UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x | ||
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010
OR
¨ | ||
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROMTO
Commission File Number: 001-34354
Altisource Portfolio Solutions S.A.
(Exact name of registrant as specified in its charter)
Luxembourg | ||
Not Applicable | ||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
291, Route d’Arlon
L-1150 Luxembourg
Grand Duchy of Luxembourg
(352) 24 69 79 00
(Address and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Common Stock, $1.00 par value | NASDAQ Global Select Market |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes Yeso¨ Noþx
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes Yeso¨ Noþx
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes Yesþx Noo¨
Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes Yesox Noo¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein and will not be contained, to the best of the Registrant’s knowledge, in the definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to thisForm 10-K.ox
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | x | |||||
Non-accelerated filer |
| Smaller reporting company | ¨ |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes Yeso¨ Noþx
The aggregate market value of the voting stock held by nonaffiliates of the registrant as of June 30, 20102011 was $462,059,307$662,418,290 based on the closing share price as quoted on the NASDAQ Global Market on that day and the assumption that all directors and executive officers of the Company, and their families, are affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.
As of January 31, 2012, there were 23,405,123 outstanding shares of the Registrant’s common shares outstandingof beneficial interest (excluding 2,007,625 shares held as of January 31, 2011 was 24,880,951.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement to be filed subsequent to the date hereof with the Commission pursuant to Regulation 14A in connection with the registrant’s 2011 Annual Meeting of Stockholders are incorporated by reference into Part III of this Report. Such Definitive Proxy Statement will be filed with the Securities and Exchange Commission not later than 120 days after the conclusion of the registrant’s fiscal year ended December 31, 2010.
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ITEM 1. | BUSINESS | 3 | |||||||
ITEM 1A. | RISK FACTORS | 11 | |||||||
UNRESOLVED STAFF COMMENTS | |||||||||
ITEM 2. | PROPERTIES | 16 | |||||||
LEGAL PROCEEDINGS | |||||||||
ITEM 4. | MINE SAFETY DISCLOSURES | 16 | |||||||
ITEM 5. | |||||||||
17 | |||||||||
ITEM 6. | SELECTED CONSOLIDATED FINANCIAL DATA | 19 | |||||||
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |||||||||
ITEM 7A. | |||||||||
44 | |||||||||
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | 45 | |||||||
ITEM 9. | |||||||||
ITEM 9A. | CONTROLS AND PROCEDURES | 79 | |||||||
OTHER INFORMATION | |||||||||
ITEM | |||||||||
ITEM 11. | EXECUTIVE COMPENSATION | 80 | |||||||
12. | |||||||||
ITEM 13. | |||||||||
ITEM 14. | |||||||||
ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES | 81 | |||||||
83 | |||||||||
FORWARD-LOOKING STATEMENTS
Except as otherwise indicated or unless the context requires otherwise, requires, “Altisource,“Altisource™,” “we,” “us,” “our” and the “Company” refer to Altisource Portfolio Solutions S.A., a Luxembourg société anonyme, or public limited company, and its wholly-owned subsidiaries.
ITEM 1. | BUSINESS |
The Company
Altisource Portfolio Solutions S.A., together with its subsidiaries, is a technology enabled global knowledge process provider initiallyof services focused on the entirehigh value, technology-enabled, knowledge-based functions principally related to real estate and mortgage services lifecycleportfolio management, asset recovery and creditcustomer relationship management. We enable our clients to cash lifecycleachieve their goals by leveraging our process management, spaces. During 2010, our first full calendar year as a separate entity, we achieved several milestones:
We are publicly traded on the NASDAQ Global Select marketMarket under the symbol ASPS. We were incorporated under the laws of Luxembourg on November 4, 1999 as Ocwen Luxembourg S.à r.l., renamed Altisource Portfolio Solutions S.à r.l. on May 12, 2009 and converted into Altisource Portfolio Solutions S.A. on June 5, 2009.
2011 Achievements
During 2011, we achieved several milestones:
Recognized revenue of $423.7 million, representing a 41% increase over the Separation Date, Ocwen distributed allyear-ended December 31, 2010.
Recognized Service Revenue of $334.8 million representing a 36% increase over the year-ended December 31, 2010.
Recognized diluted earnings per share of $2.77 representing a 47% increase over the year-ended December 31, 2010.
Generated $111.6 million of operating cash flow representing on average $0.33 for every dollar of Service Revenue generated.
In addition, we sought to strategically deploy cash generated during 2011 to either facilitate long-term growth or return such cash to shareholders:
Returned $61.1 million to shareholders through the repurchase of 1.6 million shares under the stock repurchase program at an average price of $37.57 per share.
Expended $16.4 million on capital projects to facilitate the growth of operations, primarily as a result of the Altisource common stock to Ocwen’s shareholders (the “Distribution”). Ocwen’s stockholders received one sharecontinued growth of Altisource common stock for every three sharesthe residential loan servicing portfolio of Ocwen, common stock held as of August 4, 2009 (the “Record Date”). In addition, holders of Ocwen’s 3.25% Contingent Convertible Unsecured Senior Notes due 2024 received one share of Altisource common stock deemed held on an as if converted basis.our largest customer.
• | Invested $15.0 million in Correspondent One S.A. (“Correspondent™”), an equity method investment. Correspondent One facilitates the purchase of closed conforming and government guaranteed residential mortgages from approved mortgage bankers. Correspondent One provides members of the Lenders One Mortgage Cooperative (“Lenders One®”), a national alliance of independent mortgage bankers which we manage, additional avenues to sell loans beyond Lenders One’s preferred investor arrangements and the members’ own network of loan buyers. |
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Acquired Springhouse, LLC (“Springhouse™”) an appraisal management company that utilizes a nationwide panel of appraisers to provide appraisals principally to mortgage originators and real estate managers.
Reportable Segments
We classify our businesses into three reportable segments. Mortgage Services consists of mortgage management services that span the mortgage lifecycle. Financial Services principally consists of unsecured asset recovery and customer relationship management. Technology Services (formerly Technology Products)segments:
• | Mortgage Services consists of mortgage portfolio management services that span the mortgage lifecycle from origination through real estate owned (REO) asset management and sale; |
�� | Financial Services principally consists of unsecured asset recovery and customer relationship management; and |
• | Technology Services consists of modular, comprehensive integrated technological solutions for loan servicing, vendor management and invoice presentment and payment as well as providing infrastructure support. |
In addition, ourCorporate Items and Eliminations segment includes eliminations of transactions between the reporting segments and also includes costs recognized by us related to corporate support functions such as executive, finance, legal, human resources, vendor management and invoice presentment and payment as well as providing infrastructure support.
We conduct portions of our operations in all 50 states and in three countries outside of the United States.
Mortgage Services
Our Mortgage Services providessegment continues to be the primary driver of growth. This segment generates revenue principally by providing services that loan originators and loan servicers typically outsource to third parties. TheseOur services extend acrossare provided using our national platform and span the lifecycle of a mortgage loan.
Our services typically begin with a default management referral from a customer which results in a pre-foreclosure title search, property inspection services and non-legal back-office support services in connection with managing foreclosures. Upon receipt of an asset management referral after a $6.9 billion servicing portfolio from Saxon Mortgage Services (“Saxon”) in May, 2010property has been foreclosed, we provide REO preservation, REO asset management, REO valuation, REO brokerage, REO closing and a $22.4 billion portfolio from HomEq Servicing, the United States mortgage servicing business from Barclays Bank, (“HomEq”) in September, 2010. AsREO title insurance services.
While our largest customer, this growth in Ocwen’s residential portfolio should facilitate significant growth for us during 2011.
In 2011, we reorganized our acquisitionreporting structure within this segment in that certain services originally part of MPAComponent Services and Other are now classified as part of Customer Relationship Management in February 2010 weour Financial Services segment. Following this change, Component Service and Other was renamed Origination Management Services. Prior periods have preferred accessbeen recast to financial institutions which we believe constitutes 6% ofconform to the total residential mortgage origination market. In addition, we signed an agreement with Members United Corporate Federal Credit Union (“Members United”) which gives us access to over 2,000 diverse financial institutions.
current year presentation.
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For the Years Ended December 31, | ||||||||||||
(in thousands) | 2010 | 2009 | 2008 | |||||||||
Revenue: | ||||||||||||
Asset Management Services | $ | 78,999 | $ | 30,464 | $ | 1,167 | ||||||
Component Services and Other | 40,473 | 19,196 | 11,683 | |||||||||
Residential Property Valuation | 33,502 | 26,800 | 28,882 | |||||||||
Closing and Title Services | 28,056 | 17,444 | 13,173 | |||||||||
Default Management Services | 23,741 | 9,194 | 51 | |||||||||
Total Revenue | $ | 204,771 | $ | 103,098 | $ | 54,956 | ||||||
Transactions with Related Parties: | ||||||||||||
Asset Management Services | $ | 78,999 | $ | 30,464 | $ | 1,161 | ||||||
Residential Property Valuation | 32,525 | 25,762 | 27,301 | |||||||||
Closing and Title Services | 17,379 | 13,496 | 13,173 | |||||||||
Default Management Services | 6,752 | 4,367 | — | |||||||||
Total | $ | 135,655 | $ | 74,089 | $ | 41,635 | ||||||
Reimbursable Expenses (included in Revenue)(1): | ||||||||||||
Asset Management Services | $ | 41,920 | $ | 14,308 | $ | — | ||||||
Default Management Services | 2,328 | 1,769 | — | |||||||||
Closing and Title Services | 302 | — | — | |||||||||
Total | $ | 44,550 | $ | 16,077 | $ | — | ||||||
September 30, | September 30, | September 30, | ||||||||||
For the Years Ended December 31, | ||||||||||||
(in thousands) | 2011 | 2010 | 2009 | |||||||||
Revenue: | ||||||||||||
Asset Management Services | $ | 141,486 | $ | 78,999 | $ | 30,464 | ||||||
Origination Management Services | 25,566 | 22,835 | 3,899 | |||||||||
Residential Property Valuation | 51,785 | 33,502 | 26,800 | |||||||||
Closing and Insurance Services | 56,612 | 28,056 | 17,444 | |||||||||
Default Management Services | 36,472 | 23,741 | 9,194 | |||||||||
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Total Revenue | $ | 311,921 | $ | 187,133 | $ | 87,801 | ||||||
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Transactions with Related Parties: | ||||||||||||
Asset Management Services | $ | 136,685 | $ | 78,999 | $ | 30,464 | ||||||
Residential Property Valuation | 48,734 | 32,525 | 25,762 | |||||||||
Closing and Insurance Services | 26,733 | 17,379 | 13,496 | |||||||||
Default Management Services | 11,032 | 6,752 | 4,367 | |||||||||
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Total | $ | 223,184 | $ | 135,655 | $ | 74,089 | ||||||
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Reimbursable Expenses (included in Revenue)(1): | ||||||||||||
Asset Management Services | $ | 76,511 | $ | 41,920 | $ | 14,308 | ||||||
Default Management Services | 3,497 | 2,328 | 1,769 | |||||||||
Closing and Insurance Services | 116 | 302 | — | |||||||||
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Total | $ | 80,124 | $ | 44,550 | $ | 16,077 | ||||||
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(1) | Reimbursable Expenses include costs we incur that we |
Asset Management Services. Principally includes property preservation, property inspection, REO asset management and REO brokerage. Asset Management Services has been the largest contributor to Service Revenue growth year to date which reflects an increase in the number of REO sold, the number of REO for which we provide property preservation services and an increase in pre-foreclosure inspection services.
Origination Management Services. Principally includes MPA, our contract underwriting business and our origination fulfillment operations currently under development.
Residential Property Valuation.Valuation Services.We provide our customers with a broad range of traditional appraisal and other valuation services, including broker price opinions, deliveredproducts through our licensed appraisal management company, working with our network of experienced appraisers and our exclusive ordering system. Customers may also order alternative valuation experts with proven track records. Ourproducts through our system and network of real estate professionals. We also offer customers have the ability to outsource all or part of their appraisal and valuation management oversight functions to us taking advantage of our national vendor network and enhanced quality reviews.
Closing and TitleInsurance Services. We provide an array of closing services (e.g., document preparation) and title services (e.g., pre-foreclosure title search, title insurance) applicable to the residential foreclosure process and the sale of residential property. Historically,During 2011, we have focused on closing supportincreasing our referral capture rate in our operational states and rolling out insured title services and un-insured title searches principally around Real Estate Owned (“REO”) sale transactions. During 2010,nationwide, similar to what we began building out our title agency operations nationally in order to be able to expandaccomplished with our title search and insurance footprint.
Default Management Services.We provide non-legal back-office support for foreclosure, bankruptcy and eviction attorneys as well as non-judicial foreclosure services in California and Nevada.trustee services. We do not execute or notarize foreclosure affidavits of debt or lost note affidavits.
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Our Financial Services segment provides collection and customer relationship management services primarily to debt originators (e.g., credit card, auto loans, retail credit)credit, mortgages) and the utility industry.
The following table represents revenues for our Financial Services segment for the past three annual periods:
For the Years Ended December 31, | ||||||||||||
(in thousands) | 2010 | 2009 | 2008 | |||||||||
Revenue: | ||||||||||||
Asset Recovery Management | $ | 48,050 | $ | 51,019 | $ | 62,771 | ||||||
Customer Relationship Management | 11,929 | 13,415 | 11,064 | |||||||||
Total Revenue | $ | 59,979 | $ | 64,434 | $ | 73,835 | ||||||
Transactions with Related Parties: | ||||||||||||
Asset Recovery Management | $ | 166 | $ | 98 | $ | 1,181 | ||||||
Reimbursable Expenses (included in Revenue)(1): | ||||||||||||
Asset Recovery Management | $ | 2,899 | $ | — | $ | — | ||||||
September 30, | September 30, | September 30, | ||||||||||
For the Years Ended December 31, | ||||||||||||
(in thousands) | 2011 | 2010 | 2009 | |||||||||
Revenue: | ||||||||||||
Asset Recovery Management | $ | 39,321 | $ | 48,050 | $ | 51,019 | ||||||
Customer Relationship Management | 31,860 | 29,567 | 28,712 | |||||||||
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Total Revenue | $ | 71,181 | $ | 77,617 | $ | 79,731 | ||||||
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Transactions with Related Parties: | ||||||||||||
Asset Recovery Management | $ | 266 | $ | 166 | $ | 98 | ||||||
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$ | 266 | $ | 166 | $ | 98 | |||||||
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Reimbursable Expenses (included in Revenue)(1): | ||||||||||||
Asset Recovery Management | $ | 1,950 | $ | 2,899 | $ | — | ||||||
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(1) | Reimbursable Expenses include costs we incur that we |
Asset Recovery Management.We provide post-charge-off consumer debt collection (e.g., credit cards, auto loans, second mortgages) on a contingent fee basis where we are paid a percentage of the cash collected.
Customer Relationship Management.We provide customer care (e.g., connects/disconnects for utilities) and early stage collections services for which we are generally compensated on a per-call, per-person or per-minute basis.
Technology Services
Technology Services comprises our REALSuite™of applications as well as our IT infrastructure services. We only provide our IT infrastructure services to Ocwen and ourselves.
Effective January 1, 2011, we modified our pricing for IT Infrastructure Services within our Technology Services segment from a model based principally on a rate card to a fully loaded costs plus mark-up methodology. This model applies to the infrastructure amounts charged to Ocwen as well as internal allocations of infrastructure costs.
Our Technology Services segment is primarily focused on (i) supporting the growth of Mortgage Services and Ocwen. In addition, Technology Services is assisting in the cost reduction and quality initiatives on-going within the Financial Services and Ocwen, (ii) developing technology solutions to facilitate delivery of services for Lenders One and Members United and (iii) commercializing our service offerings to expand their applicability.
segment.
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For the Years Ended December 31, | ||||||||||||
(in thousands) | 2010 | 2009 | 2008 | |||||||||
Revenue: | ||||||||||||
REALSuite | $ | 31,214 | $ | 25,784 | $ | 20,463 | ||||||
IT Infrastructure Services | 20,799 | 21,669 | 24,820 | |||||||||
Total Revenue | $ | 52,013 | $ | 47,453 | $ | 45,283 | ||||||
Transactions with Related Parties(1): | ||||||||||||
REALSuite | $ | 11,226 | $ | 9,899 | $ | 9,134 | ||||||
IT Infrastructure Services | 7,941 | 10,811 | 26,012 | |||||||||
Total | $ | 19,167 | $ | 20,710 | $ | 35,146 | ||||||
September 30, | September 30, | September 30, | ||||||||||
For the Years Ended December 31, | ||||||||||||
(in thousands) | 2011 | 2010 | 2009 | |||||||||
Revenue: | ||||||||||||
REALSuite | $ | 34,926 | $ | 31,214 | $ | 25,784 | ||||||
IT Infrastructure Services | 21,168 | 20,799 | 21,669 | |||||||||
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Total Revenue | $ | 56,094 | $ | 52,013 | $ | 47,453 | ||||||
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Transactions with Related Parties: | ||||||||||||
REALSuite | $ | 13,253 | $ | 11,226 | $ | 9,899 | ||||||
IT Infrastructure Services | 8,559 | 7,941 | 10,811 | |||||||||
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$ | 21,812 | $ | 19,167 | $ | 20,710 | |||||||
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The REALSuite platform includesprovides a comprehensive, modular based technology suitefully integrated set of applications and technologies that primarily consists ofmanage the end-to-end lifecycle for residential and commercial and residential servicing platforms, a vendorincluding the automated management system and an invoice presentment and payment system.of a distributed network of vendors. A brief description of key offerings within ourcomponents of the REALSuite is provideddescribed below:
REALServicing® — an enterprise residential mortgage loan servicing product that offers an efficient and effective platform for loan servicing including default administration. This technology solution features automated workflows, scriptinga dialogue engine and robust reporting capabilities. The solution spans the loan administrationservicing cycle from loan boarding to satisfaction including all collections, payment processing and reporting. We also offer REALSynergy®, an enterprise commercial loan servicing system.
REALTrans® — a patented electronic business-to-business exchange that automates and simplifies the ordering, tracking and fulfilling of mortgage and other services.vendor provided services principally related to mortgages. This technology solution, whether web-based or integrated into a servicing system, connects multiple service providers through a single platform and forms an efficient method for managing a large scale network of vendors.
REALRemit® — a patented electronic invoice presentmentinvoicing and payment system that provides vendors with the ability to submit invoices electronically for payment and to have invoice payments deposited directly to their respective bank accounts.
IT Infrastructure Services.We provide a full suite of IT services (e.g., desktop applications,management, application support, network management, telephony, help desk) throughdata center management, disaster recovery, helpdesk and infrastructure security) for which we perform remote management of IT functions internally and for Ocwen.
Corporate Items and Eliminations
Corporate items principallyItems and Eliminations includes expenditureseliminations of transactions between the reporting segments and this segment also includes costs recognized by us related to corporate support functions such as executive, finance, legal, human resources, riskvendor management and consumer behavior.six sigma. Prior to the date of Separation, Date, this segment included eliminations of transactions between the reporting segments as well as expenditures recognized by us related to the Separation.
Customers
We provide services to some of year-end, our active client base includedthe most respected organizations in their industries, including one of the U.S.’ largest sub-prime servicers, utility companies, primarily incommercial banks, servicers, investors, mortgage bankers, financial service companies and hedge funds across the financial services, consumer products and services, utilities, government, real estate services and mortgage servicing sectors.
U.S.
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Following the date of Separation, Ocwen is contractually obligated to purchase certain Mortgage Services and Technology Services from us under service agreements. These agreements extend until August 2017 subject to termination under certain provisions. Ocwen is not restricted from redeveloping these services. We settle amounts with Ocwen on a daily, weekly or monthly basis based upon the nature of the services and when the service is completed.
With respect to Ocwen, because such services are charged torelated party revenues consist of revenues earned directly from Ocwen and revenues earned from the mortgagee and/orloans serviced by Ocwen when Ocwen determines the investor andservice provider. We earn additional revenue on the loan portfolios serviced by Ocwen that are not expensesconsidered related party revenues as Ocwen does not have the ability to Ocwen. Ocwen, or services derived from Ocwen’s loan servicing portfolio, asdecide the service provider. As a percentage of each of our segment revenues and as a percentage of consolidated revenues, related party revenue was as follows for the year ended December 31:
For the Years Ended December 31, | ||||||||
2010 | 2009 | |||||||
Mortgage Services | 66 | % | 72 | % | ||||
Technology Services | 37 | 44 | ||||||
Financial Services | < 1 | < 1 | ||||||
Consolidated Revenues | 51 | % | 47 | % |
September 30, | September 30, | September 30, | ||||||||||
For the Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Mortgage Services | 72 | % | 73 | % | 84 | % | ||||||
Technology Services | 39 | 37 | 44 | |||||||||
Financial Services | < 1 | < 1 | < 1 | |||||||||
Consolidated Revenues | 58 | % | 51 | % | 47 | % |
We record revenues we earn from Ocwen under the various long-term servicing contracts at rates we believe to be market rates as they are consistent with one or more of the following: the fees we charge to other customers for comparable services; the rates Ocwen pays to other service providers; fees commensurate with market surveys prepared by unaffiliated firms; orand prices being charged by our competitors.
Sales and Marketing
We have experienced sales personnel and relationship managers with subject matter expertise for each of our primary services.expertise. These individuals maintain relationships throughout the industry sectors we serve and play an important role in generating new client leads as well as identifying opportunities to expand our services with existing clients. Additional leads are also generated through request for proposal processes from key industry participants. Our sales team works collaboratively and is compensated principally with a base salary and commission for sales generated.
From a sales and marketing perspective, our primary focus is supporting the growth of our largest customer, Ocwen, and on expanding relationships with existing customersMPA members and targeting new customers that could have a material positive impact on our results of operations. Given the highly concentrated nature of the industries that we serve, the time and effort spent in expanding relationships or winning new relationships is significant.
Intellectual Property
We rely on a combination of contractual restrictions, internal security practices, patents, trademarks, copyrights, trade secrets and other intellectual property to establish and protect our software, technology and expertise. We also own or, as necessary and appropriate, have obtained licenses from third parties to intellectual property relating to our services, processes and business. These intellectual property rights are important factors in the success of our businesses.
As of December 31, 2011, we have been awarded one patent that expires in 2023 and three patents that expire in 2024. The U.S. Patent Office has also notified us of the allowance of a pending U.S. Patent Application. In addition, Altisource has registered trademarks or recently filed applications for registration of trademarks in a number of countries or groups of countries including the United States, the European Community, India and in eleven other countries or groups of countries. These trademarks generally can be renewed indefinitely.
We actively protect our rights and intend to continue our policy of taking all measures we deem reasonable and necessary to develop and protect our patents, copyrights, trade secrets, trademarks and other intellectual property rights.
Industry and 2025, respectively. In addition, Altisource has registered trademarks or recently filed applications for registration of trademarks in a number of countries or groups of countries including the United States the European Community, India and in twelve other countries or groups of countries. These trademarks generally can be renewed indefinitely.
Competition
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Given the diverse nature of services that we and our competitors offer, we cannot determine our position in the market with certainty, but we believe that we represent only a small portion of very large sized markets. Given our size, some of our competitors may offer more diversified services, operate in broader geographic markets or have greater financial resources than we do. In addition, some of our larger customers retain multiple providers and continuously evaluate of our performance against our competitors.
Competitive factors in our Mortgage Services business include the quality and timeliness of our services, the size and competence of our network of vendors and the breadth of the services we offer. For Financial Services, competitive factors include the ability to achieve a collection rate comparable to our competitors; the quality and personal nature of the service; the consistency and professionalism of the service and the recruitment, training and retention of our workforce. Competitive factors in our Technology Services business include the quality of the technology-based application or service; application features and functions; ease of delivery and integration; our ability to maintain, enhance and support the applications or services and coststhe cost of obtaining, maintaining and enforceabilityenforcing of our patents.
Employees
As of December 31, 2010,2011, we had the following number of employees:
Consolidated | ||||||||||||||||
United States | India | Other | Altisource | |||||||||||||
Mortgage Services | 92 | 1,832 | 29 | 1,953 | ||||||||||||
Financial Services(1) | 655 | 463 | — | 1,118 | ||||||||||||
Technology Services | 19 | 506 | — | 525 | ||||||||||||
Corporate | 23 | 210 | 35 | 268 | ||||||||||||
Total Employees | 789 | 3,011 | 64 | 3,864 | ||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
United States | India | Other | Consolidated Altisource | |||||||||||||
Mortgage Services | 228 | 2,853 | 4 | 3,085 | ||||||||||||
Financial Services | 593 | 1,678 | — | 2,271 | ||||||||||||
Technology Services | 47 | 552 | — | 599 | ||||||||||||
Corporate | 46 | 341 | 65 | 452 | ||||||||||||
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Total Employees | 914 | 5,424 | 69 | 6,407 | ||||||||||||
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We have not experienced any work stoppages, and we consider our relations with employees to be good. We believe that our future success will depend, in part, on our ability to continue to attract, hire and retain skilled and experienced personnel.
Seasonality
Our revenues are seasonal. More specifically, Financial Services revenue tends to be higher in the first half of the year, particularly the first quarter, as borrowers may utilize tax refunds and bonuses to pay debts.debts, and generally declines throughout the rest of the year. Mortgage Services revenue is impacted by propertyREO sales which tend to be at their lowest level during fall and winter months and highest during spring and summer months.
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Our business isbusinesses are subject to extensive regulationlaws and regulations by federal, state and local governmental authorities including the Federal Trade Commission, and the state agencies that license our mortgage services, collection entities and collection entities.the SEC. We also must comply with a number of federal, state and local consumer protection laws including, among others, the Dodd-Frank Act Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), the Gramm-Leach-Bliley Act, the Fair Debt Collection Practices Act, the Real Estate Settlement Procedures Act (“RESPA”), the Truth in Lending Act (“TILA”), the Fair Credit Reporting Act, the Homeowners Protection Act and the SAFE Act. These requirements can and do change as statutes and regulations are enacted, promulgated or amended.
We are subject to certain federal, state and local consumer protection provisions. We are also subject to licensing and regulation as a mortgage service provider and/or debt collector in a number of states. We are subject to audits and examinations that are conducted by the states. Our employees may be required to be licensed by various state commissions for the particular type of service delivered and to participate in regular continuing education programs. From time to time, we receive requests from state and other agencies for records, documents and information
regarding our policies, procedures and practices regarding our mortgage services and debt collection business activities. We are also subject to the requirements of the Foreign Corrupt Practices Act and comparable foreign laws, due to our activities in foreign jurisdictions. We incur ongoing costs to comply with governmental laws and regulations.
Available Information
We file annual, quarterly and current reportsAnnual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other information with the Securities and Exchange Commission (“SEC”). These filings are available to the public over the Internet at the SEC’s web site athttp://www.sec.gov. You may also read and copy any document we file at the SEC’s public reference room located at 100 F Street, N.E., Washington, DC 20549. Please call the SEC at 1 800-SEC-0330 for further information on the public reference room.
Our principal Internet address iswww.altisource.com and we encourage investors to use it as a way of easily finding information about us. We promptly make available on this website, free of charge, the reports that we file or furnish with the SEC, corporate governance information (including our Code of Business Conduct and Ethics) and select press releases. The contents of our website are available for informational purposes only and shall not however, a part ofbe deemed incorporated by reference in this report.
The following risk factors and other information included in this Annual Report on Form 10-K should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or that we presently deem less significant may also impair our business operations. If any of the following risks actually occur, our business, operating results and financial condition could be materially adversely affected.
Risks Related to Our ability to grow is affected by our ability to retainBusiness and expand our existing client relationships and our ability to attract new customers.
Industry
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As of December 31, 2010,2011, our chairman owns or controls more than 15%13% of Ocwen’s common stock and 25%23% of our common stock. We derived 51%58% of our revenues in 20102011 from Ocwen or the loan servicing portfolio managed by Ocwen. Given this close and continuing relationship with Ocwen, we may encounter difficulties in obtaining and retaining other customers who compete with Ocwen. Should these and other potential customers continue to view Altisource as part of Ocwen or as too closely related to or dependent upon Ocwen, they may be unwilling to utilize our services, and our growth could be inhibited as a result.
We are dependent on certain key customer relationships, the loss of or their inability to pay could reduceaffect our revenues.business and results of operations.
We currently generate approximately 51%58% of our revenue from Ocwen. Following the Separation, Ocwen is contractually obligated to purchase certain services from our Mortgage Services and Technology Services from ussegments under service agreements that extend for eight years from the date of Separation Date subject to termination under certain provisions.
While no other individual client represents more than 10% of our consolidated revenues, we are exposed to customer concentration. Most of our customers are not contractually obligated to continue to use our services at historical levels or at all. The loss of any of these key customers or their failure to pay us could reduce our revenues and adversely affect results of operations.
Our business is subject to substantial competition.
The markets for our services are very competitive. Our competitors vary in size and in the scope and breadth of the services they offer. We compete for existing and new customers against both third parties and the in-house capabilities of our customers. Some of our competitors have substantial resources and some have widely used technology platforms that they seek to use as a competitive advantage to drive sales of other products and services. In addition, we expect that the markets in which we compete will continue to attract new competitors and new technologies. These new technologies may render our existing technologies obsolete, resulting in operating inefficiencies and increased competitive pressure. There can be no assurance that we will be able to compete successfully against current or future competitors or that competitive pressures we face in the markets in which we operate will not materially adversely affect our business, financial condition and results of operations.
Our intellectual property rights are valuable and any inability to protect them could reduce the value of our services.
Our patents, trademarks, trade secrets, copyrights and other intellectual property rights are important assets. The efforts we have taken to protect these proprietary rights may not be sufficient or effective. The unauthorized use of our intellectual property or significant impairment of our intellectual property rights could harm our business, make it more expensive to do business or hurt our ability to compete. Protecting our intellectual property rights is costly and time consuming.
Although we seek to obtain patent protection for our innovations, it is possible we may not be able to protect some of these innovations. Changes in patent law, such as changes in the law regarding patentable subject matter, can also impact our ability to obtain patent protection for our innovations. In addition, given the costs of obtaining patent protection, we may choose not to protect certain innovations that later turn out to be important. Furthermore, there is always the possibility, despite our efforts, that the scope of the protection gained will be insufficient or that an issued patent may be deemed invalid or unenforceable.
Technology failures could damage our business operations and increase our costs.
System disruptions or failures may interrupt or delay our ability to provide services to our customers. Any sustained and repeated disruptions in these services may have an adverse impact on our results of operations.
The secure transmission of confidential information over the Internet is essential to maintaining consumer confidence. Security breaches and acts of vandalism could result in a compromise or breach of the technology that we use to protect our customers’ personal information and transaction data and could result in the assessment of penalties. Furthermore, Congress or individual states could enact new laws regulating electronic commerce that could adversely affect us and our results of operations.
Our technology solutions have a long sale cycle and are subject to development and obsolescence risks.
Many of our services in the Technology Services segment are based on sophisticated software and computing systems with long sales cycles. We may encounter delays when developing new technology solutions and services. We may experience difficulties in installing or integrating our technologies on platforms used by our customers. Further, defects in our technology solutions, errors or delays in the processing of electronic transactions, or other difficulties could result in interruption of business operations, delay in market acceptance, additional development and remediation costs, loss of customers, negative publicity or exposure to liability claims. Any one or more of the foregoing occurrences could have a material adverse effect on our business, financial condition or results of operations.
Our business is subject to extensive regulation, and failure to comply with existing or new regulations may adversely impact us.
Our business is subject to extensive regulation by federal, state and local governmental authorities including the Federal Trade Commission, the state agencies that license certain of our mortgage related services and collection services and the SEC. We also must comply with a number of federal, state and local consumer protection laws including, among others, the Gramm-Leach-Bliley Act, the Fair Debt Collection Practices Act, the Real Estate
Settlement Procedures Act, the Truth in Lending Act, the Fair Credit Reporting Act, the Homeowners Protection Act, the SAFE Act, the Mortgage Act and the Foreign Corrupt Practices Act. These requirements can and do change as statutes and regulations are enacted, promulgated or amended.
The ongoing economic uncertainty and troubled housing market have resulted in increased regulatory scrutiny of all participants involved in the mortgage industry. This scrutiny has included federal and state governmental agency review of all aspects of the mortgage lending and servicing industries, including an increased legislative and regulatory focus on consumer protection practices. One such recently enacted regulation is the Dodd-Frank Act (see further description inItem 1. Business, Government Regulation section above). In some cases, penalties for noncompliance are significantly increased and could lead to settlements or consent orders on us or our customers that may curtail or restrict the business as it is currently conducted.
We are subject to additional certain federal, state and local consumer protection provisions. We also are subject to licensing and regulation as a mortgage services provider, valuation provider, appraisal management company, asset manager, property manager, title insurance agency, real estate broker and/or debt collector in a number of states. We are subject to audits and examinations that are conducted by the states in which we do business. Our employees and subsidiaries may be required to be licensed by various state commissions for the particular type of service sold and to participate in regular continuing education programs. From time to time, we receive requests from state and other agencies for records, documents and information regarding our policies, procedures and practices for our mortgage services and debt collection business activities. We incur significant ongoing costs to comply with governmental regulations.
The volume of new or modified laws and regulations has increased in recent years and, in addition, some individual municipalities have begun to enact laws that restrict mortgage services activities. If our regulators impose new or more restrictive requirements, we may incur significant additional costs to comply with such requirements which could further adversely affect our results of operations or financial condition. In addition, our failure to comply with these laws and regulations can possibly lead to civil and criminal liability, loss of licensure, damage to our reputation in the industry, fines and penalties, and litigation, including class action lawsuits or administrative enforcement actions. Any of these outcomes could harm our results of operations or financial condition.
If we fail to comply with privacy regulations imposed on providers of services to financial institutions, our business could be harmed.
As a provider of services to financial institutions, we are bound by the same limitations on disclosure of the information we receive from their customers that apply to the financial institutions themselves. If we fail to comply with these regulations, we could be exposed to lawsuits or to governmental proceedings, our customer relationships and reputation could be harmed and we could be inhibited in our ability to obtain new customers. In addition, the adoption of more restrictive privacy laws or rules in the future on the federal or state level could have an adverse impact on us.
We may be subject to claims of legal violations or wrongful conduct which may cause us to pay unexpected litigation costs or damages or modify our products or processes.
From time to time, we may be subject to costly and time-consuming legal proceedings that claim legal violations or wrongful conduct. These lawsuits may involve clients, vendors, competitors and / or other large groups of plaintiffs and, if resulting in findings of violations, could result in substantial damages. Alternatively, we may be forced to settle some claims out of court and change existing company practices, services and processes that are currently revenue generating. This could lead to unexpected costs or a loss of revenue.
If financial institutions at which we hold escrow funds fail, it could have a material adverse impact on our company.
We hold customers’ assets in escrow at various financial institutions, pending completion of certain real estate and debt collection activities. These amounts are held in escrow for limited periods of time, generally consisting of a few days. To the extent these assets are not co-mingled with our fees and are maintained in segregated bank accounts they are generally not included in the accompanying Consolidated Balance Sheets. Failure of one or more of these financial institutions may lead us to become liable for the funds owed to third parties, and there is no guarantee that we would recover the funds deposited, whether through Federal Deposit Insurance Corporation coverage, private insurance or otherwise.
Risks Related to our Growth Strategy
Our ability to grow is affected by our ability to retain and expand our existing client relationships and our ability to attract new customers.
Our ability to grow is affected by our ability to retain and expand our existing client relationships and our ability to attract new customers. Our ability to retain existing customers and expand those relationships is subject to a number of risks including the risk that we do not:
maintain or improve the quality of services that we provide to our customers;
maintain or improve the level of attention expected by our customers; and
successfully leverage our existing client relationships to sell additional services.
If our efforts to retain and expand our client relationships and to attract new customers do not prove effective, it could have a material adverse effect on our business and results of operations and our ability to grow our operations.
If we do not adapt our services to changes in technology or in the marketplace, or if our ongoing efforts to upgrade our technology are not successful, we could lose customers and have difficulty attracting new customers for our services.
The markets for our services are characterized by constant technological change, frequent introduction of new services and evolving industry standards. Our future success will be significantly affected by our ability to enhance, primarily through use of automation, econometrics and behavioral science principles, our current services and develop and introduce new services that address the increasingly sophisticated needs of our customers and their customers. These initiatives carry the risks associated with any new service development effort including cost overruns, delays in delivery and performance effectiveness. There can be no assurance that we will be successful in developing, marketing and selling new services that meet these changing demands. In addition, we may experience difficulties that could delay or prevent the successful development, introduction and marketing of these services. Finally, our services and their enhancements may not adequately meet the demands of the marketplace and achieve market acceptance. Any of these results would have a negative impact on our financial condition and results of operations and our ability to grow our operations.
The Company’sOur growth objectives are dependent on the timing and market acceptance of our new service offerings.
Our ability to grow may be adversely affected by difficulties or delays in service development or the inability to gain market acceptance of new services to existing and new customers. There are no guarantees that new services will prove to be commercially successful.
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Our continued growth at historical rates is dependent on the industry trend toward outsourced services. There can be no assurance that this trend will continue, as organizations may elect to perform such services themselves or may be prevented from outsourcing services. A significant change in this trend could have a materially adverse effect on our continued growth.
Our strategy of growing through selective acquisitions and mergers involves potential risks.
We intend to consider acquisitions of other companies that could complement our business including the acquisition of entities offering greater access and expertise in other asset types and markets that are valuablerelated but that we do not currently serve. If we do acquire other businesses, we may face a number of risks including diverting management’s
attention from our daily operations, to the need for additional management, operational and anyfinancial resources along with system conversions and the inability to protect themmaintain key pre-acquisition relationships with customers, suppliers and employees. Moreover, any acquisition may result in the incurrence of additional amortization expense of related intangible assets which could reduce the valueour profitability.
Risks Related to International Business
Our international operations subject us to additional risks which could have an adverse effect on our results of operations.
We have reduced our costs by utilizing lower cost labor in foreign countries such as India. For example, at December 31, 2011, over 5,400 of our services.
In many foreign countries, particularly in patent law,those with developing economies, it is common to engage in business practices that are prohibited by laws and regulations applicable to us, such as changes in the law regarding patentable subject matter, can also impact our ability to obtain patent protection for our innovations. In addition, given the costs of obtaining patent protection, we may choose not to protect certain innovations that later turn out to be important. Furthermore, there is always the possibility, despite our efforts, that the scopeForeign Corrupt Practices Act (“FCPA”). Any violations of the protection gained will be insufficientFCPA or thatlocal anti-corruption laws by us, our subsidiaries or our local agents, could have an issued patent may be deemed invalid or unenforceable.
Any political or economic instability in these countries could result in our having to replace or reduce these labor sources which may increase our costs.
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Altisource is a public limited company organized under the laws of Luxembourg. As a result, Luxembourg law and the articles of incorporation govern the rights of shareholders. The rights of shareholders under Luxembourg law may differ from the rights of shareholders of companies incorporated in other jurisdictions. A significant portion of the assets of Altisource are located outside the United States. It may be difficult for investors to enforce, in the United States, judgments obtained in U.S. courts against Altisource or its directors based on the civil liability provisions of the U.S. securities laws or to enforce, in Luxembourg, judgments obtained in other jurisdictions including the United States.
Risks Related to Our Employees
Our inability to attract and retain skilled employees may adversely impact our business.
Our business is labor intensive and places significant importance on our ability to recruit, train and retain skilled employees. Additionally, demand for qualified technical professionals conversant in certain technologies may exceed supply as new and additional skills are required to keep pace with evolving computer technology. Our ability to locate and train employees is critical to achieving our growth objective. Our inability to attract and retain skilled employees or an increase in wages or other costs of attracting, training or retaining skilled employees could have a materially adverse effect on our business, financial condition and results of operations.
ITEM 1B. | UNRESOLVED STAFF COMMENTS |
Not applicable.
Our principal executive offices are located in leased office space in Luxembourg, Grand Duchy of Luxembourg. We also leaseA summary of our principal leased office space to conduct our operations in:
Corporate and Support Services | Financial Services | Mortgage Services | Technology Services | |||||
Luxembourg, Luxembourg | X | X | ||||||
United States | ||||||||
Atlanta, GA | X | X | X | X | ||||
Irvine, CA | X | |||||||
Sacramento, CA | X | |||||||
St. Louis, MO | X | |||||||
Tempe, AZ | X | |||||||
Vestal, NY | X | |||||||
India | ||||||||
Bangalore | X | X | X | X | ||||
Goa | X | X | ||||||
Mumbai | X | X |
We do not own any real property. We consider these facilities to be suitable and adequate for the management and operations of our business.
We mayare, from time to time, be involved in legal proceedings arising in the ordinary course of business. We record a liability for litigation if an unfavorable outcome is probable and the amount of loss can be reasonably estimated, including expected insurance coverage. For proceedings where a range of loss is determined, we record a best estimate of loss within the range. When legal proceedings are material, we disclose the nature of the litigation and claims incidental to the conductextent possible the estimate of loss or range of loss. In the opinion of management, after consultation with legal counsel and considering insurance coverage where applicable, the outcome of current legal proceedings both individually and in the aggregate will not have a material impact on our business.financial condition, results of operations or cash flows. Our businesses are also subject to extensive regulation which may result in regulatory proceedings against us. See “Item 1A. Risk Factors” above.
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ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
Our common stock began tradingis listed on the NASDAQ Global Select Market under the symbol of “ASPS” on August 10, 2009.. The following table sets forth the high and low close of day sales prices for our common stock, for the periods indicated, as reported by the NASDAQ Global Select Market since the stock was first traded:
2010 | ||||||||
Quarter Ended | Low | High | ||||||
March 31 | $ | 21.13 | $ | 27.02 | ||||
June 30 | 21.84 | 28.19 | ||||||
September 30 | 24.29 | 31.14 | ||||||
December 31 | 24.40 | 30.64 |
2009 | ||||||||
Quarter Ended | Low | High | ||||||
September 30 | $ | 10.10 | $ | 14.51 | ||||
December 31 | 14.41 | 21.21 |
September 30, | September 30, | |||||||
2011 | ||||||||
Quarter Ended | Low | High | ||||||
December 31 | $ | 34.41 | $ | 50.70 | ||||
September 30 | 31.79 | 37.61 | ||||||
June 30 | 30.49 | 36.89 | ||||||
March 31 | 28.51 | 30.68 | ||||||
2010 | ||||||||
Quarter Ended | Low | High | ||||||
December 31 | $ | 24.40 | $ | 30.64 | ||||
September 30 | 24.29 | 31.14 | ||||||
June 30 | 21.84 | 28.19 | ||||||
March 31 | 21.13 | 27.02 |
The number of holders of record of our common stock as of January 31, 20112012 was 110.97. The number of beneficial stockholders is substantially greater than the number of holders as a large portion of our common stock is held through brokerage firms.
Dividends
We have never declared or paid cash dividends on our common stock, and we do not intend to pay dividends in the foreseeable future.
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On May 19, 2010, our shareholders authorized us to purchase up to 3.8 million shares of our common stock in the open market. The following table presents information related to our repurchases of our equity securities during the three months ended December 31, 2010:
Maximum | ||||||||||||||||
Total number | number | |||||||||||||||
of shares | of shares that | |||||||||||||||
purchased as | may | |||||||||||||||
part of | yet be | |||||||||||||||
Total | Weighted | publicly | purchased | |||||||||||||
number of | average | announced | under the | |||||||||||||
shares | price paid | plans | plans or | |||||||||||||
Period | purchased | per share | or programs | programs | ||||||||||||
Common shares: | ||||||||||||||||
October 1 – 31, 2010 | 65,317 | $ | 25.86 | 65,317 | 3,633,203 | |||||||||||
November 1 – 30, 2010 | 435,607 | 27.31 | 435,607 | 3,197,596 | ||||||||||||
December 1 – 31, 2010 | 69,093 | 27.37 | 69,093 | 3,128,503 | ||||||||||||
Total common shares | 570,017 | $ | 27.15 | 570,017 | 3,128,503 | |||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
Period | Total number of shares purchased(1) | Weighted average price paid per share | Total number of shares purchased as part of publicly announced plans or programs | Maximum number of shares that may yet be purchased under the plans or programs | ||||||||||||
Common Shares: | ||||||||||||||||
October 1 – 31, 2011 | 128,923 | $ | 35.56 | 128,923 | 1,971,148 | |||||||||||
November 1 – 30, 2011 | 300,373 | 45.71 | 300,373 | 1,670,775 | ||||||||||||
December 1 – 31, 2011 | 170,000 | 49.10 | 170,000 | 1,500,775 | ||||||||||||
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Total Common Shares | 599,269 | $ | 44.49 | 599,269 | 1,500,775 | |||||||||||
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(1) | Includes shares withheld from employees to satisfy tax withholding obligations that arose from the exercise of stock options. |
Stock Performance Graph
The information contained in Altisource Common Stock Comparative Performance Graph section shall not be deemed to be “soliciting material” or “filed” or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934, as amended, except to the extent that we specifically request that it be treated as soliciting material or incorporate it by reference into a document filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
The graph below compares the cumulative total stockholder return on our common stock with the cumulative total return on the S&P’s 500 Index for the period commencing on August 10, 2009, the first trading day of our common stock, and ending on December 31, 2010,30, 2011, the last trading day of fiscal year 2010.2011. The graph assumes an investment of $100 at the beginning of such period. The comparisons in the graphs below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our common stock.
8/10/2009 | 9/30/2009 | 12/31/2009 | 03/31/10 | 06/30/10 | 09/30/10 | 12/31/10 | ||||||||||||||||||||||
Altisource | $ | 100.00 | $ | 118.36 | $ | 172.05 | $ | 183.61 | $ | 202.79 | $ | 255.25 | $ | 235.33 | ||||||||||||||
S&P 500 | 100.00 | 104.54 | 110.72 | 115.65 | 101.94 | 112.86 | 124.38 | |||||||||||||||||||||
NASDAQ Composite | 100.00 | 106.53 | 113.90 | 120.37 | 105.87 | 118.89 | 133.16 |
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September 30, | September 30, | September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||
8/10/2009 | 12/31/2009 | 06/30/10 | 12/31/10 | 06/30/11 | 12/31/11 | |||||||||||||||||||
Altisource | $ | 100.00 | $ | 172.05 | $ | 202.79 | $ | 235.33 | $ | 301.64 | $ | 411.31 | ||||||||||||
S&P 500 | 100.00 | 110.72 | 101.94 | 124.38 | 131.13 | 124.87 | ||||||||||||||||||
NASDAQ Composite | 100.00 | 113.90 | 105.87 | 133.16 | 139.22 | 130.76 |
The consolidatedfollowing selected financial statementsdata as of and for the years ended December 31, 2011, 2010 and 2009 and the combined consolidated statementhas been derived from our audited Consolidated Financial Statements. The following selected financial data as of operationsand for the yearyears ended December 31, 2008 wereand 2007 has been derived from our audited consolidated financial statements that are included elsewhere in this filing. The combined consolidated statement of operations for the year ended December 31, 2007 and the combined consolidated balance sheet as of December 31, 2008 is derived from our audited financial statements not included in this report. The combined statement of operations data for the year ended December 31, 2006 and the combined balance sheet data as of December 31, 2007 and 2006 are derived from unaudited financial statements not included in this report. The unaudited financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of our management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information set forth in this report.
The historical results presented below may not be indicative of our future performance and do not necessarily reflect what our financial position and results of operations would have been had we operated as a separate, stand-alone entity for periods ending prior to August 9, 2009 (as discussed in Note 1 to the consolidated financial statements).
The selected consolidated financial data should be read in conjunction with the information contained in Item 7 of Part II, “Management’s“Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations” and our consolidated financial statements and notes thereto in Item 8 of Part II, “Financial“Financial Statements and Supplementary Data”Data”.
Years Ended December 31, | ||||||||||||||||||||
(in thousands, except per share data) | 2010(1) | 2009 | 2008 | 2007(2) | 2006 | |||||||||||||||
Revenue | $ | 301,378 | $ | 202,812 | $ | 160,363 | $ | 134,906 | $ | 96,603 | ||||||||||
Cost of Revenue | 189,059 | 126,797 | 115,048 | 96,954 | 72,163 | |||||||||||||||
Gross Profit | 112,319 | 76,015 | 45,315 | 37,952 | 24,440 | |||||||||||||||
Selling, General and Administrative Expenses | 57,352 | 39,473 | 28,088 | 27,930 | 17,622 | |||||||||||||||
Income from Operations | 54,967 | 36,542 | 17,227 | 10,022 | 6,818 | |||||||||||||||
Other Income (Expense), net | 804 | 1,034 | (2,626 | ) | (1,743 | ) | 205 | |||||||||||||
Income before Income Taxes | 55,771 | 37,576 | 14,601 | 8,279 | 7,023 | |||||||||||||||
Income Tax Benefit (Provision) | 403 | (11,605 | ) | (5,382 | ) | (1,564 | ) | (1,616 | ) | |||||||||||
Net Income | 56,174 | 25,971 | 9,219 | 6,715 | 5,407 | |||||||||||||||
Net Income Attributable to Non Controlling Interests | (6,903 | ) | — | — | — | — | ||||||||||||||
Net Income Attributable to Altisource | $ | 49,271 | $ | 25,971 | $ | 9,219 | $ | 6,715 | $ | 5,407 | ||||||||||
Net Income per Share(3) | ||||||||||||||||||||
Basic | $ | 1.96 | $ | 1.08 | $ | 0.38 | $ | 0.28 | $ | 0.22 | ||||||||||
Diluted | $ | 1.88 | $ | 1.07 | $ | 0.38 | $ | 0.28 | $ | 0.22 | ||||||||||
Transactions with Related Parties included above: | ||||||||||||||||||||
Revenue | $ | 154,988 | $ | 94,897 | $ | 64,251 | $ | 59,350 | $ | 51,971 | ||||||||||
Selling, General and Administrative Expenses | 1,056 | 4,308 | 6,208 | 8,864 | 9,103 | |||||||||||||||
Interest Expense | — | 1,290 | 2,269 | 965 | 503 |
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September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
Years Ended December 31, | ||||||||||||||||||||
(in thousands, except per share data) | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Revenue | $ | 423,687 | $ | 301,378 | $ | 202,812 | $ | 160,363 | $ | 134,906 | ||||||||||
Cost of Revenue | 275,849 | 189,059 | 126,797 | 115,048 | 96,954 | |||||||||||||||
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Gross Profit | 147,838 | 112,319 | 76,015 | 45,315 | 37,952 | |||||||||||||||
Selling, General and Administrative Expenses | 62,131 | 57,352 | 39,473 | 28,088 | 27,930 | |||||||||||||||
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Income from Operations | 85,707 | 54,967 | 36,542 | 17,227 | 10,022 | |||||||||||||||
Other Income (Expense), net | 203 | 804 | 1,034 | (2,626 | ) | (1,743 | ) | |||||||||||||
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Income Before Income Taxes | 85,910 | 55,771 | 37,576 | 14,601 | 8,279 | |||||||||||||||
Income Tax Benefit (Provision) | (7,943 | ) | 403 | (11,605 | ) | (5,382 | ) | (1,564 | ) | |||||||||||
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Net Income | 77,967 | 56,174 | 25,971 | 9,219 | 6,715 | |||||||||||||||
Net Income Attributable to Non-controlling Interests | (6,855 | ) | (6,903 | ) | — | — | — | |||||||||||||
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Net Income Attributable to Altisource | $ | 71,112 | $ | 49,271 | $ | 25,971 | $ | 9,219 | $ | 6,715 | ||||||||||
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Earnings Per Share:(1) | ||||||||||||||||||||
Basic | $ | 2.92 | $ | 1.96 | $ | 1.08 | $ | 0.38 | $ | 0.28 | ||||||||||
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Diluted | $ | 2.77 | $ | 1.88 | $ | 1.07 | $ | 0.38 | $ | 0.28 | ||||||||||
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Transactions with Related Parties Included Above: | ||||||||||||||||||||
Revenue | $ | 245,262 | $ | 154,988 | $ | 94,897 | $ | 64,251 | $ | 59,350 | ||||||||||
Selling, General and Administrative Expenses | $ | 1,893 | $ | 1,056 | $ | 4,308 | $ | 6,208 | $ | 8,864 | ||||||||||
Interest Expense | $ | — | $ | — | $ | 1,290 | $ | 2,269 | $ | 965 |
September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
Years Ended December 31, | ||||||||||||||||||||
(in thousands) | 2011 | 2010 | 2009 | 2008 | 2007 | |||||||||||||||
Cash and Cash Equivalents | $ | 32,125 | $ | 22,134 | $ | 30,456 | $ | 6,988 | $ | 5,688 | ||||||||||
Accounts Receivable, net | 52,005 | 53,495 | 30,497 | 9,077 | 16,770 | |||||||||||||||
Premises and Equipment, net | 25,600 | 17,493 | 11,408 | 9,304 | 12,173 | |||||||||||||||
Intangible Assets, net | 64,950 | 72,428 | 33,719 | 36,391 | 38,945 | |||||||||||||||
Goodwill | 14,915 | 11,836 | 9,324 | 11,540 | 14,797 | |||||||||||||||
Total Assets | 224,159 | 197,800 | 120,556 | 76,675 | 92,845 | |||||||||||||||
Lines of Credit and Other Secured Borrowings | — | — | — | 1,123 | 147 | |||||||||||||||
Capital Lease Obligations | 836 | 1,532 | 664 | 1,356 | 3,631 | |||||||||||||||
Total Liabilities | 58,216 | 45,902 | 34,208 | 16,129 | 17,171 |
As of December 31, | ||||||||||||||||||||
(in thousands) | 2010(1) | 2009 | 2008 | 2007(2) | 2006 | |||||||||||||||
Cash and Cash Equivalents | $ | 22,134 | $ | 30,456 | $ | 6,988 | $ | 5,688 | $ | — | ||||||||||
Accounts Receivable, net | 53,495 | 30,497 | 9,077 | 16,770 | 7,925 | |||||||||||||||
Premises and Equipment, net | 17,493 | 11,408 | 9,304 | 12,173 | 9,826 | |||||||||||||||
Intangible Assets, net | 72,428 | 33,719 | 36,391 | 38,945 | — | |||||||||||||||
Goodwill | 11,836 | 9,324 | 11,540 | 14,797 | 1,618 | |||||||||||||||
Total Assets | 197,800 | 120,556 | 76,675 | 92,845 | 22,205 | |||||||||||||||
Lines of Credit and Other Secured Borrowings | — | — | 1,123 | 147 | — | |||||||||||||||
Capital Lease Obligations | 1,532 | 664 | 1,356 | 3,631 | 3,219 | |||||||||||||||
Total Liabilities | 45,902 | 34,208 | 16,129 | 17,171 | 7,357 |
(1) | ||
For all periods prior to the Separation, the number of shares originally issued |
Management’s discussion and analysis of results of operations and financial condition (“MD&A”) is a supplement to the accompanying consolidated financial statements and provides additional information on our businesses, current developments, financial condition, cash flows and results of operations. Significant sections of the MD&A is organizedare as follows:
- 18 -
Segment Results of Operations.This section, beginning on page 29, provides an analysis of each business segment for the three years ended December 31, 2011 as well as our Corporate segment. In addition, we discuss significant transactions, events and trends that may affect the comparability of the results being analyzed.
Critical Accounting Judgments.This section, beginning on page 42, identifies those accounting principles we believe are most important to our financial results and that require significant judgment and estimates on the part of management in application. We provide all of our significant accounting policies in Note 2 to the accompanying consolidated financial statements.
Other Matters. This section, beginning on page 43, provides a discussion of off-balance sheet arrangements to the extent they exist. In addition, we provide a tabular discussion of contractual obligations and discuss any significant commitments or contingencies.
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K containsand certain information incorporated herein by reference contain forward-looking statements within the meaning“safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. AllThese statements may relate to, among other than statements of historical fact, including statements regarding guidance, industry prospectsthings, future events or our future results of operations ofperformance or financial position, made in this Annual Report on Form 10-K are forward looking. You can identify these forward-looking statements by the use of wordscondition. Words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such“anticipate”, “intend”, “expect”, “may”, “could”, “should”, “would”, “plan”, “estimate”, “seek”, “believe” and similar expressions are intended to identify such forward-looking statements. Forward-looking statements are subject to variousnot guarantees of future performance and involve a number of assumptions, risks and uncertainties. Accordingly, there are or will be importantuncertainties that could cause actual results to differ materially. Important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factorssuggested by the forward-looking statements include, but are not limited to, those describedthe risks discussed in Item 1A of Part 1 “Risk Factors”. We caution you not to place undue reliance on these forward-looking statements which reflect our view only as of the date of this report. We are under section entitled “Risk Factors” in this report, as such factors may be updated from timeno obligation (and expressly disclaim any obligation) to timeupdate or alter any forward-looking statements contained herein to reflect any change in our periodic filingsexpectations with the Securities and Exchange Commission (“SEC”),regard thereto or change in events, conditions or circumstances on which are accessible on the SEC’s website atwww.sec.gov. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report and in our other periodic filings. We undertake no obligation to publicly update or review any forward-lookingsuch statement whether as a result of new information, future developments or otherwise.
OVERVIEW
Our Business
We are a provider of services focused on high value, technology-enabled, knowledge-based functions principally related to real estate and mortgage portfolio management, asset recovery and customer relationship management. Utilizing integrated technology
We classify our businesses into three reportable segments:
• | Mortgage Services consists of mortgage portfolio management services that span the mortgage lifecycle from origination through REO asset management and sale; |
• | Financial Services principally consists of unsecured asset recovery and customer relationship management; and |
• | Technology Services consists of modular, comprehensive integrated technological solutions for loan servicing, vendor management and invoice presentment and payment as well as providing infrastructure support. |
In addition, ourCorporate Items and Eliminations segment includes eliminations of transactions between the reporting segments and also includes costs recognized by us related to corporate support functions such as executive, finance, legal, human resources, vendor management and six sigma.
In evaluating our performance, we utilize Service Revenue which consists of amounts attributable to our fee based services. Reimbursable Expenses and Cooperative Non-controlling Interests are pass-through items for which we earn no margin. Reimbursable Expenses consists of amounts that includes decision models and behavioralwe incur on behalf of our customers in performing our fee based scripting engines,services, but we provide solutions that improve clients’ performance and maximize their returns.
Further discussion regarding our business may be found under Part I, Item 1, “Business”.
Strategic Update
For 2011, we focused our efforts on four strategic initiatives:
Through Ocwen’s growth and our focused efforts to capture more revenue per loan serviced by Ocwen, we sought to expand the revenues derived from Ocwen’s loan portfolio principally by executing our national rollout plans. During 2010, we generated $135.7recognized $334.8 million of revenue, an 83%Service Revenue, a 36% increase over the prior year, from Ocwen’s portfolio. This growth was principally due to the successful rollout of services including asset management services nationally and default management services to 26 states during the year. In 2011, we intend to rollout our title insurance services to key states including California for which we obtained our agency licenses inyear-ended December 31, 2010. In addition, we plan to continue to add states for existing and new services where the business volume supports the expansion.
- 19 -
From a cash perspective, we generated $111.6 million in operating cash flow which represents $0.33 for every dollar of Service Revenue. We sought to strategically deploy cash principally in three ways. First, we returned $61.1 million to shareholders through the roll-outrepurchase of 1.6 million shares under the stock repurchase program. Second, we invested $16.4 million in technology and facilities to support our default orientedrapid growth. Third, we continued to invest in mortgage origination services with our $15.0 million investment in Correspondent One and our acquisition of Springhouse.
Looking ahead to 2012, we also invested in several new service offerings. This included the GoHoming.com real estate portal, the launch of REALRemit for use by external customers other than Ocwen and the launch of our title insurance services.
Support Ocwen’s growth.Our primary focus for next year will be the continued support of Ocwen. Ocwen’s growth in loans serviced, including loans boarded in the second half of 2011 and the additional 0.2 million loans we expect Ocwen to board in early 2012, will be the principal driver of our expected growth in 2012. Furthermore, we believe Ocwen will remain a leader in the on-going consolidation of high touch residential loan servicers.
Improve operating effectiveness.By improving operating effectiveness we intend to We must deliver high quality, regulatory compliant services that meet or exceed customers’ performance expectations, ultimately driving higher revenuesexpectations. This requires us to intelligently and margins for our customers. For example,persistently invest in our Mortgage Services segment, we are principally focused on assisting our customers in reducing foreclosurean array of broad based competencies including technology, quality assurance, compliance, econometrics and REO disposition timelines while maintaining high quality work. In our Financial Services segment, we have recommitted ourselves to perform in the top quartile for all key customers. Finally, in our Technology Services segment, we are focused on many initiatives including the development and deployment of business process management solutions to effectively manage our growing portfolio.
Expand Service Offerings.In 2011, we will primarily sell our expanded services offerings to Ocwen and the members of Lenders One. For Ocwen, we are primarily focused on expanding title agency services. For Lenders One, we are developing origination oriented services including valuation, title and fulfillment services that we We intend to deliver over an enhanced technology platform that recognizescapture additional revenue per loan from the unique requirements of the customers.
Bring Financial Services to ProfitabilityProfitability.. Our Financial Services segment improved in 2011 posting $4.4 million in pre-tax income, which compares to $0.3 million in 2010, although revenue declined 8% to $71.2 million. We remain committed to improvingthis segment as we believe that significant market opportunities exist in assisting clients in the financial performanceareas of our Financial Services segment principally through excellent performance for our customers. This includes initiativescustomer relationship and asset recovery management services. We continue to believe that investments in areas such as the development of optimal resolution models deployed through dynamic scripts and ensuring that we perform in the top quartile for our key accounts. In addition, we intend to grow our global delivery platform across the services we offer in this segment.
opportunities over an extended time period.
- 20 -
We have prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). For periods prior to the Separation, our results include revenues and expenses directly attributable to our operations and allocations of expense from Ocwen which may not necessarily reflect what our consolidated results of operations, financial position and cash flows would have been had we operated as an independent company during that entire period.
Stock Repurchase Plan
In May 19, 2010, our shareholders authorized us to purchase 15% of our outstanding share capital, or 3.8 million shares of our common stock, in the open market. ThroughFrom authorization through December 31, 2010,2011, we have purchased 0.72.3 million shares of our common stock on the open market at an average price of $27.11,$34.55 per share leaving 3.11.5 million shares still available for purchase.
Acquisitions
In April 2011, we acquired Springhouse, an appraisal management company that utilizes a nationwide panel of appraisers to provide real estate appraisals principally to mortgage originators, including the members of Lenders One, and real estate asset managers. In July 2011, we acquired the assembled workforce of a sub-contractor in India that performs asset recovery services. See Note 4 to the consolidated financial statements for additional information.
Factors Affecting Comparability
The following items may impact the comparability of our results:
Effective January 2011, we acquired allmodified our pricing for IT Infrastructure Services within our Technology Services segment from a rate card model primarily based on headcount to a fully loaded cost plus mark-up methodology. This new model applies to the infrastructure amounts charged to Ocwen as well as internal allocations of infrastructure cost. The impact of this change is discussed further in the outstanding membership interests of MPA. MPA was formed with the purpose of managing BPMC which operates as Lenders One. Lenders One is a national alliance of independent mortgage bankers that provides its Members with education and training along with revenue enhancing, cost reducing and market share expanding opportunities. The results of operations of BPMC have been consolidated under the variable interest model since the acquisition date;Technology Services segment;
To further align the interests of management with shareholders, we expanded our use of equity compensation. For the yearyears ended December 31, 2011, 2010 and 2009, we have recognized $3.1 million of equity compensation expense as compared toof $4.0 million, $3.1 million and $0.3 million, for the full year ending December 31, 2009.respectively. Contributing to the increase was the attainment of certain market performance criteria in 2011 and 2010 which triggered vesting of a portion of the awards and acceleration in the expense recognition of these grants;
In the fourth quarter of 2010, we recognized $2.8 million of goodwill impairment related to the Financial Services segment;
In June 2010, we received a favorable tax ruling regarding the treatment of certain intangibles that exist for purposes of determining our taxable income. The ruling was retroactive to the date of Separation. As a result of the ruling, we recognized a $3.4 million credit attributable to 2009 in the second quarter 2010;
In February 2010, we acquired all of the outstanding membership interest of MPA which was formed for the purpose of managing the Lenders One Mortgage Cooperative. The results of operations of Lenders One have been consolidated since the acquisition date under Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 810;
During the year ended December 31, 2009, we recognized $3.4 million of one-time costs in our Corporate segment in anticipation of the Separation from Ocwen; and
During the year ended December 31, 2009, we recognized $1.9 million of facility closure costs, $1.4 million of litigation settlement losses (both recognized in Selling, General and Administrative Expenses) and a $2.3 million litigation settlement gain in Other Income in our Financial Services segment.
- 21 -
Summary Consolidated Results
Following is a discussion of our consolidated results of operations for each of the years in the three year period ended December 31, 2010.2011. For a more detailed discussion of the factors that affected the results of our business segments in these periods, see “SEGMENT RESULTS OF OPERATIONS” below.
The following table sets forth information regarding our results of operations for the years ended December 31, 2011, 2010 2009, and 2008.
Years Ended December 31, | ||||||||||||||||||||
(dollars in thousands) | 2010 | (*) | 2009 | (*) | 2008 | |||||||||||||||
Service Revenue | $ | 247,026 | 32 | % | $ | 186,735 | 16 | % | $ | 160,363 | ||||||||||
Reimbursable Expenses | 47,449 | 195 | 16,077 | 100 | — | |||||||||||||||
Cooperative Non-controlling Interests | 6,903 | 100 | — | — | — | |||||||||||||||
Total Revenue | 301,378 | 49 | 202,812 | 26 | 160,363 | |||||||||||||||
Cost of Revenue | 189,059 | (49 | ) | 126,797 | (10 | ) | 115,048 | |||||||||||||
Gross Profit | 112,319 | 48 | 76,015 | 68 | 45,315 | |||||||||||||||
Gross Profit/Service Revenue | 45 | % | 41 | % | 28 | % | ||||||||||||||
Selling, General and Administrative Expenses | 57,352 | (45 | ) | 39,473 | (41 | ) | 28,088 | |||||||||||||
Income from Operations | 54,967 | 50 | 36,542 | 112 | 17,227 | |||||||||||||||
Income from Operations/Service Revenue | 22 | % | 20 | % | 11 | % | ||||||||||||||
Other Income (Expense), net | 804 | (22 | ) | 1,034 | 139 | (2,626 | ) | |||||||||||||
Income Before Income Taxes | 55,771 | 48 | 37,576 | 157 | 14,601 | |||||||||||||||
Income Tax Benefit (Provision) | 403 | 104 | (11,605 | ) | (116 | ) | (5,382 | ) | ||||||||||||
Net Income | 56,174 | 116 | 25,971 | 182 | 9,219 | |||||||||||||||
Net Income Attributable to Non-controlling Interests | (6,903 | ) | (100 | ) | — | — | — | |||||||||||||
Net Income Attributable to Altisource | $ | 49,271 | 90 | % | $ | 25,971 | 182 | % | $ | 9,219 | ||||||||||
Transactions with Related Parties: | ||||||||||||||||||||
Revenue | $ | 154,988 | $ | 94,897 | $ | 64,251 | ||||||||||||||
Selling, General and Administrative Expenses | 1,056 | 4,308 | 6,208 | |||||||||||||||||
Interest Expense | — | 1,290 | 2,269 |
September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
Years Ended December 31, | ||||||||||||||||||||
(in thousands, except per share data) | 2011 | % Better /(Worse) | 2010 | % Better /(Worse) | 2009 | |||||||||||||||
Service Revenue | $ | 334,758 | 36 | $ | 247,026 | 32 | $ | 186,735 | ||||||||||||
Reimbursable Expenses | 82,074 | 73 | 47,449 | 195 | 16,077 | |||||||||||||||
Cooperative Non-controlling Interest | 6,855 | (1 | ) | 6,903 | N/M | — | ||||||||||||||
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Total Revenue | 423,687 | 41 | 301,378 | 49 | 202,812 | |||||||||||||||
Cost of Revenue | 275,849 | (46 | ) | 189,059 | (49 | ) | 126,797 | |||||||||||||
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Gross Profit | 147,838 | 32 | 112,319 | 48 | 76,015 | |||||||||||||||
Selling, General and Administrative Expenses | 62,131 | (8 | ) | 57,352 | (45 | ) | 39,473 | |||||||||||||
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Income from Operations | 85,707 | 56 | 54,967 | 50 | 36,542 | |||||||||||||||
Other Income, net | 203 | (75 | ) | 804 | (22 | ) | 1,034 | |||||||||||||
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Income Before Income Taxes and Non-controlling Interests | 85,910 | 54 | 55,771 | 48 | 37,576 | |||||||||||||||
Income Tax (Provision) Benefit | (7,943 | ) | N/M | 403 | 103 | (11,605 | ) | |||||||||||||
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Net Income | 77,967 | 39 | 56,174 | 116 | 25,971 | |||||||||||||||
Net Income Attributable to Non-controlling Interests | (6,855 | ) | 1 | (6,903 | ) | N/M | — | |||||||||||||
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Net Income Attributable to Altisource | $ | 71,112 | 44 | $ | 49,271 | 90 | $ | 25,971 | ||||||||||||
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Margins: | ||||||||||||||||||||
Gross Profit/Service Revenue | 44 | % | 45 | % | 41 | % | ||||||||||||||
Income from Operations/Service Revenue | 26 | % | 22 | % | 20 | % | ||||||||||||||
Earnings Per Share: | ||||||||||||||||||||
Basic | $ | 2.92 | 49 | $ | 1.96 | 81 | $ | 1.08 | ||||||||||||
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Diluted | $ | 2.77 | 47 | $ | 1.88 | 76 | $ | 1.07 | ||||||||||||
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Transactions with Related Parties: | ||||||||||||||||||||
Revenue | $ | 245,262 | 58 | $ | 154,988 | 63 | $ | 94,897 | ||||||||||||
Selling, General and Administrative Expenses | $ | 1,893 | 79 | $ | 1,056 | (75 | ) | $ | 4,308 | |||||||||||
Interest Expenses | $ | — | N/M | $ | — | (100 | ) | $ | 1,290 |
- 22 -N/M — not meaningful.
The following table presents our revenues for the years ended December 31, 2011, 2010 2009 and 2008:
Years Ended December 31, | ||||||||||||||||||||
(dollars in thousands) | 2010 | (*) | 2009 | (*) | 2008 | |||||||||||||||
Mortgage Services: | ||||||||||||||||||||
Service Revenue | $ | 153,318 | 76 | % | $ | 87,021 | 58 | % | $ | 54,956 | ||||||||||
Reimbursable Expenses | 44,550 | 177 | 16,077 | 100 | — | |||||||||||||||
Cooperative Non-controlling Interest | 6,903 | 100 | — | — | — | |||||||||||||||
Mortgage Services — Total Revenue | 204,771 | 99 | 103,098 | 88 | 54,956 | |||||||||||||||
Financial Services: | ||||||||||||||||||||
Service Revenue | 57,080 | (11 | ) | 64,434 | (13 | ) | 73,835 | |||||||||||||
Reimbursable Expenses | 2,899 | 100 | — | — | — | |||||||||||||||
Financial Services — Total Revenue | 59,979 | (7 | ) | 64,434 | (13 | ) | 73,835 | |||||||||||||
Technology Services | 52,013 | 10 | 47,453 | 5 | 45,283 | |||||||||||||||
Eliminations | (15,385 | ) | (26 | ) | (12,173 | ) | 11 | (13,711 | ) | |||||||||||
Total Revenue | $ | 301,378 | 49 | % | $ | 202,812 | 26 | % | $ | 160,363 | ||||||||||
Transactions with Related Parties: | ||||||||||||||||||||
Mortgage Services | $ | 135,655 | $ | 74,089 | $ | 41,635 | ||||||||||||||
Financial Services | 166 | 98 | 1,181 | |||||||||||||||||
Technology Services(1) | 19,167 | 20,710 | 35,146 |
September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
Years Ended December 31, | ||||||||||||||||||||
(in thousands) | 2011 | % Better /(Worse) | 2010 | % Better /(Worse) | 2009 | |||||||||||||||
Service Revenue: | ||||||||||||||||||||
Mortgage Services | $ | 224,942 | 66 | $ | 135,680 | 89 | $ | 71,724 | ||||||||||||
Financial Services | 69,231 | (7 | ) | 74,718 | (6 | ) | 79,731 | |||||||||||||
Technology Services | 56,094 | 8 | 52,013 | 10 | 47,453 | |||||||||||||||
Eliminations | (15,509 | ) | (1 | ) | (15,385 | ) | (26 | ) | (12,173 | ) | ||||||||||
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Total Service Revenue | 334,758 | 36 | 247,026 | 32 | 186,735 | |||||||||||||||
Reimbursable Expenses: | ||||||||||||||||||||
Mortgage Services | 80,124 | 80 | 44,550 | 177 | 16,077 | |||||||||||||||
Financial Services | 1,950 | (33 | ) | 2,899 | N/M | — | ||||||||||||||
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Total Reimbursable Expenses | 82,074 | 73 | 47,449 | 195 | 16,077 | |||||||||||||||
Cooperative Non-controlling Interests: | ||||||||||||||||||||
Mortgage Services | 6,855 | (1 | ) | 6,903 | N/M | — | ||||||||||||||
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Total Revenue | $ | 423,687 | 41 | $ | 301,378 | 49 | $ | 202,812 | ||||||||||||
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Average Loans Serviced by Ocwen | 524,668 | 31 | 401,706 | 14 | 351,595 | |||||||||||||||
Transactions with Related Parties: | ||||||||||||||||||||
Mortgage Services | $ | 223,184 | 65 | $ | 135,655 | 83 | $ | 74,089 | ||||||||||||
Financial Services | 266 | 60 | 166 | 69 | 98 | |||||||||||||||
Technology Services | 21,812 | 14 | 19,167 | (7 | ) | 20,710 |
- 23 -
The increase in Reimbursable Expenses over the three year period is due to the general decline in revenues include reduced placements fromexpansion of our largest customer in this segment partially offset by placements from other customers. In addition, we continue to build out a global delivery platform for collections which sometimes results in lower revenues per account although at higher margins.
Our revenues are seasonal. More specifically, Financial Services revenue tends to be higher in the first half of the yearquarter as borrowers may utilize tax refunds to pay debts.debts and generally declines throughout the year. Mortgage Services revenue is impacted by Real Estate Owned (“REO”) sales of residential homes which tend to be at their lowest level during fall and winter months and highest during spring and summer months.
- 24 -
Cost of revenueRevenue principally includes payroll and employee benefits associated with personnel employed in customer service and operations roles, fees paid to external providers related to provision of services, reimbursable expenses, technology and telephony expenses as well as depreciation and amortization of operating assets. The components of Cost of Revenue were as follows for the years ended December 31, 2011, 2010 2009 and 2008:
Years Ended December 31, | ||||||||||||||||||||
(dollars in thousands) | 2010 | (*) | 2009 | (*) | 2008 | |||||||||||||||
Compensation and Benefits | $ | 62,791 | (23 | )% | $ | 51,251 | 14 | % | $ | 59,311 | ||||||||||
Outside Fees and Services | 60,583 | (41 | ) | 43,026 | (20 | ) | 35,825 | |||||||||||||
Reimbursable Expenses | 47,449 | (195 | ) | 16,077 | (100 | ) | — | |||||||||||||
Technology and Communication | 18,236 | (11 | ) | 16,443 | 17 | 19,912 | ||||||||||||||
Cost of Revenue | $ | 189,059 | (49 | )% | $ | 126,797 | (10 | )% | $ | 115,048 | ||||||||||
Gross Profit Percentage | ||||||||||||||||||||
Gross Profit/Service Revenue | 45 | % | 41 | % | 28 | % | ||||||||||||||
September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
Years Ended December 31, | ||||||||||||||||||||
(in thousands) | 2011 | % Better /(Worse) | 2010 | % Better /(Worse) | 2009 | |||||||||||||||
Compensation and Benefits | $ | 82,548 | (31 | ) | $ | 62,791 | (23 | ) | $ | 51,251 | ||||||||||
Outside Fees and Services | 86,201 | (42 | ) | 60,583 | (41 | ) | 43,026 | |||||||||||||
Reimbursable Expenses | 82,074 | (73 | ) | 47,449 | (195 | ) | 16,077 | |||||||||||||
Technology and Communications | 18,772 | (50 | ) | 12,548 | (8 | ) | 11,613 | |||||||||||||
Depreciation and Amortization | 6,254 | (10 | ) | 5,688 | (18 | ) | 4,830 | |||||||||||||
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Cost of Revenue | $ | 275,849 | (46 | ) | $ | 189,059 | (49 | ) | $ | 126,797 | ||||||||||
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Gross Profit Percentage: | ||||||||||||||||||||
Gross Profit/Service Revenue | 44 | % | 45 | % | 41 | % | ||||||||||||||
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The increase in Cost of Revenue is directly attributable to our investments in personnel and technology principally to support the increase in Ocwen’s residential loan servicing portfolio, the development of new mortgage and real estate portfolio management services and growth in third party vendor costs.
As a consolidated basis, our gross margins based onpercent of Service Revenue, Compensation and Benefits declined for the year ended December 31, 2010 increasedeach period presented as a result of investments in training, technology and process improvement and, in 2011, the compositionweakening of revenues being more weighted towards the higher margin Mortgage Services segment,Indian Rupee. Two factors mitigate initiatives meant to improve employee productivity. First, in anticipation of Ocwen’s boarding of significant loan servicing portfolios (as occurred in September 2010, September 2011 and expected in the acquisitionfirst half of MPA2012), we have had to hire personnel three to six months in 2010 andadvance in order to adequately train such persons in the delivery of our abilityservices. Second, as we develop new services, we invest heavily in personnel to efficiently scale our operations as our referral base grows. Our gross profit percentage increased in 2009 compared to 2008 reflecting the composition of revenues being more weighted towards Mortgage Services. In addition, we aggressively reduced our compensation cost within our Financial Services segment both by reducing the overall number of collectors as well as redistributing collectors to less expensive locations.
Outside Fees and Services primarily increasedconsists principally of vendor costs that are not passed through at cost as Reimbursable Expenses. These principally include certain valuation and pre-foreclosure asset management services. The increase of these costs as a percent of Service Revenue in our Mortgage Services segment consistent with2011 is principally due to the expansiontiming and magnitude of our services.loans boarded by Ocwen during the year and the mix of mortgage services provided. We intend to reduce Outside Fees and Services in 2010 also increased when compared to the prior year in our Financial Services segment as a resultpercent of an increase in placements we service using external collectors.
Our gross margins can vary significantly from period to period. The most significant factors contributing to variability include seasonality, mix of services was the primary contributor to the increasedelivered, timing of investments in Reimbursable Expenses which are reflected as a componentnew services and hiring of Cost of Revenues.
customers.
- 25 -
Selling, General and Administrative Expenses include payroll, employee benefits, occupancy and other costs associated with personnel employed in executive, sales, marketing, human resources consumer behavior, internal audit and finance roles. This category also includes professional fees, depreciation and amortization on non-operating assets. The components of Selling, General and Administrative Expenses were as follows for the years ended December 31, 2011, 2010 2009 and 2008:
Years Ended December 31, | ||||||||||||||||||||
(dollars in thousands) | 2010 | (*) | 2009 | (*) | 2008 | |||||||||||||||
Compensation and Benefits | $ | 19,116 | N/M | $ | 4,096 | 34 | % | $ | 6,208 | |||||||||||
Professional Services | 8,026 | 22 | % | 10,252 | (214 | ) | 3,270 | |||||||||||||
Occupancy Related Costs | 12,154 | (44 | ) | 8,456 | (4 | ) | 8,125 | |||||||||||||
Amortization of Intangible Assets | 4,891 | (83 | ) | 2,672 | (5 | ) | 2,554 | |||||||||||||
Goodwill Impairment | 2,816 | (100 | ) | — | — | |||||||||||||||
Other | 10,349 | 26 | 13,997 | (77 | ) | 7,931 | ||||||||||||||
Total Selling, General and Administrative Expenses | $ | 57,352 | (45 | )% | $ | 39,473 | (41 | )% | $ | 28,088 | ||||||||||
Operating Margin Percentage | ||||||||||||||||||||
Income from Operations/Service Revenue | 22 | % | 20 | % | 11 | % | ||||||||||||||
September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
Years Ended December 31, | ||||||||||||||||||||
(in thousands) | 2011 | % Better /(Worse) | 2010 | % Better /(Worse) | 2009 | |||||||||||||||
Compensation and Benefits | $ | 22,327 | (17 | ) | $ | 19,116 | N/M | $ | 4,096 | |||||||||||
Professional Services | 6,658 | 17 | 8,026 | 22 | 10,252 | |||||||||||||||
Occupancy Related Costs | 17,824 | (67 | ) | 10,684 | (36 | ) | 7,854 | |||||||||||||
Amortization of Intangible Assets | 5,291 | (8 | ) | 4,891 | (83 | ) | 2,672 | |||||||||||||
Goodwill Impairment | — | 100 | 2,816 | N/M | — | |||||||||||||||
Depreciation and Amortization | 2,097 | (43 | ) | 1,470 | (144 | ) | 602 | |||||||||||||
Other | 7,934 | 23 | 10,349 | 26 | 13,997 | |||||||||||||||
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| |||||||||||||||
Total Selling, General & Administrative Expenses | $ | 62,131 | (8 | ) | $ | 57,352 | (45 | ) | $ | 39,473 | ||||||||||
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| |||||||||||||||
Operating Percentage: | ||||||||||||||||||||
Income from Operations/Service Revenue | 26 | % | 22 | % | 20 | % | ||||||||||||||
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|
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|
|
N/M — not meaningful.
Selling, General and Administrative costs on a consolidated basis began to stabilize in 2011. The significant increase over the periods presented is principally attributable to increased costs associated with being a newly formed public company and increased Occupancy Related Costs to support the growth in operations as previously described.
Compensation and Benefits increased in 2010 primarilyover the periods presented as a result of the cost of being a separate public company for a full year; the need to havewe developed separate support functions such asincluding accounting, legallaw and human resources;resources. In addition, contributing to the previously mentioned reclassification of certain executiveincrease in 2011 and marketing related compensation costs from Cost of Revenues; and2010 was increased equity compensation for senior executives. Compensation and Benefits
Professional Services expense decreased in 2008 primarily representthe most recent period principally due to a focus on reduced legal costs through increased compliance, particularly within our Financial Services segment. The 2009 period includes one-time expenses allocated from Ocwen throughassociated with the Separation Date($3.4 million) and litigation costs ($1.4 million).
Other costs principally include travel related expenditures, bank charges and reserves for certain corporate functions as discussed more fully in “SECTION 1 — OVERVIEW, Separation”above. Subsequent to the Separation Date, these typesdoubtful accounts. In 2009, this category also includes one-time facility closure costs of expenses (although no longer allocated from Ocwen) are included in all of the Selling, General and Administrative Expense categories above. As a result, the decrease in 2009 is the result of allocations from Ocwen only representing a partial period compared to a full year of allocations from Ocwen$1.9 million in the 2008.
Income from Operations as a public company such as audit fees along with Director and Officer insurance.
our revenue grew significantly.
- 26 -
Income Tax (Provision)/Benefit
Years Ended December 31, | ||||||||||||||||||||
(dollars in thousands) | 2010 | (*) | 2009 | (*) | 2008 | |||||||||||||||
Income Before Income Taxes | $ | 55,771 | 48 | % | $ | 37,576 | 157 | % | $ | 14,601 | ||||||||||
Interest, net | 87 | 95 | 1,644 | 38 | 2,655 | |||||||||||||||
Depreciation and Amortization | 7,158 | (32 | ) | 5,432 | 31 | 7,836 | ||||||||||||||
Amortization of Intangibles | 4,891 | (83 | ) | 2,672 | (5 | ) | 2,554 | |||||||||||||
Goodwill Impairment | 2,816 | — | — | |||||||||||||||||
Net Income attributable to Non-controlling Interests | (6,903 | ) | (100 | ) | — | — | — | |||||||||||||
EBITDA | $ | 63,820 | 35 | % | $ | 47,324 | 71 | % | $ | 27,646 | ||||||||||
EBITDA Margin: | ||||||||||||||||||||
EBITDA/Service Revenue | 26 | % | 25 | % | 17 | % | ||||||||||||||
- 27 -
Our income tax provision computed by applying the Luxembourg statutory tax rate of 28.6%28.8% differs from our effective tax rate primarilyin all three periods because of the effect of the favorable tax ruling as well as the varying tax rates in multiple taxing jurisdictions.
Recent Accounting Pronouncements
There are no pending accounting pronouncements that are expected to have a material impact upon adoption.
SEGMENT RESULTS OF OPERATIONS
The following section provides a discussion of pre-tax results of operations of our business segments for the years ended December 31, 2011, 2010 2009 and 2008.2009. Transactions between segments are accounted for as third-party arrangements for purposes of presenting Segment Results of Operations. Intercompany transactions primarily consist of information technology infrastructure services and charges for the use of certain REAL servicesREALSuite applications from our Technology Services segment to our other two segments. Generally, we reflect these charges within Technologysegments and Communication in the segment receiving the services except for consulting services which we reflect in professional services.
- 28 -
September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
For the Year Ended December 31, 2011 | ||||||||||||||||||||
(in thousands) | Mortgage Services | Financial Services | Technology Services | Corporate Items and Eliminations | Consolidated Altisource | |||||||||||||||
Revenue | $ | 311,921 | $ | 71,181 | $ | 56,094 | $ | (15,509 | ) | $ | 423,687 | |||||||||
Cost of Revenue | 202,035 | 51,096 | 36,874 | (14,156 | ) | 275,849 | ||||||||||||||
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| |||||||||||
Gross Profit | 109,886 | 20,085 | 19,220 | (1,353 | ) | 147,838 | ||||||||||||||
Selling, General and Administrative Expenses | 15,278 | 15,634 | 4,867 | 26,352 | 62,131 | |||||||||||||||
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| |||||||||||
Income (Loss) from Operations | 94,608 | 4,451 | 14,353 | (27,705 | ) | 85,707 | ||||||||||||||
Other Income (Expense), net | 248 | (34 | ) | (49 | ) | 38 | 203 | |||||||||||||
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Income (Loss) Before Income Taxes | $ | 94,856 | $ | 4,417 | $ | 14,304 | $ | (27,667 | ) | $ | 85,910 | |||||||||
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Transactions with Related Parties: | ||||||||||||||||||||
Revenue | $ | 223,184 | $ | 266 | $ | 21,812 | $ | — | $ | 245,262 | ||||||||||
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| |||||||||||
Selling, General and Administrative Expenses | $ | — | $ | — | $ | — | $ | 1,893 | $ | 1,893 | ||||||||||
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For the Year Ended December 31, 2010 | ||||||||||||||||||||
Corporate | ||||||||||||||||||||
Mortgage | Financial | Technology | Items and | Consolidated | ||||||||||||||||
(in thousands) | Services | Services | Services | Eliminations | Altisource | |||||||||||||||
Revenue | $ | 204,771 | $ | 59,979 | $ | 52,013 | $ | (15,385 | ) | $ | 301,378 | |||||||||
Cost of Revenue | 124,485 | 49,781 | 28,909 | (14,116 | ) | 189,059 | ||||||||||||||
Gross Profit | 80,286 | 10,198 | 23,104 | (1,269 | ) | 112,319 | ||||||||||||||
Selling, General and Administrative Expenses | 14,890 | 19,567 | 4,985 | 17,910 | 57,352 | |||||||||||||||
Income (Loss) from Operations | 65,396 | (9,369 | ) | 18,119 | (19,179 | ) | 54,967 | |||||||||||||
Other income (expense), net | 781 | (50 | ) | (60 | ) | 133 | 804 | |||||||||||||
Income (Loss) Before Income Taxes | $ | 66,177 | $ | (9,419 | ) | $ | 18,059 | $ | (19,046 | ) | $ | 55,771 | ||||||||
Reconciliation to EBITDA | ||||||||||||||||||||
Income (Loss) Before Income Taxes | $ | 66,177 | $ | (9,419 | ) | $ | 18,059 | $ | (19,046 | ) | $ | 55,771 | ||||||||
Interest, net | (11 | ) | 55 | 64 | (21 | ) | 87 | |||||||||||||
Depreciation(1) | 268 | 1,972 | 4,499 | 419 | 7,158 | |||||||||||||||
Amortization of Intangibles | 2,218 | 2,673 | — | — | 4,891 | |||||||||||||||
Goodwill Impairment | — | 2,816 | — | — | 2,816 | |||||||||||||||
Net Income attributable to Non controlling interests | (6,903 | ) | — | — | — | (6,903 | ) | |||||||||||||
EBITDA | $ | 61,749 | $ | (1,903 | ) | $ | 22,622 | $ | (18,648 | ) | $ | 63,820 | ||||||||
Transactions with Related Parties Included Above: | ||||||||||||||||||||
Revenue | $ | 135,655 | $ | 166 | $ | 19,167 | $ | — | $ | 154,988 | ||||||||||
Selling, General and Administrative Expenses | — | — | — | 1,056 | 1,056 | |||||||||||||||
Interest Expense | — | — | — | — | — |
For the Year Ended December 31, 2009 | ||||||||||||||||||||
Corporate | ||||||||||||||||||||
Mortgage | Financial | Technology | Items and | Consolidated | ||||||||||||||||
(in thousands) | Services | Services | Services | Eliminations | Altisource | |||||||||||||||
Revenue | $ | 103,098 | $ | 64,434 | $ | 47,453 | $ | (12,173 | ) | $ | 202,812 | |||||||||
Cost of Revenue | 60,735 | 52,871 | 24,477 | (11,286 | ) | 126,797 | ||||||||||||||
Gross Profit | 42,363 | 11,563 | 22,976 | (887 | ) | 76,015 | ||||||||||||||
Selling, General and Administrative Expenses | 5,625 | 19,267 | 4,731 | 9,850 | 39,473 | |||||||||||||||
Income (Loss) from Operations | 36,738 | (7,704 | ) | 18,245 | (10,737 | ) | 36,542 | |||||||||||||
Other income (expense), net | 31 | 1,324 | (319 | ) | (2 | ) | 1,034 | |||||||||||||
Income (Loss) Before Income Taxes | $ | 36,769 | $ | (6,380 | ) | $ | 17,926 | $ | (10,739 | ) | $ | 37,576 | ||||||||
Reconciliation to EBITDA | ||||||||||||||||||||
Income (Loss) Before Income Taxes | $ | 36,769 | $ | (6,380 | ) | $ | 17,926 | $ | (10,739 | ) | $ | 37,576 | ||||||||
Interest, net | 28 | 1,314 | 318 | (16 | ) | 1,644 | ||||||||||||||
Depreciation(1) | 48 | 2,402 | 2,906 | 76 | 5,432 | |||||||||||||||
Amortization of Intangibles | — | 2,672 | — | — | 2,672 | |||||||||||||||
EBITDA | $ | 36,845 | $ | 8 | $ | 21,150 | $ | (10,679 | ) | $ | 47,324 | |||||||||
Transactions with Related Parties Included Above: | ||||||||||||||||||||
Revenue | $ | 74,089 | $ | 98 | $ | 20,710 | $ | — | $ | 94,897 | ||||||||||
Selling, General and Administrative Expenses | 2,712 | 467 | 1,517 | (388 | ) | 4,308 | ||||||||||||||
Interest Expense | 30 | 1,029 | 231 | — | 1,290 |
- 29 -
For the Year Ended December 31, 2008 | ||||||||||||||||||||
Corporate | ||||||||||||||||||||
Mortgage | Financial | Technology | Items and | Consolidated | ||||||||||||||||
(in thousands) | Services | Services | Services | Eliminations | Altisource | |||||||||||||||
Revenue | $ | 54,956 | $ | 73,835 | $ | 45,283 | $ | (13,711 | ) | $ | 160,363 | |||||||||
Cost of Revenue | 36,392 | 62,590 | 29,777 | (13,711 | ) | 115,048 | ||||||||||||||
Gross Profit | 18,564 | 11,245 | 15,506 | — | 45,315 | |||||||||||||||
Selling, General and Administrative Expenses | 5,027 | 17,168 | 6,118 | (225 | ) | 28,088 | ||||||||||||||
Income (Loss) from Operations | 13,537 | (5,923 | ) | 9,388 | 225 | 17,227 | ||||||||||||||
Other income (expense), net | (58 | ) | (1,952 | ) | (391 | ) | (225 | ) | (2,626 | ) | ||||||||||
Income (Loss) Before Income Taxes | $ | 13,479 | $ | (7,875 | ) | $ | 8,997 | $ | — | $ | 14,601 | |||||||||
Reconciliation to EBITDA | ||||||||||||||||||||
Income (Loss) Before Income Taxes | $ | 13,479 | $ | (7,875 | ) | $ | 8,997 | $ | — | $ | 14,601 | |||||||||
Interest, net | 58 | 2,025 | 572 | — | 2,655 | |||||||||||||||
Depreciation(1) | 34 | 3,202 | 4,600 | — | 7,836 | |||||||||||||||
Amortization of Intangibles | — | 2,554 | — | — | 2,554 | |||||||||||||||
EBITDA | $ | 13,571 | $ | (94 | ) | $ | 14,169 | $ | — | $ | 27,646 | |||||||||
Transactions with Related Parties Included Above: | ||||||||||||||||||||
Revenue | $ | 41,635 | $ | 1,181 | $ | 35,146 | $ | (13,711 | ) | $ | 64,251 | |||||||||
Selling, General and Administrative Expenses | 3,633 | 595 | 1,980 | — | 6,208 | |||||||||||||||
Interest Expense | 58 | 1,833 | 378 | — | 2,269 |
September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
For the Year Ended December 31, 2010 | ||||||||||||||||||||
(in thousands) | Mortgage Services | Financial Services | Technology Services | Corporate Items and Eliminations | Consolidated Altisource | |||||||||||||||
Revenue | $ | 187,133 | $ | 77,617 | $ | 52,013 | $ | (15,385 | ) | $ | 301,378 | |||||||||
Cost of Revenue | 117,691 | 56,575 | 28,909 | (14,116 | ) | 189,059 | ||||||||||||||
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Gross Profit | 69,442 | 21,042 | 23,104 | (1,269 | ) | 112,319 | ||||||||||||||
Selling, General and Administrative Expenses | 13,718 | 20,739 | 4,985 | 17,910 | 57,352 | |||||||||||||||
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Income (Loss) from Operations | 55,724 | 303 | 18,119 | (19,179 | ) | 54,967 | ||||||||||||||
Other Income (Expense), net | 781 | (50 | ) | (60 | ) | 133 | 804 | |||||||||||||
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Income (Loss) Before Income Taxes | $ | 56,505 | $ | 253 | $ | 18,059 | $ | (19,046 | ) | $ | 55,771 | |||||||||
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Transactions with Related Parties: | ||||||||||||||||||||
Revenue | $ | 135,655 | $ | 166 | $ | 19,167 | $ | — | $ | 154,988 | ||||||||||
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Selling, General and Administrative Expenses | $ | — | $ | — | $ | — | $ | 1,056 | $ | 1,056 | ||||||||||
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- 30 -
September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
For the Year Ended December 31, 2009 | ||||||||||||||||||||
(in thousands) | Mortgage Services | Financial Services | Technology Services | Corporate Items and Eliminations | Consolidated Altisource | |||||||||||||||
Revenue | $ | 87,801 | $ | 79,731 | $ | 47,453 | $ | (12,173 | ) | $ | 202,812 | |||||||||
Cost of Revenue | 56,539 | 57,067 | 24,477 | (11,286 | ) | 126,797 | ||||||||||||||
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Gross Profit | 31,262 | 22,664 | 22,976 | (887 | ) | 76,015 | ||||||||||||||
Selling, General and Administrative Expenses | 4,913 | 19,979 | 4,731 | 9,850 | 39,473 | |||||||||||||||
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Income (Loss) from Operations | 26,349 | 2,685 | 18,245 | (10,737 | ) | 36,542 | ||||||||||||||
Other Income (Expense), net | 31 | 1,324 | (319 | ) | (2 | ) | 1,034 | |||||||||||||
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Income (Loss) Before Income Taxes | $ | 26,380 | $ | 4,009 | $ | 17,926 | $ | (10,739 | ) | $ | 37,576 | |||||||||
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Transactions with Related Parties: | ||||||||||||||||||||
Revenue | $ | 74,089 | $ | 98 | $ | 20,710 | $ | — | $ | 94,897 | ||||||||||
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Selling, General and Administrative Expenses | $ | 2,712 | $ | 467 | $ | 1,517 | $ | (388 | ) | $ | 4,308 | |||||||||
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Interest Expense | $ | 30 | $ | 1,029 | $ | 231 | $ | — | $ | 1,290 | ||||||||||
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The following table presents our results of operations for our Mortgage Services segment for the years ended December 31:
Years Ended December 31, | ||||||||||||||||||||
(dollars in thousands) | 2010 | (*) | 2009 | (*) | 2008 | |||||||||||||||
Service Revenue | $ | 153,318 | 76 | % | $ | 87,021 | 58 | % | $ | 54,956 | ||||||||||
Reimbursable Expenses | 44,550 | 177 | 16,077 | 100 | — | |||||||||||||||
Cooperative Non-controlling Interest | 6,903 | 100 | — | 100 | — | |||||||||||||||
Total Revenue | 204,771 | 99 | 103,098 | 88 | 54,956 | |||||||||||||||
Cost of Revenue | 124,485 | (105 | ) | 60,735 | (67 | ) | 36,392 | |||||||||||||
Gross Profit | 80,286 | 90 | 42,363 | 128 | 18,564 | |||||||||||||||
Gross Profit/Service Revenue | 52 | % | 49 | % | 34 | % | ||||||||||||||
Selling, General and Administrative Expenses | 14,890 | (165 | ) | 5,625 | (12 | ) | 5,027 | |||||||||||||
Income from Operations | $ | 65,396 | 78 | % | $ | 36,738 | 171 | % | $ | 13,537 | ||||||||||
Income from Operations/Service Revenue | 43 | % | 42 | % | 25 | % | ||||||||||||||
EBITDA(1) | $ | 61,749 | 68 | % | $ | 36,845 | 171 | % | $ | 13,571 | ||||||||||
Transactions with Related Parties: | ||||||||||||||||||||
Revenue | $ | 135,655 | $ | 74,089 | $ | 41,635 | ||||||||||||||
Selling, General and Administrative Expenses | — | 2,712 | 3,633 | |||||||||||||||||
Interest Expense | — | 30 | 58 |
September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
Years Ended December 31, | ||||||||||||||||||||
(in thousands) | 2011 | % Better /(Worse) | 2010 | % Better /(Worse) | 2009 | |||||||||||||||
Service Revenue | $ | 224,942 | 66 | $ | 135,680 | 89 | $ | 71,724 | ||||||||||||
Reimbursable Expenses | 80,124 | 80 | 44,550 | 177 | 16,077 | |||||||||||||||
Cooperative Non-controlling Interest | 6,855 | (1) | 6,903 | N/M | — | |||||||||||||||
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Total Revenue | 311,921 | 67 | 187,133 | 113 | 87,801 | |||||||||||||||
Cost of Revenue | 202,035 | (72) | 117,691 | (108) | 56,539 | |||||||||||||||
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Gross Profit | 109,886 | 58 | 69,442 | 122 | 31,262 | |||||||||||||||
Selling, General and Administrative Expenses | 15,278 | (11) | 13,718 | (179) | 4,913 | |||||||||||||||
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Income from Operations | $ | 94,608 | 70 | $ | 55,724 | 111 | $ | 26,349 | ||||||||||||
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Margins: | ||||||||||||||||||||
Gross Profit/Service Revenue | 49 | % | 51 | % | 44 | % | ||||||||||||||
Income from Operations/Service Revenue | 42 | % | 41 | % | 37 | % | ||||||||||||||
Transactions with Related Parties | ||||||||||||||||||||
Revenue | $ | 223,184 | 65 | $ | 135,655 | 83 | $ | 74,089 | ||||||||||||
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Selling, General and Administrative Expenses | $ | — | N/M | $ | — | (100) | $ | 2,712 | ||||||||||||
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Interest Expense | $ | — | N/M | $ | — | (100) | $ | 30 | ||||||||||||
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N/M — not meaningful.
Our Mortgage Services segment continued to beis the primary driver of our overall growth for the periods presented. The growth in Mortgage Services has been driven by our development and national rollout of default oriented Mortgage Services over our national delivery platform. This segment was also aided byis directly attributable to the growth in Ocwen’s residential loan servicing portfolio and our acquisition of MPA in February 2010.
In 2011, we reorganized our reporting structure within this segment in that certain services originally part of Component Services and flood certification services. ThroughOther are now classified as part of Customer Relationship Management in our acquisitionFinancial Services segment. Following this change, Component Service and Other was renamed Origination Management Services. Prior periods have been recast to conform to the current year presentation.
An initiative for 2011 was the formation of MPA, we have preferred access to financial institutionsCorrespondent One which we believe constitutes 6% of the total residential mortgage origination market. In addition, forprovides members of MPA, we believe that over time we can work with Ocwen and other partners to provideLenders One additional avenues to sell loans beyond the currentLenders One’s preferred investor arrangements resultingand the members’ own network of loan buyers. We anticipate this will result in improved capital markets execution. We expect this willexecution for the members and facilitate the sale of our services to the members.
Revenue
September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
Years Ended December 31, | ||||||||||||||||||||
(in thousands) | 2011 | % Better /(Worse) | 2010 | % Better /(Worse) | 2009 | |||||||||||||||
Service Revenue | ||||||||||||||||||||
Asset Management Services | $ | 64,975 | 75 | $ | 37,079 | 130 | $ | 16,156 | ||||||||||||
Origination Management Services | 18,711 | 17 | 15,932 | N/M | 3,899 | |||||||||||||||
Residential Property Valuation | 51,785 | 55 | 33,502 | 25 | 26,800 | |||||||||||||||
Closing and Insurance Services | 56,496 | 104 | 27,754 | 59 | 17,444 | |||||||||||||||
Default Management Services | 32,975 | 54 | 21,413 | 188 | 7,425 | |||||||||||||||
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|
|
|
| |||||||||||||||
Total Service Revenue | 224,942 | 66 | 135,680 | 89 | 71,724 | |||||||||||||||
Reimbursable Expenses | ||||||||||||||||||||
Asset Management Services | 76,511 | 83 | 41,920 | 193 | 14,308 | |||||||||||||||
Default Management Services | 3,497 | 50 | 2,328 | 32 | 1,769 | |||||||||||||||
Closing and Insurance Services | 116 | (62) | 302 | N/M | — | |||||||||||||||
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|
| |||||||||||||||
Total Reimbursable Expenses | 80,124 | 80 | 44,550 | 177 | 16,077 | |||||||||||||||
Non-controlling Interests | 6,855 | (1) | 6,903 | N/M | — | |||||||||||||||
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| |||||||||||||||
Total Revenue | $ | 311,921 | 67 | $ | 187,133 | 113 | $ | 87,801 | ||||||||||||
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Transactions with Related Parties: | ||||||||||||||||||||
Asset Management Services | $ | 136,685 | 73 | $ | 78,999 | 159 | $ | 30,464 | ||||||||||||
Residential Property Valuation | 48,734 | 50 | 32,525 | 26 | 25,762 | |||||||||||||||
Closing and Insurance Services | 26,733 | 54 | 17,379 | 29 | 13,496 | |||||||||||||||
Default Management Services | 11,032 | 63 | 6,752 | 55 | 4,367 | |||||||||||||||
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| |||||||||||||||
Total | $ | 223,184 | 65 | $ | 135,655 | 83 | $ | 74,089 | ||||||||||||
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- 31 -
Years Ended December 31, | ||||||||||||||||||||
(dollars in thousands) | 2010 | (*) | 2009 | (*) | 2008 | |||||||||||||||
Revenue: | ||||||||||||||||||||
Asset Management Services | $ | 78,999 | 159 | % | $ | 30,464 | N/M | $ | 1,167 | |||||||||||
Component Services and Other | 40,473 | 111 | 19,196 | 64 | % | 11,683 | ||||||||||||||
Residential Property Valuation | 33,502 | 25 | 26,800 | (7 | ) | 28,882 | ||||||||||||||
Closing and Title Services | 28,056 | 61 | 17,444 | (32 | ) | 13,173 | ||||||||||||||
Default Management Services | 23,741 | 158 | 9,194 | N/M | 51 | |||||||||||||||
Total Revenue | $ | 204,771 | 99 | % | $ | 103,098 | 88 | % | $ | 54,956 | ||||||||||
Reimbursable Expenses: | ||||||||||||||||||||
Asset Management Services | $ | 41,920 | $ | 14,308 | $ | — | ||||||||||||||
Default Management Services | 2,328 | 1,769 | — | |||||||||||||||||
Closing and Title Services | 302 | — | — | |||||||||||||||||
Reimbursable Expenses | $ | 44,550 | $ | 16,077 | $ | — | ||||||||||||||
Transactions with Related Parties: | ||||||||||||||||||||
Asset Management Services | $ | 78,999 | $ | 30,464 | $ | 1,161 | ||||||||||||||
Residential Property Valuation | 32,525 | 25,762 | 27,301 | |||||||||||||||||
Closing and Title Services | 17,379 | 13,496 | 13,173 | |||||||||||||||||
Default Management Services | 6,752 | 4,367 | — | |||||||||||||||||
Revenue | $ | 135,655 | $ | 74,089 | $ | 41,635 | ||||||||||||||
Asset Management Services.Asset management services principally include property preservation, property inspection, REO asset management and REO brokerage. During 2009, we established brokerage operations in three key states and launchedwww.altisourcehomes.com andwww.gohoming.com. InAsset Management Services has been the first quarter of 2010, we completed our national network for property preservation services and, including our real estate broker referral network, have national coverage for REO dispositions. The increase in revenuelargest contributor to Service Revenue growth over the three year period has mostly been driven by ourwhich reflects an increase in the number of REO sold, the number of REO for which we provide property preservation services to date; however, theand an increase in REO brokerage referrals should ultimately drive additional revenues.
ComponentOrigination Management Services and Other. ComponentOrigination Management Services includes MPA and our business process group which principally provides outsourced services for key insurers in the mortgage industry. In addition, we record the results of MPA in this grouping.developing fulfillment business. The increase in component services over the three yearsyear period is principally due to the inclusion of MPA’s results from the date of acquisition in 2010February 2010. For the year ended December 31, 2011, MPA experienced a net increase of 35 members and an expanded relationship with an existing customer beginning in the second quarterhad 214 members as of 2009. The renewed contract with the existing customer has a five year term, thus we anticipate that we will continue to generate revenues from this customer at least at the current level for the next several years.
Residential Property Valuation.Valuation Services.During 2010, we saw anWe provide our customers with a broad range of traditional appraisal and other valuation services. The increase over the three year period was primarily in broker price opinion referrals and revenues as a result of Ocwen’s residential loan servicing portfolio growth includingand, in 2011, to a lesser degree from the HomEq portfolio. We expect to see an increased level of referrals to continue duringSpringhouse acquisition in April 2011. As one of the more mature services in our portfolio, residential property valuations are more subject to market conditions and therefore saw declines in 2009 as compared to 2008 given the downturn in private label mortgage securitizations.
- 32 -
Default Management Services. This group includes support services whereby weWe provide non-legal back-office support for foreclosure, bankruptcy and eviction attorneys as well as non-judicial foreclosure services in California and Nevada.trustee services. We do not execute or notarize foreclosure affidavits of debt or lost note affidavits. Higher revenue in 2010The increase over the three year period was primarily driven by our increased footprint as we expanded the states where we provide foreclosure support services to 26 states during the year. In addition we also expanded the footprint over which we provide our bankruptcy and eviction support services. In 2009, the majoritya result of our revenue was derived from processing foreclosure support services.
Cost of Revenue
Years Ended December 31, | ||||||||||||||||||||
(dollars in thousands) | 2010 | (*) | 2009 | (*) | 2008 | |||||||||||||||
Expenditures | $ | 79,935 | (79 | )% | $ | 44,658 | (23 | )% | $ | 36,392 | ||||||||||
Reimbursable Expenses | 44,550 | (177 | ) | 16,077 | (100 | ) | — | |||||||||||||
Cost of Revenue | $ | 124,485 | (105 | )% | $ | 60,735 | (67 | )% | $ | 36,392 | ||||||||||
Gross Profit Percentage: | ||||||||||||||||||||
Gross Profit/Service Revenue | 52 | % | 49 | % | 34 | % | ||||||||||||||
September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
Years Ended December 31, | ||||||||||||||||||||
(in thousands) | 2011 | % Better /(Worse) | 2010 | % Better /(Worse) | 2009 | |||||||||||||||
Compensation and Benefits | $ | 37,264 | (81) | $ | 20,584 | (154) | $ | 8,115 | ||||||||||||
Outside Fees and Services | 73,888 | (64) | 45,135 | (55) | 29,208 | |||||||||||||||
Reimbursable Expenses | 80,124 | (80) | 44,550 | (177) | 16,077 | |||||||||||||||
Technology and Communications | 10,150 | (42) | 7,160 | (131) | 3,093 | |||||||||||||||
Depreciation and Amortization | 609 | (132) | 262 | N/M | 46 | |||||||||||||||
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Cost of Revenue | $ | 202,035 | (72) | $ | 117,691 | (108) | $ | 56,539 | ||||||||||||
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Gross Margin Percentage: | ||||||||||||||||||||
Gross Profit/Service Revenue | 49 | % | 51 | % | 44 | % | ||||||||||||||
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N/M — Not meaningful.
Cost of Revenues increased for the periods presented due to investments in personnel and vendor costs to support the national rollout of services and in anticipation of the growthincrease in Ocwen’s residential loan portfolio. Theseservicing portfolio as well as the development of new mortgage and real estate portfolio management services.
The most significant factors impacting gross profit margins as a percent of Service Revenue are investments in personnel and third party vendor costs. Although we have been able to generally maintain or improve our margins in a period of accelerated growth, over time we will seek to reduce employee and vendor costs haveas a percent of Service Revenue principally included increasedthrough deployment of our next generation vendor, process and payment management technologies beginning in the second half of 2012 and continuing through 2013.
Our margins also can vary substantially based upon when servicing is acquired by Ocwen. Typically, compensation and benefits will increase in anticipation of an acquisition as we hire and technology costs. Duetrain personnel to deliver services in advance of the numberactual boarding of people hiredloans. Subsequently, as new loans are boarded, for the first couple of months post boarding, we tend to deliver an elevated level of valuations and pre-foreclosure services for which we incur substantially more Outside Fees and Services when compared to asset management services.
When compared to 2010, gross profits as a percent of Service Revenue declined in 2011 principally due to additional investment in personnel to support the requisite training time, it was necessaryboarding of loans in September and November 2011 and to prepare for loans we expect Ocwen to board in 2012. In addition, we continue to invest in personnel to develop these resources several months priorour newer services including insurance and origination services. Gross profit margins as a percent of Service Revenue improved in 2010 when compared to the completion2009 as a result of Ocwen’s acquisitionservices being more weighted towards asset management services which tend to have higher margins as a result of the HomEq residential loan portfolio.
Selling, General and Administrative Expenses
Years Ended December 31, | ||||||||||||||||||||
(dollars in thousands) | 2010 | (*) | 2009 | (*) | 2008 | |||||||||||||||
Total Selling, General and Administrative Expenses | $ | 14,890 | (165 | )% | $ | 5,625 | (12 | )% | $ | 5,027 | ||||||||||
Operating Percentage: | ||||||||||||||||||||
Income from Operations/Service Revenue | 43 | % | 42 | % | 25 | % | ||||||||||||||
September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
Years Ended December 31, | ||||||||||||||||||||
(in thousands) | 2011 | % Better /(Worse) | 2010 | % Better /(Worse) | 2009 | |||||||||||||||
Occupancy Related Costs and Other | $ | 12,543 | (9) | $ | 11,493 | (134) | $ | 4,910 | ||||||||||||
Amortization of Intangible Assets | 2,619 | (18) | 2,219 | N/M | — | |||||||||||||||
Depreciation and Amortization | 116 | N/M | 6 | (100) | 3 | |||||||||||||||
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Selling, General and Administrative Expenses | $ | 15,278 | (11) | $ | 13,718 | (179) | $ | 4,913 | ||||||||||||
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Operating Margin Percentage: | ||||||||||||||||||||
Income from Operations/Service Revenue | 42 | % | 41 | % | 37 | % | ||||||||||||||
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- 33 -
The increase in 2010 principallywas also as a result of the classification of certain compensation and benefit costs related to segment management and marketing previously being captured either in Cost of Revenue or as a component of the Corporate segment. In addition, professional services fees such as those associated with the external audit have increased in 2010 as a result of being a public company for a full year. Finally, we incurred significant additional facility costs as a result of scaling our operations.
Years Ended December 31, | ||||||||||||||||||||
(dollars in thousands) | 2010 | (*) | 2009 | (*) | 2008 | |||||||||||||||
EBITDA | $ | 61,749 | 68 | % | $ | 36,845 | 171 | % | $ | 13,571 | ||||||||||
EBITDA Margin: | ||||||||||||||||||||
EBITDA/Service Revenue | 40 | % | 42 | % | 25 | % | ||||||||||||||
- 34 -
The following table presents our results of operations for our Financial Services segment for the years ended December 31:
Years Ended December 31, | ||||||||||||||||||||
(dollars in thousands) | 2010 | (*) | 2009 | (*) | 2008 | |||||||||||||||
Service Revenue | $ | 57,080 | (11 | )% | $ | 64,434 | (13 | )% | $ | 73,835 | ||||||||||
Reimbursable Expenses | 2,899 | 100 | — | — | — | |||||||||||||||
Total Revenue | 59,979 | (7 | ) | 64,434 | (13 | ) | 73,835 | |||||||||||||
Cost of Revenue | 49,781 | 6 | 52,871 | 16 | 62,590 | |||||||||||||||
Gross Profit | 10,198 | (12 | ) | 11,563 | 3 | 11,245 | ||||||||||||||
Gross Profit/Service Revenue | 18 | % | 18 | % | 15 | % | ||||||||||||||
Selling, General and Administrative Expenses | 19,567 | (2 | ) | 19,267 | (12 | ) | 17,168 | |||||||||||||
Loss from Operations | $ | (9,369 | ) | (22 | )% | $ | (7,704 | ) | (30 | )% | $ | (5,923 | ) | |||||||
Loss from Operations/Service Revenue | (16 | )% | (12 | )% | (8 | %) | ||||||||||||||
EBITDA(1) | $ | (1,903 | ) | N/M | $ | 8 | 109 | % | $ | (94 | ) | |||||||||
Transactions with Related Parties: | ||||||||||||||||||||
Revenue | $ | 166 | $ | 98 | $ | 1,181 | ||||||||||||||
Selling, General and Administrative Expenses | — | 467 | 595 | |||||||||||||||||
Interest expense | — | 1,029 | 1,833 |
N/M — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
In 2011, we failed to execute on certain key strategic initiatives which resulted in performance issues and for some customers the decline in placements. In the fourth quarter of 2010, we made significant changes to the management ofreorganized our reporting structure within this segment includingin that certain services originally part of Component Services and Other in the namingMortgage Services segment are now classified as part of a new President and the hiring of a new Chief Operations Officer. We continue to make further investmentsCustomer Relationship Management in personnel and technology and believe this will lead to improved performance during 2011.
Our leadership team is focused on improving revenue per collector,disciplined floor management, delivering more services over our global delivery platform, expanding our quality and analytical initiatives and investing in new technology. We expect limited revenue growth
In July 2011, we purchased the assembled workforce of a sub-contractor in this segmentIndia that performs asset recovery services. For periods prior to the acquisition, the costs paid to the sub-contractor were included as a component of Outside Fees and instead will be focused on performanceServices. Since acquisition, the costs have been recorded as employee costs, technology or occupancy as appropriate which has resulted in movement between Cost of our collectors, which should facilitate growth in future years as well as margin improvement.
Revenue
September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
Years Ended December 31, | ||||||||||||||||||||
% Better | % Better | |||||||||||||||||||
(in thousands) | 2011 | /(Worse) | 2010 | /(Worse) | 2009 | |||||||||||||||
Service Revenue | ||||||||||||||||||||
Asset Recovery Management | $ | 37,371 | (17 | ) | $ | 45,151 | (12 | ) | $ | 51,019 | ||||||||||
Customer Relationship Management | 31,860 | 8 | 29,567 | 3 | 28,712 | |||||||||||||||
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Total Service Revenue | 69,231 | (7 | ) | 74,718 | (6 | ) | 79,731 | |||||||||||||
Reimbursable Expenses: | ||||||||||||||||||||
Asset Recovery Management | 1,950 | (33 | ) | 2,899 | N/M | — | ||||||||||||||
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Total Reimbursable Expenses | 1,950 | (33 | ) | 2,899 | N/M | — | ||||||||||||||
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Total Revenue | $ | 71,181 | (8 | ) | $ | 77,617 | (3 | ) | $ | 79,731 | ||||||||||
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Transactions with Related Parties: | ||||||||||||||||||||
Asset Recovery Management | $ | 266 | 60 | $ | 166 | 69 | $ | 98 | ||||||||||||
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- 35 -
Years Ended December 31, | ||||||||||||||||||||
(dollars in thousands) | 2010 | (*) | 2009 | (*) | 2008 | |||||||||||||||
Revenue: | ||||||||||||||||||||
Asset Recovery Management | $ | 48,050 | (6 | )% | $ | 51,019 | (19 | )% | $ | 62,771 | ||||||||||
Customer Relationship Management | 11,929 | (11 | ) | 13,415 | 21 | 11,064 | ||||||||||||||
Total Revenue | $ | 59,979 | (7 | )% | $ | 64,434 | (13 | )% | $ | 73,835 | ||||||||||
Reimbursable Expenses: | ||||||||||||||||||||
Asset Recovery Management | $ | 2,899 | $ | — | $ | — | ||||||||||||||
Transactions with Related Parties: | ||||||||||||||||||||
Asset Recovery Management | $ | 166 | $ | 98 | $ | 1,181 |
Financial Services revenue declined over the three year period due to a decline in revenue attributable to asset recovery management, primarily associated with one of the segment’s largest customers. The decline was due to the general economic environment which has kept collection rates depressed and also the result of the client shifting work to the Company’s global delivery platform. Our global delivery platform consists of highly trained specialists in various geographic regions. The use of specialists in certain countries may result in lower commission rates paid by clients but results in higher margins principally due to the mix of placementslower employee cost structure. These declines were partially offset by growth in new asset recovery management accounts, which drove an increase in associated revenues, and a shiftgrowth in placements to operations that provide lower per collector revenue, but we believe will ultimately result in higher margins.
Cost of Revenue
Years Ended December 31, | ||||||||||||||||||||
(dollars in thousands) | 2010 | (*) | 2009 | (*) | 2008 | |||||||||||||||
Expenditures | $ | 46,882 | 11 | % | $ | 52,871 | 16 | % | $ | 62,590 | ||||||||||
Reimbursable Expenses | 2,899 | (100 | ) | — | — | — | ||||||||||||||
Cost of Revenue | $ | 49,781 | 6 | % | $ | 52,871 | 16 | % | $ | 62,590 | ||||||||||
Gross Profit Percentage: | ||||||||||||||||||||
Gross Profit/Service Revenue | 18 | % | 18 | % | 15 | % | ||||||||||||||
September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
Years Ended December 31, | ||||||||||||||||||||
% Better | % Better | |||||||||||||||||||
(in thousands) | 2011 | /(Worse) | 2010 | /(Worse) | 2009 | |||||||||||||||
Compensation and Benefits | $ | 29,764 | 4 | $ | 30,948 | 9 | $ | 34,116 | ||||||||||||
Outside Fees and Services | 11,587 | 25 | 15,417 | (12 | ) | 13,816 | ||||||||||||||
Reimbursable Expenses | 1,950 | 33 | 2,899 | N/M | — | |||||||||||||||
Technology and Communications | 7,784 | (7 | ) | 7,298 | 20 | 9,130 | ||||||||||||||
Depreciation and Amortization | 11 | 15 | 13 | (160 | ) | 5 | ||||||||||||||
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Cost of Revenue | $ | 51,096 | 10 | $ | 56,575 | 1 | $ | 57,067 | ||||||||||||
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Gross Margin Percentage: | ||||||||||||||||||||
Gross Profit/Service Revenue | 29 | % | 28 | % | 28 | % | ||||||||||||||
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N/M – Not meaningful.
Cost of Revenues netas percent of reimbursable expenses, decreasedService Revenue has remained flat over the three year periodperiods presented as we have actively worked to manage our cost structure in a declining revenue environment. We principally managed our cost structure through a reduction in compensation and benefit costs both through reduction in overall headcount as well as expanding our use of our global workforce.
The decline in Compensation and Benefits in 2011 is mostly offset by the acquisition of a sub-contractor, as previously described, for which costs incurred prior to the acquisition were recorded in Outside Fees and Services. Since acquisition, costs have been recorded as employee costs, technology or occupancy as appropriate which has also resulted in movement between Cost of Revenue and Selling, General and Administrative Expense categories.
Cost of Revenues in 2010 decreased as compared to 2009 principally due to a reduction in compensation and benefits as a result of a lower number of collectors and reduced commissions. In addition, we have reduced and continue to seek ways to further reduce technology and communication costs for this segment. Partially offsetting these decreases werecommissions, partially offset by higher costs associated with the utilization of outside collectors. We continue to analyze our cost structure and intend to manage our costs to improve our results even if collection rates remain at depressed levels.
- 36 -
Years Ended December 31, | ||||||||||||||||||||
(dollars in thousands) | 2010 | (*) | 2009 | (*) | 2008 | |||||||||||||||
Total Selling, General and Administrative Expenses | $ | 19,567 | (2 | )% | $ | 19,267 | (12 | )% | $ | 17,168 | ||||||||||
Operating Percentage: | ||||||||||||||||||||
Loss from Operations/Service Revenue | (16 | )% | (12 | )% | (8 | )% | ||||||||||||||
September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
Years Ended December 31,. | ||||||||||||||||||||
% Better | % Better | |||||||||||||||||||
(in thousands) | 2011 | /(Worse) | 2010 | /(Worse) | 2009 | |||||||||||||||
Occupancy Related Costs and Other(1) | $ | 11,569 | 19 | $ | 14,248 | 16 | $ | 16,906 | ||||||||||||
Amortization of Intangible Assets | 2,672 | — | 2,672 | — | 2,672 | |||||||||||||||
Depreciation and Amortization | 1,393 | (39 | ) | 1,003 | (150 | ) | 401 | |||||||||||||
Goodwill Impairment | — | 100 | 2,816 | N/M | — | |||||||||||||||
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Selling, General and Administrative Expenses | $ | 15,634 | 25 | $ | 20,739 | (4 | ) | $ | 19,979 | |||||||||||
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Operating Margin Percentage: | ||||||||||||||||||||
Income from Operations/Service Revenue | 6 | % | 0 | % | 3 | % | ||||||||||||||
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N/M — not meaningful.
(1) | ||
Includes $1.9 million in one-time facility closure costs primarily consisting of lease exit costs and severance and $1.4 million of legal settlement losses in 2009. |
Selling, General and Administrative Expenses include infrequent items. In 2010, we recognizeddecreased in 2011 primarily due to a $2.8 million ofgoodwill impairment for goodwillrecorded in the fourth quarter. Selling, General and Administrative Expensesquarter of 2010 (no impairment recorded in 2009 included $1.9 million in facility closure costs primarily consisting of lease exit costs and severance for closure of facilities in Miramar, Florida and Victoria, British Columbia, Canada (see Note 10 to the consolidated financial statements). In addition, 2009 included $1.4 million of legal settlement losses. Excluding these items, Selling, General and Administrative Expenses increased in 2010 principally2011) as well as a result of the classificationreduced occupancy costs and costs from our Technology Services segment following implementation of certain compensation and benefit costs related to segment management and marketing previously being captured either in Cost of Revenue or as a component of the Corporate segment.
Years Ended December 31, | ||||||||||||||||||||
(dollars in thousands) | 2010 | (*) | 2009 | (*) | 2008 | |||||||||||||||
EBITDA | $ | (1,903 | ) | N/M | $ | 8 | 109 | % | $ | (94 | ) | |||||||||
EBITDA Margin: | ||||||||||||||||||||
EBITDA/Service Revenue | (3 | )% | 0 | % | 0 | % | ||||||||||||||
containment measures.
- 37 -
The following table presents our results of operations for our Technology Services segment for the years ended December 31:
Years Ended December 31, | ||||||||||||||||||||
(dollars in thousands) | 2010 | (*) | 2009 | (*) | 2008 | |||||||||||||||
Revenue | $ | 52,013 | 10 | % | $ | 47,453 | 5 | % | $ | 45,283 | ||||||||||
Cost of Revenue | 28,909 | (18 | ) | 24,477 | 18 | 29,777 | ||||||||||||||
Gross Profit | 23,104 | 1 | 22,976 | 48 | 15,506 | |||||||||||||||
Gross Profit Percentage | 44 | % | 48 | % | 34 | % | ||||||||||||||
Selling, General and Administrative Expenses | 4,985 | (5 | ) | 4,731 | 23 | 6,118 | ||||||||||||||
Income from Operations | $ | 18,119 | (1 | )% | $ | 18,245 | 94 | % | $ | 9,388 | ||||||||||
Operating Income Percentage | 35 | % | 38 | % | 21 | % | ||||||||||||||
EBITDA(1) | $ | 22,622 | 7 | % | $ | 21,150 | 49 | % | $ | 14,169 | ||||||||||
Transactions with Related Parties: | ||||||||||||||||||||
Revenue(2) | $ | 19,167 | $ | 20,710 | $ | 35,146 | ||||||||||||||
Selling, General and Administrative Expenses | — | 1,517 | 1,980 | |||||||||||||||||
Interest expense | — | 231 | 378 |
September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
Years Ended December 31, | ||||||||||||||||||||
% Better | % Better | |||||||||||||||||||
(in thousands) | 2011 | /(Worse) | 2010 | /(Worse) | 2009 | |||||||||||||||
Revenue | $ | 56,094 | 8 | $ | 52,013 | 10 | $ | 47,453 | ||||||||||||
Cost of Revenue | 36,874 | (28 | ) | 28,909 | (18 | ) | 24,477 | |||||||||||||
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Gross Profit | 19,220 | (17 | ) | 23,104 | 1 | 22,976 | ||||||||||||||
Selling, General and Administrative Expenses | 4,867 | 2 | 4,985 | (5 | ) | 4,731 | ||||||||||||||
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Income from Operations | $ | 14,353 | (21 | ) | $ | 18,119 | (1 | ) | $ | 18,245 | ||||||||||
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Margins: | ||||||||||||||||||||
Gross Profit/Revenue | 34 | % | 44 | % | 48 | % | ||||||||||||||
Income from Operations/Revenue | 26 | % | 35 | % | 38 | % | ||||||||||||||
Transactions with Related Parties Revenue | $ | 21,812 | 14 | $ | 19,167 | (7 | ) | $ | 20,710 | |||||||||||
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The primary focus of the Technology Services segment continuestoday is to be supportingsupport the growth of Mortgage Services and Ocwen as well as theOcwen. In addition, Technology Services assists in cost reduction and quality initiatives on-going within the Financial Services segment. In
Effective January 1, 2011, however, we also intend to expend significant resources, principally personnel costs and external consulting costs, to accomplish several key objectives:
In addition, in 2011 we now report our service offerings will either limit the growthConsumer Analytics group within Technology Services (previously reported in our Corporate Segment). Our Consumer Analytics group seeks to expand our use of this segment or may result inbehavioral sciences by building proprietary algorithms and psychologically-optimized communications through a lowering of the reported results for this segment in 2011.
Revenues
September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
Years Ended December 31, | ||||||||||||||||||||
% Better | % Better | |||||||||||||||||||
(in thousands) | 2011 | /(Worse) | 2010 | /(Worse) | 2009 | |||||||||||||||
Revenue: | ||||||||||||||||||||
REALSuite | $ | 34,926 | 12 | $ | 31,214 | 21 | $ | 25,784 | ||||||||||||
IT Infrastructure Services | 21,168 | 2 | 20,799 | (4 | ) | 21,669 | ||||||||||||||
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Total Revenue | $ | 56,094 | 8 | $ | 52,013 | 10 | $ | 47,453 | ||||||||||||
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Transactions with Related Parties: | ||||||||||||||||||||
REALSuite | $ | 13,253 | 18 | $ | 11,226 | 13 | $ | 9,899 | ||||||||||||
IT Infrastructure Services | 8,559 | 8 | 7,941 | (27 | ) | 10,811 | ||||||||||||||
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Revenue | $ | 21,812 | 14 | $ | 19,167 | (7 | ) | $ | 20,710 | |||||||||||
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Years Ended December 31, | ||||||||||||||||||||
(dollars in thousands) | 2010 | (*) | 2009 | (*) | 2008 | |||||||||||||||
Revenue: | ||||||||||||||||||||
REALSuite | $ | 31,214 | 21 | % | $ | 25,784 | 26 | % | $ | 20,463 | ||||||||||
IT Infrastructure Services | 20,799 | (4 | ) | 21,669 | (13 | ) | 24,820 | |||||||||||||
Total Revenue | $ | 52,013 | 10 | % | $ | 47,453 | 5 | % | $ | 45,283 | ||||||||||
Transactions with Related Parties(1): | ||||||||||||||||||||
REALSuite | $ | 11,226 | $ | 9,899 | $ | 9,134 | ||||||||||||||
IT Infrastructure Services | 7,941 | 10,811 | 26,012 | |||||||||||||||||
Revenue | $ | 19,167 | $ | 20,710 | $ | 35,146 | ||||||||||||||
As mentioned above, IT Infrastructure Services revenue is principally based on fully loaded costs. This increase in 2011 is attributabledue to the growth in both our and Ocwen’s residential loan portfolio.
Cost of Revenue
September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
Years Ended December 31, | ||||||||||||||||||||
% Better | % Better | |||||||||||||||||||
(in thousands) | 2011 | /(Worse) | 2010 | /(Worse) | 2009 | |||||||||||||||
Compensation and Benefits | $ | 15,519 | (38 | ) | $ | 11,259 | (32 | ) | $ | 8,533 | ||||||||||
Outside Fees and Services | 727 | N/M | 31 | N/M | — | |||||||||||||||
Technology and Communications | 14,994 | (23 | ) | 12,206 | (9 | ) | 11,214 | |||||||||||||
Depreciation and Amortization | 5,634 | (4 | ) | 5,413 | (14 | ) | 4,730 | |||||||||||||
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Cost of Revenue | $ | 36,874 | (28 | ) | $ | 28,909 | (18 | ) | $ | 24,477 | ||||||||||
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Gross Margin Percentage: | ||||||||||||||||||||
Gross Profit/Service Revenue | 34 | % | 44 | % | 48 | % | ||||||||||||||
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N/M — Not meaningful.
Cost of Revenues increased for the periods presented due to investments in personnel and vendor costs to support the acquisitiongrowth of Ocwen and our operations. In addition, we continue to strengthen our technology design and development competencies as we invest in the HomEq residential loan portfolio.next generation of REALSuite technologies. We expect revenues in this groupingTechnology Services’ Compensation and Benefits costs to increase as we continue to declineinvest in 2011.
Technology and Communication costs increased principally due to the addition of Revenue
Years Ended December 31, | ||||||||||||||||||||
(dollars in thousands) | 2010 | (*) | 2009 | (*) | 2008 | |||||||||||||||
Cost of Revenue | $ | 28,909 | (18 | )% | $ | 24,477 | 18 | % | $ | 29,777 | ||||||||||
Gross Margin Percentage: | ||||||||||||||||||||
Cost of Revenue/Total Revenue | 44 | % | 48 | % | 34 | % | ||||||||||||||
growth.
- 39 -
Years Ended December 31, | ||||||||||||||||||||
(dollars in thousands) | 2010 | (*) | 2009 | (*) | 2008 | |||||||||||||||
Total Selling, General and Administrative Expenses | $ | 4,985 | (5 | )% | $ | 4,731 | 23 | % | $ | 6,118 | ||||||||||
Operating Percentage: | ||||||||||||||||||||
Operating Income/Total Revenue | 35 | % | 38 | % | 21 | % | ||||||||||||||
September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
Years Ended December 31, | ||||||||||||||||||||
(in thousands) | 2011 | % Better /(Worse) | 2010 | % Better /(Worse) | 2009 | |||||||||||||||
Occupancy Related Costs and Other | $ | 4,843 | 2 | $ | 4,943 | (8 | ) | $ | 4,560 | |||||||||||
Depreciation and Amortization | 24 | 43 | 42 | 75 | 171 | |||||||||||||||
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Selling, General and Administrative Expenses | $ | 4,867 | 2 | $ | 4,985 | (5 | ) | $ | 4,731 | |||||||||||
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Operating Margin Percentage: | ||||||||||||||||||||
Income from Operations/Service Revenue | 26 | % | 35 | % | 38 | % | ||||||||||||||
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Selling, General and Administrative Expenses in 2011 were comparable to those in 2010. Selling, General and Administrative Expenses increased in 2010 as a result of increased occupancy charges associated with the new data center and as a result of costs incurred in preparing for the HomEq transaction.
Years Ended December 31, | ||||||||||||||||||||
(dollars in thousands) | 2010 | (*) | 2009 | (*) | 2008 | |||||||||||||||
EBITDA | $ | 22,622 | 7 | % | $ | 21,150 | 49 | % | $ | 14,169 | ||||||||||
EBITDA Margin: | ||||||||||||||||||||
EBITDA/Total Revenue | 43 | % | 45 | % | 31 | % | ||||||||||||||
The operating margin decreased in 2010over the three year period as higher revenues were more than offset by increased compensationa result of the Revenue and occupancy costs associated with the new data center asCost of Revenue fluctuations described above. The Company is increasing expenditures in technology software and hardware to support its commercialization efforts, Ocwen’s growing servicing portfolio and Altisource’s growth.
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Selling, General and Administrative Expenses
Years Ended December 31, | ||||||||||||||||||||
(dollars in thousands) | 2010 | (*) | 2009 | (*) | 2008 | |||||||||||||||
Total Selling, General and Administrative Expenses | $ | 17,910 | (82 | )% | $ | 9,850 | N/M | $ | (225 | ) | ||||||||||
September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
Years Ended December 31, | ||||||||||||||||||||
(in thousands) | 2011 | % Better /(Worse) | 2010 | % Better /(Worse) | 2009 | |||||||||||||||
Total Selling, General and Administrative Expenses | $ | 26,352 | (47 | ) | $ | 17,910 | (82 | ) | $ | 9,850 |
During 2011, we incurred a full year of costs for those employees hired during 2010 and also hired additional resources principally focused on legal, compliance and quality assurance. As a result, our expenses associated with related professional fees decreased. In addition, lease costs increased related to the build out of new facilities to support Ocwen’s growth. Typically, we include new lease costs within Corporate until the facility is put into use at which time the prospective lease cost is included within the appropriate segment. Lastly, we continue to invest in an enterprise resource planning system that we expect will increase the quality of our support functions and over time reduce costs. As a percentage of total consolidated Service Revenue, Corporate expenses were essentially flat in 2011.
Corporate costs rose throughout 2010 as we invested in staff to support our growing operations, as a result of our first full year of being a public company and as a result of the increase in regulatory and compliance requirements. During 2011, we also intend to hire additional resources in corporate principally focused on compliance matters and quality assurance. In addition, we intend to invest in technologies to help with the increasing demands as a result of the growth in our businesses. We expect these investments will increase the quality of these services and eventually reduce our Cost of Revenue.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
We seek to deploy excess cash generated in a disciplined manner. Principally, we will continue to investreinvest excess cash in developing compelling services that we believe will generate high margins. In addition, we may seek to acquire a limited number of complementary companies that fit our strategic objectives. Finally, given the tax inefficiency of dividends, the low returns earned on cash held and our desirecurrent belief to only performpursue a limited number of acquisitions, we believe one of the best ways to return value to shareholders is through a share repurchase program.
On May 19, 2010, our shareholders authorized us to purchase up to 3.8 million shares of our common stock in the open market. Through December 31, 2010,2011, we purchased 0.72.3 million shares of our common stock on the open market at an average price of $27.11,$34.55 leaving 3.11.5 million shares still available for purchase.
Cash Flows
The following table presents our cash flows for the years ended December 31:
Years Ended December 31, | ||||||||||||||||||||
(dollars in thousands) | 2010 | (*) | 2009 | (*) | 2008 | |||||||||||||||
Net Income Adjusted for Non-Cash Items | $ | 73,030 | 120 | % | $ | 33,192 | 58 | % | $ | 21,055 | ||||||||||
Working Capital | (20,218 | ) | N/M | 92 | (99 | ) | 7,850 | |||||||||||||
Cash Flow from Operating Activities | 52,812 | 59 | 33,284 | 15 | 28,905 | |||||||||||||||
Cash Flow from Investing Activities | (39,489 | ) | N/M | (7,536 | ) | (44 | ) | (5,216 | ) | |||||||||||
Cash Flow from Financing Activities | (21,645 | ) | N/M | (2,280 | ) | (90 | ) | (22,389 | ) | |||||||||||
Net Change in Cash | (8,322 | ) | (135 | ) | 23,468 | N/M | 1,300 | |||||||||||||
Cash at Beginning of Period | 30,456 | N/M | 6,988 | 23 | 5,688 | |||||||||||||||
Cash at End of Period | $ | 22,134 | (27 | ) | $ | 30,456 | N/M | $ | 6,988 | |||||||||||
September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
Years Ended December 31, | ||||||||||||||||||||
(dollars in thousands) | 2011 | % Better /(Worse) | 2010 | % Better /(Worse) | 2009 | |||||||||||||||
Net Income Adjusted for Non-Cash Items | $ | 96,657 | 30 | $ | 74,564 | 131 | $ | 33,192 | ||||||||||||
Working Capital | 14,954 | 169 | (21,752 | ) | N/M | 92 | ||||||||||||||
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Cash Flow from Operating Activities | 111,611 | 111 | 52,812 | 59 | 33,284 | |||||||||||||||
Cash Flow from Investing Activities | (33,070 | ) | 16 | (39,489 | ) | N/M | (7,536 | ) | ||||||||||||
Cash Flow from Financing Activities | (68,550 | ) | (217 | ) | (21,645 | ) | N/M | (2,280 | ) | |||||||||||
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Net Change in Cash | 9,991 | 220 | (8,322 | ) | (135 | ) | 23,468 | |||||||||||||
Cash at Beginning of Period | 22,134 | (27 | ) | 30,456 | N/M | 6,988 | ||||||||||||||
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Cash at End of Period | $ | 32,125 | 45 | $ | 22,134 | (27 | ) | $ | 30,456 | |||||||||||
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- 41 -
Cash flow from operating activities consists of two components: (i) net income adjusted for depreciation, amortization and certain other non-cash items and (ii) working capital. For the year ended December 31, 2010,2011, we generated $52.6$111.6 million in positive cash flow from operations whichor approximately $0.33 for every dollar of service revenue. This primarily reflects our increased profitability, adjusted for non-cash items, as our businesses have expanded. Our working capital requirements increased significantly beginning the third quarter of 2010 as a result of our expanded Asset Management and Default Managementyear-over-year growth in mortgage-related services withinas well as a focused effort to improve our Mortgage Services segment and the increase in associated referrals.
The significant increase in operating cash flow in 20092010 compared to 20082009 was primarily driven by our expansion of high margin residential default services inincreased profitability as our Mortgage Services segment. In addition, the operating improvement in both Financial Services and Technology Services contributed to the increased operating cash flow.
Cash Flow from Investing Activities
During 2011, we invested $15.0 million in Correspondent One to facilitate the establishment of this business. In addition, we acquired Springhouse for net consideration of $1.8 million and Tracmail for net consideration of $0.7 million. Finally, we spent $16.4 million on capital expenditures principally consisting of technology investments and leasehold improvements necessary to facilitate our growth.
The largest use of cash flow for investing activities in 2010 was the acquisition of MPA in February 2010 for which the purchase consideration included $26.8 million in cash, net of cash acquired. In addition, we increased purchases of premises and equipment and technology to support our expansion of operations and in anticipation of the growth in Ocwen’s residential loan servicing portfolio. We currently expect capital expenditures in 2011 to be consistent with 2010 levels.
Cash Flow from Financing Activities
The largest use of cash flow from financing activities was the repurchase of shares for $62.2 million and $17.8 million.
In 2009, and 2008, prior to our Separation from Ocwen, we participated in a centralized cash management program with Ocwen. We made a significant amount of our cash disbursements through centralized payable systems which were operated by Ocwen, and a significant amount of our cash receipts were received by us and transferred to centralized accounts maintained by Ocwen. There were no formal financing arrangements with Ocwen. Prior to the Separation we recorded all cash receipts and disbursement activity between Ocwen and us through invested equity in the Consolidated Balance Sheets and as net distributions in the Consolidated Statements of Equity and Cash Flows because we considered such amounts to have been distributed to Ocwen. As such, our cash flow from financing activities in 2009 and 2008 primarily included payments on debt and the net change in our invested equity balance.
Liquidity Requirements after December 31, 20102011
During the first quarter of 2011,2012, we expect to distribute $3.1$2.4 million to the Lenders One members, representing non-controlling interests.
Management is not aware of any other trends or events, commitments or uncertainties which have not otherwise been disclosed that will or are likely to impact liquidity in a material way (see also Contractual Obligations, Commitments and Contingencies below).
Capital Resources
Given our ability to generate cash flow which is sufficient to fund both current operations as well as expansion activities, we require very limited capital. Were we to need additional capital, we believe we have adequate access to both debt and equity capital markets. In general, we have the ability to utilize cash generated throughout our operations without incurring significant additional costs such as withholding taxes.
- 42 -
The preparation of financial statements in conformity with generally accepted accounting principles of the United States (“GAAP”) requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. For additional information, see Note 2 to the consolidated financial statements. Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments, or conditions.
Revenue Recognition
We recognize revenues from the services we provide in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)ASC Topic 605. ASC Topic 605 sets forth guidance as to when revenue is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been performed; (3) the
seller’s price to the buyer is fixed or determinable; and (4) collectability is reasonably assured. Generally, the contract terms for these services are relatively short in duration, and we recognize revenues as the services are performed either on a per unit or a fixed price basis. Our revenue recognition policies are detailed in Note 2 to the consolidated financial statements. Significant areas of judgment include the period over which we recognize property preservation andrevenue, certain default management services revenue, certain insurance program management fees and the determination of fair value for certain IT infrastructure services that we provide Ocwen. Management considers historical information and other third-party objective evidence on a periodic basis in determining the appropriate revenue recognition.
Goodwill and Identifiable Intangible Assets
Goodwill. We evaluate goodwill for impairment annually during the fourth quarter or more frequently when an event occurs or circumstances change that indicates that the carrying value may not be recoverable. We test goodwill for impairment by first comparing the book value of net assets to the fair value of the reporting units. If the fair value is determined to be less than the book value, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. We estimate the fair value of the reporting units using discounted cash flows. Forecasts of future cash flow are based on our best estimate of future net sales and operating expenses, based primarily on expected category expansion, pricing, market segment share and general economic conditions. Certain estimates of discounted cash flows involve businesses and geographies with limited financial history and developing revenue models.
Based on the fourth quarter 2011 analysis, management concluded no impairment was indicated given the fair value for the associated reporting units was substantially in excess of the book value.
In 2010, management determined it was prudent to impair the remaining $2.8 million of goodwill in the Financial Services segment. This determination was made after considering quantitative and qualitative factors including past performance and execution risk.
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Given the performance of our Financial Services segment, we continue to monitor the performance of amortizing intangible assets, particularly those associated with customer lists. To date, we have not determined the need for any impairment charges for identified intangible assets.
Accounting for Income Taxes
We are subject to income taxes in Luxembourg, the United States, India and Uruguay. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are many transactions and estimates for which the ultimate tax determination may vary from year to year. For example, our effective tax rates could be adversely affected by lower than anticipated earnings in countries where we have lower statutory rates and higher than anticipated earnings in countries where we have higher statutory rates, by changes in foreign currency exchange rates or by changes in the relevant tax, accounting and other laws, regulations, principles and interpretations. We are subject to audit in various taxing jurisdictions, and such jurisdictions may assess additional income tax during an examination. Although we believe our tax balances are sufficient to support our future tax liabilities, the final determination of tax audits and any related litigation could differ from the balances we have accrued.
OTHER MATTERS
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements other thanconsist of escrow arrangements and operating leases.
We hold customers’ assets in escrow at various financial institutions pending completion of certain real estate and debt collection activities. These amounts are held in escrow for limited periods of time, generally consisting of a few days. To the extent these assets are not co-mingled with our fees and are maintained in segregated bank accounts, they are generally not included in the accompanying Consolidated Balance Sheets, the balance of which is $17.7 million at December 31, 2011.
Contractual Obligations, Commitments and Contingencies
Our long-term contractual obligations generally include our operating lease payments on certain of our property and equipment. The following table sets forth information relating to our contractual obligations as of December 31, 2010:
Payments due by period | ||||||||||||||||||||
Less than | More than | |||||||||||||||||||
(in thousands) | Total | 1 year | 1-3 years | 3-5 years | 5 years | |||||||||||||||
Non-Cancelable Operating Lease Obligations | $ | 11,571 | $ | 4,867 | $ | 5,102 | $ | 972 | $ | 630 | ||||||||||
Capital Lease Obligations — Principal | 1,531 | 679 | 852 | — | — | |||||||||||||||
Contractual Interest Payments(1) | 84 | 59 | 25 | — | — | |||||||||||||||
Total | $ | 13,186 | $ | 5,605 | $ | 5,979 | $ | 972 | $ | 630 | ||||||||||
September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
Payments due by period | ||||||||||||||||||||
(in thousands) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
Non-Cancelable Operating Lease Obligations | $ | 18,448 | $ | 9,564 | $ | 8,884 | $ | — | $ | — | ||||||||||
Capital Lease Obligations – Principal | 836 | 634 | 202 | — | — | |||||||||||||||
Contractual Interest Payments(1) | 27 | 25 | 2 | — | — | |||||||||||||||
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Total | $ | 19,311 | $ | 10,223 | $ | 9,088 | $ | — | $ | — | ||||||||||
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(1) | Represents estimated future interest payments on capital leases, based on applicable interest rates as of December 31, |
For further information, see Note 1718 to the consolidated financial statements.
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For the year ended December 31, 2010, approximately $135.72011, we generated $223.2 million of Mortgage Services, $0.2$0.3 million of Financial Services and $19.2$21.8 million of Technology Services segment revenues wererevenue from services provided to Ocwen or sales derived from Ocwen’s loan servicing portfolio.Ocwen. Services provided to Ocwen included residential property valuation, real estate asset management and sales, trustee management services, property inspection and preservation, closing and titleinsurance services, charge-off second mortgage collections, core technology back office support and multiple business technologies including our REALSuite of products. We provided all services at rates we believe to be comparable to market rates.
For the year ended December 31, 2010,2011, Altisource billed Ocwen $1.8$2.6 million and Ocwen billed Altisource $1.1$1.9 million for services provided under the Transition Services Agreement. These amounts are reflected as a component of Selling, General and Administrative Expenses in the accompanying Consolidated Statements of Operations.
Our financial market risk consists primarily of foreign currency exchange risk.
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
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September 30, | |||||
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS | |||||
47 | |||||||
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To the Board of Directors and Stockholders of Altisource Portfolio Solutions S.A.:
We have audited the accompanying consolidated balance sheets of Altisource Portfolio Solutions S.A. and subsidiaries (the “Company”) as of December 31, 20102011 and 2009,2010, and the related consolidated statements of operations, changes in stockholders’ and invested equity, and cash flows for each of the twothree years in the period ended December 31, 2010.2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. The consolidated financial statements of the Company for the year ended December 31, 2008, before the inclusion of earnings per share information presented on the 2008 statement of operations and the related disclosures in Note 15 to the consolidated financial statements, were audited by other auditors whose report, dated May 12, 2009 (June 26, 2009 as to Note 1 and Note 10), expressed an unqualified opinion on those statements.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements referred to above present fairly, in all material respects, the financial position of Altisource Portfolio Solutions S.A. and subsidiaries as of December 31, 20102011 and 2009,2010, and the results of their operations and their cash flows for each of the twothree years in the period ended December 31, 2010,2011, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 3 to the consolidated financial statements, the Company has entered into significant transactions with Ocwen Financial Corporation, a related party.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2010,2011, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 18, 201116, 2012 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
February 18, 2011
16, 2012
- 47 -
To the Board of Directors and Stockholders of Altisource Portfolio Solutions S.A.:
We have audited the internal control over financial reporting of Altisource Portfolio Solutions S.A. and subsidiaries (the “Company”) as of December 31, 2010,2011, based on criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010,2011, based on the criteria established inInternal Control — Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 20102011 of the Company and our report dated February 18, 201116, 2012 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding significant transactions with Ocwen Financial Corporation, a related party.
/s/ Deloitte & Touche LLP
Atlanta, Georgia
February 18, 2011
16, 2012
- 48 -
- 49 -
(Dollars inIn Thousands, Except Per Share Data)
December 31, | ||||||||
2010 | 2009 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and Cash Equivalents | $ | 22,134 | $ | 30,456 | ||||
Accounts Receivable, net | 53,495 | 30,497 | ||||||
Prepaid Expenses and Other Current Assets | 13,076 | 2,904 | ||||||
Deferred Tax Assets, net | 551 | 1,546 | ||||||
Total Current Assets | 89,256 | 65,403 | ||||||
Restricted Cash | 1,045 | — | ||||||
Premises and Equipment, net | 17,493 | 11,408 | ||||||
Deferred Tax Assets, net | 1,206 | — | ||||||
Intangible Assets, net | 72,428 | 33,719 | ||||||
Goodwill | 11,836 | 9,324 | ||||||
Other Non-current Assets | 4,536 | 702 | ||||||
Total Assets | $ | 197,800 | $ | 120,556 | ||||
LIABILITIES AND EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts Payable and Accrued Expenses | $ | 35,384 | $ | 24,192 | ||||
Capital Lease Obligations — Current | 680 | 536 | ||||||
Other Current Liabilities | 5,616 | 5,939 | ||||||
Total Current Liabilities | 41,680 | 30,667 | ||||||
Capital Lease Obligations — Non-current | 852 | 128 | ||||||
Deferred Tax Liability, net | — | 2,769 | ||||||
Other Non-current Liabilities | 3,370 | 644 | ||||||
Commitment and Contingencies (Note 17) | ||||||||
Stockholders’ and Invested Equity | ||||||||
Common Stock ($1.00 par value; 100,000 shares authorized; 25,413 shares issued and 24,881 outstanding in 2010; 24,145 shares issued and outstanding in 2009) | 25,413 | 24,145 | ||||||
Retained Earnings | 58,546 | 11,665 | ||||||
Additional Paid-in Capital | 79,297 | 50,538 | ||||||
Treasury Stock, at cost ($1.00 par value; 532 shares in 2010) | (14,418 | ) | — | |||||
Altisource Equity | 148,838 | 86,348 | ||||||
Non—controlling Interests | 3,060 | — | ||||||
Total Equity | 151,898 | 86,348 | ||||||
Total Liabilities and Equity | $ | 197,800 | 120,556 | |||||
September 30, | September 30, | |||||||
December 31, | ||||||||
2011 | 2010 | |||||||
ASSETS | ||||||||
Current Assets: | ||||||||
Cash and Cash Equivalents | $ | 32,125 | $ | 22,134 | ||||
Accounts Receivable, net | 52,005 | 53,495 | ||||||
Prepaid Expenses and Other Current Assets | 5,002 | 13,076 | ||||||
Deferred Tax Asset, net | 1,133 | 551 | ||||||
|
|
|
| |||||
Total Current Assets | 90,265 | 89,256 | ||||||
Restricted Cash | 158 | 1,045 | ||||||
Premises and Equipment, net | 25,600 | 17,493 | ||||||
Deferred Tax Asset, net | 4,373 | 1,206 | ||||||
Intangible Assets, net | 64,950 | 72,428 | ||||||
Goodwill | 14,915 | 11,836 | ||||||
Investment in Equity Affiliate | 14,470 | — | ||||||
Other Non-current Assets | 9,428 | 4,536 | ||||||
|
|
|
| |||||
Total Assets | $ | 224,159 | $ | 197,800 | ||||
|
|
|
| |||||
LIABILITIES AND EQUITY | ||||||||
Current Liabilities: | ||||||||
Accounts Payable and Accrued Expenses | $ | 44,867 | $ | 35,384 | ||||
Capital Lease Obligations—Current | 634 | 680 | ||||||
Other Current Liabilities | 9,939 | 5,616 | ||||||
|
|
|
| |||||
Total Current Liabilities | 55,440 | 41,680 | ||||||
Capital Lease Obligations—Non-current | 202 | 852 | ||||||
Other Non-current Liabilities | 2,574 | 3,370 | ||||||
Commitment and Contingencies | ||||||||
Equity: | ||||||||
Common Stock ($1.00 par value; 100,000 shares authorized; | ||||||||
25,413 shares issued and 23,405 outstanding in 2011; | ||||||||
25,413 shares issued and 24,881 outstanding in 2010) | 25,413 | 25,413 | ||||||
Retained Earnings | 126,161 | 58,546 | ||||||
Additional Paid-in-Capital | 83,229 | 79,297 | ||||||
Treasury Stock, at cost ($1.00 par value; 2,008 and 532 sharesin 2011 and 2010, respectively) | (72,048 | ) | (14,418 | ) | ||||
|
|
|
| |||||
Altisource Equity | 162,755 | 148,838 | ||||||
Non-controlling Interests | 3,188 | 3,060 | ||||||
|
|
|
| |||||
Total Equity | 165,943 | 151,898 | ||||||
|
|
|
| |||||
Total Liabilities and Equity | $ | 224,159 | $ | 197,800 | ||||
|
|
|
|
See notes to consolidated and combined consolidated financial statements.
- 50 -
(Dollars inIn Thousands, Except Per Share Data)
For the Years Ended December 31, | ||||||||||||
2008 | ||||||||||||
2010 | 2009 | (Combined | ||||||||||
(in thousands, except earnings per share) | (Consolidated) | (Consolidated) | Consolidated) | |||||||||
Revenue | $ | 301,378 | $ | 202,812 | $ | 160,363 | ||||||
Cost of Revenue | 189,059 | 126,797 | 115,048 | |||||||||
Gross Profit | 112,319 | 76,015 | 45,315 | |||||||||
Selling, General and Administrative Expenses | 57,352 | 39,473 | 28,088 | |||||||||
Income from Operations | 54,967 | 36,542 | 17,227 | |||||||||
Other Income (Expense), net | 804 | 1,034 | (2,626 | ) | ||||||||
Income Before Income Taxes and Non-controlling Interests | 55,771 | 37,576 | 14,601 | |||||||||
Income Tax Benefit (Provision) | 403 | (11,605 | ) | (5,382 | ) | |||||||
Net Income | 56,174 | 25,971 | 9,219 | |||||||||
Net Income Attributable to Non—controlling Interests | (6,903 | ) | — | — | ||||||||
Net Income Attributable to Altisource | $ | 49,271 | $ | 25,971 | $ | 9,219 | ||||||
Earnings Per Share | ||||||||||||
Basic | $ | 1.96 | $ | 1.08 | $ | 0.38 | ||||||
Diluted | $ | 1.88 | $ | 1.07 | $ | 0.38 | ||||||
Weighted Average Shares Outstanding | ||||||||||||
Basic | 25,083 | 24,062 | 24,050 | |||||||||
Diluted | 26,259 | 24,261 | 24,050 | |||||||||
Transactions with Related Parties included above: | ||||||||||||
Revenue | $ | 154,988 | $ | 94,897 | $ | 64,251 | ||||||
Selling, General and Administrative Expenses | 1,056 | 4,308 | 6,208 | |||||||||
Interest Expense | — | 1,290 | 2,269 |
September 30, | September 30, | September 30, | ||||||||||
For the Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Revenue | $ | 423,687 | $ | 301,378 | $ | 202,812 | ||||||
Cost of Revenue | 275,849 | 189,059 | 126,797 | |||||||||
|
|
|
|
|
| |||||||
Gross Profit | 147,838 | 112,319 | 76,015 | |||||||||
Selling, General and Administrative Expenses | 62,131 | 57,352 | 39,473 | |||||||||
|
|
|
|
|
| |||||||
Income from Operations | 85,707 | 54,967 | 36,542 | |||||||||
Other Income (Expense), net | 203 | 804 | 1,034 | |||||||||
|
|
|
|
|
| |||||||
Income Before Income Taxes and Non-controlling Interests | 85,910 | 55,771 | 37,576 | |||||||||
Income Tax Benefit (Provision) | (7,943 | ) | 403 | (11,605 | ) | |||||||
|
|
|
|
|
| |||||||
Net Income | 77,967 | 56,174 | 25,971 | |||||||||
Net Income Attributable to Non-controlling Interests | (6,855 | ) | (6,903 | ) | — | |||||||
|
|
|
|
|
| |||||||
Net Income Attributable to Altisource | $ | 71,112 | $ | 49,271 | $ | 25,971 | ||||||
|
|
|
|
|
| |||||||
Earnings Per Share: | ||||||||||||
Basic | $ | 2.92 | $ | 1.96 | $ | 1.08 | ||||||
|
|
|
|
|
| |||||||
Diluted | $ | 2.77 | $ | 1.88 | $ | 1.07 | ||||||
|
|
|
|
|
| |||||||
Weighted Average Shares Outstanding: | ||||||||||||
Basic | 24,373 | 25,083 | 24,062 | |||||||||
|
|
|
|
|
| |||||||
Diluted | 25,685 | 26,259 | 24,261 | |||||||||
|
|
|
|
|
| |||||||
Transactions with Related Parties Included Above: | ||||||||||||
Revenue | $ | 245,262 | $ | 154,988 | $ | 94,897 | ||||||
Selling, General and Administrative Expenses | $ | 1,893 | $ | 1,056 | $ | 4,308 | ||||||
Interest Expense | $ | — | $ | — | $ | 1,290 |
See notes to consolidated and combined consolidated financial statements.
- 51 -
(In Thousands)
Altisource Equity | ||||||||||||||||||||||||||||||||||||
Additional | Non- | |||||||||||||||||||||||||||||||||||
Invested | Common Stock | Retained | Paid-in | Treasury | controlling | Comprehensive | ||||||||||||||||||||||||||||||
Equity | Shares | Earnings | Capital | Stock, at cost | Interests | Total | Income | |||||||||||||||||||||||||||||
Balance, January 1, 2008 | $ | 69,615 | 263 | $ | 6,059 | $ | — | $ | — | $ | — | $ | — | $ | 75,674 | |||||||||||||||||||||
Net Income | 9,219 | — | — | — | — | — | — | 9,219 | ||||||||||||||||||||||||||||
Net Transfers to Parent | (24,347 | ) | — | — | — | — | — | — | (24,347 | ) | ||||||||||||||||||||||||||
Balance, December 31, 2008 | 54,487 | 263 | 6,059 | — | — | — | — | 60,546 | ||||||||||||||||||||||||||||
Share Issuance due to Conversion to a Luxembourg Societé Anonyme | (3,283 | ) | 9,079 | 3,283 | — | — | — | — | — | |||||||||||||||||||||||||||
Net Income for Pre-separation Period | 14,306 | — | — | — | — | — | — | 14,306 | $ | 14,306 | ||||||||||||||||||||||||||
Net transfers to Ocwen | (1,354 | ) | — | — | — | — | — | — | (1,354 | ) | — | |||||||||||||||||||||||||
Consummation of Spin-off Transaction and Distribution to Common Stock | (64,156 | ) | 14,732 | 14,732 | — | 49,424 | — | — | — | — | ||||||||||||||||||||||||||
Share-Based Compensation Expense | — | — | — | — | 296 | — | — | 296 | — | |||||||||||||||||||||||||||
Exercise of Stock Options | — | 71 | 71 | — | 818 | — | — | 889 | — | |||||||||||||||||||||||||||
Net Income for Post-separation Period | — | — | — | 11,665 | — | — | — | 11,665 | 11,665 | |||||||||||||||||||||||||||
Balance, December 31, 2009 | — | 24,145 | 24,145 | 11,665 | 50,538 | — | — | 86,348 | $ | 25,971 | ||||||||||||||||||||||||||
Net Income | — | — | — | 49,271 | — | — | 6,903 | 56,174 | $ | 56,174 | ||||||||||||||||||||||||||
Acquisition of The Mortgage Partnership of America, L.L.C. | — | 959 | 959 | — | 22,941 | — | 3,268 | 27,168 | — | |||||||||||||||||||||||||||
Contributions from Non-controlling Interest Holders | — | — | — | — | — | — | 41 | 41 | — | |||||||||||||||||||||||||||
Distributions to Non-controlling Interest Holders | — | — | — | — | — | — | (7,152 | ) | (7,152 | ) | — | |||||||||||||||||||||||||
Share-based Compensation Expense | — | — | — | — | 3,110 | — | — | 3,110 | — | |||||||||||||||||||||||||||
Exercise of Stock Options | — | 298 | 298 | (2,390 | ) | 2,708 | 3,370 | — | 3,986 | — | ||||||||||||||||||||||||||
Delivery of Vested Restricted Stock | — | 11 | 11 | — | — | — | — | 11 | — | |||||||||||||||||||||||||||
Repurchase of Shares | — | — | — | — | — | (17,788 | ) | — | (17,788 | ) | — | |||||||||||||||||||||||||
Balance, December 31, 2010 | $ | — | 25,413 | $ | 25,413 | $ | 58,546 | $ | 79,297 | $ | (14,418 | ) | $ | 3,060 | $ | 151,898 | $ | 56,174 | ||||||||||||||||||
00000 | 00000 | 00000 | 00000 | 00000 | 00000 | 00000 | 00000 | 00000 | ||||||||||||||||||||||||||||
Altisource Equity | ||||||||||||||||||||||||||||||||||||
Invested Equity | Common Stock | Retained Earnings | Additional Paid-in Capital | Treasury Stock, at cost | Non-controlling Interests | Total | Comprehensive Income | |||||||||||||||||||||||||||||
Shares | ||||||||||||||||||||||||||||||||||||
Balance, January 1, 2009 | $ | 54,487 | 263 | $ | 6,059 | $ | — | $ | — | $ | — | $ | — | $ | 60,546 | |||||||||||||||||||||
Share Issuance due to Conversion to a Luxembourg Societé Anonyme | (3,283 | ) | 9,079 | 3,283 | — | — | — | — | — | |||||||||||||||||||||||||||
Net Income for Pre-separation Period | 14,306 | — | — | — | — | — | — | 14,306 | $ | 14,306 | ||||||||||||||||||||||||||
Net Transfers to Ocwen | (1,354 | ) | — | — | — | — | — | — | (1,354 | ) | — | |||||||||||||||||||||||||
Consummation of Spin-off Transaction and Distribution to Common Stock | (64,156 | ) | 14,732 | 14,732 | — | 49,424 | — | — | — | — | ||||||||||||||||||||||||||
Share-Based Compensation Expense | — | — | — | — | 296 | — | — | 296 | — | |||||||||||||||||||||||||||
Exercise of Stock Options | — | 71 | 71 | — | 818 | — | — | 889 | — | |||||||||||||||||||||||||||
Net Income for Post-separation Period | — | — | — | 11,665 | — | — | — | 11,665 | 11,665 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Balance, December 31, 2009 | — | 24,145 | 24,145 | 11,665 | 50,538 | — | — | 86,348 | $ | 25,971 | ||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||
Net Income | — | — | — | 49,271 | — | — | 6,903 | 56,174 | $ | 56,174 | ||||||||||||||||||||||||||
Acquisition of MPA | — | 959 | 959 | — | 22,941 | — | 3,268 | 27,168 | — | |||||||||||||||||||||||||||
Contributions from Non-controlling Interest Holders | — | — | — | — | — | — | 41 | 41 | — | |||||||||||||||||||||||||||
Distributions to Non-controlling Interest Holders | — | — | — | — | — | — | (7,152 | ) | (7,152 | ) | — | |||||||||||||||||||||||||
Share-based Compensation Expense | — | — | — | — | 3,110 | — | — | 3,110 | — | |||||||||||||||||||||||||||
Exercise of Stock Options | — | 298 | 298 | (2,390 | ) | 2,708 | 3,370 | — | 3,986 | — | ||||||||||||||||||||||||||
Delivery of Vested Restricted Stock | — | 11 | 11 | — | — | — | — | 11 | — | |||||||||||||||||||||||||||
Repurchase of Shares | — | — | — | — | — | (17,788 | ) | — | (17,788 | ) | — | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Balance, December 31, 2010 | — | 25,413 | 25,413 | 58,546 | 79,297 | (14,418 | ) | 3,060 | 151,898 | $ | 56,174 | |||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||
Net Income | — | — | — | 71,112 | — | — | 6,855 | 77,967 | $ | 77,967 | ||||||||||||||||||||||||||
Contributions from Non-controlling Interest Holders | — | — | — | — | — | — | 49 | 49 | — | |||||||||||||||||||||||||||
Distributions to Non-controlling Interest Holders | — | — | — | — | — | — | (6,776 | ) | (6,776 | ) | — | |||||||||||||||||||||||||
Share-based Compensation Expense | — | — | — | — | 3,932 | — | — | 3,932 | — | |||||||||||||||||||||||||||
Exercise of Stock Options | — | — | — | (3,497 | ) | — | 4,521 | — | 1,024 | — | ||||||||||||||||||||||||||
Repurchase of Shares | — | — | — | — | — | (62,151 | ) | — | (62,151 | ) | — | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Balance, December 31, 2011 | $ | — | 25,413 | $ | 25,413 | $ | 126,161 | $ | 83,229 | $ | (72,048 | ) | $ | 3,188 | $ | 165,943 | $ | 77,967 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated and combined consolidated financial statements.
- 52 -
(Dollars inIn Thousands)
For the Years Ended December 31, | ||||||||||||
2008 | ||||||||||||
2010 | 2009 | (Combined | ||||||||||
(in thousands) | (Consolidated) | (Consolidated) | Consolidated) | |||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
Net Income | $ | 56,174 | $ | 25,971 | $ | 9,219 | ||||||
Reconciling Items: | ||||||||||||
Depreciation and Amortization | 7,158 | 5,432 | 7,836 | |||||||||
Amortization of Intangible Assets | 4,891 | 2,672 | 2,554 | |||||||||
Goodwill Impairment | 2,816 | — | — | |||||||||
Share-based Compensation Expense | 3,110 | 296 | — | |||||||||
Deferred Income Taxes | (1,119 | ) | (1,179 | ) | 1,197 | |||||||
Loss on Disposal of Premises and Equipment | — | — | 249 | |||||||||
Changes in Operating Assets and Liabilities, net of Acquisitions: | ||||||||||||
Accounts Receivable | (16,725 | ) | (21,420 | ) | 7,693 | |||||||
Prepaid Expenses and Other Current Assets | (9,851 | ) | 117 | 305 | ||||||||
Other Assets | (2,799 | ) | (616 | ) | 57 | |||||||
Accounts Payable and Accrued Expenses | 8,180 | 19,425 | (3,370 | ) | ||||||||
Other Current and Non-current Liabilities | 977 | 2,586 | 3,165 | |||||||||
Net Cash Flow from Operating Activities | 52,812 | 33,284 | 28,905 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
Additions to Premises and Equipment | (11,614 | ) | (7,536 | ) | (5,216 | ) | ||||||
Acquisition of MPA, net of Cash Acquired | (26,830 | ) | — | — | ||||||||
Change in Restricted Cash | (1,045 | ) | — | — | ||||||||
Net Cash Flow from Investing Activities | (39,489 | ) | (7,536 | ) | (5,216 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
Principal Payments on Capital Lease Obligations | (743 | ) | (692 | ) | (2,275 | ) | ||||||
Proceeds from Stock Option Exercises | 3,997 | 889 | — | |||||||||
Purchase of Treasury Stock | (17,788 | ) | — | — | ||||||||
Contributions from Non-controlling Interests | 41 | — | — | |||||||||
Distributions to Non-controlling Interests | (7,152 | ) | — | — | ||||||||
Net Distribution to Parent | — | (1,354 | ) | (21,090 | ) | |||||||
Borrowings from Line of Credit | — | — | 33,417 | |||||||||
Payments of Line of Credit | — | (1,123 | ) | (32,294 | ) | |||||||
Repayment of Short-Term Borrowings | — | — | (147 | ) | ||||||||
Net Cash Flow from Financing Activities | (21,645 | ) | (2,280 | ) | (22,389 | ) | ||||||
Net (Decrease) Increase in Cash and Cash Equivalents | (8,322 | ) | 23,468 | 1,300 | ||||||||
Cash and Cash Equivalents at the Beginning of the Year | 30,456 | 6,988 | 5,688 | |||||||||
Cash and Cash Equivalents at the End of the Year | $ | 22,134 | $ | 30,456 | $ | 6,988 | ||||||
Supplemental Cash Flow Information | ||||||||||||
Interest Paid | $ | 108 | $ | 25 | $ | 121 | ||||||
Income Taxes Paid | 6,069 | 795 | 26 | |||||||||
Non-cash Investing and Financing Activities | ||||||||||||
Shares issued in Connection with MPA Acquisition | $ | 23,900 | $ | — | $ | — | ||||||
Reduction in Income Tax Payable from Tax Amortizable Goodwill | 3,029 | 2,216 | 3,622 | |||||||||
Increase in Common Stock due to the Company’s Conversion to a Luxembourg Société Anonyme | — | 3,283 | — |
September 30, | September 30, | September 30, | ||||||||||
For the Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Cash Flows from Operating Activities: | ||||||||||||
Net Income | $ | 77,967 | $ | 56,174 | $ | 25,971 | ||||||
Reconciling Items: | ||||||||||||
Depreciation and Amortization | 8,351 | 7,158 | 5,432 | |||||||||
Amortization of Intangible Assets | 5,291 | 4,891 | 2,672 | |||||||||
Goodwill Impairment | — | 2,816 | — | |||||||||
Share-based Compensation Expense | 3,932 | 3,110 | 296 | |||||||||
Equity in Losses of Affiliate | 530 | — | — | |||||||||
Bad Debt Expense | 967 | 1,534 | — | |||||||||
Deferred Income Taxes | (381 | ) | (1,119 | ) | (1,179 | ) | ||||||
Changes in Operating Assets and Liabilities, net of Acquisitions: | ||||||||||||
Accounts Receivable | 812 | (18,259 | ) | (21,420 | ) | |||||||
Prepaid Expenses and Other Current Assets | 747 | (9,851 | ) | 117 | ||||||||
Other Assets | (4,892 | ) | (2,799 | ) | (616 | ) | ||||||
Accounts Payable and Accrued Expenses | 14,760 | 8,180 | 19,425 | |||||||||
Other Current and Non-current Liabilities | 3,527 | 977 | 2,586 | |||||||||
|
|
|
|
|
| |||||||
Net Cash Flows from Operating Activities | 111,611 | 52,812 | 33,284 | |||||||||
|
|
|
|
|
| |||||||
Cash Flows from Investing Activities: | ||||||||||||
Additions to Premises and Equipment | (16,442 | ) | (11,614 | ) | (7,536 | ) | ||||||
Acquisition of Business, net of Cash Acquired | (2,515 | ) | (26,830 | ) | — | |||||||
Investment in Equity Affiliate | (15,000 | ) | — | — | ||||||||
Change in Restricted Cash | 887 | (1,045 | ) | — | ||||||||
|
|
|
|
|
| |||||||
Net Cash Flows from Investing Activities | (33,070 | ) | (39,489 | ) | (7,536 | ) | ||||||
|
|
|
|
|
| |||||||
Cash Flows from Financing Activities: | ||||||||||||
Principal Payments on Capital Lease Obligations | (696 | ) | (743 | ) | (692 | ) | ||||||
Proceeds from Stock Option Exercises | 1,024 | 3,997 | 889 | |||||||||
Purchase of Treasury Stock | (62,151 | ) | (17,788 | ) | — | |||||||
Contributions from Non-controlling Interests | 49 | 41 | — | |||||||||
Distributions to Non-controlling Interests | (6,776 | ) | (7,152 | ) | — | |||||||
Net Distribution to Parent | — | — | (1,354 | ) | ||||||||
Payments of Line of Credit | — | — | (1,123 | ) | ||||||||
|
|
|
|
|
| |||||||
Net Cash Flows from Financing Activities | (68,550 | ) | (21,645 | ) | (2,280 | ) | ||||||
|
|
|
|
|
| |||||||
Net Increase (Decrease) in Cash and Cash Equivalents | 9,991 | (8,322 | ) | 23,468 | ||||||||
Cash and Cash Equivalents at the Beginning of the Year | 22,134 | 30,456 | 6,988 | |||||||||
|
|
|
|
|
| |||||||
Cash and Cash Equivalents at the End of the Year | $ | 32,125 | $ | 22,134 | $ | 30,456 | ||||||
|
|
|
|
|
| |||||||
Supplemental Cash Flow Information | ||||||||||||
Interest Paid | $ | 83 | $ | 108 | $ | 25 | ||||||
Income Taxes (Received) Paid, net | (1,956 | ) | 6,069 | 795 | ||||||||
Non-Cash Investing and Financing Activities | ||||||||||||
Shares issued in Connection with Acquisition | $ | — | $ | 23,900 | $ | — | ||||||
Reduction in Income Tax Payable from Tax Amortizable Goodwill | 3,367 | 3,029 | 2,216 | |||||||||
Increase in Common Stock due to the Company’s Conversion to a | ||||||||||||
Luxembourg Société Anonyme | — | — | 3,283 |
See notes to consolidated and combined consolidated financial statements.statements
- 53 -
1. ORGANIZATION AND BASIS OF PRESENTATION
Altisource Portfolio Solutions S.A., together with its subsidiaries, (which may be referred to as Altisource™, the Company, we, us or our) is a provider of services focused on high value, technology-enabled, knowledge-based functions principally related to real estate and mortgage portfolio management, asset recovery and customer relationship management. Utilizing integrated technology that includes decision models and behavioral based scripting engines, we provide solutions that improve clients’ performance and maximize their returns. We were incorporated under the laws of Luxembourg on November 4, 1999 as Ocwen Luxembourg S.à r.l., renamed Altisource Portfolio Solutions S.à r.l. on May 12, 2009 and converted into Altisource Portfolio Solutions S.A. on June 5, 2009. We became a publicly traded company on the NASDAQ Global Select market under the symbol “ASPS” as of August 10, 2009, see “Separation” below.
In February 2010, we acquired all of the outstanding membership interests of The Mortgage Partnership of America, L.L.C. (“MPA”MPA™”). MPA was formed as a Missouri limited liability company to serve as the manager of Best Partners Mortgage Cooperative, Inc. (“BPMC”BPMC™”) doing business as Lenders One Mortgage Cooperative (“Lenders One”One®”). Lenders One is a national alliance of independent mortgage bankers (“Members”) that provides its Members with education and training along with revenue enhancing, cost reducing and market share expanding opportunitiesopportunities. In April 2011, we acquired Springhouse, LLC (“Springhouse™”) an appraisal management company that utilizes a nationwide panel of appraisers to provide real estate appraisals principally to mortgage originators, including the members of Lenders One, and real estate asset managers. In July 2011, we acquired the assembled workforce of a sub-contractor (“Tracmail”) in India that performed asset recovery services (see Note 4).
We conduct our operations through three reporting segments: Mortgage Services, Financial Services and Technology Services (formerly Technology Products).Services. In addition, we report our corporate related expenditures as a separate segment (see Note 1819 for a description of our business segments).
Separation— – On August 10, 2009, (the “Separation Date”), we became a stand-alone public company in connection with our separation from Ocwen Financial Corporation (“Ocwen”Ocwen®”) (the “Separation”). Prior to the Separation, our businesses were wholly-owned subsidiaries of Ocwen. On the date of Separation, Date, Ocwen distributed all of the Altisource common stock to Ocwen’s shareholders (the “Distribution”).
In connection with the Separation, we entered into various agreements with Ocwen that define our relationship after the Separation including a Separation Agreement, a Tax Matters Agreement, an Employee Matters Agreement, an Intellectual Property Agreement, a Data Center and Disaster Recovery Agreement, a Technology Services Agreement, a Transition Services Agreement and certain long-term servicing contracts (collectively, the “Agreements”).
Basis of Presentation Consolidated— – Beginning August 10, 2009, after our assets and liabilities were formally contributed by Ocwen to Altisource pursuant to the terms of the Separation Agreement, theour financial statements of the Company have been presented on a consolidated basis for financial reporting purposes. Our consolidated financial statements include the assets and liabilities, revenues and expenses directly attributable to our operations.
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The financial statements for the periodsperiod ended December 31, 2009 and 2008 also do not necessarily reflect what the Company’sour consolidated results of operations, financial position and cash flows would have been had the Companywe operated as an independent company during the entire periods presented. For instance, as an independent public company, Altisource incurs costs for maintaining a separate Board of Directors, obtaining a separate audit, relocating certain executive management and hiring additional personnel.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements(continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting— – The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Principles of Consolidation— – The financial statements include the accounts of the Company, its wholly-owned subsidiaries and those entities in which we have a variable interest and are the primary beneficiary. Intercompany balances and transactions have been eliminated.
Prior to our acquisition of MPA, MPA and Lenders One entered into a management agreement that ends on December 31, 2025. MPA was formed to act on behalf of Lenders One and its Members principally to provide its Members with education and training along with revenue enhancing, cost reducing and market share expanding opportunities. For providing these services, MPA receives payment from Lenders One, and in some instances the vendors, based upon the benefits achieved for the Members. The management agreement provides MPA with broad powers such as recruiting members for Lenders One, collection of fees and other obligations from Members of Lenders One, processing of all rebates owed to Lenders One, day-to-day operation of Lenders One and negotiation of contracts with vendors including signing contracts on behalf of Lenders One.
The management agreement between MPA and Lenders One, pursuant to which MPA is the management company of Lenders One, represents a variable interest in a variable interest entity. MPA determined that they areit is the primary beneficiary of Lenders One as they haveit has the power to direct the activities that most significantly impact Lenders One’s economic performance and the obligation to absorb losses or the right to receive benefits.benefits from Lenders One. As a result, Lenders One is presented in the accompanying consolidated financial statements on a consolidated basis with the interests of the Members reflected as Non-controlling Interest on the Consolidated Balance Sheets. At December 31, 2010,2011, Lenders One had total assets of $5.0$5.2 million and liabilities of less than $0.1 million.
Use of Estimates— – The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, determining shared-based compensation, income taxes, collectability of receivables, valuation of acquired intangibles and goodwill, depreciable lives of fixed assets and contingencies. Actual results could differ materially from those estimates.
Cash and Cash Equivalents—– We classify all highly liquid instruments with an original maturity of three months or less at the time of purchase as cash equivalents.
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Premises and Equipment, Net— – We report Premises and Equipment, Netnet at cost or estimated fair value at acquisition and depreciate them over their estimated useful lives using the straight-line method as follows:
September 30, | ||||
Furniture and Fixtures | 5 years | |||
Office Equipment | 5 years | |||
Computer Hardware and Software | 2 | |||
Leasehold Improvements | Shorter of useful life or term of lease |
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements(continued)
We record payments for maintenance and repairs as expenses when incurred. We record expenditures for significant improvements and new equipment as capital expenses and depreciate them over the shorter of the capitalized asset’s life or the life of the lease.
We review Premises and Equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. We measure recoverability of assets to be held and used by comparison of the carrying amount of an asset or asset group to estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset or asset group exceeds its estimated future cash flows, we recognize an impairment charge in the amount by which the carrying amount of the assets exceeds the fair value of the asset or asset group.
Computer software includes the fair value of software acquired in business combinations and purchased software. Purchased software is recorded at cost and amortized using the straight-line method over its estimated useful life. Software acquired in business combinations is recorded at its fair value and amortized using the straight-line method over its estimated useful life, ranging from two to three years.
Business Combinations—– We account for acquisitions using the purchase method of accounting in accordance with Accounting Standards Codification (“ASC”) Topic 805).805. The purchase price of the acquisition is allocated to the assets acquired and liabilities assumed using the fair values determined by management as of the acquisition date.
Investment in Equity Affiliate– We utilize the equity method to account for investments in equity securities where we have the ability to exercise significant influence over operating and financial policies of the investee. We include a proportionate share of earnings and/or losses of equity method investees in Equity Income (Loss) in Affiliates, net which is included in Other Income (Expense), net in the Consolidated Statements of Operations.
Goodwill—– Goodwill represents the excess cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. We evaluate goodwill for impairment annually or more frequently when an event occurs or circumstances change that indicate that the carrying value may not be recoverable. We test goodwill for impairment by first comparing the book value of net assets to the fair value of the reporting units. If the fair value is determined to be less than the book value, a second step is performed to compute the amount of impairment as the difference between the estimated fair value of goodwill and the carrying value. We estimate the fair value of the reporting units using discounted cash flows. Forecasts of future cash flows are based on our best estimate of future net sales and operating expenses, based primarily on estimated category expansion, pricing, market segment share and general economic conditions.
We conduct our annual impairment test as of November 30 of each year and determined inno impairment of goodwill was required for the years ended December 31, 2011 and 2009 (in 2010, that it was appropriate to impair the remainingwe recorded a $2.8 million of goodwillimpairment in our Financial Service segment.
segment).
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We perform tests for impairment if conditions exist that indicate the carrying value may not be recoverable. When facts and circumstances indicate that the carrying value of Intangible Assets determined to have definite lives may not be recoverable, management assesses the recoverability of the carrying value by preparing estimates of cash flows of discrete intangible assets consistent with models utilized for internal planning purposes. If the sum of the undiscounted expected future cash flows is less than the carrying value, we would recognize an impairment to the extent carrying amount exceeds fair value. No impairment was recognized during the periods presented.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements(continued)
Fair Value of Financial Instruments—– The fair value of financial instruments, which primarily include Cash and Cash Equivalents, Restricted Cash, Accounts Receivable and Accounts Payable and Accrued Expenses are carried at amounts that approximate their fair value due to the short-term nature of these amounts.
Functional Currency—The currency of the predecessor owners of MPAprimary economic environment in conjunction with the acquisition. The arrangement allows the holders to put a portion of the Altisource shares issued as consideration to Altisource at a predetermined price. Altisource calculated the fair value of this put option arrangement on the acquisition date at $1.3 million by utilizing a Black-Scholes option pricing model (see Note 4). The fair value calculation is deemed to be a Level 3 calculation. The fair value of the put at December 31, 2010 of $0.7 million was valued using the following assumptions:
Defined Contribution401(k) Plan— – Some of our employees currently participate in a defined contribution 401(k) plan under which we may make matching contributions equal to a discretionary percentage determined by us. We recorded expense of $0.1 million, $0.2 million and $0.1 million in 2011, 2010 and 2009, respectively, related to our discretionary amounts contributed.
- 57 -
Earnings Per Share—– We compute Earnings Per Share (“EPS”) in accordance with ASC Topic 260. Basic Net Income per Share is computed by dividing Net Income by the weighted-average number of common stock outstanding for the period. Diluted Net Income Per Share reflects the assumed conversion of all dilutive securities. Due to the nature and timing of Separation, the number of outstanding shares issued in the capitalization were the only shares outstanding prior to the Separation.
Revenue Recognition—– We recognize revenues from the services we provide in accordance with ASC Topic 605. ASC Topic 605 sets forth guidance as to when revenue is realized or realizable and earned when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been performed; (3) the seller’s price to the buyer is fixed or determinable; and (4) collectability is reasonably assured. Generally, the contract terms for these services are relatively short in duration, and we recognize revenues as the services are performed either on a per unit or a fixed price basis. Specific policies for each of our reportable segments are as follows:
Mortgage Services: We recognize revenues for the majority of the services we provide in this segment on completion of the service to our customer. Residential property valuation, certain property inspection and property preservation services, mortgage due diligence and certain closing and title services include specific deliverables for our customers for which we recognize revenues when we deliver the related report or complete the related service to the customer, if collectibility is reasonably assured. We also perform services for which we recognize revenue at the time of closing of the related real estate transaction including real estate sales, real estate closings and certain title services. For default processing services and certain property preservation services, we recognize revenue over the period during which we perform the related services, with full recognition on completion of the related foreclosure filing or on closing of the related real estate transaction. For component services, we charge for these services based upon the number of employees utilized as the related services are performed. We record revenue associated with real estate sales on a net basis as we perform services as an agent without assuming the risks and rewards of ownership of the asset and the commission earned on the sale is a fixed percentage. Reimbursable expenses of $80.1 million, $44.6 million and $16.1 million incurred in 2011, 2010 and 2009, respectively, primarily in conjunction with our property preservation and default processing services are included in revenues with an equal offsetting expense included in cost of revenues. These amounts are recognized on a gross basis, principally because we have complete control over selection of vendors.
Financial Services: We generally earn our fees for asset recovery management services as a percentage of the amount we collect on delinquent consumer receivables on behalf of our clients and recognize revenues upon collection from the debtors. We also provide customer relationship management services for which we earn and recognize revenues on a per-call, per-person or per minute basis as the related services are performed.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements(continued)
Technology Services: For our REALSuite,REALSuite™, we charge based on the number of our client’s loans processed on the system or on a per-transaction basis. We record transactional revenues when the service is provided and other revenues monthly based on the number of loans processed, employees serviced or services provided. Furthermore, we provide IT infrastructure services to Ocwen and charge for these services primarily based on the number of employees that are using the applicable systems and the number and type of licensed products used by Ocwen. We record revenue associated with implementation services upon completion and maintenance ratably over the related service period.
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Tax laws are complex and subject to different interpretations by the taxpayer and respective governmental taxing authorities. Significant judgment is required in determining tax expense and in evaluating tax positions including evaluating uncertainties under ASC Topic 740.
3. TRANSACTIONS WITH RELATED PARTIES
Ocwen remains our largest customer. Following the Separation, Ocwen is contractually obligated to purchase certain Mortgage Services and Technology Services from us under service agreements. These agreements extend for eight years from the date of Separation Date subject to termination under certain provisions. Ocwen is not restricted from redeveloping these services. We settle amounts with Ocwen on a daily, weekly or monthly basis based upon the nature of the services and when the service is completed.
With respect to Ocwen, because such services are charged torelated party revenues consist of revenues earned directly from Ocwen and revenues earned from the mortgagee and/orloans serviced by Ocwen when Ocwen determines the investor andservice provider. We earn additional revenue on the loan portfolios serviced by Ocwen that are not expensesconsidered related party revenues as Ocwen does not have the ability to Ocwen. Ocwen, or services derived from Ocwen’s loan servicing portfolio, asdecide the service provider. As a percentage of each of our segmentssegment revenues and as a percentage of consolidated revenues, related party revenue was as follows for the year ended December 31:
For the Years Ended December 31, | ||||||||
2010 | 2009 | |||||||
Mortgage Services | 66 | % | 72 | % | ||||
Technology Services | 37 | 44 | ||||||
Financial Services | < 1 | < 1 | ||||||
Consolidated Revenues | 51 | % | 47 | % |
September 30, | September 30, | September 30, | ||||||||||
For the Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Mortgage Services | 72 | % | 73 | % | 84 | % | ||||||
Technology Services | 39 | 37 | 44 | |||||||||
Financial Services | < 1 | < 1 | < 1 | |||||||||
Consolidated Revenues | 58 | % | 51 | % | 47 | % |
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements(continued)
We record revenues we earn from Ocwen under the various long-term servicing contracts at rates we believe to be market rates as they are consistent with one or more of the following: the fees we charge to other customers for comparable services; the rates Ocwen pays to other service providers; fees commensurate with market surveys prepared by unaffiliated firms; and prices being charged by our competitors.
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Transition Services
In connection with the Separation, Altisource and Ocwen entered into a Transition Services Agreement under which services in such areas as human resources, vendor management, corporate services, six sigma, quality assurance, quantitative analytics, treasury, accounting, tax, risk management, legal, strategic planning, compliance and other areas are provided to the counterparty for up to two years from the Separation Date.date of Separation. The agreement was subsequently extended in August 2011 for certain services for an additional year. For the yearyears ended December 31, 2011 and 2010, Altisource billed Ocwen $2.6 million and $1.8 million, respectively, and Ocwen billed Altisource $1.9 million and $1.1 million respectively for services provided under this agreement. Amounts were immaterial in 2009. These amounts are reflected as a component of Selling, General and Administrative expenses in the Consolidated Statements of Operations. Amounts were immaterial in 2009.
Separation Related Expenditures
Included in Selling, General and Administrative Expenses in the accompanying Statement of Operations, we have recognized $3.4 million of Separation related expenses for the year ended December 31, 2009, primarily representing professional fees and other costs associated with establishing the Company as a stand-alone entity. Prior to the second quarter of 2009, all previous costs in connection with the Separation were recognized by Ocwen.
4. ACQUISITION OF ACQUISITIONS
The results of operations of the following acquisitions have been included in our consolidated results from the respective acquisition dates. The acquisitions did not have a material effect on our financial position, results of operations or cash flows.
Acquisition-related transaction costs are included in Selling, General and Administrative Expenses in the Consolidated Statements of Operations.
Springhouse and Tracmail
In April 2011, we acquired Springhouse, an appraisal management company that utilizes a nationwide panel of appraisers to provide real estate appraisals principally to mortgage originators, including the members of Lenders One, and real estate asset managers.
In July 2011, we acquired the assembled workforce of Tracmail, a sub-contractor in India that performed asset recovery services. Prior to acquisition, the costs paid to the sub-contractor were included in Outside Fees and Services (included in Cost of Revenue in the Consolidated Financial Statements).
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements(continued)
The allocation of the purchase price for these transactions is as follows:
September 30, | ||||
(in thousands) | ||||
Accounts Receivable | $ | 289 | ||
Premises and Equipment | 16 | |||
Identifiable Intangible Assets | 1,180 | |||
Goodwill | 3,079 | |||
|
| |||
4,564 | ||||
Accounts Payable and Accrued Expenses | (2,049 | ) | ||
|
| |||
Total Consideration | $ | 2,515 | ||
|
|
Management has assigned the following lives to identified assets acquired as a result of the acquisitions:
September 30, | ||||
Estimated Life (in Years) | ||||
Premises and Equipment | 2 – 5 | |||
Trademarks(1) | 4 | |||
Customer Lists(1) | 6 | |||
Non-compete(1) | 2 | |||
Goodwill | Indefinite | |||
(1) The identifiable assets are subject to amortization on a straight-line basis as this best approximates the benefit period related to these assets. |
The goodwill arising from the Springhouse acquisition assigned to our Mortgage Services segment relates principally to in-place workforce and our ability to go to market more quickly with a retail origination appraisal business. The goodwill arising from the Tracmail acquisition assigned to our Financial Services segment relates principally to in-place workforce. All goodwill and intangible assets related to the acquisitions are expected to be amortizable and deductible for income tax purposes.
MPA
On February 12, 2010, we acquired all of the outstanding membership interests of MPA pursuant to a Purchase and Sale Agreement. MPA serves as the manager of Lenders One, a national alliance of independent mortgage bankers. The alliance was established in 2000 and as of December 31, 20102011 consisted of 179214 members.
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Notes to Consolidated and Combined Consolidated Financial Statements(continued)
Consideration for the transaction consisted of cash, common stock and put option agreements:
(in thousands) | Consideration | |||
Cash | $ | 29,000 | ||
Common Stock | 23,900 | |||
Put Option Agreements at Fair Value | 1,289 | |||
Working Capital Adjustment | 835 | |||
Total Consideration | $ | 55,024 | ||
September 30, | ||||
(in thousands) | Consideration | |||
Cash | $ | 29,000 | ||
Common Stock | 23,900 | |||
Put Option Agreements at Fair Value | 1,289 | |||
Working Capital Adjustment | 835 | |||
|
| |||
Total Consideration | $ | 55,024 | ||
|
|
The common stock consisted of 1.0 million shares of Altisource’s common stock valued at $24.92 per share based on the closing price of Altisource common stock on February 11, 2010. A portion of the stock consideration (0.3 million shares) will bewas held in escrow two years from the closing date of the acquisition to secure MPA’s indemnification obligations under the Purchase and Sale Agreement. The escrowed shares were released in 2011. In addition, we entered into three put option agreements with certain of the sellers whereby each seller has the right, with respect to an aggregate of 0.5 million shares of our common stock, to put up to 25% of eligible shares each year for a total of four years at a price equal to $16.84 per share. The fair value of theAll remaining put was initially established at the date of acquisition ($1.3 million) using the following assumptions:
(in thousands) | ||||
Cash | $ | 2,170 | ||
Accounts Receivable | 4,279 | |||
Prepaid Expenses and Other Current Assets | 321 | |||
Premises and Equipment | 18 | |||
Identifiable Intangible Assets | 43,600 | |||
Goodwill | 10,218 | |||
60,606 | ||||
Accounts Payable and Accrued Expenses | (2,176 | ) | ||
Other Current Liabilities | (138 | ) | ||
Non-controlling Interests | (3,268 | ) | ||
Total Purchase Price | $ | 55,024 | ||
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Year Ended | ||||
December 31, | ||||
(in thousands) | 2010 | |||
Revenue | $ | 18,039 | ||
Net Income Before Income Taxes and Non-controlling Interests | 13,863 |
share price thresholds.
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Years Ended December 31, | ||||||||||||||||
2010 | 2009 | |||||||||||||||
As | As | |||||||||||||||
(in thousands, except per share amounts) | Reported | Pro Forma | Reported | Pro Forma | ||||||||||||
Revenue | $ | 301,378 | $ | 303,022 | $ | 202,812 | $ | 223,810 | ||||||||
Net Income Attributable to Altisource | 49,271 | 49,143 | 25,971 | 30,283 | ||||||||||||
Earnings Per Share — Diluted | 1.88 | 1.87 | 1.07 | 1.20 |
Accounts Receivable, net consists of the following:
December 31, | ||||||||
Quarter Ended | 2010 | 2009 | ||||||
Third-party Accounts Receivable | $ | 19,039 | $ | 11,638 | ||||
Unbilled Fees | 32,055 | 9,073 | ||||||
Receivable from Ocwen | 3,950 | 10,066 | ||||||
Other Receivables | 583 | 416 | ||||||
55,627 | 31,193 | |||||||
Allowance for Doubtful Accounts | (2,132 | ) | (696 | ) | ||||
Total | $ | 53,495 | $ | 30,497 | ||||
September 30, | September 30, | |||||||
December 31, | ||||||||
(in thousands) | 2011 | 2010 | ||||||
Third-party Accounts Receivable | $ | 13,776 | $ | 19,039 | ||||
Unbilled Fees | 34,553 | 32,055 | ||||||
Receivable from Ocwen | 5,250 | 3,950 | ||||||
Receivable from Correspondent One | 123 | — | ||||||
Other Receivables | 350 | 583 | ||||||
|
|
|
| |||||
54,052 | 55,627 | |||||||
Allowance for Doubtful Accounts | (2,047 | ) | (2,132 | ) | ||||
|
|
|
| |||||
Total | $ | 52,005 | $ | 53,495 | ||||
|
|
|
|
Unbilled Fees consist primarily of Asset Management and Default Management Services for which we recognize revenues over the service delivery period but bill at completion of the service.
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Notes to Consolidated and Combined Consolidated Financial Statements(continued)
A summary of the allowance for doubtful accounts, net of recoveries, for the years ended December 31, 2011, 2010 2009 and 20082009 is as follows:
(in thousands) | ||||
Balance, January 1, 2008 | $ | 959 | ||
Bad Debt Expense | 864 | |||
Recoveries | (449 | ) | ||
Write-offs | (597 | ) | ||
Balance, December 31, 2008 | 777 | |||
Bad Debt Expense | 338 | |||
Recoveries | (205 | ) | ||
Write-offs | (214 | ) | ||
Balance, December 31, 2009 | $ | 696 | ||
Bad Debt Expense | 1,735 | |||
Recoveries | (106 | ) | ||
Write-offs | (193 | ) | ||
Balance, December 31, 2010 | $ | 2,132 | ||
September 30, | ||||
(in thousands) | ||||
Balance, January 1, 2009 | $ | 777 | ||
Bad Debt Expense | 338 | |||
Recoveries | (205 | ) | ||
Write-offs | (214 | ) | ||
|
| |||
Balance, December 31, 2009 | 696 | |||
Bad Debt Expense | 1,735 | |||
Recoveries | (106 | ) | ||
Write-offs | (193 | ) | ||
|
| |||
Balance, December 31, 2010 | $ | 2,132 | ||
Bad Debt Expense | 967 | |||
Recoveries | (54 | ) | ||
Write-offs | (998 | ) | ||
|
| |||
Balance, December 31, 2011 | $ | 2,047 | ||
|
|
6. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid Expenses and Other Current Assets consistsconsist of the following:
December 31, | ||||||||
(in thousands) | 2010 | 2009 | ||||||
Prepaid Expenses | $ | 5,134 | $ | 2,435 | ||||
Income Tax Receivable | 7,327 | — | ||||||
Other Current Assets | 615 | 469 | ||||||
Total | $ | 13,076 | $ | 2,904 | ||||
September 30, | September 30, | |||||||
December 31, | ||||||||
(in thousands) | 2011 | 2010 | ||||||
Prepaid Expenses | $ | 4,211 | $ | 5,134 | ||||
Income Tax Receivable | — | 7,327 | ||||||
Other Current Assets | 791 | 615 | ||||||
|
|
|
| |||||
Total | $ | 5,002 | $ | 13,076 | ||||
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- 64 -
Premises and Equipment, net which include amounts recorded under capital leases, consists of the following:
December 31, | ||||||||
(in thousands) | 2010 | 2009 | ||||||
Computer Hardware and Software | $ | 32,931 | $ | 23,591 | ||||
Office Equipment and Other | 9,717 | 9,203 | ||||||
Furniture and Fixtures | 2,226 | 2,663 | ||||||
Leasehold Improvements | 4,501 | 3,441 | ||||||
49,375 | 38,898 | |||||||
Less: Accumulated Depreciation and Amortization | (31,882 | ) | (27,490 | ) | ||||
Total | $ | 17,493 | $ | 11,408 | ||||
September 30, | September 30, | |||||||
December 31, | ||||||||
(in thousands) | 2011 | 2010 | ||||||
Computer Hardware and Software | $ | 39,452 | $ | 32,931 | ||||
Office Equipment and Other | 15,068 | 9,717 | ||||||
Furniture and Fixtures | 4,299 | 2,226 | ||||||
Leasehold Improvements | 7,014 | 4,501 | ||||||
|
|
|
| |||||
65,833 | 49,375 | |||||||
Less: Accumulated Depreciation and Amortization | (40,233 | ) | (31,882 | ) | ||||
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|
| |||||
Total | $ | 25,600 | $ | 17,493 | ||||
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|
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements(continued)
Depreciation and amortization expense, inclusive of capital lease obligations, amounted to $8.4 million, $7.2 million and $5.4 million for 2011, 2010 and $7.8 million for 2010, 2009, and 2008, respectively, and is included in Cost of Revenue for operating assets and in Selling, General and Administrative expense for non-operating assets in the accompanying Consolidated Statements of Operations.
8. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
Goodwill relates to the acquisitions of MPA, NCISpringhouse, Tracmail, and the company that developed the predecessor to our REALTrans® vendor management platform.
Changes in Goodwill during the years ended December 31, 20102011 and 20092010 are summarized below:
Mortgage | Technology | Financial | ||||||||||||||
(in thousands) | Services | Services | Services | Total | ||||||||||||
Balance, January 1, 2009 | $ | — | $ | 1,618 | $ | 9,922 | $ | 11,540 | ||||||||
Component 2 Amortization (a) | — | — | (2,216 | ) | (2,216 | ) | ||||||||||
Balance, December 31, 2009 | — | 1,618 | 7,706 | 9,324 | ||||||||||||
Acquisition of MPA | 10,218 | — | — | 10,218 | ||||||||||||
Component 2 Amortization (a) | — | — | (4,890 | ) | (4,890 | ) | ||||||||||
Impairment Loss (b) | — | — | (2,816 | ) | (2,816 | ) | ||||||||||
Balance, December 31, 2010 | $ | 10,218 | $ | 1,618 | $ | — | $ | 11,836 | ||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
(in thousands) | Mortgage Services | Financial Services | Technology Services | Total | ||||||||||||
Balance, January 1, 2010 | $ | — | $ | 7,706 | $ | 1,618 | $ | 9,324 | ||||||||
Acquisition of MPA | 10,218 | — | — | 10,218 | ||||||||||||
Component 2 Amortization (a) | — | (4,890 | ) | — | (4,890 | ) | ||||||||||
Impairment Loss (b) | — | (2,816 | ) | — | (2,816 | ) | ||||||||||
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| |||||||||
Balance, December 31, 2010 | 10,218 | — | 1,618 | 11,836 | ||||||||||||
Acquisition of Springhouse | 701 | — | — | 701 | ||||||||||||
Acquisition of Tracmail | — | 2,378 | — | 2,378 | ||||||||||||
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| |||||||||
Balance, December 30, 2011 | $ | 10,919 | $ | 2,378 | $ | 1,618 | $ | 14,915 | ||||||||
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a) | See footnote (a) below Intangible Assets table below. |
b) | Based on the fourth quarter goodwill impairment test, management determined it was prudent to impair $2.8 million of goodwill in the Financial Services segment. This determination was made after considering quantitative and qualitative factors including past performance and execution risk. |
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements(continued)
Intangible Assets, Net
Intangible assets relate to our acquisitions of MPA (see Note 4) and Nationwide Credit, Inc (“NCI®”). No impairment charges were taken during the periods presented.
Intangible Assets, net during the years ended December 31, 2011 and 2010 consist of the following:
September 30, | September 30, | September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||||||||
Weighted Average Estimated Useful | Gross Carrying Amount | Accumulated Amortization | Net Book Value | |||||||||||||||||||||||||
Life | December 31, | December 31, | December 31, | |||||||||||||||||||||||||
(dollars in thousands) | (Years) | 2011 | 2010 | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||
Definite-lived Intangible | ||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||
Trademarks | 16 | $ | 10,614 | $ | 10,200 | $ | 3,353 | $ | 2,346 | $ | 7,261 | $ | 7,854 | |||||||||||||||
Customer Lists | 19 | 38,366 | 37,700 | 13,010 | (a) | 7,447 | 25,356 | 30,253 | ||||||||||||||||||||
Operating Agreement | 20 | 35,000 | 35,000 | 3,354 | 1,604 | 31,646 | 33,396 | |||||||||||||||||||||
Non-compete Agreement | 4 | 1,300 | 1,200 | 613 | 275 | 687 | 925 | |||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
| |||||||||||||||||
Total Intangible Assets | $ | 85,280 | $ | 84,100 | $ | 20,330 | $ | 11,672 | $ | 64,950 | $ | 72,428 | ||||||||||||||||
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|
a) | Prior to our acquisition of NCI in 2007, NCI completed an acquisition which created tax-deductible goodwill that amortizes for tax purposes over time. When we acquired NCI in 2007, we recorded a lesser amount of goodwill for financial reporting purposes than what had previously been recorded at NCI for tax purposes. This difference between the amount of goodwill recorded for financial reporting purposes and the amount recorded for taxes is referred to as “Component 2” goodwill and it | |
- 65 -
Weighted | ||||||||||||||||||||||||||||
Average | ||||||||||||||||||||||||||||
Estimated | Gross | Accumulated | ||||||||||||||||||||||||||
Useful Life | Carrying Amount | Amortization | Net Book Value | |||||||||||||||||||||||||
(in thousands) | (Years) | 2010 | 2009 | 2010 | 2009 | 2010 | 2009 | |||||||||||||||||||||
Definite-lived Intangible Assets | ||||||||||||||||||||||||||||
Trademarks | 16 | $ | 10,200 | $ | 2,800 | $ | 2,346 | $ | 1,447 | $ | 7,854 | $ | 1,353 | |||||||||||||||
Customer Lists | 19 | 37,700 | 37,700 | 7,447 | 5,334 | 30,253 | 32,366 | |||||||||||||||||||||
Operating Agreement | 20 | 35,000 | — | 1,604 | — | 33,396 | — | |||||||||||||||||||||
Non Competing Agreement | 4 | 1,200 | — | 275 | — | 925 | — | |||||||||||||||||||||
Total Intangible Assets | $ | 84,100 | $ | 40,500 | $ | 11,672 | $ | 6,781 | $ | 72,428 | $ | 33,719 | ||||||||||||||||
9. INVESTMENT IN EQUITY AFFILIATE
Correspondent One S.A. (“Correspondent One™”) facilitates the purchase of closed conforming and $4.2government guaranteed residential mortgages from approved mortgage bankers. Correspondent One provides members of Lenders One additional avenues to sell loans beyond Lenders One’s preferred investor arrangements and the members’ own network of loan buyers. We have significant influence over the general operations of Correspondent One consistent with our 49% ownership level and therefore account for our investment under the equity method. As of December 31, 2011 we have no additional funding commitments to Correspondent One.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements(continued)
Correspondent One is in the initial phases of building its operations and therefore is expected to operate at a loss into 2012. The net loss on this investment using the equity method was $0.5 million respectively.
September 30, | ||||
(in thousands) | Year Ended December 31, 2011 | |||
Net loss | $ | (1,087 | ) | |
As of December 31,2011 | ||||
Current Assets | $ | 29,600 | ||
Non Current Assets | 524 | |||
Current Liabilities | 461 | |||
Equity | 29,663 |
10. OTHER NON-CURRENT ASSETS
Other Non-Current Assets consist of the following:
September 30, | September 30, | |||||||
December 31, | ||||||||
(in thousands) | 2011 | 2010 | ||||||
Security Deposits | $ | 7,615 | $ | 3,047 | ||||
Unbilled Fees | 1,773 | 1,449 | ||||||
Other | 40 | 40 | ||||||
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| |||||
Total | $ | 9,428 | $ | 4,536 | ||||
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|
11. ACCOUNTS PAYABLE, AND ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accounts Payable and Accrued Expenses consist of the following:
December 31, | ||||||||
(in thousands) | 2010 | 2009 | ||||||
Accounts Payable | $ | 5,960 | $ | 1,114 | ||||
Income Taxes Payable, net | 3,807 | 4,853 | ||||||
Payable to Ocwen | 2,418 | 2,716 | ||||||
Accrued Expenses — General | 11,189 | 8,373 | ||||||
Accrued Salaries and Benefits | 12,010 | 7,136 | ||||||
Total | $ | 35,384 | $ | 24,192 | ||||
September 30, | September 30, | |||||||
December 31, | ||||||||
(in thousands) | 2011 | 2010 | ||||||
Accounts Payable | $ | 2,974 | $ | 5,960 | ||||
Accrued Expenses—General | 18,485 | 11,189 | ||||||
Accrued Salaries and Benefits | 14,575 | 12,010 | ||||||
Income Taxes Payable | 6,419 | 3,807 | ||||||
Payable to Ocwen | 2,414 | 2,418 | ||||||
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| |||||
Total | $ | 44,867 | $ | 35,384 | ||||
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- 66 -
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
Other Current Liabilities consist of the following:
December 31, | ||||||||
(in thousands) | 2010 | 2009 | ||||||
Mortgage Charge-Off and Deficiency Collections | $ | 8 | $ | 2,458 | ||||
Deferred Revenue | 2,542 | 989 | ||||||
Facility Closure Cost Accrual, Current Portion | 253 | 272 | ||||||
Other | 2,813 | 2,220 | ||||||
Total | $ | 5,616 | $ | 5,939 | ||||
September 30, | September 30, | |||||||
December 31, | ||||||||
(in thousands) | 2011 | 2010 | ||||||
Deferred Revenue | $ | 4,581 | $ | 2,542 | ||||
Facility Closure Cost Accrual, Current Portion | 131 | 253 | ||||||
Collections Due to Clients | 768 | 726 | ||||||
Other | 4,459 | 2,095 | ||||||
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| |||||
Total | $ | 9,939 | $ | 5,616 | ||||
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Facility Closure Costs
During 2009, we accrued $1.6 million in facility closure costs (included in other current and other non-current liabilities in the Balance Sheet and in Selling, General and Administrative Expenses in the Statement of Operations) primarily consisting of lease exit costs (expected to be paid through 2014) and severance for the closure of facilities in Miramar, Florida and Victoria, British Columbia, Canada. The facility closures were in connection with our efforts to reduce overall costs and increase the utilization of remainingtwo facilities. The following table summarizes the activity for severance and other charges, all recorded in our Financial Services segment, for the years ended December 31, 20102011 and 2009:
Lease | Facility | Termination | ||||||||||||||
(in thousands) | Costs | Costs | Benefits | Total | ||||||||||||
Balance, January 1, 2009 | $ | — | $ | — | $ | — | $ | — | ||||||||
Additions Charged to Operations | 1,110 | 747 | 447 | 2,304 | ||||||||||||
Disposals or Transfers of Property | — | (747 | ) | — | (747 | ) | ||||||||||
Payments | (194 | ) | — | (447 | ) | (641 | ) | |||||||||
Balance, December 31, 2009 | 916 | — | — | 916 | ||||||||||||
Less: Long-term Portion | (644 | ) | — | — | (644 | ) | ||||||||||
Facility Closure Cost Accrual, Current Portion | $ | 272 | $ | — | $ | — | $ | 272 | ||||||||
Balance, December 31, 2009 | $ | 916 | $ | — | $ | — | $ | 916 | ||||||||
Payments | (244 | ) | — | — | (244 | ) | ||||||||||
Balance, December 31, 2010 | 672 | — | — | 672 | ||||||||||||
Less: Long-term Portion | (419 | ) | — | — | (419 | ) | ||||||||||
Facility Closure Cost Accrual, Current Portion | $ | 253 | $ | — | $ | — | $ | 253 | ||||||||
September 30, | ||||
(in thousands) | Total | |||
Balance, January 1, 2010 | $ | 916 | ||
Payments | (244 | ) | ||
|
| |||
Balance, December 31, 2010 | 672 | |||
Less: Long-term Portion | (419 | ) | ||
|
| |||
Facility Closure Cost Accrual, Current Portion | $ | 253 | ||
|
| |||
Balance, December 31, 2010 | $ | 672 | ||
Payments | (217 | ) | ||
|
| |||
Balance, December 31, 2011 | 455 | |||
Less: Long-term Portion | (324 | ) | ||
|
| |||
Facility Closure Cost Accrual, Current Portion | $ | 131 | ||
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- 67 -
For the Years Ended December 31, | ||||||||||||
(in thousands) | 2010 | 2009 | 2008 | |||||||||
Compensation and Benefits | $ | 62,791 | $ | 51,251 | $ | 59,311 | ||||||
Outside Fees and Services | 60,583 | 43,026 | 35,825 | |||||||||
Reimbursable Expenses | 47,449 | 16,077 | — | |||||||||
Technology and Communications | 18,236 | 16,443 | 19,912 | |||||||||
$ | 189,059 | $ | 126,797 | $ | 115,048 | |||||||
For the Years Ended December 31, | ||||||||||||
(in thousands) | 2010 | 2009 | 2008 | |||||||||
Compensation and Benefits | $ | 19,116 | $ | 4,096 | $ | 6,208 | ||||||
Professional Services | 8,026 | 10,252 | 3,270 | |||||||||
Occupancy Related Costs | 12,154 | 8,456 | 8,125 | |||||||||
Amortization of Intangible Assets | 4,891 | 2,672 | 2,554 | |||||||||
Goodwill Impairment | 2,816 | — | — | |||||||||
Other | 10,349 | 13,997 | 7,931 | |||||||||
$ | 57,352 | $ | 39,473 | $ | 28,088 | |||||||
- 68 -
For the Years Ended December 31, | ||||||||||||
(in thousands) | 2010 | 2009 | 2008 | |||||||||
Interest Income | $ | 31 | $ | 16 | $ | 16 | ||||||
Interest Expense | (119 | ) | (1,660 | ) | (2,607 | ) | ||||||
Change in Fair Value of Put Option | 557 | — | — | |||||||||
Other, net | 335 | 2,678 | (35 | ) | ||||||||
$ | 804 | $ | 1,034 | $ | (2,626 | ) | ||||||
For the Years Ended December 31, | ||||||||||||
(in thousands) | 2010 | 2009 | 2008 | |||||||||
Current: | ||||||||||||
Domestic — Luxembourg | $ | (1,031 | ) | $ | 4,827 | $ | 4 | |||||
Foreign — U.S. Federal | — | 8,321 | 202 | |||||||||
Foreign — U.S. State | 561 | — | (379 | ) | ||||||||
Foreign — Non U.S. | 1,186 | 26 | 736 | |||||||||
$ | 716 | $ | 13,174 | $ | 563 | |||||||
Deferred: | ||||||||||||
Domestic — Luxembourg | $ | 395 | $ | (107 | ) | $ | — | |||||
Foreign — U.S. Federal | (1,014 | ) | (1,581 | ) | (102 | ) | ||||||
Foreign — U.S. State | (68 | ) | (66 | ) | 1,299 | |||||||
Foreign — Non U.S. | (432 | ) | 185 | — | ||||||||
(1,119 | ) | (1,569 | ) | 1,197 | ||||||||
Benefit Applied to Reduce Goodwill | 3,622 | |||||||||||
Total | $ | (403 | ) | $ | 11,605 | $ | 5,382 | |||||
- 69 -
December 31, | ||||||||
(in thousands) | 2010 | 2009 | ||||||
Current Deferred Tax Assets: | ||||||||
Allowance for Doubtful Accounts and Other Reserves | $ | 143 | $ | 1,074 | ||||
Accrued Expenses | 807 | 751 | ||||||
Current Deferred Tax Liabilities: | ||||||||
Prepaid Expense | (399 | ) | (279 | ) | ||||
Current Deferred Tax Asset, Net: | $ | 551 | $ | 1,546 | ||||
Non-current Deferred Tax Assets: | ||||||||
Non Operating Loss Carryforwards — U.S. Federal | 8,891 | 6,644 | ||||||
Non Operating Loss Carryforwards — U.S. State | 2,058 | 1,623 | ||||||
Depreciation | 58 | 1,680 | ||||||
Non-U.S. Deferred Tax Asset | 916 | 692 | ||||||
Other | 416 | 193 | ||||||
Non-current Deferred Tax Liabilities: | ||||||||
Intangible Assets | (9,258 | ) | (11,013 | ) | ||||
U.S. State Taxes | — | (1,068 | ) | |||||
3,081 | (1,249 | ) | ||||||
Valuation Allowance | (1,875 | ) | (1,520 | ) | ||||
Non-current Deferred Tax Asset (Liability), net | $ | 1,206 | $ | (2,769 | ) | |||
Net Deferred Tax Asset (Liability) | $ | 1,757 | $ | (1,223 | ) | |||
- 70 -
For the Years Ended December 31, | ||||||||||||
2010 | 2009 | 2008 | ||||||||||
Statutory Tax Rate | 28.6 | % | 28.6 | % | 29.6 | % | ||||||
Foreign Rate Differential | (23.0 | ) | 2.6 | 11.0 | ||||||||
Tax Adjustment for Retroactive Ruling | (7.0 | ) | — | — | ||||||||
Change in Valuation Allowances | 0.5 | (0.9 | ) | 9.1 | ||||||||
State Tax Expense | 0.3 | — | — | |||||||||
Indefinite Deferral on Earnings of Non-U.S. Affiliates | — | — | (12.8 | ) | ||||||||
Indefinite Deferral on Earnings of Non-Luxembourg Affiliates | — | 0.6 | — | |||||||||
Other | (0.2 | ) | — | — | ||||||||
(0.8 | )% | 30.9 | % | 36.9 | % | |||||||
these facilities.
- 71 -
For the Years Ended December 31, | ||||||||||||
(in thousands, except per share amounts) | 2010 | 2009 | 2008 | |||||||||
Net Income | $ | 49,271 | $ | 25,971 | $ | 9,219 | ||||||
Weighted-Average Common Shares Outstanding, Basic | 25,083 | 24,062 | 24,050 | |||||||||
Dilutive Effect of Stock Options | 1,176 | 196 | — | |||||||||
Dilutive Effect of Restricted Shares | — | 3 | — | |||||||||
Weighted-Average Common Shares Outstanding, Diluted | 26,259 | 24,261 | 24,050 | |||||||||
Earnings Per Share | ||||||||||||
Basic | $ | 1.96 | $ | 1.08 | $ | 0.38 | ||||||
Diluted | $ | 1.88 | $ | 1.07 | $ | 0.38 | ||||||
- 72 -
Common Stock
Our Board of Directors has the power to issue shares of authorized but unissued common stock without further shareholder action subject to the requirements of applicable laws and stock exchanges. At December 31, 2010,2011, we had authorized 100.0 million shares. At December 31, 2010,2011, we had 24.923.4 million shares of common stock outstanding. The holders of shares of Altisource common stock are entitled to one vote for each share on all matters voted on by shareholders, and the holders of such shares will possess all voting power.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements(continued)
Treasury Stock
On May 19, 2010, our shareholders authorized us to purchase up to 3.8 million shares of our common stock in the open market. Through December 31, 2010,2011, we purchased 0.72.3 million shares of our common stock on the open market at an average price of $27.11,$34.55 per share, leaving 3.11.5 million shares still available for purchase.
Equity Incentive Plan
Our 2009 Equity Incentive Plan (the “Plan”) provides for various types of equity awards, including stock options, stock appreciation rights, stock purchase rights, restricted shares and other awards, or a combination of any of the above. Under the Plan, the Companywe may grant up to 6.7 million share-based awards to officers, directors, key employees and certain Ocwen employees. As of December 31, 2010, 2.52011, 2.3 million share-based awards were available for future grant under the plan.Plan. The shares will be issued from authorized and unissued shares of our common stock. Expired and forfeited awards are available for re-issuance. Vesting and exercise of share-based awards are generally contingent on continued employment.
Equity-Based Compensation
We have issued stock-based awards in the form of stock options for certain employees and restricted stock units.officers. We recorded total stock compensation expense including the allocation discussed above of $3.1$4.0 million, $0.3$3.1 million and $0.3 million for the years ended December 31, 2011, 2010 2009 and 2008,2009, respectively. The total compensation expense is includedfor 2011 and 2010 includes $3.0 million and $0.5 million, respectively, related to the vesting of performance awards that vested in Selling, General2011 and Administrative Expenses in the accompany Statements2010, respectively.
Outstanding equity based compensation currently only consists of Operations.
Service-based Options.These options are granted at fair market value on the date of grant. The options generally vest over four or five years with equal annual cliff-vesting and expire on the earlier of 10 years after the date of grant or 3 months afterfollowing termination of service. A total of 1.21.0 million service-based awards were outstanding at December 31, 2010.
2011.
- 73 -
We granted 0.2 million stock options (at an average price of $33.15 per share) and 0.9 million stock options (at an average price of $23.58 per share) during the years ended December 31, 2011 and 2010, respectively.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements(continued)
The fair value of the service-based options was determined using the Black-Scholes options pricing model while a lattice (binomial) model was used to determine the fair value of the market-based options using the following weighted average assumptions as of the grant date:
2010 | 2009 | |||||||||||||||
Black-Scholes | Binomial | Black-Scholes | Binomial | |||||||||||||
Risk-free Interest Rate | 1.50 – 3.20 | % | 0.02 – 3.66 | % | 2.64 | % | 0.50 – 3.86 | % | ||||||||
Expected Stock Price Volatility | 47 – 50 | % | 51 – 52 | % | 39 | % | 38 – 46 | % | ||||||||
Expected Dividend Yield | — | — | — | — | ||||||||||||
Expected Option Life (in years) | 6.25 – 7 | — | 5 | — | ||||||||||||
Contractual Life (in years) | — | 13 | — | 10 | ||||||||||||
Fair Value | $ | 11.95 – $13.24 | $ | 10.05 – $12.42 | $ | 5.35 | $ | 4.54 and $5.33 |
September 30, | September 30, | September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||
2011 | 2010 | 2009 | ||||||||||||||||||||||
Black-Scholes | Binomial | Black-Scholes | Binomial | Black-Scholes | Binomial | |||||||||||||||||||
Risk-free Interest Rate | 1.69 – 1.93 | % | 0.04 – 3.03 | % | 1.50 – 3.20 | % | 0.02 – 3.66 | % | 2.64 | % | 0.50 – 3.86 | % | ||||||||||||
Expected Stock Price Volatility | 48 | % | 55.7 – 55.8 | % | 47 – 50 | % | 51 – 52 | % | 39 | % | 38 – 46 | % | ||||||||||||
Expected Dividend Yield | — | — | — | — | — | — | ||||||||||||||||||
Expected Option Life (in years) | 6.25 | — | 6.25 – 7 | — | 5 | — | ||||||||||||||||||
Contractual Life (in years) | — | 14 | — | 13 | — | 10 | ||||||||||||||||||
Fair Value | $ | 16.33 – $17.85 | $ | 16.91 – $20.39 | $ | 11.95 – $13.24 | $ | 10.05 – $12.42 | $ | 5.35 | $ | 4.54 – $5.33 |
The following table summarizes the weighted-average fair value of stock options granted, and the total intrinsic value of stock options exercised:
December 31 | ||||||||||||
2010 | 2009 | |||||||||||
Weighted-Average Fair Value at Date of Grant | $ | 18.18 | $ | 5.14 | ||||||||
Intrinsic Value of Options Exercised | (in thousands) | $ | 7,530 | $ | 345 | |||||||
Fair Value of Options Vested | (in thousands) | $ | 926 | $ | 441 |
September 30, | September 30, | September 30, | ||||||||||
December 31 | ||||||||||||
2011 | 2010 | |||||||||||
Weighted-Average Fair Value at Date of Grant | $ | 17.66 | $ | 18.18 | ||||||||
Intrinsic Value of Options Exercised | (in thousands | ) | $ | 4,966 | $ | 7,530 | ||||||
Fair Value of Options Vested | (in thousands | ) | $ | 3,536 | $ | 926 |
Stock-based compensation expense is recorded, net of estimated forfeiture rates ranging from 1% to 3%. The 2010 and 2009 compensation expense included $0.5 million and $0.1 million, respectively relating
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to certain performance based options for which the performance and market-based criteria for vesting were met during 2010 and 2009.
As of December 31, 2010,2011, estimated unrecognized compensation costs related to share-based payments amounted to $8.5$5.8 million which we expect to recognize over a weighted-average remaining requisite service period of approximately 3.43.0 years.
- 74 -
Weighted | Aggregate | |||||||||||||||
Weighted | Average | Intrinsic | ||||||||||||||
Average | Contractual | Value | ||||||||||||||
Number of | Exercise | Term | (in | |||||||||||||
Options | Price | (in years) | thousands) | |||||||||||||
Outstanding at December 31, 2009 | 3,190,639 | $ | 9.90 | |||||||||||||
Granted | 927,501 | 23.58 | ||||||||||||||
Exercised | (422,485 | ) | 9.43 | |||||||||||||
Forfeited | (244,042 | ) | 11.19 | |||||||||||||
Outstanding at December 31, 2010 | 3,451,613 | $ | 13.46 | 7.3 | $ | 52,641 | ||||||||||
Exercisable at December 31, 2010 | 1,333,283 | $ | 10.00 | 5.8 | $ | 24,945 | ||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||
Number of Options | Weighted Average Exercise Price | Weighted Average Contractual Term (in years) | Aggregate Intrinsic Value (in thousands) | |||||||||||||
Outstanding at December 31, 2010 | 3,451,613 | $ | 13.46 | 7.3 | $ | 52,641 | ||||||||||
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Granted | 181,000 | 33.15 | ||||||||||||||
Exercised | (231,908 | ) | 11.20 | |||||||||||||
Forfeited | (156,747 | ) | 24.44 | |||||||||||||
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Outstanding at December 31, 2011 | 3,243,958 | $ | 14.19 | 6.7 | $ | 116,755 | ||||||||||
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Exercisable at December 31, 2011 | 1,787,132 | $ | 10.92 | 6.0 | $ | 70,165 | ||||||||||
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The following table summarizes information about stock options outstanding and exercisable at December 31, 2010:
Options Outstanding | �� | Options Exercisable | ||||||||||||||||||||||
Weighted | Weighted | |||||||||||||||||||||||
Average | Weighted | Average | Weighted | |||||||||||||||||||||
Remaining | Average | Remaining | Average | |||||||||||||||||||||
Exercise Price | Contractual | Exercise | Contractual | Exercise | ||||||||||||||||||||
Range | Number | Life | Price | Number | Life | Price | ||||||||||||||||||
$2.00 – $6.00 | 67,037 | 2.09 | $ | 2.95 | 67,037 | 2.1 | $ | 2.95 | ||||||||||||||||
$6.01 – $9.00 | 115,433 | 1.28 | 7.50 | 115,433 | 1.3 | 7.50 | ||||||||||||||||||
$9.01 – $12.00 | 2,070,835 | 7.4 | 9.61 | 904,588 | 7.2 | 9.69 | ||||||||||||||||||
$12.01 – $15.00(a) | 303,308 | 4.7 | 14.21 | 246,225 | 3.7 | 14.22 | ||||||||||||||||||
$15.01 – $18.00(a) | — | — | — | — | — | — | ||||||||||||||||||
$18.01 – $21.00(a) | — | — | — | — | — | — | ||||||||||||||||||
$21.01 – $24.00(a) | 375,000 | 9.1 | 22.01 | — | — | — | ||||||||||||||||||
$24.01 – $27.00(a) | 520,000 | 9.4 | 24.86 | — | — | — | ||||||||||||||||||
3,451,613 | 1,333,283 | |||||||||||||||||||||||
September 30, | September 30, | September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||
Options Outstanding | Options Exercisable | |||||||||||||||||||||||
Exercise Price Range | Number | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | ||||||||||||||||||
$0.00 – $5.00 | 40,342 | 1.09 | $ | 2.97 | 40,342 | 1.09 | $ | 2.97 | ||||||||||||||||
$5.01 – $10.00 | 2,035,326 | 6.28 | 9.49 | 1,387,416 | 6.16 | 9.46 | ||||||||||||||||||
$10.01 – $15.00 | 251,248 | 4.93 | 13.22 | 212,498 | 4.42 | 13.05 | ||||||||||||||||||
$20.01 – $25.00(a) | 786,042 | 8.27 | 23.81 | 146,876 | 8.27 | 23.81 | ||||||||||||||||||
$30.01 – $35.00(a) | 72,500 | 9.44 | 33.03 | — | — | — | ||||||||||||||||||
$35.01 – $40.00(a) | 58,500 | 9.56 | 37.09 | — | — | — | ||||||||||||||||||
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3,243,958 | 1,787,132 | |||||||||||||||||||||||
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(a) | These options contain market-based components as described above. All other options are time-based awards. |
- 75 -
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
The following table summarizes the market prices necessary in order for the market performance options to begin to vest:
(in thousands, except share prices) | Market Based Options | |||||||
Ordinary | Extraordinary | |||||||
Vesting Price | Performance | Performance | ||||||
$40.00 – $45.00 | 188 | 8 | ||||||
$45.01 – $50.00 | 250 | — | ||||||
$50.01 – $55.00 | 10 | — | ||||||
$65.01 – $70.00 | — | 94 | ||||||
$70.01 – $75.00 | — | 125 | ||||||
$75.01 – $80.00 | — | 5 | ||||||
448 | 232 | |||||||
Weighted Average Share Price | $ | 47.33 | $ | 69.97 | ||||
September 30, | September 30, | |||||||
Market Based Options | ||||||||
(in thousands, except share prices) Vesting Price | Ordinary Performance | Extraordinary Performance | ||||||
$60.00 – $65.00 | 10 | — | ||||||
$65.01 – $70.00 | 26 | 72 | ||||||
$70.01 – $75.00 | 8 | 125 | ||||||
$75.01 – $95.00 | 0 | 5 | ||||||
$95.01 – $115.00 | 0 | 17 | ||||||
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44 | 219 | |||||||
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| |||||
Weighted Average Share Price | $ | 67.45 | $ | 74.40 | ||||
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13. COST OF REVENUE
Cost of Revenue principally includes payroll and employee benefits associated with personnel employed in customer service and operations roles; fees paid to external providers related to provision of services, reimbursable expenses, technology and telephony expenses as well as depreciation and amortization of operating assets. The components of Cost of Revenue were as follows for the periods ended December 31:
September 30, | September 30, | September 30, | ||||||||||
For the Years Ended December 31, | ||||||||||||
(in thousands) | 2011 | 2010 | 2009 | |||||||||
Compensation and Benefits | $ | 82,548 | $ | 62,791 | $ | 51,251 | ||||||
Outside Fees and Services | 86,201 | 60,583 | 43,026 | |||||||||
Expense Reimbursements | 82,074 | 47,449 | 16,077 | |||||||||
Technology and Communications | 18,772 | 12,548 | 11,613 | |||||||||
Depreciation and Amortization | 6,254 | 5,688 | 4,830 | |||||||||
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| |||||||
Total | $ | 275,849 | $ | 189,059 | $ | 126,797 | ||||||
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Restricted SharesNotes to Consolidated Financial Statements
14. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, General and Administrative Expenses include payroll for personnel employed in executive, sales, marketing, human resources and finance roles. This category also includes occupancy costs, professional fees, depreciation and amortization on non-operating assets. The components of Selling, General and Administrative Expenses were as follows for the periods ended December 31:
September 30, | September 30, | September 30, | ||||||||||
For the Years Ended December 31, | ||||||||||||
(in thousands) | 2011 | 2010 | 2009 | |||||||||
Compensation and Benefits | $ | 22,327 | $ | 19,116 | $ | 4,096 | ||||||
Professional Services | 6,658 | 8,026 | 10,252 | |||||||||
Occupancy Related Costs | 17,824 | 10,684 | 7,854 | |||||||||
Amortization of Intangible Assets | 5,291 | 4,891 | 2,672 | |||||||||
Goodwill Impairment | — | 2,816 | — | |||||||||
Depreciation and Amortization | 2,097 | 1,470 | 602 | |||||||||
Other | 7,934 | 10,349 | 13,997 | |||||||||
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Total | $ | 62,131 | $ | 57,352 | $ | 39,473 | ||||||
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Other in 2009 includes $1.4 million relating to a litigation settlement.
15. OTHER INCOME (EXPENSE), NET
Other Income (Expense) consists of the following:
September 30, | September 30, | September 30, | ||||||||||
For the Years Ended December 31, | ||||||||||||
(in thousands) | 2011 | 2010 | 2009 | |||||||||
Interest Income | $ | 32 | $ | 31 | $ | 16 | ||||||
Interest Expense | (85 | ) | (119 | ) | (1,660 | ) | ||||||
Change in Fair Value of Put Option | 732 | 557 | — | |||||||||
Equity Loss in Affiliate, net | (530 | ) | — | — | ||||||||
Other, net | 54 | 335 | 2,678 | |||||||||
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Total | $ | 203 | $ | 804 | $ | 1,034 | ||||||
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Through the date of Separation, Interest Expense included an interest charge from Ocwen which represented an allocation of Ocwen’s total interest expense calculated based on our assets in comparison to Ocwen’s total assets. This charge was $1.3 million for the year ending December 31, 2009. Subsequent to the date of Separation, we are no longer subject to the interest charge from Ocwen.
The change in Fair Value of Put Option relates to three put option agreements we entered into with certain of the sellers of MPA. The Put Option expired in December 2011.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements(continued)
Equity loss in affiliate represents our proportionate share of the earnings in Correspondent One (see Note 9).
Other, net in 2009 includes $2.3 million of income relating to a litigation settlement.
16. INCOME TAXES
The income tax (benefit) provision consists of the following:
September 30, | September 30, | September 30, | ||||||||||
For the Years Ended December 31, | ||||||||||||
(in thousands) | 2011 | 2010 | 2009 | |||||||||
Current: | ||||||||||||
Domestic — Luxembourg | $ | 2,300 | $ | (1,031 | ) | $ | 4,827 | |||||
Foreign — U.S. Federal | — | — | 8,321 | |||||||||
Foreign — U.S. State | 119 | 561 | — | |||||||||
Foreign — Non U.S. | 2,891 | 1,186 | 26 | |||||||||
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$ | 5,310 | $ | 716 | $ | 13,174 | |||||||
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Deferred: | ||||||||||||
Domestic — Luxembourg | $ | (387 | ) | $ | 395 | $ | (107 | ) | ||||
Foreign — U.S. Federal | 3,216 | (1,014 | ) | (1,581 | ) | |||||||
Foreign — U.S. State | (22 | ) | (68 | ) | (66 | ) | ||||||
Foreign — Non U.S. | (174 | ) | (432 | ) | 185 | |||||||
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$ | 2,633 | $ | (1,119 | ) | $ | (1,569 | ) | |||||
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Total | $ | 7,943 | $ | (403 | ) | $ | 11,605 | |||||
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We received a favorable ruling in June 2010 regarding the treatment of certain intangibles that exist for purposes of determining the Company’s taxable income. The ruling is retroactive to the date of Separation. As a result of the ruling, the Company recognized a $3.4 million credit attributable to 2009 in the second quarter of 2010. The impact of this is included above as a component of the current Luxembourg tax benefit. This ruling did not have a material impact on our deferred tax assets or liabilities. Income tax computed by applying the Luxembourg statutory income tax rate of 28.8% differs from income tax computed at the effective tax rate primarily because of the effect of the favorable tax ruling as well as differing tax rates in multiple jurisdictions, including losses recognized in our U.S. operations.
The Company accounts for certain income and expense items differently for financial purposes and income tax purposes. We recognize deferred income tax assets and liabilities for these differences between the financial reporting basis and the tax basis of our assets and liabilities as well as expected benefits of utilizing net operating loss and credit carryforwards. We measure deferred income tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which we expect to recover or settle those temporary differences.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements(continued)
A summary of the tax effects of the temporary differences is as follows:
September 30, | September 30, | |||||||
December 31, | ||||||||
(in thousands) | 2011 | 2010 | ||||||
Current Deferred Tax Assets: | ||||||||
Allowance for Doubtful Accounts and Other Reserves | $ | 72 | $ | 143 | ||||
Accrued Expenses | 1,294 | 807 | ||||||
Current Deferred Tax Liabilities: | ||||||||
Prepaid Expense | (233 | ) | (399 | ) | ||||
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Current Deferred Tax Asset, Net: | $ | 1,133 | $ | 551 | ||||
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Non-current Deferred Tax Assets: | ||||||||
Non Operating Loss Carryforwards — U.S. Federal | $ | 10,998 | $ | 8,891 | ||||
Non Operating Loss Carryforwards — U.S. State | 2,209 | 2,058 | ||||||
Depreciation | — | 58 | ||||||
Non-U.S. Deferred Tax Asset | 1,479 | 916 | ||||||
Other | 564 | 416 | ||||||
Non-current Deferred Tax Liabilities: | ||||||||
Intangible Assets | $ | (8,014 | ) | $ | (9,258 | ) | ||
Depreciation | (654 | ) | — | |||||
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6,582 | 3,081 | |||||||
Valuation Allowance | $ | (2,209 | ) | $ | (1,875 | ) | ||
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Non-current Deferred Tax Asset, net | $ | 4,373 | $ | 1,206 | ||||
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Net Deferred Tax Asset | $ | 5,506 | $ | 1,757 | ||||
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A valuation allowance is provided when it is deemed more-likely-than-not that some portion or all of a deferred tax asset will not be realized. In determining whether a valuation allowance is needed, we considered estimates of future taxable income, future reversals of temporary differences, tax character and the impact of tax planning strategies that can be implemented, if warranted. As of December 31, 2011, we provided a valuation allowance of $2.2 million related to certain state operating losses. This represents an increase of $0.3 million compared to the prior year increase of $0.3 million. The increase in valuation allowance during 2011 relates to additional state losses generated in the current year.
We have not provided Luxembourg deferred taxes on cumulative earnings of non-Luxembourg affiliates as these earnings have been indefinitely reinvested. The earnings relate to ongoing operations and at December 31, 2011, were $16 million.
As of December 31, 2011, the Company had a deferred tax asset of $13.2 million relating to U.S. Federal and State net operating losses. Of this amount, $2.2 million relating to state net operating losses were subject to a valuation allowance. The gross amount of net operating losses available for carryover to future years approximates $33 million. Of this amount, $15.9 million relates to NCI for periods prior to our acquisition and is subject to Section 382 of the Internal Revenue Code (the “Code”) which limits their use to approximately $1.3 million per year. These losses are scheduled to expire between the years 2022 and 2029.
The separation from Ocwen and relocation of certain operations to Luxembourg resulted in changes to deferred tax balances which include amounts charged to stockholders’ equity of approximately $1.0 million. For periods prior to the date of Separation, we are included in Ocwen’s tax returns. Our responsibility with respect to restrictedthese periods is governed by a tax sharing agreement. In accordance with this agreement, U.S. income taxes were allocated as if they had been calculated on a separate company basis except that benefits for any net operating losses will be provided to the extent such loss is utilized in the consolidated U.S. federal tax return. The provision for income taxes prior to the date of Separation has been determined on a pro-forma basis as if we had filed separate income taxes under our current structure for the periods presented.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements(continued)
The Distribution was intended to be a tax-free transaction under Section 355 of the Code. However, Ocwen recognized, and paid tax on, substantially all of the gain it has in the assets that comprise Altisource as a result of the restructuring. To the extent Ocwen does recognize tax under Section 355 of the Code, Altisource has agreed to indemnify Ocwen. In addition, we have agreed to indemnify Ocwen should the expected tax treatments not be upheld upon review or audit to the extent related to our operating results. The Company does not anticipate a material obligation under this indemnity.
The following table reconciles the Income Tax Provision to the Luxembourg income tax rate:
September 30, | September 30, | September 30, | ||||||||||
For the Years Ended December 31, | ||||||||||||
2011 | 2010 | 2009 | ||||||||||
Statutory Tax Rate | 28.80 | % | 28.60 | % | 28.60 | % | ||||||
Foreign Rate Differential | (19.27 | ) | (23.00 | ) | 2.60 | |||||||
Tax Adjustment for Retroactive Ruling | — | (7.00 | ) | — | ||||||||
Change in Valuation Allowances | — | 0.50 | (0.90 | ) | ||||||||
State Tax Expense | 0.07 | 0.30 | — | |||||||||
Indefinite Deferral on Earnings of Non - U.S Luxembourg Affiliates | — | — | 0.60 | |||||||||
Other | 0.45 | (0.20 | ) | — | ||||||||
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10.05 | % | (0.80 | )% | 30.90 | % | |||||||
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The Company follows ASC Topic 740 which clarifies the accounting and disclosure for uncertainty in tax positions. We analyzed our tax filing positions in all of the domestic and foreign tax jurisdictions where we are required to file income tax returns as well as for all open tax years in these jurisdictions. Based on this review, no reserves for uncertain income tax positions were required to have been recorded pursuant to ASC Topic 740. In addition, we determined that we did not need to record a cumulative effect adjustment related to the adoption of ASC Topic 740.
We recognize accrued interest and penalties related to uncertain tax positions in Selling, General and Administrative Expenses in the Statements of Operations. As of December 31, 2011 and 2010, we did not have a liability recorded for payment of interest and penalties associated with uncertain tax positions.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements(continued)
17. EARNINGS PER SHARE
Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares was as followsoutstanding for the period. Diluted EPS reflects the assumed conversion of dilutive securities.
Basic and diluted EPS for the years ended December 31:
Weighted | ||||||||
Average | ||||||||
Restricted | Grant Date | |||||||
Shares | Fair Value | |||||||
Outstanding at December 31, 2009 | 3,236 | $ | 18.00 | |||||
Issued at Separation | — | — | ||||||
Vested | (3,236 | ) | 18.00 | |||||
Forfeited | — | — | ||||||
Treasury stock repurchased | — | |||||||
Outstanding at December 31, 2010 | — | |||||||
September 30, | September 30, | September 30, | ||||||||||
For the Years Ended December 31, | ||||||||||||
(in thousands, except per share data) | 2011 | 2010 | 2009 | |||||||||
Net Income Attributable to Altisource | $ | 71,112 | $ | 49,271 | $ | 25,971 | ||||||
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Weighted-Average Common Shares Outstanding, | ||||||||||||
Basic | 24,373 | 25,083 | 24,062 | |||||||||
Dilutive Effect of Stock Options | 1,312 | 1,176 | 196 | |||||||||
Dilutive Effect of Restricted Shares | — | — | 3 | |||||||||
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Weighted-Average Common Shares Outstanding, | ||||||||||||
Diluted | 25,685 | 26,259 | 24,261 | |||||||||
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Earnings Per Share | ||||||||||||
Basic | $ | 2.92 | $ | 1.96 | $ | 1.08 | ||||||
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Diluted | $ | 2.77 | $ | 1.88 | $ | 1.07 | ||||||
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A total of acceptance0.1 million options that were anti-dilutive have been excluded from the computation of diluted EPS for each of the equipment and damages for breaches of implied warranties and related torts. Separately, we were a party to a pending arbitration brought by the vendor seeking payment of annual support and maintenance fees for periods subsequent to when we returned the equipment to the vendor. The vendor also requested payment of discounts it provided to us purportedly to be a marketing partner for the vendor. On March 2, 2010, we were notified that the arbitrator ruled in a binding opinion that we owed $1.4 million to Noble Systems Corp, which was accrued as ofyears ended December 31, 2011 and 2010 (negligible amount for 2009). These options were anti-dilutive because their exercise price was greater than the average market price of our stock. Also excluded from the computation of diluted EPS are 0.3 million options for December 31, 2011, and 0.7 million options for each of 2010 and 2009 inrespectively, granted for shares that are issuable upon the Financial Services segmentachievement of certain market and was paid during 2010.
performance criteria related to our stock price and an annualized rate of return to investors that have not been met at this point.
- 76 -
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
18. COMMITMENTS AND CONTINGENCIES
Litigation
From time to time, we received a complaint from Nationwide Inflection, LLC (“Inflection”) related to the release of escroware involved in connection with the June 2007 acquisition of NCI. Inflection claimed that it had not breached any representations and was entitled to recover all sums in escrow. We responded timely claiming that we had suffered losses in excess of the escrow as a result of breach of contract. Ultimately, during the third quarter of 2009, the parties agreed to settle all complaints which resulted in $2.3 million being released to Altisource and recognized as a gain in other income, net in the Statement of Operations. We also received $0.4 million related to interest received on the escrow and reimbursement for expenses incurred in connection with defending ourselves in lawsuits in existence at the time of the acquisition, with an additional $0.3 million in escrow available to cover future legal expenses incurred in the one remaining lawsuit that was subsequently resolved.
Leases
We lease certain premises and equipment under various capital and operating lease agreements. Future minimum lease payments at December 31, 20102011 under non-cancelable capital and operating leases with an original term exceeding one year are as follows:
Operating | ||||||||
Capital Lease | Lease | |||||||
(in thousands) | Obligations | Obligations | ||||||
2011 | $ | 738 | $ | 4,867 | ||||
2012 | 619 | 3,408 | ||||||
2013 | 258 | 1,695 | ||||||
2014 | — | 762 | ||||||
2015 | — | 210 | ||||||
1,615 | $ | 10,942 | ||||||
Less: Amounts Representing Interest | (84 | ) | ||||||
Capital Lease Obligations | 1,531 | |||||||
Less: Current Portion Under Capital Lease Obligation | (679 | ) | ||||||
Long-term Portion Under Capital Lease Obligation | $ | 852 | ||||||
September 30, | September 30, | |||||||
(in thousands) | Capital Lease Obligations | Operating Lease Obligations | ||||||
2012 | $ | 659 | 9,564 | |||||
2013 | 204 | 5,561 | ||||||
2014 | — | 3,060 | ||||||
2015 | — | 263 | ||||||
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863 | $ | 18,448 | ||||||
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| |||||||
Less: Amounts Representing Interest | (27 | ) | ||||||
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Capital Lease Obligations | 836 | |||||||
Less: Current Portion Under Capital Lease Obligation | (634 | ) | ||||||
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Long-term Portion Under Capital Lease Obligation | $ | 202 | ||||||
|
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Total operating lease expense, net of sublease income, was $10.8 million, $7.8 million $4.2 million and $3.9$4.2 million for the years ended December 31, 2011, 2010, 2009, and 2008,2009, respectively. The operating leases generally relate to office locations and reflect customary lease terms which range from 1 to 7 years in duration.
Escrow Balances
We hold customers’ assets in escrow at various financial institutions pending completion of certain real estate and debt collection activities. These amounts are held in escrow for limited periods of time, generally consisting of a few days. To the extent these assets are not co-mingled with our fees and are maintained in segregated bank accounts, they are generally not included in the Consolidated Balance Sheets, the balance of which is $17.7 million at December 31, 2011.
19. SEGMENT REPORTING
Our business segments reflectare based upon our organizational structure which focuses primarily on the services offered and are consistent with the internal reporting that we use to evaluate operating performance and to assess the allocation of our resources by our Chief Executive Officer.
- 77 -
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements(continued)
integrated technological solutions for loan servicing, vendor management and invoice presentment and payment as well as providing infrastructure support. In addition, ourCorporate Items and Eliminationssegment prior to the Separation Date includes eliminations of transactions between the reporting segments as well as expenditures recognized by us related to the Separation. Subsequent to the Separation Date, in addition to the previously mentioned items,and this segment also includes costs recognized by us related to corporate support functions such as executive, finance, legal, human resources, vendor management and consumer behavior.
Financial information for our segments is as follows:
For the Year Ended December 31, 2010 | ||||||||||||||||||||
Corporate | ||||||||||||||||||||
Mortgage | Financial | Technology | Items and | Consolidated | ||||||||||||||||
(in thousands) | Services | Services | Services | Eliminations | Altisource | |||||||||||||||
Revenue | $ | 204,771 | $ | 59,979 | $ | 52,013 | $ | (15,385 | ) | $ | 301,378 | |||||||||
Cost of Revenue | 124,485 | 49,781 | 28,909 | (14,116 | ) | 189,059 | ||||||||||||||
Gross Profit | 80,286 | 10,198 | 23,104 | (1,269 | ) | 112,319 | ||||||||||||||
Selling, General and Administrative Expenses | 14,890 | 19,567 | 4,985 | 17,910 | 57,352 | |||||||||||||||
Income (Loss) from Operations | 65,396 | (9,369 | ) | 18,119 | (19,179 | ) | 54,967 | |||||||||||||
Other Income (Expense), net | 781 | (50 | ) | (60 | ) | 133 | 804 | |||||||||||||
Income (Loss) Before Income Taxes | $ | 66,177 | $ | (9,419 | ) | $ | 18,059 | $ | (19,046 | ) | $ | 55,771 | ||||||||
Transactions with Related Parties Included Above: | ||||||||||||||||||||
Revenue | $ | 135,655 | $ | 166 | $ | 19,167 | $ | — | $ | 154,988 | ||||||||||
Selling, General and Administrative Expenses | $ | — | $ | — | $ | — | $ | 1,056 | $ | 1,056 | ||||||||||
Interest Expense | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
For the Year Ended December 31, 2009 | ||||||||||||||||||||
Corporate | ||||||||||||||||||||
Mortgage | Financial | Technology | Items and | Consolidated | ||||||||||||||||
(in thousands) | Services | Services | Services | Eliminations | Altisource | |||||||||||||||
Revenue | $ | 103,098 | $ | 64,434 | $ | 47,453 | $ | (12,173 | ) | $ | 202,812 | |||||||||
Cost of Revenue | 60,735 | 52,871 | 24,477 | (11,286 | ) | 126,797 | ||||||||||||||
Gross Profit | 42,363 | 11,563 | 22,976 | (887 | ) | 76,015 | ||||||||||||||
Selling, General and Administrative Expenses | 5,625 | 19,267 | 4,731 | 9,850 | 39,473 | |||||||||||||||
Income (Loss) from Operations | 36,738 | (7,704 | ) | 18,245 | (10,737 | ) | 36,542 | |||||||||||||
Other Income (Expense), net | 31 | 1,324 | (319 | ) | (2 | ) | 1,034 | |||||||||||||
Income (Loss) Before Income Taxes | $ | 36,769 | $ | (6,380 | ) | $ | 17,926 | $ | (10,739 | ) | $ | 37,576 | ||||||||
Transactions with Related Parties Included Above: | ||||||||||||||||||||
Revenue | $ | 74,089 | $ | 98 | $ | 20,710 | $ | — | $ | 94,897 | ||||||||||
$ | 2,712 | $ | 467 | $ | 1,517 | $ | (388 | ) | $ | 4,308 | ||||||||||
$ | 30 | $ | 1,029 | $ | 231 | $ | — | $ | 1,290 | |||||||||||
September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
For the Year Ended December 31, 2011 | ||||||||||||||||||||
Corporate | ||||||||||||||||||||
Mortgage | Financial | Technology | Items and | Consolidated | ||||||||||||||||
(in thousands) | Services | Services | Services | Eliminations | Altisource | |||||||||||||||
Revenue | $ | 311,921 | $ | 71,181 | $ | 56,094 | $ | (15,509 | ) | $ | 423,687 | |||||||||
Cost of Revenue | 202,035 | 51,096 | 36,874 | (14,156 | ) | 275,849 | ||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Gross Profit | 109,886 | 20,085 | 19,220 | (1,353 | ) | 147,838 | ||||||||||||||
Selling, General and Administrative Expenses | 15,278 | 15,634 | 4,867 | 26,352 | 62,131 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Income (Loss) from Operations | 94,608 | 4,451 | 14,353 | (27,705 | ) | 85,707 | ||||||||||||||
Other Income (Expense), net | 248 | (34 | ) | (49 | ) | 38 | 203 | |||||||||||||
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|
|
|
|
|
|
|
| |||||||||||
Income (Loss) Before Income Taxes | $ | 94,856 | $ | 4,417 | $ | 14,304 | $ | (27,667 | ) | $ | 85,910 | |||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Transactions with Related Parties: | ||||||||||||||||||||
Revenue | $ | 223,184 | $ | 266 | $ | 21,812 | $ | — | $ | 245,262 | ||||||||||
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|
|
|
|
|
|
|
|
| |||||||||||
Selling, General and Administrative Expenses | $ | — | $ | — | $ | — | $ | 1,893 | $ | 1,893 | ||||||||||
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- 78 -
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
For the Year Ended December 31, 2008 | ||||||||||||||||||||
Corporate | ||||||||||||||||||||
Mortgage | Financial | Technology | Items and | Consolidated | ||||||||||||||||
(in thousands) | Services | Services | Services | Eliminations | Altisource | |||||||||||||||
Revenue | $ | 54,956 | $ | 73,835 | $ | 45,283 | $ | (13,711 | ) | $ | 160,363 | |||||||||
Cost of Revenue | 36,392 | 62,590 | 29,777 | (13,711 | ) | 115,048 | ||||||||||||||
Gross Profit | 18,564 | 11,245 | 15,506 | — | 45,315 | |||||||||||||||
Selling, General and Administrative Expenses | 5,027 | 17,168 | 6,118 | (225 | ) | 28,088 | ||||||||||||||
Income (Loss) from Operations | 13,537 | (5,923 | ) | 9,388 | 225 | 17,227 | ||||||||||||||
Other Income (Expense), net | (58 | ) | (1,952 | ) | (391 | ) | (225 | ) | (2,626 | ) | ||||||||||
Income (Loss) Before Income Taxes | $ | 13,479 | $ | (7,875 | ) | $ | 8,997 | $ | — | $ | 14,601 | |||||||||
Transactions with Related Parties Included Above: | ||||||||||||||||||||
Revenue | $ | 41,635 | $ | 1,181 | $ | 35,146 | $ | (13,711 | ) | $ | 64,251 | |||||||||
Corporate | ||||||||||||||||||||
Mortgage | Financial | Technology | Items and | Consolidated | ||||||||||||||||
(in thousands) | Services | Services | Services | Eliminations | Altisource | |||||||||||||||
Total Assets: | ||||||||||||||||||||
December 31, 2010 | $ | 93,173 | $ | 43,202 | $ | 31,469 | $ | 29,956 | $ | 197,800 | ||||||||||
December 31, 2009 | $ | 8,259 | $ | 51,579 | $ | 15,677 | $ | 45,041 | $ | 120,556 | ||||||||||
September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
For the Year Ended December 31, 2010 | ||||||||||||||||||||
Corporate | ||||||||||||||||||||
Mortgage | Financial | Technology | Items and | Consolidated | ||||||||||||||||
(in thousands) | Services | Services | Services | Eliminations | Altisource | |||||||||||||||
Revenue | $ | 187,133 | $ | 77,617 | $ | 52,013 | $ | (15,385 | ) | $ | 301,378 | |||||||||
Cost of Revenue | 117,691 | 56,575 | 28,909 | (14,116 | ) | 189,059 | ||||||||||||||
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|
|
|
|
|
|
|
| |||||||||||
Gross Profit | 69,442 | 21,042 | 23,104 | (1,269 | ) | 112,319 | ||||||||||||||
Selling, General and Administrative Expenses | 13,718 | 20,739 | 4,985 | 17,910 | 57,352 | |||||||||||||||
|
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|
|
|
|
|
|
|
| |||||||||||
Income (Loss) from Operations | 55,724 | 303 | 18,119 | (19,179 | ) | 54,967 | ||||||||||||||
Other Income (Expense), net | 781 | (50 | ) | (60 | ) | 133 | 804 | |||||||||||||
|
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|
|
|
|
|
|
|
| |||||||||||
Income (Loss) Before Income Taxes | $ | 56,505 | $ | 253 | $ | 18,059 | $ | (19,046 | ) | $ | 55,771 | |||||||||
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| |||||||||||
Transactions with Related Parties: | ||||||||||||||||||||
Revenue | $ | 135,655 | $ | 166 | $ | 19,167 | $ | — | $ | 154,988 | ||||||||||
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| |||||||||||
Selling, General and Administrative Expenses | $ | — | $ | — | $ | — | $ | 1,056 | $ | 1,056 | ||||||||||
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- 79 -
September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
For the Year Ended December 31, 2009 | ||||||||||||||||||||
Corporate | ||||||||||||||||||||
Mortgage | Financial | Technology | Items and | Consolidated | ||||||||||||||||
(in thousands) | Services | Services | Services | Eliminations | Altisource | |||||||||||||||
Revenue | $ | 87,801 | $ | 79,731 | $ | 47,453 | $ | (12,173 | ) | $ | 202,812 | |||||||||
Cost of Revenue | 56,539 | 57,067 | 24,477 | (11,286 | ) | 126,797 | ||||||||||||||
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|
|
|
|
| |||||||||||
Gross Profit | 31,262 | 22,664 | 22,976 | (887 | ) | 76,015 | ||||||||||||||
Selling, General and Administrative Expenses | 4,913 | 19,979 | 4,731 | 9,850 | 39,473 | |||||||||||||||
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|
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|
|
|
|
|
| |||||||||||
Income (Loss) from Operations | 26,349 | 2,685 | 18,245 | (10,737 | ) | 36,542 | ||||||||||||||
Other Income (Expense), net | 31 | 1,324 | (319 | ) | (2 | ) | 1,034 | |||||||||||||
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|
|
|
|
|
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|
| |||||||||||
Income (Loss) Before Income Taxes | $ | 26,380 | $ | 4,009 | $ | 17,926 | $ | (10,739 | ) | $ | 37,576 | |||||||||
|
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|
|
|
|
|
|
| |||||||||||
Transactions with Related Parties: | ||||||||||||||||||||
Revenue | $ | 74,089 | $ | 98 | $ | 20,710 | $ | — | $ | 94,897 | ||||||||||
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|
|
|
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|
| |||||||||||
Selling, General and Administrative Expenses | $ | 2,712 | $ | 467 | $ | 1,517 | $ | (388 | ) | $ | 4,308 | |||||||||
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| |||||||||||
Interest Expense | $ | 30 | $ | 1,029 | $ | 231 | $ | — | $ | 1,290 | ||||||||||
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|
Notes to Consolidated and Combined Consolidated Financial Statements(continued)
September 30, | September 30, | September 30, | September 30, | September 30, | ||||||||||||||||
(in thousands) | Mortgage Services | Financial Services | Technology Services | Corporate Items and Eliminations | Consolidated Altisource | |||||||||||||||
Total Assets: | ||||||||||||||||||||
December 31, 2011 | $ | 112,780 | $ | 41,276 | $ | 32,279 | $ | 37,824 | $ | 224,159 | ||||||||||
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|
| |||||||||||
December 31, 2010 | $ | 93,173 | $ | 43,202 | $ | 31,469 | $ | 29,956 | $ | 197,800 | ||||||||||
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|
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| |||||||||||
December 31, 2009 | $ | 8,259 | $ | 51,579 | $ | 15,677 | $ | 45,041 | $ | 120,556 | ||||||||||
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20. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables contain selected unaudited statement of operations information for each quarter of 20102011 and 2009.2010. The following information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period. Our business is affected by seasonality.
Unaudited quarterly results are as follows:
2010 Quarter Ended(1) | ||||||||||||||||
(in thousands, except per share amounts) | December 31, | September 30, | June 30, | March 31, | ||||||||||||
Revenue | $ | 91,477 | $ | 77,580 | $ | 71,347 | $ | 60,974 | ||||||||
Gross Profit | 35,060 | 28,667 | 26,972 | 21,620 | ||||||||||||
Income Before Income Taxes and Non-controlling Interests | 17,121 | 14,635 | 14,536 | 9,479 | ||||||||||||
Net Income | 19,553 | 11,884 | 17,643 | 7,094 | ||||||||||||
Net Income Attributable to Altisource | 16,786 | 9,832 | 16,346 | 6,307 | ||||||||||||
Net Income Per Share | ||||||||||||||||
Basic | $ | 0.67 | $ | 0.39 | $ | 0.65 | $ | 0.26 | ||||||||
Diluted | $ | 0.64 | $ | 0.37 | $ | 0.62 | $ | 0.25 | ||||||||
Weighted Average Shares Outstanding | ||||||||||||||||
Basic | 25,091 | 25,318 | 25,226 | 24,690 | ||||||||||||
Diluted | 26,183 | 26,544 | 26,247 | 25,663 |
2009 Quarter Ended(1) | ||||||||||||||||
(in thousands, except per share amounts) | December 31, | September 30, | June 30, | March 31, | ||||||||||||
Revenue | $ | 56,326 | $ | 54,064 | $ | 49,803 | $ | 42,619 | ||||||||
Gross Profit | 21,334 | 20,611 | 19,454 | 14,616 | ||||||||||||
Income Before Income Taxes and Non-controlling Interests | 8,956 | 12,092 | 10,009 | 6,519 | ||||||||||||
Net Income | 5,873 | 8,644 | 7,015 | 4,439 | ||||||||||||
Net Income Per Share | ||||||||||||||||
Basic | $ | 0.25 | $ | 0.36 | $ | 0.29 | $ | 0.18 | ||||||||
Diluted | $ | 0.24 | $ | 0.36 | $ | 0.29 | $ | 0.18 | ||||||||
Weighted Average Shares Outstanding | ||||||||||||||||
Basic | 24,083 | 24,050 | 24,050 | 24,050 | ||||||||||||
Diluted | 24,339 | 24,050 | 24,050 | 24,050 |
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2011 Quarter Ended(1) | ||||||||||||||||
(in thousands, except per share data) | December 31, | September 30, | June 30, | March 31, | ||||||||||||
Revenue | $ | 131,956 | $ | 109,793 | $ | 93,268 | $ | 88,670 | ||||||||
Gross Profit | 47,492 | 36,454 | 30,171 | 33,721 | ||||||||||||
Income Before Income Taxes and | ||||||||||||||||
Non-controlling Interests | 30,757 | 20,805 | 16,537 | 17,811 | ||||||||||||
Net Income | 28,191 | 18,962 | 14,690 | 16,124 | ||||||||||||
Net Income Attributable to Altisource | 25,731 | 17,171 | 13,385 | 14,825 | ||||||||||||
Net Income Per Share | ||||||||||||||||
Basic | $ | 1.09 | $ | 0.71 | $ | 0.54 | $ | 0.60 | ||||||||
Diluted | $ | 1.02 | $ | 0.67 | $ | 0.52 | $ | 0.57 | ||||||||
Weighted Average Shares Outstanding | ||||||||||||||||
Basic | 23,692 | 24,341 | 24,625 | 24,845 | ||||||||||||
Diluted | 25,142 | 25,489 | 25,773 | 25,928 | ||||||||||||
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements(continued)
September 30, | September 30, | September 30, | September 30, | |||||||||||||
2010 Quarter Ended(1) | ||||||||||||||||
(in thousands, except per share data) | December 31, | September 30, | June 30, | March 31, | ||||||||||||
Revenue | $ | 91,477 | $ | 77,580 | $ | 71,348 | $ | 60,974 | ||||||||
Gross Profit | 35,060 | 28,667 | 26,973 | 21,620 | ||||||||||||
Income Before Income Taxes and | ||||||||||||||||
Non-controlling Interests | 17,121 | 14,635 | 14,537 | 9,479 | ||||||||||||
Net Income | 19,553 | 11,884 | 17,644 | 7,094 | ||||||||||||
Net Income Attributable to Altisource | 16,786 | 9,832 | 16,347 | 6,307 | ||||||||||||
Net Income Per Share | ||||||||||||||||
Basic | $ | 0.67 | $ | 0.39 | $ | 0.65 | $ | 0.26 | ||||||||
Diluted | $ | 0.64 | $ | 0.37 | $ | 0.62 | $ | 0.25 | ||||||||
Weighted Average Shares Outstanding | ||||||||||||||||
Basic | 25,091 | 25,318 | 25,226 | 24,690 | ||||||||||||
Diluted | 26,183 | 26,544 | 26,247 | 25,663 |
(1) | ||
The sum of quarterly amounts, including per share amounts, may not equal amounts reported for |
- 80 -
None.
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation required by the 1934 Act, under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a-15(e) of the 1934 Act, as of December 31, 2010.2011. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of December 31, 2010,2011, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the 1934 Act. Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 20102011 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As a result of this assessment, management concluded that, as of December 31, 2010,2011, our internal control over financial reporting was effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Deloitte & Touche LLP has independently assessed the effectiveness of our internal control over financial reporting and its report is included herein.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 20102011 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Controls
Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
None.
- 81 -
The information required by this item is incorporated herein by reference to our definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act.
The information required by this item is incorporated herein by reference to our definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by this item is incorporated herein by reference to our definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act.
The information required by this item is incorporated herein by reference to our definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act.
The information required by this item is incorporated herein by reference to our definitive proxy statement to be filed pursuant to Regulation 14A under the Exchange Act.
- 82 -
(a) | The following documents are filed as part of this annual report. | |
1. | Financial Statements |
See Item 8 above.
2. | Financial Statement Schedules: |
Schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are not applicable, and therefore have been omitted.
3. | Exhibits: |
Exhibit Number | Exhibit Description | |
2.1 | Form of Separation Agreement between Altisource Portfolio Solutions S.A. and Ocwen Financial Corporation (incorporated by reference to Exhibit 2.1 of the Registrant’s Form 10-12B/A | ||||
3.1 | Articles of Incorporation of Altisource Portfolio Solutions S.A. (incorporated by reference to Exhibit 2.1 of the Registrant’s Form 10-12B/A | ||||
10.1 | Separation Agreement, dated as of August 10, 2009, by and between Altisource Portfolio Solutions S.A. and Ocwen Financial Corporation (incorporated by reference to Exhibit 10.1 of the Registrant’s Current Report on Form 8-K, as filed with the Commission on August 13, 2009) | ||||
10.2 | Tax Matters Agreement, dated as of August 10, 2009, between Altisource Solutions S.à r.l. and Ocwen Financial Corporation (incorporated by reference to Exhibit 10.2 of the Registrant’s Current Report on Form 8-K, as filed with the Commission on August 13, 2009) | ||||
10.3 | Employee Matters Agreement, dated as of August 10, 2009, between Altisource Solutions S.à r.l. and Ocwen Financial Corporation (incorporated by reference to Exhibit 10.4 of the Registrant’s Current Report on Form 8-K, as filed with the Commission on August 13, 2009) | ||||
10.4 | Technology Products Services Agreement, dated as of August 10, 2009, between Altisource Solutions S.à r.l. and Ocwen Financial Corporation (incorporated by reference to Exhibit 10.5 of the Registrant’s Current Report on Form 8-K, as filed with the Commission on August 13, 2009) | ||||
10.5 | Services Agreement, dated as of August 10, 2009, between Altisource Solutions S.à r.l. and Ocwen Financial Corporation (incorporated by reference to Exhibit 10.6 of the Registrant’s Current Report on Form 8-K, as filed with the Commission on August 13, 2009) | ||||
10.6 | Data Center and Disaster Recovery Services Agreement, dated as of August 10, 2009, between Altisource Solutions S.à r.l. and Ocwen Financial Corporation (incorporated by reference to Exhibit 10.7 of the Registrant’s Current Report on Form 8-K, as filed with the Commission on August 13, 2009) |
- 83 -
Exhibit Number | Exhibit Description | ||||
10.7 | Intellectual Property Agreement, dated as of August 10, 2009, by and between Altisource Solutions S.à r.l. and Ocwen Financial Corporation (incorporated by reference to Exhibit 10.8 of the Registrant’s Current Report on Form 8-K, as filed with the Commission on August 13, 2009) | ||||
10.8 | † | Form of Altisource Portfolio Solutions S.A. 2009 Equity Incentive Plan (incorporated by reference to Exhibit 10.8 of Amendment No. 1 to the Registration Statement on Form 10, as filed with the Commission on June 29, 2009) | |||
10.9 | † | Employment Agreement by and between Altisource Solutions S.à r.l. and William B. Shepro (incorporated by reference to Exhibit 10.9 of Amendment No. 1 to the Registration Statement on Form 10, as filed with the Commission on June 29, 2009) | |||
10.10 | † | Employment Agreement by and between Altisource Solutions S.à r.l. and Robert D. Stiles (incorporated by reference to Exhibit 10.10 of Amendment No. 1 to the Registration Statement on Form 10, as filed with the Commission on June 29, 2009) | |||
10.11 | † | Employment Agreement by and between Altisource Solutions S.à r.l. and Kevin J. Wilcox (incorporated by reference to Exhibit 10.11 of Amendment No. 1 to the Registration Statement on Form 10, as filed with the Commission on June 29, 2009) | |||
10.12 | Purchase and Sale Agreement, dated as of February 12, 2010, by and among Altisource Portfolio Solutions S.A., and the Equity Interest Holders of The Mortgage Partnership of America, L.L.C. and the Management Owners | ||||
10.13 | † | Form of Put Option Agreements | |||
10.14 | Form of Non-qualified Stock Option Agreement, pursuant to the 2009 Equity Incentive Plan (incorporated by reference to Exhibit 10.14 of the Company’s 10-K as filed with the Commission on February 18, 2011) | ||||
10.15 | First Amendment to the Transition Services Agreement, dated as of August 10, 2011, by and between Ocwen Financial Corporation and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.1 of the Company’s 8-K, as filed with the Commission on August 16, 2011) | ||||
Subsidiaries of the Registrant. | |||||
Consent of Independent Registered Public Accounting Firm (Deloitte & Touche LLP). | |||||
Section 302 Certification of the Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a). | |||||
Section 302 Certification of the Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a). | |||||
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |||||
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company's Annual Report on Form 10-K for the period ended December 31, 2011, is formatted in XBRL interactive data files: (i) Consolidated Statement of Operations for each of the years in the three-year period ended December 31, 2011; (ii) Consolidated Balance Sheet at December 31, 2011, and December 31, 2010; (iii) Consolidated Statement of Changes in Stockholders’ Equity and Invested Equity for each of the years in the three-year period ended December 31, 2011; (iv) Consolidated Statement of Cash Flows for each of the years in the three-year period ended December 31, 2011; and (v) Notes to Financial Statements (as provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Act of 1934). |
* | Filed herewith |
† | Denotes management contract or compensatory arrangement |
- 84 -
Date: February 18, 2011
Altisource Portfolio Solutions S.A. | ||||||||
By: | /s/ William B. Shepro | |||||||
Name: | William B. Shepro | |||||||
Title: | Director and Chief Executive Officer (Principal Executive Officer) | |||||||
By: | ||||||||
/s/ Robert D. Stiles | ||||||||
Name: | Robert D. Stiles | |||||||
Title: | Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934 this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated as of February 18, 2011.
Signature | Title | Date | |||
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/s/ William C. Erbey William C. Erbey | Chairman of the Board of Directors | February | ||||
/s/ William B. Shepro William B. Shepro | Director and Chief Executive Officer (Principal Executive Officer) | February | ||||
/s/ W. Michael Linn W. Michael Linn | ||||||
Director | February | |||||
/s/ Roland Müller-Ineichen Roland Müller-Ineichen | Director | February | ||||
/s/ Timo Vättö Timo Vättö | Director | February | ||||
/s/ Robert D. Stiles Robert D. Stiles | Chief Financial Officer | |||||
(Principal Financial Officer and Principal Accounting Officer) | ||||||
February 16, 2012 |
- 86 -83