Item 7. Management’s Discussion and Analysis
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements and accompanying notes included elsewhere within this report. This discussion includes both historical information and forward-looking information that involves risks, uncertainties and assumptions. Our actual results may differ materially from management's expectations as a result of various factors, including but not limited to those discussed in the sections entitled "Risk Factors" and "Cautionary Statement Regarding Forward-Looking Information."
Company Overview
LendingTree, Inc. is the parent of LT Intermediate Company, LLC, which holds all of the outstanding ownership interests of LendingTree, LLC, and LendingTree, LLC owns several companies.
We operate what we believe to be the leading online consumer platform that connects consumers with the choices they need to be confident in their financial decisions. Our online consumer platform provides consumers with access to product offerings from our Network Partners, including mortgage loans, home equity loans and lines of credit, reverse mortgage loans, auto loans, credit cards, deposit accounts, personal loans, student loans, small business loans, insurance quotes and other related offerings. In addition, we offer tools and resources, including free credit scores, that facilitate comparison shopping for loans, deposit products, insurance and other offerings. We seek to match consumers with multiple providers, who can offer them competing quotes for the product, or products, they are seeking. We also serve as a valued partner to lenders and other providers seeking an efficient, scalable and flexible source of customer acquisition with directly measurable benefits, by matching the consumer inquiries we generate with these Network Partners.
Our My LendingTree platform offers a personalized comparison-shopping experience by providing free credit scores and credit score analysis. This platform enables us to monitor consumers' credit profiles and then identify and alert them to loans and other offerings on our marketplace that may be more favorable than the terms they may have at a given point in time. This is designed to provide consumers with measurable savings opportunities over their lifetimes.
We are focused on developing new product offerings and enhancements to improve the experiences that consumers and Network Partners have as they interact with us. By expanding our portfolio of financial services offerings, we are growing and diversifying our business and sources of revenue. We intend to capitalize on our expertise in performance marketing, product development and technology, and to leverage the widespread recognition of the LendingTree brand, to effect this strategy.
We believe the consumer and small business financial services industry is still in the early stages of a fundamental shift to online product offerings, similar to the shift that started in retail and travel many years ago and is now well established. We believe that like retail and travel, as consumers continue to move towards online shopping and transactions for financial services, suppliers will increasingly shift their product offerings and advertising budgets toward the online channel. We believe the strength of our brands and of our partner network place us in a strong position to continue to benefit from this market shift.
The LendingTree Loans business is presented as discontinued operations in the accompanying consolidated balance sheets, consolidated statements of operations and comprehensive income (loss) and consolidated cash flows for all periods presented. Except for the discussion under the heading "Discontinued Operations," the analysis within Management's Discussion and Analysis of Financial Condition and Results of Operations reflects our continuing operations.
Economic Conditions
During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of COVID-19. The pandemic has significantly impacted the economic conditions in the U.S., as federal, state and local governments react to the public health crisis, creating significant uncertainties in the U.S. economy. The downstream impact of various lockdown orders and related economic pullback are affecting our business and marketplace participants to varying degrees. We are continuously monitoring the impacts of the current economic conditions related to the COVID-19 pandemic and the effect on our business, financial condition and results of operations.
Of our three reportable segments, the Consumer segment has been most impacted as unsecured credit and the flow of capital in certain areas of the market have contracted. The impact to our Home and Insurance segments was much less substantial and these segments recovered by the end of 2020. While forecasting the timeline of full recovery for the Consumer segment remains challenging, the momentum of recovery has increased in each quarter subsequent to the onset of the COVID-19 pandemic. We are encouraged by the progress made, and continue to view the Consumer segment with optimism over the medium to long term. Most of our selling and marketing expenses are variable costs that we adjust dynamically in relation to revenue opportunities to profitably meet demand. Thus, as our revenue was negatively impacted during the recession, our marketing expenses generally decreased in line with revenue.
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Segment Reporting
We have three reportable segments: Home, Consumer and Insurance.
Recent Business Acquisitions
On February 28, 2020, we acquired an equity interest in Stash for $80.0 million. Stash is a consumer investing and banking platform. Stash brings together banking, investing, and financial services education into one seamless experience offering a full suite of personal investment accounts, traditional and Roth IRAs, custodial investment accounts, and banking services, including checking accounts and debit cards with a Stock-Back® rewards program.
On January 10, 2019, we acquired ValuePenguin, a personal finance website that offers consumers objective analysis on a variety of financial topics from insurance to credit cards, for $106.2 million. Combining ValuePenguin’s high-quality content and search engine optimization capability with proprietary technology and insurance carrier network from QuoteWizard enables us to provide immense value to insurance carriers and agents. This strategic acquisition positions us to achieve further scale in the insurance space as well as the broader financial services industry.
On October 31, 2018, we acquired QuoteWizard, one of the largest insurance comparison marketplaces in the growing online insurance advertising market, for $299.5 million in cash and potential contingent consideration payments of up to $70.2 million through October 2021, subject to achieving specific targets. QuoteWizard services clients by driving consumers to insurance companies’ websites, providing leads to agents and carriers, as well as phone transfers of consumers into carrier call centers. This acquisition has established LendingTree as a leading player in the online insurance advertising industry, while continuing our ongoing diversification within the financial services category.
On July 23, 2018, we acquired Student Loan Hero for $62.7 million in cash, of which $2.3 million was recognized as severance expense in our consolidated statements of operations and comprehensive income (loss). Student Loan Hero, a personal finance website dedicated to helping student loan borrowers manage their student debt, offers current and former students in-depth financial comparison tools, educational resources, and unbiased, personalized advice. This strategic transaction allows us to scale our student loan business and provide consumers with the tools and resources to better understand their personal finances and make smarter financial decisions.
On June 11, 2018, we acquired Ovation, a leading provider of credit services with a strong customer service reputation, for $12.1 million in cash and potential contingent consideration payments of up to $8.75 million through June 2020, subject to achieving specified targets. Ovation utilizes a proprietary software application that facilitates the credit repair process and is integrated directly with certain credit reporting agencies while educating consumers on credit improvement via ongoing outreach with Ovation case advisors. The proprietary software application offers consumers a simple, streamlined process to identify, dispute, and correct inaccuracies within their credit reports. Ovation's experienced management team, strong credit reporting agency relationships and customized software platform enable us to help more consumers achieve their financial goals through the LendingTree platform.
These acquisitions continue our diversification strategy.
Recent Mortgage Interest Rate Trends
Interest rate and market risks can be substantial in the mortgage lead generation business. Short-term fluctuations in mortgage interest rates primarily affect consumer demand for mortgage refinancings, while long-term fluctuations in mortgage interest rates, coupled with the U.S. real estate market, affect consumer demand for new mortgages. Consumer demand, in turn, affects lender demand for mortgage leads from third-party sources, as well as our own ability to attract online consumers to our website.
Typically, when interest rates decline, we see increased consumer demand for mortgage refinancing, which in turn leads to increased traffic to our website and decreased selling and marketing efforts associated with that traffic. At the same time, lender demand for leads from third-party sources typically decreases, as there are more consumers in the marketplace seeking refinancings and, accordingly, lenders receive more organic mortgage lead volume. Due to lower lender demand, our revenue earned per consumer typically decreases, but with correspondingly lower selling and marketing costs.
Conversely, when interest rates increase, we typically see decreased consumer demand for mortgage refinancing, leading to decreased traffic to our website and higher associated selling and marketing efforts associated with that traffic. At the same time, lender demand for leads from third-party sources typically increases, as there are fewer consumers in the marketplace and, accordingly, the supply of organic mortgage lead volume decreases. Due to high lender demand, we typically see an increase in the amount lenders will pay per matched lead, which often leads to higher revenue earned per consumer. However, increases in the amount lenders will pay per matched lead in this situation is limited by the overall cost models of our lenders, and our revenue earned per consumer can be adversely affected by the overall reduced demand for refinancing in a rising rate environment.
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We dynamically adjust selling and marketing expenditures in all interest rate environments to optimize our results against these variables.
According to Freddie Mac, 30-year mortgage interest rates increased from 3.95% at the end of 2017 to a monthly average of 4.87% in November 2018, but declined to 4.64% at the end of 2018. During 2019, 30-year mortgage interest rates steadily decreased from a monthly average of 4.46% in January 2019, ending at a monthly average of 3.72% in December. The declining trend continued into 2020, largely as a result of stimulus efforts in response to the COVID-19 pandemic, ending at a monthly average of 2.68% in December 2020.
On a full-year basis, 30-year mortgage interest rates decreased to an average 3.11% in 2020, compared to 3.94% and 4.54% in 2019 and 2018, respectively.
Typically, as mortgage interest rates decline, there are more consumers in the marketplace seeking refinancings and, accordingly, the mix of mortgage origination dollars will move towards refinance mortgages. According to Mortgage Bankers Association ("MBA") data, total refinance origination dollars increased from 28% of total 2018 mortgage origination dollars to 38% in 2019, then increased further to 60% in 2020 as a result of the general trend in average mortgage interest rates. Total refinance origination dollars increased by 70% in 2019 over 2018 and by 109% in 2020 over 2019. Industry-wide mortgage origination dollars increased by 34% in 2019 over 2018 and by 59% in 2020 over 2019.
Looking forward, the MBA is projecting 30-year mortgage interest rates to increase slightly in 2021 to an average 3.4%. According to MBA projections, the mix of mortgage origination dollars is expected to move back towards purchase mortgages with the refinance share representing just 42% for 2021.
The U.S. Real Estate Market
The health of the U.S. real estate market and interest rate levels are the primary drivers of consumer demand for new mortgages. Consumer demand, in turn, affects lender demand for purchase mortgage leads from third-party sources. Typically, a strong real estate market will lead to reduced lender demand for leads, as there are more consumers in the marketplace seeking financing and, accordingly, lenders receive more organic lead volume. Conversely, a weaker real estate market will typically lead to an increase in lender demand, as there are fewer consumers in the marketplace seeking mortgages.
According to the National Association of Realtors ("NAR"), nationwide existing home sales in 2018 declined approximately 3% compared to 2017 due to limited inventory of homes for sale and rising interest rates. Existing home sales in 2019 remained consistent with 2018 levels. In 2020, existing home sales grew by 6% over 2019, fueled by increased competition for low inventory as well as an increase in first-time home buyers. The NAR expects a 15% increase in existing home sales in 2021.
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Convertible Senior Notes and Hedge and Warrant Transactions
On July 24, 2020, we issued $575.0 million aggregate principal amount of our 0.50% Convertible Senior Notes due July 15, 2025 and, in connection therewith, entered into Convertible Note Hedge and Warrant transactions with respect to our common stock.
On May 31, 2017, we issued $300.0 million aggregate principal amount of our 0.625% Convertible Senior Notes due June 1, 2022 and, in connection therewith, entered into Convertible Note Hedge and Warrant transactions with respect to our common stock. On July 24, 2020, a portion of the net proceeds from the issuance of the 2025 Notes was used to repurchase approximately $130.3 million principal amount of the 2022 Notes. A portion of the call spread transactions associated with the 2022 Notes was also terminated on July 24, 2020 in notional amounts corresponding to the principal amount of the 2022 Notes repurchased.
For more information, see Note 15—Debt, in the notes to the consolidated financial statements included elsewhere in this report.
North Carolina Office Properties
In December 2016, we completed the acquisition of two office buildings in Charlotte, North Carolina, for $23.5 million in cash. The buildings were acquired with the intent to use such buildings as our corporate headquarters and rent any unused space. In November 2018, the office buildings were classified as held for sale. In May 2019, we sold these buildings to an unrelated third party for a sale price of $24.4 million.
Our new corporate office is currently in the final stages of construction and will be located on approximately 176,000 square feet of office space in Charlotte, North Carolina under an approximate 15-year lease that is expected to contractually commence in the first quarter of 2021.
With our expansion in North Carolina, in December 2016, we received a grant from the state that provides up to $4.9 million in reimbursements over 12 years beginning in 2017 for investing in real estate and infrastructure in addition to increasing jobs in North Carolina at specific targeted levels through 2020, and maintaining the jobs thereafter. Additionally, the city of Charlotte and the county of Mecklenburg provided a grant that will be paid over five years and is based on a percentage of new property tax we pay on the development of a corporate headquarters. In December 2018, we received an additional grant from the state that provides up to $8.4 million in reimbursements over 12 years beginning in 2020 for increasing jobs in North Carolina at specific targeted levels through 2023, and maintaining the jobs thereafter.
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Results of Operations for the Years ended December 31, 2020 and 2019
For information on fiscal 2018 results and similar comparisons, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations for the Years ended December 31, 2019 and 2018 of our Form 10-K for the fiscal year ended December 31, 2019.
Year Ended December 31, 2020 vs. 2019
2020 2019 $
Change %
Change
(Dollars in thousands)
Home $ 320,992 $ 277,935 $ 43,057 15 %
Consumer 253,198 515,037 (261,839) (51) %
Insurance 333,765 284,792 48,973 17 %
Other 2,035 28,839 (26,804) (93) %
Revenue 909,990 1,106,603 (196,613) (18) %
Costs and expenses:
Cost of revenue (exclusive of depreciation and amortization shown separately below)
54,494 68,379 (13,885) (20) %
Selling and marketing expense 617,404 735,180 (117,776) (16) %
General and administrative expense 129,101 116,847 12,254 10 %
Product development 43,636 39,953 3,683 9 %
Depreciation 14,201 10,998 3,203 29 %
Amortization of intangibles 53,078 55,241 (2,163) (4) %
Change in fair value of contingent consideration 5,327 28,402 (23,075) (81) %
Severance 295 1,026 (731) (71) %
Litigation settlements and contingencies (943) (151) (792) (525) %
Total costs and expenses 916,593 1,055,875 (139,282) (13) %
Operating (loss) income (6,603) 50,728 (57,331) (113) %
Other (expense) income, net:
Interest expense, net (36,300) (20,271) 16,029 79 %
Other income 376 524 (148) (28) %
(Loss) income before income taxes (42,527) 30,981 (73,508) (237) %
Income tax benefit 19,961 8,479 11,482 135 %
Net (loss) income from continuing operations (22,566) 39,460 (62,026) (157) %
Loss from discontinued operations, net of tax (25,689) (21,632) 4,057 19 %
Net (loss) income and comprehensive (loss) income $ (48,255) $ 17,828 $ (66,083) (371) %
Revenue
Revenue decreased in 2020 compared to 2019 due to decreases in our Consumer segment and Other category, partially offset by increases in our Insurance and Home segments.
Our Consumer segment includes the following products: credit cards, personal loans, small business loans, student loans, auto loans, deposit accounts, and other credit products such as credit repair and debt settlement. Many of our Consumer segment products are not individually significant to revenue. Revenue from our Consumer segment decreased $261.8 million in 2020 from 2019, or 51%, primarily due to decreases in our credit cards, personal loans, small business loans and student loans products.
Revenue from our credit cards product decreased $133.9 million to $77.4 million in 2020 from $211.3 million in 2019, or 63%, primarily due to the impact of economic conditions related to the COVID-19 pandemic that caused lower issuer demand, resulting in a decrease in the number of approvals and a decrease in revenue earned per approval.
Revenue from our personal loans product decreased $86.2 million to $66.5 million in 2020 from $152.7 million in 2019, or 56%, primarily due to the impact of economic conditions related to the COVID-19 pandemic that caused a contraction in the flow of capital and a decrease in revenue earned per consumer.
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For the periods presented, no other products in our Consumer segment represented more than 10% of revenue; however, certain other Consumer products experienced notable changes primarily due to the impact of economic conditions related to the COVID-19 pandemic. Revenue from our small business loans product decreased $20.9 million in 2020 compared to 2019, due to a contraction in the flow of capital and a decrease in revenue earned per consumer. Revenue from our student loans product decreased $18.0 million in 2020 compared to 2019, due to a decrease in the number of consumers on our marketplace seeking student loans and lower demand for student loan refinancing due to the CARES Act providing temporary payment deferral relief.
The ongoing COVID-19 pandemic is anticipated to continue to impact our Consumer product revenues in the near-term due to the significant industry-wide contraction in the availability of capital for products in the Consumer segment, specifically credit cards, small business loans and personal loans, as discussed above.
Revenue from our Insurance segment increased $49.0 million to $333.8 million in 2020 from $284.8 million in 2019, or 17%, due to increases in the number of consumers seeking insurance coverage, partially offset by a decrease in revenue earned per consumer.
Our Home segment includes the following products: purchase mortgage, refinance mortgage, home equity loans and lines of credit, reverse mortgage loans, and real estate. Revenue from our Home segment increased $43.1 million in 2020 from 2019, or 15%, primarily due to an increase in revenue from our refinance mortgage product, partially offset by decreases in our purchase mortgage and home equity loans and lines of credit products.
Revenue from our refinance mortgage product increased $98.3 million in 2020 compared to 2019, primarily due to an increase in the number of consumers completing request forms resulting from increased refinancing activity in a declining interest rate environment, partially offset by a decrease in revenue earned per consumer. Revenue from our purchase mortgage product and our home equity loans and lines of credit product decreased $28.8 million and $24.0 million, respectively, in 2020 compared to 2019. Revenue from our purchase mortgage and home equity loans and lines of credit products decreased due to a shift in lender focus toward refinance products as well as decreases in revenue earned per consumer.
Our Other category includes revenue from the resale of online advertising space to third parties and revenue from home improvement referrals. Revenue in the Other category decreased $26.8 million in 2020 compared to 2019, as we ceased offering home improvement referrals during the first quarter of 2019 and ceased reselling online advertising space during the first quarter of 2020.
Cost of revenue
Cost of revenue consists primarily of costs associated with compensation and other employee-related costs (including stock-based compensation) relating to internally-operated customer call centers, third-party customer call center fees, costs for online advertising resold to third parties, credit scoring fees, credit card fees, website network hosting and server fees.
Cost of revenue decreased in 2020 from 2019, primarily due to a $21.7 million decrease for the cost of resold advertising space, partially offset by increases in compensation and benefits, website network hosting and server fees, and credit card fees of $2.4 million, $2.3 million, and $2.1 million, respectively.
Cost of revenue as a percentage of revenue remained consistent at 6% for each of 2020 and 2019.
Selling and marketing expense
Selling and marketing expense consists primarily of advertising and promotional expenditures and compensation and other employee-related costs (including stock-based compensation) for personnel engaged in sales or marketing functions. Advertising and promotional expenditures primarily include online marketing, as well as television, print and radio spending. Advertising production costs are expensed in the period the related ad is first run.
The decrease in selling and marketing expense in 2020 compared to 2019 was primarily due to decreases in advertising and promotional expense of $120.4 million, as discussed below. This was partially offset by an increase in compensation and benefits of $2.7 million as a result of increases in headcount.
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Advertising and promotional expense is the largest component of selling and marketing expense, and is comprised of the following:
Year Ended December 31, 2020 vs. 2019
2020 2019 $
Change %
Change
(Dollars in thousands)
Online $ 539,910 $ 653,739 $ (113,829) (17) %
Broadcast 13,415 20,972 (7,557) (36) %
Other 14,423 13,469 954 7 %
Total advertising expense $ 567,748 $ 688,180 $ (120,432) (18) %
Revenue is primarily driven by Network Partner demand for our products, which is matched to corresponding consumer requests. We adjust our selling and marketing expenditures dynamically in relation to anticipated revenue opportunities in order to ensure sufficient consumer inquiries to profitably meet such demand. An increase in a product’s revenue is generally met by a corresponding increase in marketing spend, and conversely a decrease in a product’s revenue is generally met by a corresponding decrease in marketing spend. This relationship exists for our Home, Consumer and Insurance segments.
We decreased our advertising expenditures in 2020 compared to 2019 in response to changes in Network Partner demand on our marketplace as a result of the ongoing COVID-19 pandemic discussed above. We will continue to adjust selling and marketing expenditures dynamically in relation to this and in response to anticipated revenue opportunities.
General and administrative expense
General and administrative expense consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in finance, legal, tax, corporate information technology, human resources and executive management functions, as well as facilities and infrastructure costs and fees for professional services.
General and administrative expense increased in 2020 compared to 2019, primarily due to increases in professional fees, facilities expense, and technology expense of $5.7 million, $4.9 million, and $4.1 million, respectively. 2019 also benefited from a $2.7 million gain on the sale of two office buildings in Charlotte, North Carolina. This was partially offset by decreases in travel and entertainment expense of $3.8 million and employee morale of $1.7 million.
Non-cash compensation expense within general and administrative expense is expected to increase in 2021, which could result in reductions in net income from continuing operations in 2021 compared to historical periods. For additional information, see Note 13—Stock-Based Compensation in the notes to the consolidated financial statements included elsewhere in this report. Non-cash compensation expense is excluded from Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization ("Adjusted EBITDA"), as discussed below.
General and administrative expense as a percentage of revenue increased to 14% in 2020 compared to 11% in 2019.
Product development
Product development expense consists primarily of compensation and other employee-related costs (including stock-based compensation) and third-party labor costs that are not capitalized, for employees and consultants engaged in the design, development, testing and enhancement of technology.
Product development expense increased in 2020 compared to 2019 as we continued to invest in internal development of new and enhanced features, functionality and business opportunities that we believe will enable us to better and more fully serve consumers and Network Partners.
Depreciation
The increase in depreciation expense in 2020 compared to 2019 was primarily the result of higher investment in internally developed software in recent years, to support the growth of our business.
Contingent consideration
During 2020, we recorded aggregate contingent consideration expense of $5.3 million due to adjustments in the estimated fair value of the earnout payments related to our recent acquisitions. For 2020, the net contingent consideration expense for the QuoteWizard, Ovation and SnapCap acquisitions was $4.0 million, $1.3 million and $0.1 million, respectively.
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During 2019, we recorded aggregate contingent consideration expense of $28.4 million due to adjustments in the estimated fair value of the earnout payments related to our recent acquisitions. For 2019, the contingent consideration expense for the QuoteWizard and SnapCap acquisitions were $27.1 million and $2.2 million, respectively. This was partially offset by a contingent consideration gain for the DepositAccounts acquisition of $1.0 million.
Interest expense
Interest expense increased in 2020 compared to 2019 due to the issuance of $575.0 million of our 2025 Notes as well as the repurchase of a portion of our existing 2022 Notes in July 2020. In 2020, interest expense of $11.5 million was recognized on the newly-issued 2025 Notes. Further, a loss on debt extinguishment of $7.8 million was recognized within interest expense upon the partial repurchase of the 2022 Notes. These increases to interest expense were partially offset by lower interest expense on the 2022 Notes subsequent to the repurchase of $130.3 million principal amount of the 2022 Notes. See Note 15—Debt for additional information on the issuance of the 2025 Notes and the partial repurchase of the 2022 Notes.
Income tax benefit
Year Ended December 31,
2020 2019
(in thousands, except percentages)
Income tax benefit $ 19,961 $ 8,479
Effective tax rate 46.9 % (27.4) %
For 2020, the effective tax rate varied from the federal statutory rate of 21% in part due to the benefit derived from excess tax deductions from the vesting of restricted stock and exercise of stock options of $2.5 million, including state taxes. The effective tax rate for 2020 was also impacted by a tax benefit of $6.1 million for the impact of the CARES Act, as described below.
On March 27, 2020, President Trump signed into law the CARES Act. This legislation is an economic relief package in response to the public health and economic impacts of COVID-19 and includes various provisions that impact us, including, but not limited to, modifications for net operating losses, accelerated timeframe for refunds associated with prior minimum taxes and modifications of the limitation on business interest.
We revalued deferred tax assets related to net operating losses in light of the changes in the CARES Act and recorded a net tax benefit of $6.1 million during 2020. These deferred tax assets are being revalued, as they have been carried back to 2016 and 2017, which are tax periods prior to the TCJA when the federal statutory tax rate was 35% versus the 21% federal statutory tax rate in effect after the enactment of the TCJA.
For 2019, the effective tax rate varied from the federal statutory rate of 21% primarily due to the benefit derived from excess tax deductions from the vesting of restricted stock and exercise of stock options of $17.1 million, including state taxes and the benefit of an expected 2019 federal research and development tax credit of $3.5 million, offset by expense due to incremental valuation allowance on state net operating losses of $3.9 million, primarily due to state legislative changes.
Discontinued Operations
The results of discontinued operations include the results of the LendingTree Loans business formerly operated by our wholly-owned subsidiary, HLC. The sale of substantially all of the assets of HLC, including the LendingTree Loans business, was completed on June 6, 2012. HLC filed a petition under Chapter 11 of the United States Bankruptcy Code on July 21, 2019, which was converted to Chapter 7 of the United States Bankruptcy Code on September 16, 2019.
As a result of the voluntary bankruptcy petition, as of the initial July 21, 2019 bankruptcy petition filing date, HLC and its consolidated subsidiary were deconsolidated from LendingTree’s consolidated financial statements. The effect of such deconsolidation was the elimination of the consolidated assets and liabilities of HLC (and its consolidated subsidiary) from LendingTree’s consolidated balance sheets.
Prior to the bankruptcy filing, losses from the LendingTree Loans business were primarily due to litigation settlements and contingencies and legal fees associated with ongoing legal proceedings.
The results of discontinued operations include litigation settlements and contingencies and legal fees associated with ongoing legal proceedings against LendingTree, Inc. or LendingTree, LLC that arose due to the LendingTree Loans business or the HLC bankruptcy filing.
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See Note 21—Discontinued Operations to the consolidated financial statements included elsewhere in this report for more information, including the accounting effect of HLC’s bankruptcy filing on our consolidated financial statements.
Segment Profit
Year Ended December 31, 2020 vs. 2019
2020 2019 $
Change %
Change
(Dollars in thousands)
Home $ 132,123 $ 103,121 $ 29,002 28 %
Consumer 106,890 213,185 (106,295) (50) %
Insurance 131,142 114,639 16,503 14 %
Other (682) 1,373 (2,055) (150) %
Segment profit $ 369,473 $ 432,318 $ (62,845) (15) %
Segment profit is our primary segment operating metric. Segment profit is calculated as segment revenue less segment selling and marketing expenses attributed to variable costs paid for advertising, direct marketing and related expenses that are directly attributable to the segments' products. See Note 22—Segment Information in the notes to the consolidated financial statements for additional information on segments and a reconciliation of segment profit to pre-tax income from continuing operations.
Consumer segment profit decreased $106.3 million during 2020, primarily due to decreases in revenue, partially offset by corresponding decreases in selling and marketing expense due to the impact of economic conditions related to the COVID-19 pandemic. While the Consumer segment was the most impacted by the COVID-19 pandemic, particularly in our credit cards, personal loans and small business loans products, recovery in the segment gained momentum throughout 2020. We are encouraged by increasing credit card issuer budgets, increasing lender demand, and sustained signs of improved consumer health and spending, while continuing to be aware of challenges in consumer demand for unsecured loans. While the timeline of full recovery for the Consumer segment remains uncertain, we continue to view the segment with optimism over the medium to long term.
Home segment profit increased $29.0 million during 2020, primarily due to an increase in revenue resulting from increased lender capacity and competition among network lenders, as well as due to margins that have improved as 2020 progressed. In an environment of historic lows in mortgage rates and nearly historic highs in mortgage originations, lender demand increased in 2020 and persists into the new year. Lenders adding operational capacity have increasingly turned to LendingTree to help drive growth. We continue to view our leading position in the mortgage industry as a key point of competitive differentiation, and believe that the mortgage industry is still in the early stages of the shift to digital fulfillment, which has accelerated throughout 2020. We believe that our reputation, history and lender relationships position us to not only benefit from but also help drive this accelerating shift to price discovery and digital fulfillment.
Insurance segment profit increased $16.5 million during 2020, primarily due to increases in revenue, partially offset by corresponding increases in selling and marketing expense. We are consistently innovating and identifying opportunities for diversification and growth within the Insurance industry. The rollout of our new publisher platform during 2020, which enables third-party content producers to monetize traffic through our distribution network, has increasingly contributed to segment results during the year. The build out in 2020 of our in-house agency serving property and casualty clients, which complements our existing offerings by enabling us to drive volume for insurance carriers who do not write premiums directly, shows promising unit economics and we intend to scale the number of licensed agents and the geographic coverage significantly throughout 2021. Finally, in addition to the automobile and home categories, our health insurance and Medicare categories continue to scale. The Medicare category, which we began building out in 2020, showed significant promise during our first open-enrollment period in the fourth quarter of 2020. We believe there is significant opportunity in this category, and intend to continue investing in its growth over the coming years.
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization
We report Adjusted EBITDA as a supplemental measure to GAAP. This measure is the primary metric by which we evaluate the performance of our businesses, on which our marketing expenditures and internal budgets are based and by which, in most years, management and many employees are compensated. We believe that investors should have access to the same set of tools that we use in analyzing our results. This non-GAAP measure should be considered in addition to results prepared in accordance with GAAP but should not be considered a substitute for or superior to GAAP results. We provide and encourage investors to examine the reconciling adjustments between the GAAP and non-GAAP measures discussed below.
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Definition of Adjusted EBITDA
We report Adjusted EBITDA as net income from continuing operations adjusted to exclude interest, income tax, amortization of intangibles and depreciation, and to further exclude (1) non-cash compensation expense, (2) non-cash impairment charges, (3) gain/loss on disposal of assets, (4) restructuring and severance expenses, (5) litigation settlements and contingencies, (6) acquisitions and dispositions income or expense (including with respect to changes in fair value of contingent consideration), and (7) one-time items. Adjusted EBITDA has certain limitations in that it does not take into account the impact to our statement of operations of certain expenses, including depreciation, non-cash compensation and acquisition-related accounting. We endeavor to compensate for the limitations of the non-GAAP measures presented by also providing the comparable GAAP measures with equal or greater prominence and descriptions of the reconciling items, including quantifying such items, to derive the non-GAAP measures. These non-GAAP measures may not be comparable to similarly titled measures used by other companies.
One-Time Items
Adjusted EBITDA is adjusted for one-time items, if applicable. Items are considered one-time in nature if they are non-recurring, infrequent or unusual and have not occurred in the past two years or are not expected to recur in the next two years, in accordance with SEC rules. One-time items for the year ended December 31, 2020 consisted of expenses incurred in connection with a secondary public offering of our common stock by our largest shareholder, for which we did not receive any proceeds. There are no adjustments for one-time items for the year ended December 31, 2019.
Non-Cash Expenses that are Excluded from Adjusted EBITDA
Non-cash compensation expense consists principally of expense associated with grants of restricted stock, restricted stock units and stock options, some of which awards have performance-based vesting conditions. These expenses are not paid in cash, and we include the related shares in our calculations of fully diluted shares outstanding. Upon settlement of restricted stock units, exercise of certain stock options or vesting of restricted stock awards, the awards may be settled, on a net basis, with us remitting the required tax withholding amount from our current funds.
Amortization of intangibles are non-cash expenses relating primarily to intangible assets acquired through acquisitions. At the time of an acquisition, the intangible assets of the acquired company, such as purchase agreements, technology and customer relationships, are valued and amortized over their estimated lives.
The following table is a reconciliation of net (loss) income from continuing operations to Adjusted EBITDA.
Year Ended December 31,
2020 2019
(in thousands)
Net (loss) income from continuing operations $ (22,566) $ 39,460
Adjustments to reconcile to Adjusted EBITDA:
Amortization of intangibles 53,078 55,241
Depreciation 14,201 10,998
Severance 295 1,026
Loss (gain) on impairments and disposal of assets 1,160 (945)
Non-cash compensation expense 53,733 52,167
Costs of secondary public offering 863 —
Change in fair value of contingent consideration 5,327 28,402
Acquisition expense 2,217 211
Litigation settlements and contingencies (943) (151)
Interest expense, net 36,300 20,271
Income tax benefit (19,961) (8,479)
Adjusted EBITDA $ 123,704 $ 198,201
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Financial Position, Liquidity and Capital Resources
For information on fiscal 2018 results and similar comparisons, see Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Financial Position, Liquidity and Capital Resources of our Form 10-K for the fiscal year ended December 31, 2019.
General
As of December 31, 2020, we had $169.9 million of cash and cash equivalents, compared to $60.2 million of cash and cash equivalents as of December 31, 2019.
We expect our cash and cash equivalents and cash flows from operations to be sufficient to fund our operating needs for the next twelve months and beyond. Our revolving credit facility described below is an additional potential source of liquidity. We will continue to monitor the impact of the ongoing COVID-19 pandemic on our liquidity and capital resources. We expect our cashflow from operating activities to be negatively impacted by the economic recession.
Notable transactions affecting cash and cash equivalents during the reported periods are as follows:
2020
In July 2020, we made litigation settlement payments of $26.5 million to the ResCap Liquidating Trust ("ResCap") and $36.0 million to the HLC bankruptcy Trustee for the matters noted in Note 21—Discontinued Operations. In October 2020, due to the timing of distributions from the HLC bankruptcy estate, we were required to make a further payment of $6.4 million to ResCap. We anticipate receiving a total $8.6 million reimbursement from the HLC bankruptcy estate related to the ResCap payments by the third quarter of 2021.
In July 2020, we issued $575.0 million of our 2025 Notes for net proceeds of approximately $559.9 million. We used approximately $63.0 million of the net proceeds to enter into Convertible Note Hedge and Warrant transactions. Further, we used $234.0 million of the net proceeds to repurchase approximately $130.3 million principal amount of our 2022 Notes. To the extent of the repurchases of the 2022 Notes, we received approximately $15.6 million as a result of terminating a corresponding portion of the Convertible Note Hedge and Warrant transactions entered into on May 31, 2017. See Note 15—Debt for additional information.
In February 2020, we acquired an equity interest in Stash for $80.0 million. The investment was funded through $80.0 million drawn on our Amended Revolving Credit Facility. See Note 8—Equity Investment to the consolidated financial statements included elsewhere in this report for more information.
During 2020, we made net repayments of $75.0 million on our Amended Revolving Credit Facility.
During 2020, we made contingent consideration payments of $6.0 million, $4.4 million and $20.2 million related to the prior acquisitions of SnapCap, Ovation and QuoteWizard, respectively. We could make an additional potential contingent consideration payment of up to $23.4 million for QuoteWizard.
2019
In 2019, we purchased an aggregate of 22,731 shares of our common stock pursuant to a stock repurchase program for $5.5 million.
In May 2019, we completed the sale of two office buildings in Charlotte, North Carolina to an unrelated third party for a sale price of $24.4 million. We received proceeds of $24.1 million, net of closing fees of $0.3 million.
In January 2019, we acquired ValuePenguin for $106.2 million in cash. The acquisition was funded through $90.0 million drawn on our 2017 Revolving Credit Facility and the balance using cash on hand.
During 2019, we paid down $140.0 million on our 2017 Revolving Credit Facility.
During 2019, we made contingent consideration payments of $3.0 million, $3.0 million, $4.4 million and $23.4 million related to the prior acquisitions of SnapCap, DepositAccounts, Ovation and QuoteWizard, respectively.
Senior Secured Revolving Credit Facility
On December 10, 2019, we entered into an amended and restated $500.0 million five-year senior secured revolving credit facility, which matures on December 10, 2024. Borrowings under the Amended Revolving Credit Facility can be used to finance working capital needs, capital expenditures and general corporate purposes, including to finance permitted acquisitions. In July 2020, we executed a temporary amendment to the Amended Revolving Credit Facility to provide for certain covenant relief, primarily to facilitate the issuance of the 2025 Notes, the repurchase of a portion of the 2022 Notes, and to pay down
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existing borrowings under the credit facility. The amendment applies from the effective date through the fiscal quarter ending June 30, 2021, unless terminated in advance by us.
As of February 26, 2021, we have outstanding a $0.2 million letter of credit under the Amended Revolving Credit Facility. The remaining borrowing capacity at February 26, 2021 is $499.8 million.
For additional information on the Amended Revolving Credit Facility, see Note 15—Debt in the notes to the consolidated financial statements included elsewhere in this report.
Cash Flows from Continuing Operations
Our cash flows attributable to continuing operations are as follows:
Year Ended December 31,
2020 2019
(in thousands)
Net cash provided by operating activities $ 111,299 $ 157,174
Net cash used in investing activities $ (122,149) $ (101,060)
Net cash provided by (used in) financing activities $ 193,290 $ (87,678)
Cash Flows from Operating Activities
Our largest source of cash provided by our operating activities is revenues generated by our products. Our primary uses of cash from our operating activities include advertising and promotional payments. In addition, our uses of cash from operating activities include compensation and other employee-related costs, other general corporate expenditures, litigation settlements and contingencies, certain contingent consideration payments, and income taxes.
Net cash provided by operating activities attributable to continuing operations decreased in 2020 from 2019 primarily due to a decrease in revenue, partially offset by a corresponding decrease in selling and marketing expense. This was further partially offset by a net increase in cash from changes in working capital, primarily due to favorable changes in accounts receivable, partially countered by unfavorable changes in income taxes receivable and current contingent consideration.
Cash Flows from Investing Activities
Net cash used in investing activities attributable to continuing operations in 2020 of $122.1 million consisted of the purchase of an $80.0 million equity interest in Stash and capital expenditures of $42.1 million primarily related to internally developed software and leasehold improvements for our new principal corporate offices currently under construction.
Net cash used in investing activities attributable to continuing operations in 2019 of $101.1 million consisted primarily of the acquisition of ValuePenguin for $105.6 million, net of cash acquired, and capital expenditures of $20.0 million primarily related to internally developed software. This was partially offset by proceeds of $24.1 million on the sale of two office buildings, net of closing expenses.
Cash Flows from Financing Activities
Net cash provided by financing activities attributable to continuing operations in 2020 of $193.3 million consisted primarily of $575.0 million of gross proceeds from the issuance of the 2025 Notes, partially offset by $233.9 million paid to repurchase a portion of the 2022 Notes, a net $47.4 million paid for the related convertible note hedge and warrant transactions outlined above, $75.0 million of net repayments on our Amended Revolving Credit Facility, and $16.6 million for the payment of debt issuance costs.
Net cash used in financing activities attributable to continuing operations in 2019 of $87.7 million consisted primarily of $50.0 million of net repayments on our 2017 Revolving Credit Facility, $21.3 million of aggregate contingent consideration payments for the prior acquisitions of SnapCap, Ovation and QuoteWizard, $5.5 million for the repurchase of our stock, and $8.4 million in withholding taxes paid upon surrender of shares to satisfy obligations on equity awards, net of proceeds from the exercise of stock options.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements other than a letter of credit and our funding commitments pursuant to our surety bonds, none of which have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is
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material to investors. See Note 16—Commitments to the consolidated financial statements included elsewhere in the report for further details.
Summary of Contractual Obligations
The following table sets forth our contractual obligations and commercial commitments as of December 31, 2020.
Payments Due By Period as of December 31, 2020
Contractual Obligations (a)
Total Less Than
1 Year 1-3 Years 3-5 Years More Than
5 Years
Operating lease obligations (b)
$ 150,958 $ 9,147 $ 25,440 $ 20,309 $ 96,062
Long-term contractual obligations (c)
23,146 13,858 8,512 776 —
Convertible debt 744,690 — 169,690 575,000 —
Total contractual obligations $ 918,794 $ 23,005 $ 203,642 $ 596,085 $ 96,062
(a) Excludes potential obligations under surety bonds. Excludes a $2.6 million accrual related to uncertain tax position, as we are unable to determine when, or if, payments for these taxes will ultimately be made.
(b) Our operating lease obligations are associated with office space and office equipment.
(c) Includes a liability of $8.2 million for the estimated fair value of the contingent consideration obligation reflected on the balance sheet for the QuoteWizard acquisition. The actual contingent consideration payment could range from zero to $23.4 million for QuoteWizard. Also includes $14.9 million of certain other commitments.
Critical Accounting Policies and Estimates
The following disclosure is provided to supplement the description of our accounting policies contained in Note 2—Significant Accounting Policies to the consolidated financial statements included elsewhere in this report in regard to significant areas of judgment. This disclosure includes accounting policies related to both continuing operations and discontinued operations. Management is required to make certain estimates and assumptions during the preparation of the consolidated financial statements in accordance with generally accepted accounting principles. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates. Because of the size of the financial statement elements to which they relate, some of our accounting policies and estimates have a more significant impact on our consolidated financial statements than others. A discussion of some of our more significant accounting policies and estimates follows.
Income Taxes
Estimates of deferred income taxes and the significant items giving rise to the deferred assets and liabilities are shown in Note 14—Income Taxes to the consolidated financial statements included elsewhere in this report, and reflect management's assessment of actual future taxes to be paid on items reflected in the consolidated financial statements, giving consideration to both timing and the probability of realization. Actual income taxes could vary from these estimates due to future changes in income tax law, state income tax apportionment or the outcome of any review of our tax returns by the IRS, as well as actual operating results that may vary significantly from anticipated results.
We also recognize liabilities for uncertain tax positions based on the two-step process prescribed by the accounting guidance for uncertainty in income taxes. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. This measurement step is inherently difficult and requires subjective estimations of such amounts to determine the probability of various possible outcomes. We consider many factors when evaluating and estimating our tax positions and tax benefits, which may require periodic adjustments and which may not accurately anticipate actual outcomes.
A valuation allowance is provided on deferred tax assets if it is determined that it is "more likely than not" that the deferred tax asset will not be realized. At December 31, 2020, 2019 and 2018, we recorded a partial valuation allowance of $5.8 million, $4.1 million and $2.2 million, respectively, primarily related to state net operating losses, which we do not expect to be able to utilize prior to expiration.
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Stock-Based Compensation
The forms of stock-based awards granted to our employees are principally restricted stock units ("RSUs"), RSUs with performance conditions and stock options. Further, stock options with market conditions, restricted stock awards ("RSAs") with performance conditions and RSAs with market conditions have been granted to our Chairman and Chief Executive Officer. The value of RSUs is measured at their grant dates as the fair value of common stock and amortized ratably as non-cash compensation expense over the vesting term. The value of stock options issued is generally estimated using a Black-Scholes option pricing model. The value of performance-based grants is measured at their grant dates and recognized as non-cash compensation expense, considering the probability of the targets being achieved. Performance-based grants with a market condition are generally valued using a Monte Carlo simulation model. If an award is modified, we determine if the modification requires a new calculation of fair value or change in the vesting term of the award. See Note 13—Stock-Based Compensation to the consolidated financial statements included elsewhere in this report for additional information on assumptions and inputs to the fair value determination of stock-based awards.
Evaluation of Goodwill Impairment
We test goodwill annually for impairment as of October 1, or more frequently upon the occurrence of certain events or substantive changes in circumstances. As part of our annual impairment testing of goodwill, we may elect to assess qualitative factors as a basis for determining whether it is necessary to perform the traditional quantitative impairment testing. If our assessment of these qualitative factors indicates that it is not more likely than not that the fair value of the reporting unit or indefinite-lived intangible asset is less than its carrying value, then no further testing is required. Otherwise, the goodwill reporting unit must be quantitatively tested for impairment.
Performing the quantitative test for goodwill impairment that compares the reporting unit fair value with its carrying value using a discounted cash flow analysis requires the exercise of significant judgments, including judgments about appropriate discount rates, perpetual growth rates and the amount and timing of expected future cash flows. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
The value of goodwill subject to assessment for impairment at December 31, 2020 is $420.1 million.
Recoverability of Long-Lived Assets
We review the carrying value of all long-lived assets, primarily property and equipment, definite-lived intangible assets and operating lease right-of-use assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may be impaired. Impairment is considered to have occurred whenever the carrying value of a long-lived asset cannot be recovered from cash flows that are expected to result from the use and eventual disposition of the asset. This recoverability test requires us to make assumptions and judgments related to factors used in a calculation of undiscounted cash flows, including, but not limited to, management’s expectations for future operations and projected cash flows. The key assumptions used in this calculation include Adjusted EBITDA, the remaining useful lives of the primary cash flow generating asset in the asset group and, to a lesser extent, the deduction of capital expenditures and taxes paid in cash to arrive at net cash flows.
Subsequent to the adoption of ASU 2018-15 in the first quarter of 2020, capitalized implementation costs incurred in a hosting arrangement that is a service contract are also allocated to and included within long-lived asset groups tested for recoverability.
The combined value of long-lived assets and capitalized implementation costs incurred in a hosting arrangement that is a service contract subject to assessment for impairment is $267.9 million at December 31, 2020.
Business Acquisitions
When we acquire businesses, we allocate the purchase price to tangible assets and liabilities and identifiable intangible assets acquired at their acquisition date fair values. Any residual purchase price is recorded as goodwill. We also estimate the fair value of any contingent consideration using Level 3 unobservable inputs. Our estimates of fair value are based upon assumptions believed to be reasonable but which are uncertain and involve significant judgments by management.
We reassess the fair value of contingent consideration quarterly until the contingency is resolved, and changes in the fair value are recorded in operating income in the consolidated statements of operations and comprehensive income (loss).
New Accounting Pronouncements
See Note 2—Significant Accounting Policies to the consolidated financial statements included elsewhere in this report for a description of recent accounting pronouncements.
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