Tree.com, Inc. (parent of LendingTree, LLC) — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. The filing is by Tree.com, Inc., the parent of LendingTree, LLC. Unless noted, financial amounts below are in millions of dollars. LendingTree Loans and the Real Estate businesses are presented as discontinued operations; continuing results primarily reflect the Exchanges business.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Continuing-operations revenue | $13.1 | $15.2 | $44.0 | $48.0 |
| Gross margin | $12.1 (92.4%) | $13.9 (91.1%) | $40.4 (92.0%) | $44.4 (92.4%) |
| Operating loss | $(3.8) | $(7.4) | $(27.5) | $(21.8) |
| Adjusted EBITDA from continuing operations | $(0.5) | $(6.4) | $(14.3) | $(14.2) |
| Net income (loss), all operations | $12.6 | $1.8 | $(44.7) | $(5.1) |
| Basic EPS, all operations | $1.14 | $0.16 | $(4.07) | $(0.47) |
- Q3 continuing revenue fell 14%; match fees declined 4% and closed-loan fees fell 77%, reflecting pricing changes and lower closed-loan fees. Nine-month revenue fell 8%, despite a 6% increase in match fees, as closed-loan fees declined 75%.
- Q3 operating loss narrowed as selling and marketing expense dropped 35% and general and administrative expense fell 30%. For the nine months, operating loss worsened 26%, principally because litigation settlements and contingencies rose to $5.2 million from $0.1 million.
- Q3 net income included $16.3 million of income from discontinued operations, including a $7.8 million after-tax gain on the RealEstate.com asset sale. Continuing operations still lost $3.7 million. Nine-month discontinued operations lost $16.9 million.
- Continuing-operations operating cash use was $20.9 million for the nine months, compared with $30.1 million in 2010. Investing cash use was $7.0 million and financing cash use was $4.3 million. Including discontinued operations, cash and cash equivalents decreased $58.5 million to $10.3 million.
Balance sheet, liquidity and debt
- At September 30, cash and cash equivalents were $10.3 million and restricted cash was $13.0 million, versus $68.8 million and $8.2 million, respectively, at December 31, 2010. Management attributed part of the decline to LendingTree Loans using $30 million of unrestricted cash to fund loans during Q3; those loans were sold in October.
- Total assets were $297.2 million, total liabilities $238.0 million and shareholders’ equity $59.1 million. Current assets and liabilities include substantial discontinued-operation balances, so headline current totals should be interpreted in that context.
- Discontinued LendingTree Loans had $141.9 million outstanding under warehouse lines at quarter-end, secured by loans held for sale. Its loans held for sale were $185.3 million. Subsequent to quarter-end, committed warehouse capacity increased to $275 million; one $100 million line was scheduled to expire December 13, 2011. The company reported covenant compliance for Q3.
Material changes, outlook and risks
- Planned LendingTree Loans sale: The May 2011 agreement with Discover Bank provides for approximately $55.9 million, subject to adjustments: $35.9 million at closing and two later $10 million payments subject to conditions. Discover extended the termination date to December 8, 2011 and paid a $1.0 million extension fee, creditable against the purchase price. Closing remained subject to conditions, including regulatory approvals and operational and financial requirements.
- Real Estate exit: The company closed its company-owned brokerage offices by March 31 and sold remaining RealEstate.com assets in September for $8.3 million, recognizing a $7.8 million gain. Nine-month Real Estate losses included goodwill disposal, trademark impairment and restructuring charges.
- Management said lower mortgage rates boosted mortgage leads in Q2 and Q3, while reducing lender demand for externally generated leads; it expects to keep adjusting marketing spend to revenue opportunities. Management also cited continued housing-market weakness and did not provide specific forward earnings guidance.
- Management expected Discover Bank lead payments after closing to add revenue and be accretive to gross and net margin. If the sale does not close, warehouse availability tightens, or rates move adversely, the company may need to reduce working capital, sell assets or seek financing; financing may not be available on acceptable terms.
- Loan repurchase and indemnification obligations remain with LendingTree Loans after a sale. The recorded reserve was $27.0 million; estimated remaining possible losses were $25 million to $33 million, excluding a separate $0.3 million settlement payment. The company cautioned that estimates are uncertain because it lacks current loan-level performance data.
- Legal and regulatory matters include a proposed Massachusetts regulatory consent agreement, with a fine amount not stated and loss range not estimable, and a North Carolina tax assessment with a possible loss range of $0 to $3.6 million for which no reserve was recorded. Litigation accruals were $3.7 million at September 30.
- Disclosure controls were deemed ineffective because of an unresolved material weakness related to income taxes identified at year-end 2010. Management reported remediation steps but said the revised controls had not operated long enough to conclude the weakness was remediated.
Important facts for investors to verify
- Whether the Discover transaction closed, its final consideration and the status of the two contingent payments and escrow.
- Updated warehouse borrowing capacity, maturities, covenant compliance and liquidity needs while LendingTree Loans remains active.
- Actual outcomes and reserve adequacy for loan repurchase claims, the Massachusetts matter, litigation and the North Carolina tax assessment.
- Progress in remediating the income-tax control weakness and any subsequent changes in disclosure controls.
- Continuing Exchanges revenue, match volumes and marketing efficiency after LendingTree Loans becomes a participating network lender and pays for leads.