Qurate Retail(QRTEA) - 2022 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements. This section presents the unaudited condensed consolidated financial statements of Qurate Retail, Inc. and its subsidiaries, including balance sheets, statements of operations, comprehensive earnings (loss), cash flows, and equity, along with detailed notes explaining the basis of presentation, significant accounting policies, and specific financial line items Condensed Consolidated Balance Sheets The condensed consolidated balance sheets show a slight decrease in total assets and total equity for Qurate Retail, Inc. and its subsidiaries from December 31, 2021, to March 31, 2022, while current liabilities increased Condensed Consolidated Balance Sheet Highlights (Amounts in millions) | Metric | March 31, 2022 | December 31, 2021 | | :-------------------------------- | :------------- | :---------------- | | Total Assets | $15,808 | $16,249 | | Total Liabilities | $12,801 | $13,219 | | Total Equity | $3,007 | $3,030 | | Current Assets | $4,169 | $4,448 | | Current Liabilities | $4,310 | $4,224 | - Total assets decreased by $441 million, and total liabilities decreased by $418 million from December 31, 2021, to March 31, 2022[10][14] Condensed Consolidated Statements of Operations The condensed consolidated statements of operations reveal a significant year-over-year decline in total revenue, operating income, and net earnings attributable to Qurate Retail, Inc. shareholders for the three months ended March 31, 2022 Condensed Consolidated Statements of Operations Highlights (Three months ended March 31, amounts in millions, except per share amounts) | Metric | 2022 | 2021 | | :---------------------------------------------------- | :--- | :--- | | Total revenue, net | $2,883 | $3,337 | | Operating income (loss) | $106 | $373 | | Net earnings (loss) attributable to Qurate Retail, Inc. shareholders | $1 | $206 | | Basic net earnings (loss) per common share | $0.00 | $0.50 | | Diluted net earnings (loss) per common share | $0.00 | $0.49 | - Total revenue decreased by $454 million, and net earnings attributable to shareholders dropped from $206 million to $1 million year-over-year[17] Condensed Consolidated Statements of Comprehensive Earnings (Loss) The condensed consolidated statements of comprehensive earnings (loss) show a shift from comprehensive earnings to a comprehensive loss attributable to Qurate Retail, Inc. shareholders for the three months ended March 31, 2022, primarily influenced by foreign currency translation adjustments and debt credit risk adjustments Condensed Consolidated Statements of Comprehensive Earnings (Loss) Highlights (Three months ended March 31, amounts in millions) | Metric | 2022 | 2021 | | :---------------------------------------------------- | :--- | :--- | | Net earnings (loss) | $13 | $224 | | Foreign currency translation adjustments | $(60) | $(73) | | Comprehensive earnings (loss) attributable to debt credit risk adjustments | $29 | $(56) | | Comprehensive earnings (loss) attributable to Qurate Retail, Inc. shareholders | $(24) | $86 | - Comprehensive earnings attributable to shareholders declined from $86 million in Q1 2021 to a loss of $24 million in Q1 2022[20] Condensed Consolidated Statements of Cash Flows The condensed consolidated statements of cash flows indicate a significant shift from net cash provided by operating activities in Q1 2021 to net cash used in Q1 2022, while financing activities provided a substantial amount of cash in the current quarter Condensed Consolidated Statements of Cash Flows Highlights (Three months ended March 31, amounts in millions) | Metric | 2022 | 2021 | | :---------------------------------------- | :---- | :--- | | Net cash provided (used) by operating activities | $(179) | $153 | | Net cash provided (used) by investing activities | $(16) | $(180) | | Net cash provided (used) by financing activities | $229 | $(23) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $21 | $(67) | - Operating activities shifted from providing $153 million in cash in Q1 2021 to using $179 million in Q1 2022, while financing activities provided $229 million in Q1 2022, a significant increase from using $23 million in Q1 2021[23] Condensed Consolidated Statements of Equity The condensed consolidated statements of equity detail changes in stockholders' equity components, reflecting net earnings/loss, other comprehensive earnings/loss, and stock-based compensation for the three months ended March 31, 2022, and 2021 Condensed Consolidated Statements of Equity Highlights (Three months ended March 31, amounts in millions) | Metric | Balance at March 31, 2022 | Balance at January 1, 2022 | | :-------------------------------- | :------------------------ | :----------------------- | | Total Stockholders' Equity | $2,880 | $2,894 | | Net earnings (loss) | $1 | $— | | Other comprehensive earnings (loss) | $(25) | $— | | Stock-based compensation | $14 | $— | - Total stockholders' equity decreased slightly from $2,894 million at January 1, 2022, to $2,880 million at March 31, 2022, primarily due to other comprehensive losses partially offset by stock-based compensation[26] Notes to Condensed Consolidated Financial Statements These notes provide essential context and detailed disclosures for the condensed consolidated financial statements, covering the Company's accounting policies, significant estimates, and specific financial instrument details, as well as segment information and recent events like the Rocky Mount fire and Zulily's restructuring (1) Basis of Presentation This section outlines the consolidation principles, the seasonal nature of Qurate Retail's businesses, the application of GAAP, key management estimates, the ongoing impact of the COVID-19 pandemic, and details of related party transactions with Liberty Media Corporation and Liberty Broadband Corporation - Qurate Retail's businesses (QVC, HSN, Cornerstone, Zulily) are seasonal, with higher sales in the fourth calendar quarter due to holiday shopping[30] - COVID-19 has led to increased cleaning protocols, hybrid work models, and higher wages/incentives due to labor shortages, causing shipping delays at fulfillment centers[33][125] Related Party Transactions (Amounts in millions) | Metric | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :-------------------------------- | :-------------------------------- | :-------------------------------- | | Reimbursable to LMC | $3 | $2 | | Tax sharing payable to LMC and Liberty Broadband (as of period end) | $74 | $96 | (2) Stock-Based Compensation This note details the Company's stock-based compensation plans, including restricted stock awards (RSAs), restricted stock units (RSUs), and stock options, and reports the compensation expense recognized, along with tables summarizing RSU grants and outstanding awards Stock-Based Compensation Expense (Amounts in millions) | Metric | Three months ended March 31, 2022 | Three months ended March 31, 2021 | | :-------------------------- | :-------------------------------- | :-------------------------------- | | Stock-based compensation | $15 | $16 | - Total unrecognized compensation cost related to unvested Awards was approximately $152 million as of March 31, 2022, to be recognized over a weighted average period of approximately 1.8 years[53] RSUs Granted (Three months ended March 31, 2022) | RSU Type | RSUs Granted (000's) | Weighted Average GDFV | | :---------------------------------------------------- | :------------------- | :-------------------- | | Series A Qurate Retail common stock, subsidiary employees | 10,486 | $4.91 | | Series A Qurate Retail common stock, Qurate Retail employees and directors | 217 | $4.91 | | Series A Qurate Retail common stock, Qurate Retail President and CEO | 596 | $4.91 | | Series B Qurate Retail common stock, Qurate Retail Chairman of the Board | 327 | $4.95 | (3) Earnings (Loss) Per Common Share This section explains the computation of basic and diluted earnings (loss) per common share (EPS) and provides the weighted average number of common shares outstanding (WASO) for the periods, noting the exclusion of antidilutive shares Qurate Retail Common Stock WASO (Three months ended March 31, number of shares in millions) | Metric | 2022 | 2021 | | :---------------------- | :--- | :--- | | Basic WASO | 379 | 411 | | Potentially dilutive shares | 5 | 11 | | Diluted WASO | 384 | 422 | - 26 million and 25 million potential common shares were excluded from diluted EPS for the three months ended March 31, 2022 and 2021, respectively, because their inclusion would have been antidilutive[57] (4) Assets and Liabilities Measured at Fair Value This note outlines the fair value hierarchy used for financial instruments and presents the fair value measurements for cash equivalents, indemnification assets, and debt, detailing realized and unrealized gains and losses driven by market activity Fair Value Measurements at March 31, 2022 (Amounts in millions) | Description | Total | Quoted prices in active markets for identical assets (Level 1) | Significant other observable inputs (Level 2) | | :------------------------ | :---- | :--------------------------------------------------------- | :------------------------------------------ | | Cash equivalents | $213 | $213 | $— | | Indemnification asset | $239 | $— | $239 | | Debt | $1,151 | $— | $1,151 | Realized and Unrealized Gains (Losses) on Financial Instruments, net (Three months ended March 31, amounts in millions) | Instrument | 2022 | 2021 | | :------------------------------ | :--- | :--- | | Equity securities | $(10) | $7 | | Exchangeable senior debentures | $124 | $46 | | Indemnification asset | $(85) | $(52) | | Other financial instruments | $1 | $40 | | Total | $30 | $41 | - The decrease in net realized and unrealized gains for Q1 2022 was primarily due to decreased unrealized gains on derivative instruments and the indemnification asset, and increased unrealized losses on equity securities, partially offset by increased unrealized gains on exchangeable senior debentures[146] (5) Intangible Assets This note provides information on goodwill and intangible assets subject to amortization, detailing changes in goodwill carrying amounts due to foreign currency adjustments and presenting the expected amortization expense for the next five years Goodwill Carrying Amount (Amounts in millions) | Metric | Balance at January 1, 2022 | Foreign currency translation adjustments | Balance at March 31, 2022 | | :-------------------------------- | :------------------------- | :------------------------------------- | :------------------------ | | Total Goodwill | $6,339 | $(27) | $6,312 | Expected Amortization Expense for Intangible Assets (Amounts in millions) | Period | Expected Amortization Expense | | :---------------- | :---------------------------- | | Remainder of 2022 | $242 | | 2023 | $208 | | 2024 | $130 | | 2025 | $58 | | 2026 | $52 | - Amortization expense for intangible assets with finite useful lives was $82 million for both the three months ended March 31, 2022, and 2021[65] (6) Long-Term Debt This note summarizes Qurate Retail's debt, including corporate-level debentures and subsidiary-level notes and facilities, detailing the QVC Senior Secured Credit Facility, debt covenants, and the fair value of debt, highlighting an increase in the current portion of debt Debt Summary (Carrying value, amounts in millions) | Metric | March 31, 2022 | December 31, 2021 | | :-------------------------------- | :------------- | :---------------- | | Total consolidated Qurate Retail debt | $7,092 | $6,989 | | Less current classification | $(1,901) | $(1,315) | | Total long-term debt | $5,191 | $5,674 | - The current portion of debt increased to $1,901 million at March 31, 2022, from $1,315 million at December 31, 2021, partly due to the 4.375% Senior Secured Notes due 2023 being classified as current[67][68] - The QVC Senior Secured Credit Facility is a $3.25 billion revolving credit facility maturing on October 27, 2026, with $2,481 million available at March 31, 2022, and an interest rate of 1.8%[70][74][78] - Qurate Retail and its subsidiaries were in compliance with all debt covenants at March 31, 2022[80] (7) Preferred Stock This note describes the 8.0% Series A Cumulative Redeemable Preferred Stock, detailing its priority, cumulative dividend rights, liquidation preferences, mandatory and optional redemption terms, and limited voting rights, classified as a liability on the balance sheet - 12,668,027 shares of 8.0% Series A Cumulative Redeemable Preferred Stock were issued and outstanding at March 31, 2022[84] - Holders are entitled to quarterly cash dividends at 8.0% per annum of the liquidation price on a cumulative basis[86] - The Preferred Stock is subject to mandatory redemption on March 15, 2031, and optional redemption by Qurate Retail on or after September 14, 2025 (fifth anniversary of issue date)[89][92] - The Preferred Stock is classified as a liability, and all accrued dividends are recognized as interest expense[95] (8) Commitments and Contingencies This note addresses contingent liabilities from legal and tax proceedings, the significant financial and operational impact of the December 2021 Rocky Mount fulfillment center fire, and restructuring charges related to Zulily's transformation initiatives - Contingent liabilities from legal and tax proceedings are not expected to be material[96] - The Rocky Mount fulfillment center fire (December 18, 2021) significantly damaged QVC's second-largest fulfillment center, which will not reopen[97][131] - QVC recorded an $80 million write-down related to Rocky Mount inventory in Q1 2022, which is expected to be part of a business interruption insurance claim[99][102][132] - An insurance receivable balance of $143 million was recorded as of March 31, 2022, for probable recoveries related to fire costs[98][131] - Zulily incurred $2 million in restructuring charges during Q1 2022, primarily related to the closure of its Bethlehem, Pennsylvania fulfillment center[103][185] (9) Information About Qurate Retail's Operating Segments This note provides disaggregated financial information for Qurate Retail's reportable segments: QxH (QVC U.S. and HSN), QVC International, and Zulily, detailing their revenue and Adjusted OIBDA performance, along with a reconciliation of Adjusted OIBDA to operating income and earnings before income taxes - Qurate Retail's reportable segments are QxH, QVC International, and Zulily, each managed separately due to different technologies, distribution channels, and marketing strategies[106][107] Total Revenue by Segment (Three months ended March 31, amounts in millions) | Segment | 2022 | 2021 | | :---------------- | :--- | :--- | | QxH | $1,684 | $1,936 | | QVC International | $670 | $774 | | Zulily | $232 | $377 | | Corporate and other | $297 | $250 | | Consolidated Total | $2,883 | $3,337 | Adjusted OIBDA by Segment (Three months ended March 31, amounts in millions) | Segment | 2022 | 2021 | | :---------------- | :--- | :--- | | QxH | $225 | $349 | | QVC International | $104 | $143 | | Zulily | $(18) | $6 | | Corporate and other | $24 | $19 | | Consolidated Total | $335 | $517 | Reconciliation of Adjusted OIBDA to Operating Income (Loss) (Three months ended March 31, amounts in millions) | Metric | 2022 | 2021 | | :---------------------------------------------------- | :--- | :--- | | Adjusted OIBDA | $335 | $517 | | Stock-based compensation | $(15) | $(16) | | Depreciation and amortization | $(130) | $(128) | | Restructuring and fire related costs, net | $(84) | $— | | Operating income (loss) | $106 | $373 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on Qurate Retail's financial performance and condition, including forward-looking statements, an overview of business operations, detailed analysis of consolidated and segment-level results, and material changes in liquidity and capital resources Overview This overview introduces Qurate Retail's core video and online commerce businesses and discusses key factors impacting operations, including the lingering effects of the COVID-19 pandemic, supply chain disruptions, inflationary pressures, and the significant operational and financial impact of the Rocky Mount fulfillment center fire - Qurate Retail's largest businesses and reportable segments are QxH (QVC U.S. and HSN) and QVC International, along with Zulily[122] - COVID-19 has led to increased cleaning protocols, hybrid work models, and higher wages/incentives due to labor shortages, causing shipping delays and a shift in customer demand from home products to apparel[125][126] - The Company experienced increased product shortages, escalating shipping disruptions, extended lead times, and higher inventory levels due to global supply chain and labor market challenges[129] - Inflationary pressures, including higher wages, freight, and merchandise costs, are outpacing QVC's pricing power, exacerbated by global events[129] - The Rocky Mount fulfillment center fire in December 2021, which was QVC's second-largest, resulted in an $80 million inventory write-down in Q1 2022 and an insurance receivable of $143 million as of March 31, 2022[131][132] Results of Operations—Consolidated Consolidated operating results show a significant year-over-year decline in revenue, operating income, and Adjusted OIBDA for the three months ended March 31, 2022, primarily driven by decreases across QxH, Zulily, and QVC International, partially offset by growth in the Corporate and other segment Consolidated Operating Results (Three months ended March 31, amounts in millions) | Metric | 2022 | 2021 | Change | | :-------------------------- | :--- | :--- | :----- | | Revenue | $2,883 | $3,337 | $(454) | | Operating Income (Loss) | $106 | $373 | $(267) | | Adjusted OIBDA | $335 | $517 | $(182) | - Consolidated revenue decreased by 13.6% or $454 million, with QxH, Zulily, and QVC International contributing to the decline, while Corporate and other revenue increased by $47 million due to strong demand at Cornerstone[134] - Consolidated operating income decreased by $267 million, and Adjusted OIBDA decreased by 35.2% or $182 million, primarily due to declines across all major segments[137][140] - Stock-based compensation decreased slightly from $16 million in Q1 2021 to $15 million in Q1 2022[136] Other Income and Expense This section analyzes the components of other income and expense, noting flat interest expense, a significant decrease in share of losses from affiliates, a decline in net realized and unrealized gains on financial instruments, and an increase in other net income, all contributing to a lower net earnings Other Income and Expense (Three months ended March 31, amounts in millions) | Metric | 2022 | 2021 | | :---------------------------------------------------- | :--- | :--- | | Interest expense | $(117) | $(117) | | Share of earnings (losses) of affiliates | $(1) | $(32) | | Realized and unrealized gains (losses) on financial instruments, net | $30 | $41 | | Other, net | $53 | $13 | | Total Other income (expense) | $(35) | $(95) | | Net earnings | $13 | $224 | - Share of losses of affiliates decreased by $31 million, primarily due to the sale and wind-down of alternative energy entities[145] - Realized and unrealized gains on financial instruments, net, decreased by $11 million, driven by lower gains on derivative instruments and the indemnification asset, partially offset by higher gains on exchangeable senior debentures[146] - Other, net income increased by $40 million, primarily due to the sale of warrants at QVC, an increase in tax sharing benefit, and foreign currency exchange gains[147] Material Changes in Financial Condition This section details Qurate Retail's liquidity position, including available cash balances, borrowing capacity, and cash flow activities, outlining primary sources and projected uses of cash, emphasizing the sufficiency of liquidity to meet future needs Liquidity Position (March 31, 2022, amounts in millions) | Metric | Amount | | :-------------------------------- | :----- | | Cash and cash equivalents | $608 | | Borrowing capacity (QVC Senior Secured Credit Facility) | $2,481 | Cash Flow Information (Three months ended March 31, amounts in millions) | Metric | 2022 | 2021 | | :---------------------------------------- | :---- | :--- | | Net cash provided (used) by operating activities | $(179) | $153 | | Net cash provided (used) by investing activities | $(16) | $(180) | | Net cash provided (used) by financing activities | $229 | $(23) | - Primary sources of cash in Q1 2022 included net debt borrowings of $265 million and $12 million from dispositions of investments[156] - Projected uses of cash for the remainder of 2022 include $228-$255 million for capital improvement, $213 million for interest payments, debt repayment, potential stock buybacks, preferred stock dividends, and new investments[157] - Approximately $233 million of foreign cash and cash equivalents are available for domestic purposes with no significant tax consequences upon repatriation[154] Results of Operations—Businesses This section provides a detailed analysis of the operating results for QVC (comprising QxH and QVC International) and Zulily, highlighting revenue drivers, cost structures, and specific challenges faced by each segment, such as supply chain issues, foreign exchange impacts, and restructuring efforts QVC QVC's consolidated net revenue decreased by 13.1% year-over-year, primarily due to a decline in units shipped, unfavorable foreign exchange rates, and reduced shipping revenue, partially offset by lower product returns, with cost of goods sold increasing as a percentage of revenue due to higher fulfillment costs and inventory obsolescence exacerbated by the Rocky Mount fire QVC Operating Results (Three months ended March 31, amounts in millions) | Metric | 2022 | 2021 | | :---------------------------------------------------- | :--- | :--- | | Net revenue | $2,354 | $2,710 | | Adjusted OIBDA | $329 | $492 | | Operating income | $130 | $381 | - Consolidated QVC net revenue decreased by 13.1%, driven by a 10.6% decrease in units shipped, $50 million in unfavorable foreign exchange rates, and a $29 million decrease in shipping and handling revenue[164] - QxH net revenue decreased by 13.0% (constant currency), with declines in all categories except apparel, while QVC International net revenue decreased by 7.0% (constant currency) across all product categories except apparel[167][168] - Cost of goods sold as a percentage of net revenue increased to 66.3% (from 64.9%), primarily due to higher freight and warehousing costs, strains on the fulfillment network from the Rocky Mount fire, and increased inventory obsolescence[172] - SG&A expenses (excluding stock-based compensation) increased by $12 million, mainly due to a $10 million increase in estimated credit losses and higher personnel costs[174] - QVC recorded $82 million in fire-related costs, net, in Q1 2022, primarily from a write-down on Rocky Mount inventory[175] Zulily Zulily experienced a significant 38.5% decrease in net revenue year-over-year, primarily due to a 45.6% decline in units shipped and a 30% decline in active customers, resulting from reduced marketing spend and product scarcity, with cost of goods sold as a percentage of revenue slightly increasing due to sales deleverage, and the segment recording restructuring charges Zulily Operating Results (Three months ended March 31, amounts in millions) | Metric | 2022 | 2021 | | :---------------------------------------------------- | :--- | :--- | | Net revenue | $232 | $377 | | Adjusted OIBDA | $(18) | $6 | | Operating income (loss) | $(38) | $(18) | - Net revenue decreased by 38.5%, driven by a 45.6% decline in total units shipped and a 30% decline in active customers, attributed to reduced marketing spend and product scarcity[181] - Cost of goods sold as a percentage of net revenue slightly increased to 76.7% (from 76.4%), primarily due to unfavorable fixed costs and fulfillment costs from sales deleverage[182] - SG&A expenses (excluding stock-based compensation) as a percentage of net revenue increased from 19.4% to 28.0% due to sales deleverage, despite reduced marketing spend[184] - Zulily recorded $2 million in restructuring charges in Q1 2022 related to its regional office space strategy and the closure of its Pennsylvania fulfillment center[185] - Depreciation and amortization decreased by $5 million, mainly due to the amortization of Zulily's customer relationship asset reaching the end of its useful life[186] Item 3. Quantitative and Qualitative Disclosures about Market Risk. This section details Qurate Retail's exposure to market risks, primarily from interest rate fluctuations on its debt and investments, and foreign currency exchange rate fluctuations affecting its foreign subsidiaries, with interest rate risk managed through a mix of fixed and variable rate debt and periodic assessment of derivative financial instruments - Qurate Retail is exposed to market risk from interest rate changes on borrowing and investment activities, and foreign currency exchange rate fluctuations, particularly from QVC's foreign subsidiaries[187][190] Debt Composition by Rate Type (March 31, 2022, amounts in millions) | Segment | Variable rate debt (Principal amount) | Weighted average interest rate | Fixed rate debt (Principal amount) | Weighted average interest rate | | :------------------------ | :---------------------------------- | :----------------------------- | :------------------------------- | :----------------------------- | | QxH and QVC International | $402 | 1.8% | $4,575 | 5.0% | | Zulily | $200 | 1.8% | $— | —% | | Corporate and other | $20 | 1.8% | $1,951 | 5.3% | - A 1% change in foreign currency exchange rates relative to the U.S. Dollar would have impacted QVC's Adjusted OIBDA by approximately $1 million for the three months ended March 31, 2022[190] Item 4. Controls and Procedures. This section confirms that Qurate Retail's disclosure controls and procedures were effective as of March 31, 2022, providing reasonable assurance for timely and accurate reporting, and states that there were no material changes in internal control over financial reporting during the quarter - The Company's disclosure controls and procedures were effective as of March 31, 2022[193] - There were no material changes in the Company's internal control over financial reporting during the three months ended March 31, 2022[194] PART II—OTHER INFORMATION Item 1. Legal Proceedings This section states that there are no legal proceedings to report for Qurate Retail, Inc - No legal proceedings were reported[196] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports that Qurate Retail, Inc. did not repurchase any Series A or Series B common stock under its share repurchase programs during the three months ended March 31, 2022, nor were any shares surrendered for withholding taxes on stock-based compensation - No repurchases of Series A or Series B common stock were made under the Company's share repurchase programs during the three months ended March 31, 2022[197] - No shares were surrendered by officers and employees to pay withholding taxes on stock-based compensation during the three months ended March 31, 2022[198] Item 6. Exhibits This section lists all exhibits filed as part of the Quarterly Report on Form 10-Q, including various certifications and Inline XBRL documents - Exhibits include Rule 13a-14(a)/15d-14(a) Certifications, Section 1350 Certification, Reconciliation of Net Assets and Net Earnings, and various Inline XBRL documents[200] SIGNATURES SIGNATURES This section contains the official signatures of Qurate Retail, Inc.'s President and Chief Executive Officer, David Rawlinson II, and Chief Accounting Officer and Principal Financial Officer, Brian J. Wendling, certifying the Quarterly Report on Form 10-Q - The report was signed by David Rawlinson II, President and Chief Executive Officer, and Brian J. Wendling, Chief Accounting Officer and Principal Financial Officer, on May 6, 2022[204]