Tree.com, Inc. (LendingTree) — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; filed April 16, 2012. The registrant is Tree.com, Inc., parent of LendingTree, LLC. The filing reports 2011 annual results, not a standalone fourth-quarter summary. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Business context and strategic changes
Continuing operations consist of Exchanges, a consumer lead-generation and comparison-shopping business across mortgage, education, auto, home services and other verticals. Non-mortgage Exchanges generated approximately 30% of 2011 revenue. LendingTree Loans and the former Real Estate business are classified as discontinued operations.
- Tree.com closed its company-operated RealEstate.com brokerage offices by March 31, 2011 and sold remaining domain and trademark assets in September for $8.3 million, recording a $7.8 million gain.
- The company agreed to sell substantially all LendingTree Loans operating assets to Discover for approximately $55.9 million, subject to closing conditions. The amended agreement anticipated closing by mid-2012.
- Continuing-period comparisons exclude discontinued operations; 2010 results were recast accordingly. The filing also restated 2010 financial statements for errors it characterized as immaterial to that period.
Financial results and liquidity
| Metric | 2011 | 2010 | Change / context |
|---|---|---|---|
| Continuing revenue | $54.6 | $59.9 | Down 9% |
| Operating loss, continuing operations | $(61.1) | $(33.1) | Loss widened; includes $29.3 of asset impairment charges |
| Net loss, continuing operations | $(49.7) | $(26.6) | Includes $11.8 tax benefit in 2011 |
| Net loss attributable to common shareholders | $(59.5) | $(18.2) | 2011 includes discontinued-operations loss after a $7.8 disposal gain |
| Adjusted EBITDA, continuing operations | $(15.7) | $(22.1) | Improved by $6.4; non-GAAP measure |
| Net cash used in continuing operating activities | $(28.1) | $(31.6) | Cash burn continued |
| Cash and cash equivalents at year-end | $45.5 | $68.8 | Restricted cash was $12.5 versus $8.2 |
Continuing operating loss was 112% of revenue, compared with 55% in 2010. Cost of revenue was 8% of revenue (9% in 2010); selling and marketing remained 85% of revenue. Match-fee revenue rose 5% to $51.1 million, while closed-loan fees fell 76% to $2.1 million after the company shifted mortgage pricing toward upfront match fees. Matched requests declined 7%, from 1.14 million to 1.07 million.
Discontinued operations had revenue of $121.4 million in 2011, down 12% from $138.3 million. LendingTree Loans reported revenue of $117.5 million and a $0.7 million net loss, versus $124.2 million revenue and $18.5 million net income in 2010. The Real Estate businesses reported a $9.1 million net loss in 2011, including the disposal gain, versus a $10.1 million net loss in 2010.
Continuing operations used $8.1 million in investing activities, principally $6.1 million of capital expenditures, and $3.3 million in financing activities. Consolidated total assets were $331.3 million and total liabilities $285.9 million at year-end; these totals include discontinued operations. The filing does not provide a single consolidated debt figure for continuing operations. LendingTree Loans, classified as discontinued, had $197.7 million outstanding on warehouse lines at year-end, secured by loans held for sale; borrowing capacity was $275 million at year-end and increased to $325 million after a January 2012 facility was added.
Material changes, outlook, risks and unusual items
- Sale proceeds and conditions: The $55.9 million Discover price included $5 million in extension payments credited to the price; $3 million had been paid in March 2012, $37.9 million was due at closing, and $10 million one year after closing. Certain payments depend on specified Exchanges metrics. Approximately $19 million of the initial payment was expected to be held in escrow for contingent liabilities. Regulatory approvals and other closing conditions remained outstanding.
- Post-sale model: Management expected mortgage inquiries then sent exclusively to LendingTree Loans to become available to Network Lenders, generally for matching with multiple lenders. It expected lead sales to Discover to add revenue and to be accretive to gross and net margins, while noting uncertainty about demand and profitability. Management also anticipated lower general and administrative costs in 2012 and continued flexible marketing spending. No specific consolidated revenue or earnings guidance was provided.
- Impairment and control weaknesses: A $29.0 million impairment of indefinite-lived trade names and trademarks and $0.3 million of definite-lived impairment were recorded for the second quarter of 2011. The company restated second- and third-quarter 2011 results after identifying weaknesses in controls over impairment assumptions and income-tax accounting. Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2011; remediation was underway but incomplete.
- Contingencies: The loan-loss reserve for previously sold loans was $31.5 million at year-end; management estimated remaining possible representation-and-warranty losses of $27–$37 million, excluding specified settlements. Tree.com would retain these liabilities after the asset sale. The Massachusetts regulator matter had an estimated possible loss range of $0.5–$7.1 million, with $0.5 million reserved; a North Carolina tax matter had a possible $0–$3.6 million loss with no reserve recorded.
- Other material risks: The sale could be delayed or fail; warehouse financing and mortgage-market conditions affect LendingTree Loans pending sale. After the sale, the Exchanges business must absorb more mortgage leads through lender demand, which was not assured. Other risks include mortgage-market weakness, lender and investor concentration, regulatory and licensing requirements, consumer-data security, litigation, and the company’s history of losses. Accumulated deficit was $858.1 million.
- Audit and outlook context: Deloitte issued an unqualified opinion on the financial statements, but did not audit internal-control effectiveness. Management cautioned that forward-looking statements were uncertain and undertook no general obligation to update them. The company had no history of cash dividends and did not expect to pay them in the foreseeable future.
Investor facts to verify
- Whether the Discover sale closed on schedule, the net cash actually received, and the amount and timing of escrow releases and deferred payments.
- Actual post-sale mortgage lead volumes, lender demand, lead monetization, and margins versus management’s expectations.
- Subsequent loan repurchase, indemnification and premium-repayment claims compared with the $31.5 million reserve and estimated $27–$37 million possible-loss range.
- Progress in remediating the income-tax and intangible-asset impairment control weaknesses, and any subsequent restatements or reporting effects.
- Resolution and cash cost of the Massachusetts regulatory matter, North Carolina tax matter, and other pending litigation or contingencies.
- Continuing-operations cash burn, liquidity after restricted cash and sale-related escrow, and any financing needs.