Weakness in Internal Control over Financial Reporting
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. We have identified a material weakness related to information technology general controls (“ITGCs”) at Zulily which also impact an inventory management system in place for certain QVC and HSN fulfillment centers. These ITGCs were not designed and operating effectively to ensure (i) that access to applications and data, and the ability to make program changes, were adequately restricted to appropriate personnel, (ii) that the activities of individuals with access to modify data and make program and job changes were appropriately monitored and (iii) that changes introduced in the production environment had undergone sufficient testing and review. Our business process controls (automated and manual) and reports and information that are dependent on the affected ITGCs were also deemed ineffective because they could have been adversely impacted.
We believe these control deficiencies are due to:
● | Inadequate risk assessment to fully understand the nature and extent of risk related to certain segregation of duties, provisioning and the design of the change control environment. |
● | Insufficient training of IT personnel related to change management and logical access processes. |
● | Lack of adequate resources with knowledge of our internal controls over financial reporting related to general information technology systems. |
● | Failure to select and apply appropriate ITGCs with accountability enforced through formal policies and procedures. |
The control deficiencies did not result in any identified misstatements.
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Remediation Plan for Material Weakness in Internal Control over Financial Reporting
In response to the material weakness described above, the Company has developed a plan with oversight from the Audit Committee of the Board of Directors to remediate the material weakness. The remediation efforts are underway and include the following:
● | Enhancing the ITGC risk assessment process; |
● | Evaluating talent and addressing identified gaps; |
● | Delivering training on internal control over financial reporting; |
● | Improving change management and logical access control activities that contributed to the ITGC material weakness including removing all inappropriate IT system access associated with the ITGC material weakness; |
● | Implementing user activity monitoring for control activities contributing to the ITGC material weakness; and |
● | Implementing additional compensating control activities over the completeness and accuracy of data provided by the affected systems. |
The Company believes the foregoing efforts will remediate the material weakness described above. 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.
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PART II—OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 1A. Risk Factors
Any further impairment of our goodwill or other intangible assets could have a material adverse effect on our business, results of operations and financial condition.
From time to time we review the recoverability of goodwill and other certain identifiable intangible assets, including whenever events or circumstances indicate that the carrying value of a reporting unit, including goodwill, or an identifiable intangible asset may not be recoverable. We may incur impairment charges on goodwill or identifiable intangible assets if we determine that the fair values of a reporting unit, including goodwill, or identifiable intangible assets are less than their current carrying values. We evaluate, on a regular basis, whether events or circumstances have occurred that indicate all, or a portion, of the carrying amount of goodwill may no longer be recoverable, in which case an impairment charge to earnings would become necessary.
As a result of recent financial performance of certain subsidiary businesses, macroeconomic conditions (including inflation and higher interest rates) and a decline in the Company’s stock price, the Company identified significant goodwill impairments for the quarter ended September 30, 2022 for the QxH and Zulily reporting units relating to their tradenames and goodwill. These impairment charges resulted in a substantial reduction in our total stockholders’ equity.
Recent business trends and global economic conditions may continue to make it a challenge for certain subsidiary businesses to be able to realize their current long-term forecast. The Company will continue to monitor its subsidiary businesses’ current business performance versus the current and updated long-term forecasts, among other relevant considerations, to determine if the carrying value of its assets (including goodwill and trademarks) is appropriate. Future outlook declines in revenue, cash flows, or other factors could result in a further decrease in fair value that may result in a determination that carrying value adjustments are required, which could be material, and we could be required to record additional impairment charges on our goodwill or other identifiable intangible assets in the future, which could result in further reductions to stockholders’ equity and material non-cash charges to our earnings and may negatively impact our stock price and financial condition.
We have identified a material weakness in our internal control over financial reporting, that, if 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 4. Controls and Procedures,” we have concluded that our disclosure controls and procedures were ineffective as of September 30, 2022 due to a material weakness in our internal control over financial reporting. The identified material weakness relates to information technology general controls (“ITGCs”) at Zulily, which also include an inventory management system in place for certain QVC and HSN fulfillment centers. Specifically, the ITGCs were not designed and operating effectively to ensure (i) that access to applications and data, and the ability to make program changes, were adequately restricted to appropriate personnel, (ii) that the activities of individuals with access to modify data and make program and job changes were appropriately monitored and (iii) that changes introduced in the production environment had undergone sufficient testing and review. Our 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 control deficiencies identified did not result in any identified misstatements, a reasonable possibility exists that a material misstatement to the annual or interim consolidated financial statements and disclosures will not be prevented or detected on a timely basis.
As further described in “Item 4. Controls and Procedures,” we are taking the necessary steps to remediate the material weakness. However, as the reliability of the internal control process requires repeatable execution, the successful on-going
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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 that additional or a similar material weakness will not develop or be identified.
Implementing any further changes to our 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 internal controls are inadequate or that we are unable to produce accurate financial statements on a timely basis may harm the price of our common stock.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Share Repurchase Programs
In May 2019, the board authorized the repurchase of $500 million of Series A Qurate Retail common stock (“QRTEA”) or Series B Qurate Retail common stock (“QRTEB”). In August 2021, the board authorized the repurchase of $500 million of QRTEA or QRTEB.
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| | Series A Qurate Retail Common Stock |
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| (c) Total Number |
| (d) Maximum Number |
| |
| | | | | | | of Shares | | (or Approximate Dollar |
| |
| | | | | | | Purchased as | | Value) of Shares that |
| |
| | (a) Total Number | | (b) Average | | Part of Publicly | | May Yet Be Purchased |
| ||
| | of Shares | | Price Paid per | | Announced Plans or | | Under the Plans or |
| ||
Period | | Purchased | | Share | | Programs | | Programs |
| ||
July 1 - 31, 2021 |
| 3,404,055 | | $ | 12.22 |
| 3,404,055 | | | $280 | million |
August 1 - 31, 2021 |
| 3,585,235 | | $ | 11.33 |
| 3,585,235 | | | $739 | million |
September 1 - 30, 20211 |
| 4,587,483 | | $ | 11.18 |
| 4,587,483 | | | $688 | million |
Total |
| 11,576,773 | | $ | 11.53 |
| 11,576,773 | | | | |
There were no repurchases of QRTEBQRTEA or Preferred StockQRTEB during the three months ended September 30, 20212022 under the Company’s share repurchase program.
During the three months ended September 30, 2021,2022, 366 shares of QRTEA, no shares of QRTEA, QRTEB orand 11 shares of Preferred Stock were surrendered by our officers and employees to pay withholding taxes and other deductions in connection with the vesting of their restricted stock, restricted stock units, and options.
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Item 6. Exhibits
(a) Exhibits
Listed below are the exhibits which are filed as a part of this Quarterly Report (according to the number assigned to them in Item 601 of Regulation S-K):
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31.1 | | |
31.2 | | |
32 | | |
99.1 | | |
101.INS | | Inline XBRL Instance Document* - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document* |
101.CAL | | Inline XBRL Taxonomy Calculation Linkbase Document* |
101.LAB | | Inline XBRL Taxonomy Label Linkbase Document* |
101.PRE | | Inline XBRL Taxonomy Presentation Linkbase Document* |
101.DEF | | Inline XBRL Taxonomy Definition Document* |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)* |
* | Filed herewith |
** | Furnished herewith |
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SIGNATURES
Pursuant to the requirements 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.
| | QURATE RETAIL, INC. | |
Date: November 4, | | By: | /s/ DAVID RAWLINSON II |
| | | David Rawlinson II President and Chief Executive Officer |
Date: November 4, | | By: | /s/ BRIAN J. WENDLING |
| | | Brian J. Wendling Chief Accounting Officer and Principal Financial Officer |
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