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QVC INC – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
Edgar Glimpses
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, product and marketing strategies; the impact of the fire at theRocky Mount fulfillment center; insurance recoveries; the remediation of a material weakness; capital expenditures; revenue growth; the recoverability of our goodwill and other long-lived assets; our projected sources and uses of cash; repayment of debt; and the anticipated impact of certain contingent liabilities related to legal and tax proceedings and other matters arising in the ordinary course of business. 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 continuing global and regional economic impacts of the COVID-19 pandemic and other public health-related risks and events, on 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 on our websites and our ability to convert
visitors into consumers or contributors;
•uncertainties inherent in the development and integration of new business lines
and business strategies;
•our future financial performance, including availability, terms and deployment
of capital;
•our ability to 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 business;
•changes in, or failure or inability to comply with, government regulations,
including, without limitation, regulations of the
Commission
•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 inflation and increased labor costs;
•increases in market interest rates;
•changes in tariffs, trade policy and trade relations and the
("U.K.")'s exit from the
•changes in trade policy and trade relations with
•consumer spending levels, including the availability and amount of individual
consumer debt;
•the effects of our debt obligations;
•advertising spending levels;
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Table of Contents
•system interruption and the lack of integration and redundancy in the systems
and infrastructures of our business;
•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;
•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;
•threatened terrorist attacks, political unrest in international markets and
ongoing military action around the world;
•fluctuations in foreign currency exchange rates;
•natural disasters, public health crises (including resurgences of COVID-19 and its variants), political crises, and other catastrophic events or other events outside of our control, including climate change;
•failure to successfully implement Project Athens (defined below); and
•Qurate Retail's dependence on our cash flow for servicing its debt.
For additional risk factors, please see Part I, Item 1A of our Annual Report on Form 10-K for the year endedDecember 31, 2022 (the "2022 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 2022 10-K.
Overview
QVC, Inc. and its consolidated subsidiaries (unless otherwise indicated or required by the context, the terms "we," "our," "us," the "Company" and "QVC" refer toQVC, Inc. and its consolidated subsidiaries) 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. QVC is comprised of the reportable segments of QxH, which is comprised of QVC-U.S. andHSN, Inc. ("HSN"), andQVC-International . These segments reflect the way the Company evaluates its business performance and manages its operations.
Strategies and challenges of business units
The goal of QVC is to extend its leadership in video commerce, e-commerce, streaming commerce and social commerce by continuing to create the world's most engaging shopping experiences, combining the best of retail, media, and social, highly differentiated from traditional brick-and-mortar stores or transactional e-commerce. QVC provides customers with curated collections of unique products, made personal and relevant by the power of storytelling. We curate experiences, conversations and communities for millions of highly discerning shoppers, and we also reach large audiences, across our many platforms, for our thousands of brand partners. OnJune 27, 2022 , Qurate Retail announced a five-point turnaround plan designed to stabilize and differentiate its core QxH andQVC-International businesses and expand the Company's leadership in video streaming commerce ("Project Athens"). ProjectAthens main initiatives include: (i) improve customer experience and grow relationships; (ii) rigorously execute core processes; (iii) lower cost to serve; (iv) optimize the brand portfolio; and (v) build new high growth businesses anchored in strength. In support of Project Athens QVC's strategies are as follows.
QVC is focused on rebuilding stronger connections with their customers. In order
to improve customer experience and grow relationships, QVC is working to
optimize programming using advanced analytics to align product offerings,
promotions and
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Table of Contents airtime with customer preferences. In addition, we expect to invest in infrastructure which will endeavor to improve the customer's order to delivery experience by increasing personalization, reducing shipping time and improving shipment tracking visibility. We expect to develop a customer loyalty program which will provide customers with a more personalized experience. QVC is enhancing its core processes to deliver the human story telling experience behind a product while also sharing a clear and compelling value proposition. In order to rigorously execute core processes, QVC will optimize pricing and assortment by investing in enhanced Information Technology systems that will support real-time pricing and promotion adjustments at an item level. We will also focus on growing our private label brands to drive revenue and margin at productive scale. QVC is right sizing its cost base to improve profitability and cash generation. In order to lower cost to serve, QVC will enhance review of spending to identify cost savings opportunities, including opportunities for workforce reduction. Additionally, we will improve product margin through market vendor efficiency and lower fulfillment costs through freight optimization and higher productivity. Finally, QVC is focused on expanding in the video streaming shopping market. In order to build new high growth businesses anchored in strength, QVC expects to expand streaming viewership by improving the current streaming experience with enhanced video and navigation and seamless transactions. Additionally, we are shaping the future streaming experience with exclusive content, program and deal concepts. We are also building a next generation shopping app featuring vendors with self-made content. During 2022 QVC commenced the first phase of Project Athens, including actions to reduce inventory and a planned workforce reduction. These initiatives are consistent with QVC's strategy to operate more efficiently as it implements its turnaround plan, and QVC expects to incur additional expenses related to ProjectAthens initiatives in future periods. During the three months endedMarch 31, 2023 , QVC implemented a workforce reduction and recorded restructuring charges of$13 million in Restructuring and fire related costs, net of (recoveries) in the condensed consolidated statement of operations. QVC's future net revenue will depend on its ability to grow through digital platforms, retain and grow revenue from existing customers, and attract new 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. The current economic uncertainty in various regions of the world in which our subsidiaries and affiliates operate could adversely affect demand for our products and services since a substantial portion of our revenue is derived from discretionary spending by individuals, which typically falls during times of economic instability. Global financial markets may experience disruptions, including increased volatility and diminished liquidity and credit availability. If economic and financial market conditions in theU.S. or other key markets, includingJapan andEurope , continue to be uncertain or deteriorate, our customers may respond by suspending, delaying or reducing their discretionary spending. A suspension, delay or reduction in discretionary spending could adversely affect revenue. Accordingly, our ability to increase or maintain revenue and earnings could be adversely affected to the extent that relevant economic environments decline. Such weak economic conditions may also inhibit our expansion into new European and other markets. We currently are unable to predict the extent of any of these potential adverse effects.
The Company has seen inflationary pressures during the period including higher
wages and merchandise costs. If these pressures persist, inflated costs may
result in certain increased costs outpacing our pricing power in the near term.
OnDecember 18, 2021 , QVC experienced a fire at itsRocky Mount fulfillment center inNorth Carolina .Rocky Mount was the Company'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. The Company took 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. QVC sold the property inFebruary 2023 , received net cash proceeds of$15 million and recognized a$13 million gain on the sale in fire related costs, net of (recoveries) during the three months endedMarch 31, 2023 . We are currently evaluating long-term alternatives to alleviate the strain on our network caused by the loss of theRocky Mount fulfillment center. 21
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Table of Contents Based on the provisions of QVC's insurance policies and discussions with insurance carriers, the Company determined that recovery of certain fire related costs was probable, and recorded an insurance receivable. As ofDecember 31, 2022 , the Company recorded cumulative fire related costs of$407 million , including$119 million of costs that will not be reimbursed by QVC's insurance policies, estimated insurance recoveries of$288 million for which recovery was deemed probable, received cumulative insurance proceeds of$380 million and recorded a gain on insurance proceeds received in excess of fire losses of$132 million in restructuring and fire related costs, net of (recoveries). As ofDecember 31, 2022 , the Company recorded an insurance receivable, net of advance proceeds received, of$40 million in accounts receivable in the condensed consolidated balance sheet. During the three months endedMarch 31, 2023 , the Company received$55 million of insurance proceeds of which$40 million was applied to the insurance receivable and$15 million was recognized as a gain, partially offset by$11 million of other fire related costs in fire related costs, net of (recoveries) in the condensed consolidated statement of operations. There was no remaining insurance receivable outstanding as ofMarch 31, 2023 . We submitted our business interruption claim with the insurance company and are still in the process of assessing the valuation of loss with our insurer; there can be no guarantee that all business interruption losses will be recovered. We expect to continue to record additional costs and recoveries until the insurance claim is fully settled. While the Company took steps to minimize the overall impact to the business, we experienced increased warehouse and logistics costs during the three months endedMarch 31, 2023 and 2022 and anticipate these increased warehouse and logistics costs to continue during 2023. InNovember 2022 ,QVC-International entered into agreements to sell two properties located inGermany and theU.K. to an independent third party. Under the terms of the agreements, QVC received net cash proceeds of$102 million related to its German facility and$80 million related to itsU.K. facility when the sale closed inJanuary 2023 . 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$69 million and$44 million gain related to the successful sale leaseback of the German andU.K. properties, respectively, during the first quarter of 2023 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$42 million and$32 million right-of-use asset and operating lease liability for the German andU.K. properties, respectively. As ofDecember 31, 2022 , assets of$71 million primarily related to theGermany andU.K. properties were classified as held for sale and included in Assets held for sale noncurrent in the consolidated balance sheet, as the proceeds from the sale were used to repay a portion of QVC's senior secured credit facility borrowings which were classified as noncurrent as ofDecember 31, 2022 . QVC classifies obligations as current when they are contractually required to be satisfied in the next twelve months. 22
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Table of Contents Results of Operations
QVC's operating results were as follows:
Three months ended March 31,
(in millions) 2023 2022
Net revenue $ 2,193 2,354
Operating costs and expenses:
Cost of goods sold (exclusive of depreciation, amortization and 1,488 1,561
Rocky Mount inventory losses shown below)
Operating 178 178
Selling, general and administrative, excluding stock-based
compensation
316 286 Adjusted OIBDA (defined below) 211 329
Restructuring and fire related costs, net of (recoveries) (including
(4) 82
Gains on sale leaseback transactions (113) -
Stock-based compensation 9 8
Depreciation 23 35
Amortization 66 74
Operating income 230 130
Other (expense) income:
(Losses) gains on financial instruments (1) 1
Interest expense, net (37) (62)
Foreign currency (loss) gain (6) 8
Other income - 20
(44) (33)
Income before income taxes 186 97
Income tax expense (51) (41)
Net income 135 56
Less net income attributable to the noncontrolling interest (13) (14)
Net income attributable to QVC, Inc. stockholder $ 122 42
Net revenue
Net revenue by segment was as follows:
Three months ended March 31,
(in millions) 2023 2022
QxH $ 1,601 1,684
QVC-International 592 670
Consolidated QVC $ 2,193 2,354
QVC's consolidated net revenue decreased 6.8% for the three months ended March
31, 2023 , as compared to the corresponding period in the prior year. The three
month decrease in net revenue is primarily due to a 6.0% decrease in units
shipped, $57 million in unfavorable foreign exchange rates and a $19 million
decrease in shipping and handling revenue primarily at QxH. These declines were
partially offset by a 2.9% increase in average selling price per unit ("ASP").
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Table of Contents During the three months endedMarch 31, 2023 and 2022, the changes in revenue and expenses were affected by changes in the exchange rates for the Japanese Yen, the Euro and the U.K. Pound Sterling . In the event theU.S. Dollar strengthens against these foreign currencies in the future, QVC's revenue and operating cash flow will be negatively affected. In discussing our operating results, the term "currency exchange rates" refers to the currency exchange rates we use to convert the operating results for all countries where the functional currency is not theU.S. Dollar. We calculate the effect of changes in currency exchange rates as the difference between current period activity translated using the prior period's currency exchange rates. Throughout our discussion, we refer to the results of this calculation as the impact of currency exchange rate fluctuations. When we refer to "constant currency operating results", this means operating results without the impact of the currency exchange rate fluctuations. The disclosure of constant currency amounts or results permits investors to understand better QVC's underlying performance without the effects of currency exchange rate fluctuations.
The percentage change in net revenue for each of QVC's segments in
and in constant currency was as follows:
Three months ended March 31, 2023
Foreign Currency
U.S. Dollars Exchange Impact Constant Currency
QxH (4.9) % - % (4.9) %
QVC-International (11.6) % (8.3) % (3.3) %
QxH's net revenue decline for the three months ended March 31, 2023 was
primarily due to a 5.5% decrease in units shipped and a $17 million decrease in
shipping and handling revenue, which was partially offset by a 2.1% increase in
ASP. For the three months ended March 31, 2023 , QxH experienced shipped sales
declines across all categories.
QVC-International's net revenue decline in constant currency for the three
months ended March 31, 2023 was primarily due to a 7.1% decrease in units
shipped across all markets. This decline was partially offset by a 4.8% increase
in ASP across all markets except the U.K. For the three months ended March 31,
2023 , QVC-International experienced shipped sales growth in constant currency in
apparel, accessories and beauty with declines across all other product
categories.
Cost of goods sold (excluding depreciation, amortization and fire related costs,
net)
QVC's cost of goods sold as a percentage of net revenue was 67.9% and 66.3% for the three months endedMarch 31, 2023 and 2022, respectively. The increase in cost of goods sold as a percentage of revenue for the three months endedMarch 31, 2023 is primarily due to higher fulfillment costs across both segments and product margin pressure primarily at QxH. Higher fulfillment costs include higher rent expense as a result of warehouses sold and leased back during the prior year and current period as well as higher labor costs. The increase in cost of goods sold was partially offset by lower inventory obsolescence at QxH due to lower levels of inventory in the current period.
Operating expenses
QVC's operating expenses are principally comprised of commissions, order processing and customer service expenses, credit card processing fees and telecommunications expenses. Operating expenses were 8.1% and 7.6% of net revenue for the three months endedMarch 31, 2023 and 2022, respectively. For the three months endedMarch 31, 2023 , the increase in operating expenses as a percent of sales was primarily due to an increase in commissions expense at QxH related to fixed commissions payments, partially offset by favorable exchange rates.
Selling, general and administrative expenses (excluding transaction related
costs and stock-based compensation)
QVC's selling, general, and administrative expenses (excluding stock-based compensation) include personnel, information technology, provision for doubtful accounts, production costs, and marketing and advertising expenses. Such expenses increased$30 million , and as a percentage of net revenue, increased from 12.1% to 14.4% for the three months endedMarch 31, 2023 as compared to the three months endedMarch 31, 2022 . The increase was primarily due to a$28 million increase in consulting expenses primarily related to Project Athens, mainly at QxH and a$12 million increase in personnel costs across both segments. These increases were partially offset by a$9 million decrease in marketing expenses and$8 million in favorable exchange rates. 24
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Restructuring and fire related costs, net of (recoveries) (including
inventory losses)
QVC recorded a gain of$4 million and a loss of$82 million for the three months endedMarch 31, 2023 and 2022, respectively, in restructuring and fire related costs, net of recoveries. For the three months endedMarch 31, 2023 , the gain related to a$15 million gain on insurance proceeds received in excess of fire losses and a$13 million gain on the sale of theRocky Mount property partially offset by$13 million of restructuring costs related to workforce reduction and$11 million of other fire related costs. For the three months endedMarch 31, 2022 , the loss was due to an$80 million write-down related toRocky Mount inventory and$2 million of fire related costs. Fire related costs, net includes expenses directly related to theRocky Mount fulfillment center fire net of expected and received insurance recoveries and gain on the sale of theRocky Mount property. Expenses indirectly related to theRocky Mount fulfillment center fire, including operational inefficiencies, are primarily included in Cost of goods sold. These indirect expenses have been submitted as part of our business interruption insurance claim; however, there can be no guarantee they will be recovered.
Gains on sale leaseback transactions
QVC recorded$113 million of gains on sale leaseback transactions for the three months endedMarch 31, 2023 . The gains related to the sale leaseback of two properties located inGermany and theU.K. There were no gains on sale leaseback transactions recorded for the three months endedMarch 31, 2022 .
Stock-based compensation
Stock-based compensation includes compensation related to options and restricted stock units granted to certain officers and employees. QVC recorded$9 million and$8 million of stock-based compensation expense for the three months endedMarch 31, 2023 and 2022, respectively.
Depreciation and amortization
Depreciation and amortization consisted of the following:
Three months ended March 31,
(in millions) 2023 2022
Customer relationships 12 12
Other technology 4 4
Acquisition related amortization 16 16
Property and equipment 23 35
Software amortization 26 27
Channel placement amortization and related expenses 24 31
Total depreciation and amortization $ 89 109
For the three months ended March 31, 2023 , property and equipment depreciation
decreased primarily due to assets disposed of related to the six owned and
operated U.S. properties sold and leased back during 2022 and the Germany and
the U.K. properties sold and leased back during the first quarter of 2023. The
decrease in channel placement amortization and related expenses for the three
months ended March 31, 2023 is due to adjustments recognized related to lower
subscriber counts.
Interest expense, net
For the three months ended March 31, 2023 , consolidated interest expense, net
decreased $25 million or 40% as compared to the corresponding period in the
prior year. The decrease in interest expense is primarily due to the reversal of
interest expense accrued in prior periods related to the settlement of state
income tax reserves during the current period, partially offset by higher
interest expense as a result of higher outstanding debt and a higher interest
rate on the senior secured credit facility.
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Foreign currency gain (loss)
Certain loans between QVC and its subsidiaries are deemed to be short-term in nature, and accordingly, the translation of these loans is recorded in the condensed consolidated statements of operations. For the three months endedMarch 31, 2023 , the change in foreign currency gain (loss) was also due to variances in interest and operating payables balances between QVC and its international subsidiaries denominated in the currency of the subsidiary and the effects of currency exchange rate changes on those balances.
Income taxes
Our effective tax rate was 27.4% and 42.3% for the three months endedMarch 31, 2023 and 2022, respectively. The 2023 rate differs from theU.S. federal income tax rate of 21% due primarily to state and foreign tax expense. The effective tax rate for the three months endedMarch 31, 2023 has decreased from the corresponding period in the prior year primarily due to state and foreign tax including the reversal of tax expense accrued in prior periods related to the settlement of state income tax reserves. These drivers were impacted by the current year's relative increase inU.S. pretax income as a percentage of consolidated pretax income in comparison to the prior year.
Adjusted Operating Income before Depreciation and Amortization (Adjusted OIBDA)
To provide investors with additional information regarding our financial statements, we disclose Adjusted OIBDA, which is a non-U.S. generally accepted accounting principles ("U.S. GAAP") measure. QVC defines Adjusted OIBDA as operating income plus depreciation and amortization, stock-based compensation and excluding restructuring and fire related costs, net of recoveries (includingRocky Mount inventory losses) and gains on sale leaseback transactions. QVC's chief operating decision maker and management team use this measure of performance in conjunction with other measures to evaluate the businesses and make decisions about allocating resources among the businesses. QVC believes that this is an important indicator of the operational strength and performance of the segments by identifying those items that are not directly a reflection of each segment's performance or indicative of ongoing business trends. In addition, this measure allows QVC to view operating results, perform analytical comparisons and perform benchmarking among its 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, cash flow provided by operating activities and other measures of financial performance prepared in accordance withU.S. GAAP. The primary material limitations associated with the use of Adjusted OIBDA as compared toU.S. GAAP results are (i) it may not be comparable to similarly titled measures used by other companies in the industry, and (ii) it excludes financial information that some may consider important in evaluating QVC's performance. QVC compensates for these limitations by providing disclosure of the difference between Adjusted OIBDA andU.S. GAAP results, including providing a reconciliation of Adjusted OIBDA toU.S. GAAP results, to enable investors to perform their own analysis of QVC's operating results. The following table provides a reconciliation of operating income to Adjusted OIBDA. Three months ended March 31, (in millions) 2023 2022 Operating income $ 230 130 Depreciation and amortization 89 109 Stock-based compensation 9 8
Restructuring and fire related costs, net of (recoveries) (including
(4) 82
Gains on sale leaseback transactions (113) -
Adjusted OIBDA $ 211 329
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QVC Adjusted OIBDA decreased by
31, 2023
comprised of an
Seasonality
QVC's business is seasonal due to a higher volume of sales in the fourth calendar quarter related to year-end holiday shopping. In recent years, QVC has earned, on average, between 21% and 24% of its revenue in each of the first three quarters of the year and between 30% and 32% of its revenue in the fourth quarter of the year.
Financial Position, Liquidity and Capital Resources
General
Historically, QVC's primary sources of cash have been cash provided by operating activities and borrowings. In general, QVC uses this cash to fund its operations, make capital purchases, make payments to Qurate Retail, make interest payments and minimize QVC's outstanding senior secured credit facility balance.
As of
invested in AAA rated money market funds and time deposits with banks rated
equal to or above A.
Senior Secured Notes
All of QVC's senior secured notes are secured by the capital stock of QVC and have equal priority to the senior secured credit facility. With the exception of the 6.375% Senior Secured Notes due 2067 and the 6.25% Senior Secured Notes due 2068, for which interest is payable quarterly, the interest on QVC's senior secured notes is payable semi-annually. The senior secured notes contains certain covenants, including certain restrictions on QVC and its 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; consolidating or merging; entering into certain transactions with affiliates; entering into sale or leaseback transactions; and restricting subsidiary distributions. The senior secured notes permit QVC to make unlimited dividends or other restricted payments so long as QVC is not in default under the indentures governing the senior secured notes and QVC's consolidated leverage ratio is not greater than 3.5 to 1.0 (the "senior secured notes leverage basket"). As ofMarch 31, 2023 , QVC's consolidated leverage ratio (as calculated under QVC's senior secured notes) was greater than 3.5 to 1.0 and as a result QVC is restricted in its ability to make dividends or other restricted payments under the senior secured notes. Although QVC will not be able to make unlimited dividends or other restricted payments under the senior secured notes leverage basket, QVC will continue to be permitted to make unlimited dividends to parent entities of QVC to service the principal and interest when due in respect of indebtedness of such parent entities (so long as there is no default under the indentures governing QVC's senior secured notes) and permitted to make certain restricted payments to Qurate Retail under an intercompany tax sharing agreement in respect of certain tax obligations of QVC and its subsidiaries.
Senior Secured Credit Facility
OnOctober 27, 2021 , QVC entered into the Fifth Amended and Restated Credit Agreement with Zulily, CBI, and QVC Global, each a direct or indirect wholly owned subsidiary of Qurate Retail, as borrowers (collectively, the "Borrowers"). The Fifth Amended and Restated Credit Agreement is a multi-currency facility providing for a$3.25 billion revolving credit facility, with a$450 million sub-limit for letters of credit and an alternative currency revolving sub-limit equal to 50% of the revolving commitments thereunder. The Fifth Amended and Restated Credit Agreement may be borrowed by any Borrower, with each Borrower jointly and severally liable for the outstanding borrowings. Borrowings bear interest at either the alternate base rate ("ABR Rate") or a LIBOR-based rate (or the applicable non-U.S. Dollar equivalent rate) ("Term Benchmark/RFR Rate") at the applicable Borrower's election in each case plus a margin. Borrowings that are ABR Rate loans will bear interest at a per annum rate equal to the base rate plus a margin that varies between 0.25% and 0.625% depending on the Borrowers' combined ratio of consolidated total debt to consolidated EBITDA (the "consolidated leverage ratio"). Borrowings that are Term Benchmark/RFR Rate loans will bear interest at a per annum rate equal to the applicable rate plus a margin that varies between 1.25% and 1.625% depending on the Borrowers' consolidated leverage ratio. Each 27
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Table of Contents 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, CBI, QVC Global or any other borrower (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 may be reborrowed. The facility matures onOctober 27, 2026 . Payment of loans may be accelerated following certain customary events of default. Availability under the Fifth Amended and Restated Credit Agreement atMarch 31, 2022 was$1.88 billion . The interest rate on the senior secured credit facility was 6.3% and 1.8% atMarch 31, 2023 and 2022, respectively. The payment and performance of the Borrowers' obligations under the Fifth Amended and Restated Credit Agreement are guaranteed by each of QVC's, QVC Global's, Zulily's and CBI's Material Domestic Subsidiaries (as defined in the Fifth 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 Fifth Amended and Restated Credit Agreement are secured, pari passu with QVC's existing notes, by a pledge of all of QVC's equity interests. The borrowings under the Fifth Amended and Restated Credit Agreement are also secured by a pledge of all of Zulily's and CBI's equity interests. The Fifth Amended and Restated Credit Agreement contains certain affirmative and negative covenants, including certain restrictions on the 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 the Borrowers' consolidated leverage ratio.
Parent Issuer and Subsidiary Guarantor Summarized Financial Information
The following information contains the summarized financial information for the combined parent (QVC, Inc. ) and subsidiary guarantors (Affiliate Relations Holdings, Inc. ;Affiliate Investment, Inc. ; AMI 2, Inc.;ER Marks, Inc. ;QVC Global Corporate Holdings, LLC ;QVC GCH Company, LLC ;QVC Rocky Mount, Inc. ;QVC San Antonio, LLC ;QVC Global Holdings I, Inc. ;HSN, Inc ;HSNi, LLC ;HSN Holding LLC ;AST Sub, Inc. ;Home Shopping Network En Espanol, L.P. ; Home Shopping Network En Espanol, L.L.C;Ingenious Designs LLC ;NLG Merger Corp. ;Ventana Television, Inc. ; andVentana Television Holdings, Inc. ) pursuant to Rules 3-10, 13-01 and 13-02 of Regulation S-X. This consolidated summarized financial information has been prepared from the Company's financial information on the same basis of accounting as the Company's consolidated financial statements. Transactions between the parent and subsidiary guarantors presented on a combined basis have been eliminated. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions, such as management fees, royalty revenue and expense, interest income and expense and gains on intercompany asset transfers.Goodwill and other intangible assets have been allocated to the subsidiaries based on management's estimates. Certain costs have been partially allocated to all of the subsidiaries of the Company.
The subsidiary guarantors are 100% owned by the Company. All guarantees are full
and unconditional and are joint and several. There are no significant
restrictions on the ability of the Company to obtain funds from its
subsidiaries, including the guarantors, by dividend or loan.
Summarized financial information for the year-to-date interim period and the
most recent annual period was as follows:
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Combined Parent-QVC,
Inc. and Subsidiary
Guarantors
March 31, 2023
Current assets $ 1,804
Intercompany payable to non-guarantor subsidiaries
(2,790)
Note receivable - related party 1,740
Noncurrent assets 6,334
Current liabilities 1,005
Noncurrent liabilities 5,840
Combined Parent-QVC,
Inc. and Subsidiary
Guarantors
December 31, 2022
Current assets $ 2,086
Intercompany payable to non-guarantor subsidiaries
(2,746)
Note receivable - related party 1,740
Noncurrent assets 6,316
Current liabilities 1,495
Noncurrent liabilities 5,612
Combined Parent-QVC,
Inc. and Subsidiary
Guarantors
Three months ended
March 31, 2023
Net revenue $ 1,751
Net revenue less cost of goods sold 697
Income before taxes 70
Net income 135
Net income attributable to QVC, Inc. Stockholder 122
Combined Parent-QVC,
Inc. and Subsidiary
Guarantors
Year ended
December 31, 2022
Net revenue $ 8,043
Net revenue less cost of goods sold 3,030
Loss before taxes (2,018)
Net income (1,810)
Net loss attributable to QVC, Inc. Stockholder
(1,867)
29
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Table of Contents
Other Debt Related Information
QVC was in compliance with all of its debt covenants as of
There are no restrictions under the debt agreements on QVC's ability to pay dividends or make other restricted payments if QVC is not in default on its senior secured notes or the Fifth Amended and Restated Credit Agreement and (i) with respect to QVC's senior secured notes, QVC's consolidated leverage ratio would be no greater than 3.5 to 1.0 and (ii) with respect to the Fifth Amended and Restated Credit Agreement, the consolidated net leverage basket for QVC, QVC Global, Zulily and CBI, would be no greater than 4.0 to 1.0. As ofMarch 31, 2023 , QVC's consolidated leverage ratio (as calculated under QVC's senior secured notes) was greater than 3.5 to 1.0 and as a result QVC is restricted in its ability to make dividends or other restricted payments under the senior secured notes. Although QVC will not be able to make unlimited dividends or other restricted payments under the senior secured notes leverage basket, QVC will continue to be permitted to make unlimited dividends under the senior secured notes to parent entities of QVC to service the principal and interest when due in respect of indebtedness of such parent entities (so long as there is no default under the indentures governing QVC's senior secured notes) and permitted to make certain restricted payments to Qurate Retail under an intercompany tax sharing agreement in respect of certain tax obligations of QVC and its subsidiaries. QVC's debt credit ratings were downgraded during the quarter endedMarch 31, 2023 as follows: (i) Fitch Ratings downgraded QVC's long-term issuer default ratings from "BB-" to "B" and QVC's senior secured rating from "BB+" to "B+"; (ii) S&P Global downgraded QVC's senior secured rating from "B+" to "B-"; and (iii) Moody's downgraded QVC's senior secured debt ratings from "Ba3" to "B2".
Additional Cash Flow Information
During the three months endedMarch 31, 2023 , QVC's primary uses of cash were$403 million of principal payments of the senior secured credit facility and finance lease obligations,$214 million of principal repayment of senior secured notes,$199 million of dividends to Qurate Retail,$78 million of capital and television distribution rights expenditures and$12 million in dividend payments fromQVC-Japan to Mitsui. These uses of cash were funded primarily with$585 million of principal borrowings from the senior secured credit facility,$198 million in proceeds from sale of fixed assets and$177 million of cash provided by operating activities. As ofMarch 31, 2023 , QVC's cash, cash equivalents and restricted cash balance was$430 million . During the three months endedMarch 31, 2022 , QVC's primary uses of cash were$176 million of principal payments of the senior secured credit facility and finance lease obligations,$112 million of dividends to Qurate Retail,$36 million of capital and television distribution rights expenditures,$18 million of cash used in operating activities and$14 million in dividend payments fromQVC-Japan to Mitsui. These uses of cash were funded primarily with$368 million of principal borrowings from the senior secured credit facility. As ofMarch 31, 2022 , QVC's cash, cash equivalents balance and restricted cash was$531 million . The change in cash provided by operating activities for the three months endedMarch 31, 2023 compared to the previous year was primarily due to changes in working capital. Working capital at any specific point in time is subject to many variables, including seasonality, inventory management, the timing of cash receipts and payments, vendor payment terms, and fluctuations in foreign exchange rates. As ofMarch 31, 2023 ,$240 million of the$430 million in cash, cash equivalents and restricted cash was held by foreign subsidiaries. Cash in foreign subsidiaries is available for domestic purposes with no significant tax consequences upon repatriation to theU.S. QVC accrues taxes on the unremitted earnings of its international subsidiaries. Approximately 58% of this foreign cash balance was that ofQVC-Japan . QVC owns 60% ofQVC-Japan and shares all profits and losses with the 40% minority interest holder, Mitsui. We believe that we currently have appropriate legal structures in place to repatriate foreign cash as tax efficiently as possible and meet the business needs of QVC. 30
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Table of Contents Other QVC's material cash requirements for 2023, outside of normal operating expenses, include the costs to service outstanding debt, expenditures for affiliation agreements with television providers, and capital expenditures expected to be between$200 and$245 million , including$40 million already expended for the three months endedMarch 31, 2023 . The Company also may make dividend payments to Qurate Retail. Refer to the off-balance sheet arrangements and aggregate contractual obligations table below for a summary of other material cash requirements as ofMarch 31, 2023 . The Company expects that cash on hand and cash provided by operating activities in future periods and outstanding borrowing capacity will be sufficient to fund projected uses of cash. QVC has contingent liabilities related to legal and tax proceedings and other matters arising in the ordinary course of business. Although it is reasonably possible QVC may incur losses upon the 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, that may be required to satisfy such contingencies will not be material in relation to the accompanying condensed consolidated financial statements.
Off-balance Sheet Arrangements and Aggregate Contractual Obligations
Information concerning the amount and timing of cash requirements, both accrued and off-balance sheet, under our contractual obligations as ofMarch 31, 2023 is summarized below: Payments due by period (in millions) Remainder of 2023 2024 2025 2026 2027 Thereafter Total Long-term debt (1) $ - 600 600 1,297 575 1,925 4,997 Interest payments (2) 186 261 234 206 121 2,302 3,310 Finance lease obligations (including imputed interest) 2 1 - - - - 3 Operating lease obligations 61 80 70 64 64 815 1,154
(1) Amounts exclude Finance lease obligations and the issue discounts on the
4.45%, 4.85%, 5.45% and 5.95% Senior Secured Notes.
(2) Amounts (i) are based on the terms of our senior secured notes, (ii) assumes
that our existing debt is repaid at maturity and (iii) excludes finance lease
obligations.
31
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Table of Contents
Federal Register Extracts
Hallmark Announces AM Best Rating Changes, Interim Final Arbitration Award, and Partnership with an AM Best “A” Rated Carrier
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