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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
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xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 20112012
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
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) |
| Not Applicable (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 ¨x No xo
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 ¨o No x
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 x No ¨o
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 x No ¨o
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 this Form 10-K.x
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 x | | | | | | Accelerated filer o |
Large accelerated filer
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| | Accelerated filer
| | x
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Non-accelerated filer o | | | Smaller reporting company o |
Non-accelerated filer
| | ¨ (Do(Do not check if a smaller reporting company)
| | Smaller reporting company
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨o No x
The aggregate market value of the voting stock held by nonaffiliates of the registrant as of June 30, 20112012 was $662,418,290$1,269,084,321 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, 2012,2013, there were 23,405,12323,426,763 outstanding shares of the Registrant’s shares of beneficial interest (excluding 2,007,6251,985,985 shares held as treasury stock).
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 to be held on May 15, 2013 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, 2011.2012.
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FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K and certain information incorporated herein by reference contain forward-looking statements within the “safe harbor”safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements may relate to, among other things, future events or our future performance or financial condition. Words such as “anticipate”, “intend”, “expect”, “may”, “could”, “should”, “would”, “plan”, “estimate”, “seek”“believe”, “believe”“predict”, “potential”, or “continue” or the negative of these terms and similar expressionscomparable terminology are intended to identify such forward-looking statements. Forward-looking statements are not guarantees of future performance and involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially. Important factors that could cause actual results to differ materially from those suggested by the forward-looking statements include, but are not limited to, the risks discussed in Item 1A of Part 1I “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 no obligation (and expressly disclaim any obligation) to update or alter any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or change in events, conditions or circumstances on which any such statement is based.
PART I
Except as otherwise indicated or unless the context requires otherwise, “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 ITEM 1.
| BUSINESS |
The Company
Altisource Portfolio Solutions S.A., together with its subsidiaries, is a global provider of services focused on high value,high-value, technology-enabled, knowledge-based functionssolutions principally related to real estate and mortgage portfolio management, asset recovery and customer relationship management. We enable our clients to achieve their goals by leveraging our process management, innovative technology, econometrics and consumer behavior practice and high-quality, cost effective global human resources.
We are publicly traded on the NASDAQ Global Select Market under the symbol ASPS.“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. On August 10, 2009, we became a stand-alone public company in connection with our separation from Ocwen Financial Corporation (“Ocwen®”) (the “Separation”“Separation from Ocwen”). Prior to the date ofour Separation from Ocwen, our businesses were wholly-owned subsidiaries of Ocwen.
2011 Achievements
During 2011, we achieved several milestones:2012 Highlights
Our 2012 highlights include:
·Recognized revenue of $423.7$568.4 million, representing a 41%34% increase over the year-endedyear ended December 31, 2010.2011;
·Recognized Service Revenueservice revenue of $334.8$466.9 million representing a 36%39% increase over the year-endedyear ended December 31, 2010.2011;
·Recognized diluted earnings per share of $2.77$4.43 representing a 47%60% increase over the year-endedyear 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:2011;
·Generated cash flows from operations of $116.5 million;
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Returned $61.1 million to shareholders throughTable of Contents
·Relaunched the repurchase of 1.6 million sharesconsumer real estate portal under the stock repurchase program at an average pricenew HubzuTM brand; over 25,000 real estate owned (“REO”) assets were sold through Hubzu during the year;
·Recognized origination related service revenue of $37.57 per share.$37.8 million, representing a 72% increase over the year ended December 31, 2011;
Expended $16.4 million on capital projects to facilitate·Completed the spin-offs of Altisource Residential Corporation (“Residential”) and Altisource Asset Management Corporation (“AAMC”) into two separate publicly traded companies as further described in “Separation of Residential Asset Businesses” below and
·Prepared for 2013 growth from Ocwen’s December 28, 2012 acquisition of operations, primarily asHomeward Residential Holdings, Inc. (“Homeward Residential”) and their anticipated acquisition of a resultportion of Residential Capital, LLC’s (“ResCap”) servicing portfolio.
Separation of Residential Asset Businesses
On December 21, 2012, we completed the distribution of two wholly-owned subsidiaries via the spin-off of two separate companies, Residential and AAMC (the “Separation of the continued growthResidential Asset Businesses”). Residential’s common stock is listed on the New York Stock Exchange under the symbol “RESI,” and AAMC’s common stock is listed on the OTCQX market tier operated by OTC Markets Group, Inc. (the “OTC Market”) under the symbol “AAMC”. We distributed all of the shares of Residential common stock and AAMC common stock to our shareholders of record as of December 17, 2012. Residential and AAMC plan to enter the growing residential loan servicing portfoliosingle-family rental market. Residential will acquire residential related assets, and AAMC will provide asset management and advisory services to Residential. Residential and AAMC are further described in Item 7 of Ocwen, our largest customer.Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
| • | 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.
Acquired the assembled workforce of a sub-contractor (“Tracmail”) in India that performs asset recovery services.
Reportable Segments
We classify our businesses into the following three reportable 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;
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| �� | Financial Services principally consists of unsecured asset recovery and customer relationship management; and
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| • | 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.
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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.
We conduct portions of our operations in all 50 states and in three countries outside of the United States.
Mortgage Services
Our Mortgage Services segment continues to be the primary driver of growth. This segment generates revenue principally by providing: Provides services that span the mortgage and real estate lifecycle and are typically outsourced by loan servicers, originators and investors in single family homes. We provide these services primarily for loan servicers typically outsource to third parties. Our services are provided using our national platform and span the lifecycle of a mortgage loan. Our services are primarily centered on our relationship with Ocwen, but weportfolios serviced by Ocwen. We also have longstanding relationships with some of the leading capital marketmarkets firms, commercial banks, hedge funds, insurance companies and lending institutions.
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 property has been foreclosed, we provide REO preservation, REO asset management, REO valuation, REO brokerage, REO closing and REO title insurance services.
While our initial focus has principally been related to default services, we are also committed to developing our services to support mortgage originators and correspondent lenders. In February 2010, we acquiredbankers. Within the Mortgage Partnership of America, L.L.C. (“MPA™”). MPA is the manager of a national alliance of community mortgage bankers and correspondent lenders which does business as Lenders One. We believe MPA’s 210 plus member companies originated approximately 8% of the total U.S. residential mortgage originations in 2011. Further, in 2011, we co-formed Correspondent One which once fully operational will provide members of Lenders One additional avenues to sell their loans beyond Lenders One’s preferred investor arrangements and the members’ own network of loan buyers. We anticipate this will result in improved profitability for the members and facilitate the sale of our services to the members.
In 2011, we reorganized our reporting structure within this segment in that certain services originally part of Component Services and Other are now classified as part of Customer Relationship Management in our Financial 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.
The table below presents revenues for our Mortgage Services segment, forwe provide the past three annual periods:following services:
| | | 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 | |
| | | | | | | | | | | | |
Total Revenue | | $ | 311,921 | | | $ | 187,133 | | | $ | 87,801 | |
| | | | | | | | | | | | |
| | | |
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 | |
| | | | | | | | | | | | |
Total | | $ | 223,184 | | | $ | 135,655 | | | $ | 74,089 | |
| | | | | | | | | | | | |
| | | |
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 | | | | — | |
| | | | | | | | | | | | |
Total | | $ | 80,124 | | | $ | 44,550 | | | $ | 16,077 | |
| | | | | | | | | | | | |
(1) | Reimbursable Expenses include costs we incur that we pass through to our customers without any mark-up.
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Asset Management Servicesmanagement . Principally includes— Asset management services principally include property preservation, property inspection, REO asset management, our consumer real estate portal and REO brokerage.brokerage operations. With the Separation of the Residential Asset Management Services has been the largest contributorBusinesses, we plan 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 preservationmanagement, lease management and renovation management services and an increase in pre-foreclosure inspection services.for single-family rental properties.
Origination Management Services. Principally includes MPA, our contract underwriting business and our origination fulfillment operations currently under development.
Residential Property Valuation Services.property valuationWe provide our customers with — Residential property valuation services principally include traditional appraisal products through our licensed appraisal management company working with our network of experienced appraisers and our exclusive ordering system. Customers may also order alternative valuation products primarily through our system and network of real estate professionals. We also offer customers the ability to outsource all or part of their appraisalgenerally provide these services for loan servicers and valuation management oversight functions to us.mortgage bankers.
Closing and Insurance Servicesinsurance services. We provide — Closing and insurance services principally include an array of title search, closing services (e.g., document preparation) and title agency services, (e.g.,including document preparation, pre-foreclosure and REO title search,searches, escrow and title insurance)insurance, program management and other insurance related services applicable to the residential foreclosure processloan servicers. We also began providing closing and the sale of residential property. During 2011, we focused on increasing our referral capture rate in our operational states and rolling out insured title agency services nationwide, similar to what we accomplished with our title search and asset management businesses in 2010.for loan originations.
Default Management Services.management services We provide— Default management services principally include foreclosure trustee services for loan servicers and non-legal back-office supportprocessing and related services for and under the supervision of foreclosure, bankruptcy and eviction attorneysattorneys.
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Origination management services - Origination management services principally include Mortgage Partnership of America, L.L.C.’s (“MPA™”) operations and our contract underwriting and quality control businesses. MPA serves as wellthe manager of Best Partners Mortgage Cooperative, Inc. (“BPMC™”) doing business as foreclosure trustee services.Lenders One Mortgage Cooperative (“Lenders One®”), 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. We do not execute or notarize foreclosure affidavitsprovide other origination related services in the residential property valuation business. In addition, some of debt or lost note affidavits.the origination related reseller businesses, including the flood certification business, are included in the Technology Services REALSuiteTM business.
Financial Services
Our Financial Services segment provides: Provides collection and customer relationship management services primarily to debt originators and servicers (e.g., credit card, auto loans,lending, retail credit, mortgages) and the utility and insurance industries. Our leadership team for this segment is focused on disciplined floor management, delivering more services over our global delivery platform, expanding our quality and analytical initiatives and investing in new technology. Our global delivery platform consists of highly trained specialists in various geographic regions.
The following table represents revenues for ourWithin the Financial Services segment, forwe provide the past three annual periods:following services:
| | | 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 | |
| | | | | | | | | | | | |
| | $ | 266 | | | $ | 166 | | | $ | 98 | |
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Reimbursable Expenses (included in Revenue)(1): | | | | | | | | | | | | |
Asset Recovery Management | | $ | 1,950 | | | $ | 2,899 | | | $ | — | |
| | | | | | | | | | | | |
(1) | Reimbursable Expenses include costs we incur that we pass through to our customers without any mark-up.
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Asset Recovery Management.recovery management We provide— Asset recovery management principally includes post-charge-off consumer debt collection (e.g., credit cards, auto loans, second mortgages)services on a contingentcontingency fee basis where we are paid a percentage of the recovered debt.basis.
Customer Relationship Management.relationship managementWe provide — Customer relationship management includes 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. In addition, we provideas well as insurance and claims processing, call center services and analytical support for which we are paid based upon the number of employees utilized.
Technology Servicessupport.
Technology Services comprises: Comprises our REALSuite™TM of applications as well as our ITinformation technology (“IT”) infrastructure services. We onlycurrently provide our IT infrastructure services to Ocwen, Home Loan Servicing Solutions (“HLSS”), Correspondent One S.A. (“Correspondent One”), Residential, AAMC and ourselves. In 2011, we began to report our Consumer Analytics group within Technology Services. Previously this group was included in Corporate.
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 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 segment.
The following table presents revenues for our Technology Services segment for the past three annual periods:
| | | 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 | |
| | | | | | | | | | | | |
| | $ | 21,812 | | | $ | 19,167 | | | $ | 20,710 | |
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The REALSuite platform provides a fully integrated set of software applications and technologies that manage the end-to-end lifecycle for residential and commercial mortgage loan servicing including the automated management and payment of a distributed network of vendors. A brief description of the key components of the REALSuite software products is described below:
REALServicingREALServicing®® — anAn 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, a dialogue engine and robust reporting capabilities. The solution spans the loan servicing cyclelifecycle from loan boarding to satisfaction including all collections, payment processing and reporting. We also offer REALSynergy®, an enterprise commercial loan servicing system.
REALTransREALTrans®®— aA patented electronic business-to-business exchange that automates and simplifies the ordering, tracking and fulfilling of 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.
REALRemitREALRemit®® — aA patented electronic invoicing 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 management, application support, network management, telephony, data 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: Includes costs related to corporate support functions including executive, finance, legal, human resources, vendor management, risk and Eliminationssix sigma and also includes eliminations of transactions between the reporting segmentssegments.
We classify revenue in three categories: service revenue, revenue from reimbursable expenses and this segment also includesnon-controlling interests. In evaluating our performance, we focus on service revenue which consists of amounts attributable to our fee based services. Reimbursable expenses and non-controlling interests are pass-through items for which we earn no margin. Reimbursable expenses consist of amounts we incur on behalf of our customers in performing our fee based services, but we pass such costs recognizeddirectly on to our customers without any additional markup. Non-controlling interests represent the earnings of Lenders One, a consolidated entity not owned by us relatedAltisource. It is included in revenue and reduced from net income to corporate support functions such as executive, finance, legal, human resources, vendor management and six sigma. Priorarrive at net income attributable to the dateAltisource.
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Table of Separation, this segment included expenditures recognized by us related to the Separation.Contents
Customers
We provide services to some of the most respected organizations in their industries, including one of the U.S.’United States’ largest sub-prime servicers, utility companies, commercial banks, servicers, investors, mortgage bankers, financial service companies and hedge funds across the U.S.United States.
Our three largest customers in 20112012 accounted for 71% of our total revenue. Our largest customer, is Ocwen, which accounted for 58%60% of Altisource’sour total revenue in 2011.2012. During 2011, Ocwen successfully grew its2012, Ocwen’s residential loan servicing portfolio primarily through acquisitions togrew from $102.2 billion in unpaid principal balances as of December 31, 2011. In October 2011, Ocwen announced it had entered into a definitive agreementbalance (“UPB”) to acquire a portfolio from a subsidiary of Morgan Stanley Mortgage Capital Holdings, LLC which would result in a net gain of approximately $16.0$203.7 billion in unpaid principal balance (the “Saxon” portfolio). In November 2011,UPB. The 2012 growth is primarily from Ocwen’s acquisition of Homeward Residential in the fourth quarter and the acquisition of mortgage servicing rights and related assets from Saxon Mortgage Services, Inc. and from JP Morgan Chase portfolios in the second quarter of 2012. Additionally, in October 2012, Ocwen entered into an agreement with JPMorgan Chase, N.A. (“JPMCB”)and Walter Investment Management Corporation presented the highest bid in the auction of ResCap’s servicing portfolio. We expect Ocwen to acquire a portfolio of $15.0 billion in unpaid principal balance. Both of these transactions are expected to boardclose the ResCap transaction in the first halfquarter of 2012. Additionally, Ocwen continues to evaluate additional2013. Excluding the approximately $120 billion of Ally Bank subservicing and master servicing, the ResCap transaction will increase Ocwen’s servicing portfolio acquisitions.
Following the date of Separation,UPB by approximately $203.7 billion. With these servicing platform acquisitions, Ocwen is now positioned as the fifth largest mortgage servicer in the United States. As the structured shift of servicing to non-banks continues, we expect Ocwen to continue to grow. Ocwen’s highly scalable platform and low cost operating structure positions it to be very competitive as additional mortgage servicing portfolios become available.
Ocwen, including its wholly owned subsidiary, Ocwen Mortgage Servicing Inc. (“OMS”), are contractually obligated to purchase certain Mortgage Servicesmortgage services and Technology Servicestechnology services from us under service agreements. These agreements extend until August 2017 subject to termination under certain provisions.In October 2012, the Ocwen isagreement was extended by three years through 2020. Separately, we signed a similar agreement in October 2012 with OMS effective through 2020. Ocwen and OMS are not restricted from redeveloping these services. We settle amounts with Ocwen and OMS on a daily, weekly or monthly basis baseddepending upon the nature of the servicesservice and when the service is completed.provided.
With respect to Ocwen, related
Related party revenues consistrevenue consists of revenuesrevenue earned directly from Ocwen and revenuesits subsidiaries and revenue earned from the loans serviced by Ocwen or its subsidiaries when Ocwen determines the service provider. We earn additional revenue on the loan portfolios serviced by Ocwen or its subsidiaries that are not considered related party revenues asrevenue when a party other than Ocwen does not have the ability to decideselects the service provider. As a percentage of each of our segment revenuesrevenue and as a percentage of consolidated revenues,revenue, related party revenue was as follows for the yearyears ended December 31:
| | | September 30, | | | | September 30, | | | | September 30, | | |
| | | For the Years Ended December 31, | | |
| | | 2011 | | 2010 | | 2009 | | | 2012 | | 2011 | | 2010 | |
| | | | | | | | |
Mortgage Services | | | 72 | % | | | 73 | % | | | 84 | % | | 68 | % | 72 | % | 73 | % |
Technology Services | | | 39 | | | | 37 | | | | 44 | | | 42 | % | 39 | % | 37 | % |
Financial Services | | | < 1 | | | | < 1 | | | | < 1 | | | < 1 | % | < 1 | % | < 1 | % |
Consolidated Revenues | | | 58 | % | | | 51 | % | | | 47 | % | |
Consolidated revenue | | | 60 | % | 58 | % | 51 | % |
We record revenuesrevenue 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 ratesfees Ocwen pays to other service providers; fees commensurate with market surveys prepared by unaffiliated firms; and pricesfees charged by our competitors.
Sales and Marketing
We have experienced sales personnel and relationship managers with subject matter 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.
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From a sales and marketing perspective, our primary focus is supporting the growth of our largest customer, Ocwen, expanding relationships with existing MPA 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, 2011,2012, we have been awarded one patent that expires in 2023 and threetwo patents that expire in 2024. The U.S. Patent Office has also notified us of the allowance of a pending U.S. Patent Application.2024 and five patents that expire in 2025. In addition, Altisource haswe have 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 eleveneight other countries or groups of countries. These trademarks generally can be renewed indefinitely.indefinitely provided they are being used.
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, trademarks, copyrights, trade secrets trademarks and other intellectual property rights.
Industry and Competition
The industry verticals in which we engage are highly competitive and generally consist of a few national vendors as well as a large number of regional, local or in-house providers resulting in a fragmented market with disparate service offerings. From an overall perspective, we compete with the global business process outsourcing firms. Our Mortgage Services segment competes with national and regional third party service providers and in-house servicing operations of large mortgage lenders and servicers. Our Financial Services segment competes with other large receivables management companies as well as a fragmented group of smaller companies and law firms focused on collections. Our Technology Services segment competes with data processing and software development companies.companies and in-house technology and software operations of other loan servicers.
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 sizedlarge-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 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 servicesservices; our ability to recruit and retain software and other technical employees and the cost of obtaining, maintaining and enforcing of our patents.
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Employees
As of December 31, 2011,2012, we had the following number of employees:
| | | September 30, | | | | September 30, | | | | September 30, | | | | September 30, | | |
| | | United States | | | India | | | Other | | | Consolidated
Altisource | | | United States | | India | | Other | | Consolidated
Altisource | |
| | | | | | | | | | |
Mortgage Services | | | 228 | | | | 2,853 | | | | 4 | | | | 3,085 | | | 277 | | 2,054 | | 24 | | 2,355 | |
Financial Services | | | 593 | | | | 1,678 | | | | — | | | | 2,271 | | | 651 | | 1,613 | | — | | 2,264 | |
Technology Services | | | 47 | | | | 552 | | | | — | | | | 599 | | | 80 | | 647 | | — | | 727 | |
Corporate | | | 46 | | | | 341 | | | | 65 | | | | 452 | | | 50 | | 364 | | 10 | | 424 | |
| | | | | | | | | | | | | |
Total Employees | | | 914 | | | | 5,424 | | | | 69 | | | | 6,407 | | |
| | | | | | | | | | | | | |
Total employees | | | 1,058 | | 4,678 | | 34 | | 5,770 | |
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 ServicesServices’ asset recovery revenue tends to be higher in the first quarter, as borrowers may utilize tax refunds and bonuses to pay debts, and generally declines throughout the rest of the year. Mortgage Services revenue is impacted by REO sales which tend to be at their lowest level during fall and winter months and highest during spring and summer months.
Stock Repurchase Plan
In May 2012, our shareholders approved a new stock repurchase program, which replaced the previous stock repurchase program. Under the new plan, we are authorized to purchase up to 3.5 million shares of our common stock in the open market in addition to amounts previously purchased under the prior plan. From authorization of the prior plan in May 2010 through December 31, 2012, we purchased approximately 2.5 million shares of our common stock in the open market at an average price of $37.49 per share. During the year ended December 31, 2012, we purchased 0.3 million shares of common stock at an average price of $63.25 per share. Since no common stock was repurchased following the approval of the new plan, 3.5 million shares of common stock remain available for repurchase under the plan. Luxembourg law limits share repurchases to approximately the balance of Altisource Portfolio Solutions S.A.’s retained earnings less treasury shares. The distribution of Residential and AAMC to our shareholders reduced our retained earnings which will limit our ability to repurchase shares for a period of time. Our debt agreement also contains limits on our ability to repurchase our common stock which will limit the amount we can spend on share repurchases in any year and may prevent repurchases in certain circumstances.
Growth Initiatives
During 2012, we focused on providing high quality services to Ocwen’s growing servicing portfolio while intensifying our efforts on our strategic initiatives to diversify and expand our revenue base. Because of our high margins and low capital requirements, we are very unique in that the faster we grow our revenue, the faster our net free cash flow grows. Our 2013 strategic growth initiatives are:
·maintaining and growing our services provided to Ocwen as it continues to grow its residential loan servicing portfolio and residential loan origination platform;
·growing our origination related services by leveraging our acquisition of MPA;
·providing property management, lease management and renovation management services for single-family home rentals;
·deploying Hubzu, our consumer real estate portal to the distressed and non-distressed home sales market;
·investing in our next generation software and
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·growing the Financial Services segment’s earnings.
These initiatives are further described in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
Government Regulation
Our businesses are subject to extensive laws and regulations by federal, state and local governmental authorities including the Federal Trade Commission (“FTC”), the Consumer Financial Protection Bureau (“CFPB”), the Securities and Exchange Commission (“SEC”) and the state agencies that license our mortgage services and collection entities and the SEC.entities. 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 (“RESPA”), the Truth in Lending Act (“TILA”), the Fair Credit Reporting Act, the Telephone Consumer Protection Act, the Homeowners Protection Act, the California Homeowner’s Bill of Rights and the SAFESecure and Fair Enforcement for Mortgage Licensing (“SAFE”) Act. These requirements can and do change as statutes and regulations are enacted, promulgated or amended. One such recently enacted regulation is the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). The Dodd-Frank Act is extensive and includes reform of the regulation and supervision of financial institutions, as well as the regulation of derivatives, capital market activities and consumer financial services. Included in the Dodd Frank Act, among other things, is the creation of the Consumer Financial Protection Bureau, a new federal entity responsible for regulating consumer financial services and products. Title XIV of the Dodd-Frank Act contains the Mortgage Reform and Anti-Predatory Lending Act (“Mortgage Act”). The Mortgage Act imposes a number of additional requirements on lenders and servicers of residential mortgage loans by amending and expanding certain existing regulations. 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. The Mortgage Act generally requires that implementing regulations be issued before many of its provisions are effective. Therefore, many of these provisions in the Mortgage Act will not be effective until 2013 or early 2014.
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 (“FCPA”) 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 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”).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-03301-800-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 be deemed incorporated by reference in this report.
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ITEM 1A.RISK FACTORS
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 Business and Industry
Our continuing relationship with Ocwen may inhibit our ability to obtain and retain other customers that compete with Ocwen.
As of December 31, 2011,2012, our chairmanChairman owns or controls more than 13% of Ocwen’s common stock and 23% of our common stock. We derived 58%60% of our revenuesrevenue in 20112012 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 affect our business and results of operations.
We currently generate approximately 58%60% of our revenue from Ocwen. Following the Separation from Ocwen, Ocwen is contractually obligated to purchase certain services from our Mortgage Services and Technology Services segments under service agreements that extend for eight years from the date of Separationthrough August 2020 subject to termination under certain provisions.
While no other individual client represents more than 10% of our consolidated revenues,revenue, 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 revenuesrevenue 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 thatwhich 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
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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 solutionsWe have a long salesales cycle for many of our services and are subjecttechnology solutions and if we fail to developmentclose sales after expending significant time and obsolescence risks.resources to do so, our business, financial condition, and results of operations may be adversely affected.
Many
We may experience a long sales cycle for developing certain services. We may expend significant time and resources in pursuing a particular service or customer that does not generate revenue.
In addition, 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
Delays due to the length of our sales cycle or more of the foregoing occurrencescosts incurred that do not result in sales 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,FTC, the CFPB, the SEC and the state agencies that license certain of our mortgage related services and collection services and the SEC.services. 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 Telephone Consumer Protection Act, the Homeowners Protection Act, the SAFECalifornia Homeowner’s Bill of Rights, the Secure and Fair Enforcement for Mortgage Licensing Act, the Mortgage Reform and Anti-Predatory Lending 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 in the “Item 1. Business, Government RegulationRegulation” section above)in Item 1 of Part I, “Business”). 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 theour business as it is currently conducted.
We are subject to certain additional certain federal, state and local consumer protection provisions.regulations. We also are subject to licensing and regulation as a mortgage services provider, mortgage origination underwriter, valuation provider, appraisal management company, asset manager, property manager, title insurance agency, other insurance related services provider, real estate broker and/or debt collector in a number of states. We are subject to audits and
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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.
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. These amounts are held in escrow for limited periods of time, generally consisting of a few days, and 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 we would recover the funds deposited, whether through Federal Deposit Insurance Corporation coverage, private insurance or otherwise.
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 / 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.
Our debt makes us more sensitive to the effects of economic change; ourIf financial institutions atlevel of debt and provisions in our debt agreements could limit our ability to reactto changes in the economy or our industry.
Our debt makes us more vulnerable to changes in our results of operations because a portion of our cash flow from operations is dedicated to servicing our debt and is not available for other purposes. Additionally, increases in interest rates will negatively impact our cash flows as the interest on our debt is variable. The provisions of our debt agreement could have other negative consequences to us including the following:
·limiting our ability to borrow money for our working capital, capital expenditure and debt service requirements or other general corporate purposes;
·limiting our flexibility in planning for, or reacting to, changes in our operations, our business or the industry in which we hold escrow funds fail, it could havecompete and
·placing us at a material adverse impactcompetitive disadvantage by limiting our ability to invest in the business.
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Our ability to make payments on our company.indebtedness depends on our ability to generate cash in the future. If we do not generate sufficient cash flow to meet our debt service and working capital requirements, we may need to seek additional financing or sell assets. This may make it more difficult for us to obtain financing on terms that are acceptable to us, or at all. Without any such financing, we could be forced to sell assets to make up for any shortfall in our payment obligations under unfavorable circumstances. If necessary, we may not be able to sell assets quickly enough or for sufficient amounts to enable us to meet our obligations.
In addition, our debt agreement contains covenants that limit our flexibility in planning for or reacting to changes in our business and our industry including limitations on incurring additional indebtedness, making investments, granting liens and merging or consolidating with other companies. Complying with these covenants may impair our ability to finance our future operations or capital needs or to engage in other favorable business activities.
Our failure to comply with the covenants contained in our debt agreement, including as a result of events beyondour control, could result in an event of default which could materially andadversely affect our operating results and our financial condition.
We hold customers’ assets in escrow at various financial institutions, pending completion of certain real estate and
Our 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 leadagreement requires us to become liable forcomply with various operational, reporting and other covenants that limit us from engaging in certain types of transactions. If there were an event of default under our debt agreement that was not cured or waived, the funds owedholders of the defaulted debt could cause all amounts outstanding with respect to third parties,that debt to be immediately due and there is no guaranteepayable. We cannot assure you that our assets or cash flow would be sufficient to fully repay borrowings under our outstanding debt instruments, either upon maturity or if accelerated, upon an event of default or that we would recoverbe able to refinance or restructure the funds deposited, whether through Federal Deposit Insurance Corporation coverage, private insurancepayments on those debt instruments.
Our financial results could be negatively affected if Ocwen fails to repay our loan to them as expected.
On December 27, 2012, we loaned $75.0 million to Ocwen under a senior unsecured term loan agreement (the “Ocwen Term Loan”). If Ocwen defaults on our loan or otherwise.
on debt senior to our loan, or in the event of insolvency, liquidation, dissolution, reorganization, or bankruptcy of Ocwen, holders of debt instruments ranking senior to our loan would typically be entitled to receive payment in full before we receive any distribution in respect of our loan. After repaying such senior creditors, Ocwen may not have any remaining assets to use for repaying its obligation to us.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 and attract new customers 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.services and
·attract other servicers and non-distressed home sellers as new customers on our consumer real estate portal.
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
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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.
Our 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.
Our business is dependent on the trend toward outsourcing.
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 companiesbusinesses that could complement our business including thebusiness. In addition to considering acquisitions that could offer us greater access in our current markets, we also consider acquisition of entities offering greater access and expertise in other asset types and markets that are related to ours but that we do not currently serve. We also intend to acquire certain fee based businesses from Ocwen in connection with their acquisitions of servicing platforms. 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 financial resources along with system conversions and the inability to maintain 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 our profitability.
We may be unable to achieve some or all of the benefits we expect from the separation of Residential.
We may not be able to achieve the strategic and financial benefits we expect from the spin-off of Residential or such benefits may be delayed. These outcomes may occur if, among other things, Residential is not successful in executing its strategy to acquire non-performing loan portfolios with a portion of the portfolios converting to single-family rental assets or if Residential is not successful in raising equity and debt to grow.
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, atIndia and the Philippines. As of December 31, 2011,2012, over 5,4004,600 of our employees were based in India.India and the Philippines. These countries are subject to relatively higher degrees of political and social instability and may lack the infrastructure to withstand political unrest or natural disasters. Such disruptions can decrease efficiency and increase our costs in these countries. Weakness of the U.S.United States dollar in relation to the currencies used in these foreign countries may also reduce the savings achievable through this strategy. Furthermore, the practice of utilizing labor based in foreign countries has come under increased scrutiny in the United States and, as a result, some of our customers may require us to use labor based in the United States. We may not be able to pass on the increased costs of higher-priced United States-based labor to our customers which ultimately could have an adverse effect on our results of operations.
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In many foreign countries, particularly in those with developing economies, it is common to engage in business practices that are prohibited by laws and regulations applicable to us, such as the Foreign Corrupt Practices Act (“FCPA”).FCPA. Any violations of the FCPA or local anti-corruption laws by us, our subsidiaries or our local agents, could have an adverse effect on our business and reputation and result in substantial financial penalties or other sanctions.
Any political or economic instability in these countries could result in our having to replace or reduce these labor sources which may increase our labor costs and have an adverse impact on our results of operations.
Altisource is a Luxembourg company and it may be difficult to enforce judgments against it or its directors and executive officers.
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.United States courts against Altisource or its directors based on the civil liability provisions of the U.S.United States securities laws or to enforce, in Luxembourg, judgments obtained in other jurisdictions including the United States.
Risks Related to Our Employees
Our success depends on our directors, executive officers and key personnel
Our success is dependent on the efforts and abilities of our directors, executive officers and other key employees many of whom have significant experience in the real estate and mortgage industries. In particular we are dependent on the services of William C. Erbey, our Chairman of the Board, and William B. Shepro, our Chief Executive Officer, as well as the services of key personnel at each of our segments. The loss of the services of any of these directors, executives or key personnel, for any reason, could have a material adverse effect upon our business, operating results and financial condition.
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 and software 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.
We could have conflicts with Ocwen, HLSS, Residential or AAMC, and the Chairman or other members of our Board of Directors could have conflicts of interest due to his or their relationship with Ocwen, HLSS, Residential or AAMC, which may be resolved in a manner adverse to us.
Conflicts may arise between Ocwen, HLSS, Residential or AAMC and us as a result of our ongoing agreements and the nature of our respective businesses. Our Chairman is also the Chairman of Ocwen, HLSS, Residential and AAMC. As a result, he has obligations to us as well as to these other entities and may have conflicts of interest with respect to matters potentially or actually involving or affecting us and Ocwen, HLSS, Residential or AAMC, as the case may be.
We will also seek to manage these potential conflicts through dispute resolution and other provisions of our agreements with Ocwen, HLSS, Residential or AAMC and through oversight by independent members of our Board of Directors. There can be no assurance that such measures will be effective, that we will be able to resolve all conflicts with Ocwen, HLSS, Residential or AAMC or that the resolution of any such conflicts will be no less favorable to us than if we were dealing with a third party.
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ITEM 1B. | UNRESOLVED STAFF COMMENTS |
ITEM 1B.UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Our principal executive offices are located in leased office space in Luxembourg, Grand Duchy of Luxembourg. A summary of our principal leased office space as of December 31, 20112012 and the segments primarily occupying each location is as follows:
| | | | | | | | |
|
| Corporate
and Support
Services
| Mortgage
Services | Financial
Services
| Financial
Services | Mortgage
Services
| Technology
Services |
| Technology
Corporate and
Support Services |
| | | | | | | | |
Luxembourg, Luxembourg | | X | | | | X | | |
| | | | X |
| | | | | | | | |
United States | | | | | | | | |
Atlanta, GA | | X | | X | | X | | X |
Boston, MA | | X | | | | X | | |
Irvine, CA | | X | | | | X | | |
Sacramento, CA | | | | X | | | | |
St. Louis, MO | | X | | | | X | | |
Tempe, AZ | | | | X | | | | |
Vestal, NY | | | | X | | | | |
| | | | |
India
| | | | | | | | |
Pasay City, Philippines | | X | | | | X | | |
| | | | | | | | |
India | | | | | | | | |
Bangalore | | X | | X | | X | | X |
Goa | | | | X | | X | | |
Mumbai | | X | | X | | 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.
ITEM 3.LEGAL PROCEEDINGS ITEM 3.
| LEGAL PROCEEDINGS |
We are, from time to time, 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 to the extent 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 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. Item 1A of Part I, “Risk Factors”Factors” above.
ITEM 4. | MINE SAFETY DISCLOSURES |
ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.
16
Table of ContentsPART II
PART II
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES ITEM 5.
| MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Market Information
Our common stock is listed on the NASDAQ Global Select Market under the symbol of “ASPS”. 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:
| | | September 30, | | | | September 30, | | | 2012 | |
| | | 2011 | | |
Quarter Ended | | Low | | | High | | |
Quarter ended | | | Low | | High | |
| | | | | | |
December 31 | | $ | 34.41 | | | $ | 50.70 | | | $ | 84.56 | | $ | 124.33 | |
September 30 | | | 31.79 | | | | 37.61 | | | 70.70 | | 91.06 | |
June 30 | | | 30.49 | | | | 36.89 | | | 52.35 | | 73.23 | |
March 31 | | | 28.51 | | | | 30.68 | | | 48.55 | | 64.78 | |
| | | | 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 | | |
| | 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 | |
| | | | | | | |
The number of holders of record of our common stock as of January 31, 20122013 was 97.87. 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 payanticipate paying any cash dividends in the foreseeable future. Additionally, the payment of cash dividends may be limited by Luxembourg law and by covenants in our debt agreements.
Issuer Purchases of Equity Securities
On
In May 19, 2010,2012, our shareholders approved a new stock repurchase program, which replaced the previous stock repurchase program. Under the new plan, we are authorized us to purchase up to 3.83.5 million shares of our common stock in the open market. The following table presents information relatedmarket in addition to our repurchasesamounts previously purchased under the prior plan. From authorization of the prior plan in May 2010 through December 31, 2012, we purchased approximately 2.5 million shares of our equity securities duringcommon stock in the three monthsopen market at an average price of $37.49 per share. During the year ended December 31, 2011:2012, we purchased 0.3 million shares of common stock at an average price of $63.25 per share. Since no common stock was repurchased following the approval of the new plan, 3.5 million shares of common stock remain available for repurchase under the plan. Luxembourg law limits share repurchases to approximately the balance of Altisource Portfolio Solutions S.A.’s retained earnings less treasury shares. The distribution of Residential and AAMC to our shareholders reduced our retained earnings which will limit our ability to repurchase shares for a period of time. Our debt agreement also contains limits on our ability to repurchase our common stock which will limit the amount we can spend on share repurchases in any year and may prevent repurchases in certain circumstances.
| | | 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 | |
| | | | | | | | | | | | | | | | |
| | | | |
Total Common Shares | | | 599,269 | | | $ | 44.49 | | | | 599,269 | | | | 1,500,775 | |
| | | | | | | | | | | | | | | | |
No shares were repurchased under our stock repurchase program during the months of October 2012 through December 2012.
(1) | Includes shares withheld from employees to satisfy tax withholding obligations that arose from the exercise of stock options.
|
17
Table of Contents
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 30, 2011, the last trading day of fiscal year 2011.31, 2012. 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.
| | | 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 | | | 8/10/2009 | | 12/31/2009 | | 06/30/10 | | 12/31/10 | | 06/30/11 | | 12/31/11 | | 06/30/12 | | 12/31/12 | |
| | | | | | | | | | | | | | | | | | |
Altisource | | $ | 100.00 | | | $ | 172.05 | | | $ | 202.79 | | | $ | 235.33 | | | $ | 301.64 | | | $ | 411.31 | | | $ | 100.00 | | $ | 172.05 | | $ | 202.79 | | $ | 235.33 | | $ | 301.64 | | $ | 411.31 | | $ | 600.25 | | $ | 710.25 | |
S&P 500 | | | 100.00 | | | | 110.72 | | | | 101.94 | | | | 124.38 | | | | 131.13 | | | | 124.87 | | | 100.00 | | 110.72 | | 102.34 | | 124.88 | | 131.13 | | 124.87 | | 135.26 | | 141.46 | |
NASDAQ Composite | | | 100.00 | | | | 113.90 | | | | 105.87 | | | | 133.16 | | | | 139.22 | | | | 130.76 | | | 100.00 | | 113.90 | | 105.87 | | 133.16 | | 139.22 | | 130.76 | | 147.32 | | 151.56 | |
|
18
Table of Contents
ITEM 6. | SELECTED CONSOLIDATED FINANCIAL DATA |
ITEM 6.SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data as of and for the years ended December 31, 2012, 2011, 2010 and 2009 has been derived from our audited Consolidated Financial Statements.consolidated financial statements. The following selected financial data as of and for the yearsyear ended December 31, 2008 and 2007 has been derived from our audited Combined Consolidated Financial Statements.combined consolidated financial statements.
As a result of the Separation of the Residential Asset Businesses, we eliminated the assets and liabilities of Residential and AAMC from our consolidated balance sheet effective at the close of business on December 21, 2012. As Residential and AAMC are development stage companies and have not commenced operations, these entities had no historical results of operations.
The historical results presented below may not be indicative of our future performance and do not necessarily reflect what our financial position as of December 31, 2008 and results of operations for the years ended December 31, 2009 and 2008 would have been had we operated as a separate, stand-alone entity for periods endingended prior to August 9, 2009 (as discussed in Note 1 to the consolidated financial statements).Separation from Ocwen.
The selected consolidated financial data should be read in conjunction with the information contained in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and notes thereto in Item 8 of Part II, “Financial Statements and Supplementary Data”.
| | | 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 | |
| | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | |
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 | ) |
| | | | | | | | | | | | | | | | | | | | |
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 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net Income | | | 77,967 | | | | 56,174 | | | | 25,971 | | | | 9,219 | | | | 6,715 | |
Net Income Attributable to Non-controlling Interests | | | (6,855 | ) | | | (6,903 | ) | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Net Income Attributable to Altisource | | $ | 71,112 | | | $ | 49,271 | | | $ | 25,971 | | | $ | 9,219 | | | $ | 6,715 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Earnings Per Share:(1) | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 2.92 | | | $ | 1.96 | | | $ | 1.08 | | | $ | 0.38 | | | $ | 0.28 | |
| | | | | | | | | | | | | | | | | | | | |
Diluted | | $ | 2.77 | | | $ | 1.88 | | | $ | 1.07 | | | $ | 0.38 | | | $ | 0.28 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
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 | |
| | Years ended December 31, | |
(in thousands, except per share data) | | 2012 | | 2011 | | 2010 | | 2009 | | 2008 | |
| | | | | | | | | | | |
Revenue | | $ | 568,360 | | $ | 423,687 | | $ | 301,378 | | $ | 202,812 | | $ | 160,363 | |
Cost of revenue | | 366,201 | | 275,849 | | 189,059 | | 126,797 | | 115,048 | |
Gross profit | | 202,159 | | 147,838 | | 112,319 | | 76,015 | | 45,315 | |
Selling, general and administrative expenses | | 74,712 | | 62,131 | | 57,352 | | 39,473 | | 28,088 | |
Income from operations | | 127,447 | | 85,707 | | 54,967 | | 36,542 | | 17,227 | |
Other (expense) income, net | | (2,798 | ) | 203 | | 804 | | 1,034 | | (2,626 | ) |
Income before income taxes and non-controlling interests | | 124,649 | | 85,910 | | 55,771 | | 37,576 | | 14,601 | |
Income tax (provision) benefit | | (8,738 | ) | (7,943 | ) | 403 | | (11,605 | ) | (5,382 | ) |
Net income | | 115,911 | | 77,967 | | 56,174 | | 25,971 | | 9,219 | |
Net income attributable to non-controlling | | | | | | | | | | | |
interests | | (5,284 | ) | (6,855 | ) | (6,903 | ) | — | | — | |
Net income attributable to Altisource | | $ | 110,627 | | $ | 71,112 | | $ | 49,271 | | $ | 25,971 | | $ | 9,219 | |
| | | | | | | | | | | |
Earnings per share(1): | | | | | | | | | | | |
Basic | | $ | 4.74 | | $ | 2.92 | | $ | 1.96 | | $ | 1.08 | | $ | 0.38 | |
Diluted | | $ | 4.43 | | $ | 2.77 | | $ | 1.88 | | $ | 1.07 | | $ | 0.38 | |
| | | | | | | | | | | |
Transactions with related parties included above: | | | | | | | | | | | |
Revenue | | $ | 338,227 | | $ | 245,262 | | $ | 154,988 | | $ | 94,897 | | $ | 64,251 | |
Selling, general and administrative expenses | | $ | 2,430 | | $ | 1,893 | | $ | 1,056 | | $ | 4,308 | | $ | 6,208 | |
Other (expense) income | | $ | 86 | | $ | — | | $ | — | | $ | (1,290 | ) | $ | (2,269 | ) |
| | | 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 | |
19
Table of Contents
(1) | For all periods prior to the Separation, the number of shares originally issued of 24.1 million is being used for diluted earnings per share (“EPS”) and for basic EPS as no common stock of Altisource was traded prior to August 10, 2009 and no Altisource equity awards were outstanding prior to that date.
|
| | As of December 31, | |
(in thousands) | | 2012 | | 2011 | | 2010 | | 2009 | | 2008 | |
| | | | | | | | | | | |
Cash and cash equivalents | | $ | 105,502 | | $ | 32,125 | | $ | 22,134 | | $ | 30,456 | | $ | 6,988 | |
Accounts receivable, net | | 88,955 | | 52,005 | | 53,495 | | 30,497 | | 9,077 | |
Premises and equipment, net | | 50,399 | | 25,600 | | 17,493 | | 11,408 | | 9,304 | |
Intangible assets, net | | 56,586 | | 64,950 | | 72,428 | | 33,719 | | 36,391 | |
Goodwill | | 14,915 | | 14,915 | | 11,836 | | 9,324 | | 11,540 | |
Loan to Ocwen | | 75,000 | | — | | — | | — | | — | |
Total assets | | 429,226 | | 224,159 | | 197,800 | | 120,556 | | 76,675 | |
Long term debt, net | | 198,027 | | — | | — | | — | | 1,123 | |
Capital lease obligations | | 233 | | 836 | | 1,532 | | 664 | | 1,356 | |
Total liabilities | | 269,397 | | 58,216 | | 45,902 | | 34,208 | | 16,129 | |
| | | | | | | | | | | | | | | | |
(1) For all periods prior to the Separation from Ocwen, the number of shares originally issued of 24.1 million is being used for diluted earnings per share (“EPS”) and for basic EPS as no common stock of Altisource was traded prior to August 10, 2009 and no Altisource equity awards were outstanding prior to that date.
20
Table of Contents
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis of results of operations (“MD&A”) is a supplement to the accompanying consolidated financial statements and provides additional informationis intended to provide a reader of our financial statements with a narrative from the perspective of management on our businesses, current developments, financial condition, cash flows and results of operations.operations and liquidity. Significant sections of the MD&A are as follows:
Overview. This section, beginning on page 22, provides a description of recent developments we believe are important in understanding the results of operations and financial condition or in understanding anticipated future trends. In addition,It also provides a brief description is provided of significant transactions and events that affect the comparability of results and a discussion of the progress being analyzed.made on our growth initiatives.
Consolidated Results of Operations.This section, beginning on page 24,28, provides an analysis of our consolidated results of operations for the three years ended December 31, 2011.2012.
Segment Results of Operations.This section, beginning on page 29,31, provides an analysis of each business segment for the three years ended December 31, 20112012 as well as our Corporate Items and Eliminations segment. In addition, we discuss significant transactions, events and trends that may affect the comparability of the results being analyzed.
Liquidity and Capital Resources. This section, beginning on page 41,39, provides an analysis of our cash flows for the three years ended December 31, 2011.2012. We also discuss restrictions on cash movements, future commitments and capital resources.
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 and certain information incorporated herein by reference contain forward-looking statements within the “safe harbor”safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements may relate to, among other things, future events or our future performance or financial condition. Words such as “anticipate”, “intend”, “expect”, “may”, “could”, “should”, “would”, “plan”, “estimate”, “seek”“believe”, “believe”“predict”, “potential”, or “continue” or the negative of these terms and similar expressionscomparable terminology are intended to identify such forward-looking statements. Forward-looking statements are not guarantees of future performance and involve a number of assumptions, risks and uncertainties that could cause actual results to differ materially. Important factors that could cause actual results to differ materially from those suggested by the forward-looking statements include, but are not limited to, the risks discussed in Item 1A of Part 1I, “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 no obligation (and expressly disclaim any obligation) to update or alter any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or change in events, conditions or circumstances on which any such statement is based.
21
OVERVIEWTable of Contents
OVERVIEW
Our Business
We are a global provider of services focused on high value,high-value, technology-enabled, knowledge-based functionssolutions principally related to real estate and mortgage portfolio management, asset recovery and customer relationship management.
We classifyconduct our businesses intooperations through three reportable segments:
| • | | Mortgage Services consists of mortgage portfolio management services that span the mortgage lifecycle from origination through REO asset management and sale;segments. The Mortgage Services segment provides services that span the mortgage and real estate lifecycle and are typically outsourced by loan servicers, originators and investors in single family homes. The Financial Services segment provides collection and customer relationship management services primarily to debt originators and servicers (e.g., credit card, auto lending, retail credit, mortgages) and the utility and insurance industries. The Technology Services segmentprincipally consists of our REALSuite
|
| • | | 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.
|
TM applications as well as our information technology (“IT”) infrastructure services. The REALSuiteTM platform provides a fully integrated set of software applications and technologies that manage the end-to-end lifecycle for residential and commercial mortgage loan servicing including the automated management and payment of a distributed network of vendors. In addition, ourCorporate Items and Eliminationssegment includes eliminations of transactions between the reporting segments and also includes costs recognized by us related to corporate support functions such asincluding executive, finance, legal, human resources, vendor management, risk and six sigma. Further discussion regarding our business may be found under Item 1 of Part I, “Business”.
We classify revenue in three categories: service revenue, revenue from reimbursable expenses and non-controlling interests. In evaluating our performance, we utilize Service Revenuefocus on service revenue which consists of amounts attributable to our fee based services. Reimbursable Expensesexpenses and Cooperative Non-controlling Interestsnon-controlling interests are pass-through items for which we earn no margin. Reimbursable Expenses consistsexpenses consist of amounts that we incur on behalf of our customers in performing our fee based services, but we pass such costs directly on to our customers without any additional markup.
Further discussion regarding our business may be found under Part I, Item 1, “Business”.
Strategic Update
For 2011, we focused our efforts on strategically supporting Ocwen as its portfolio of loans serviced continued to grow at an accelerated pace. To support such growth, we invested significantly in hiring and training new personnel (increasing our global staffing by 66%), developed and expanded some of Non-controlling interests represent the newer services (primarily insurance related services) and continued to add to the geographic footprint for existing services where it made economic sense.
Through Ocwen’s growth and our focused efforts to capture more revenue per loan serviced by Ocwen, we recognized $334.8 million of Service Revenue, a 36% increase over the year-ended December 31, 2010. In addition, although we made significant investments in personnel and related costs months in advance of loans boarding, we achieved gross margins based on Service Revenue of 44%, comparable to 2010 levels, and improved income from operations as a percent of Service Revenue to 26%, up from 22% in 2010.
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 repurchase of 1.6 million shares under the stock repurchase program. Second, we invested $16.4 million in technology and facilities to support our rapid 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 expect to remain focused on a few key initiatives that we believe will allow us to continue to deliver superior results for our customers and shareholders:
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. We must deliver high quality, regulatory compliant services that meet or exceed customers’ performance expectations. This requires us to intelligently and persistently invest in an array of broad based competencies including technology, quality assurance, compliance, econometrics and behavioral science among others.
Service Offerings. We intend to capture additional revenue per loan from the loans boarded on our systems as well as develop a more balanced portfolio of service offerings that we believe will enable us to generate long-term consistent revenue and earnings growth, with faster growth in 2012. In 2012, we will expand our offering of mortgage origination services, principally to the members of Lenders One, as well as begin implementation of our next generation of REALSuite technologies.a consolidated entity not owned by Altisource. It is included in revenue and reduced from net income to arrive at net income attributable to Altisource.
Bring Financial Services to Profitability. 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 this segment as we believe that significant market opportunities exist in assisting clients in the areas of customer relationship and asset recovery management services. We continue to believe that investments in areas such as optimal resolution models deployed through dynamic scripts will enable us to take advantage of these opportunities over an extended time period.
Basis of Presentation
We have prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). For periods prior
Recent Acquisitions by Ocwen
During 2012, Ocwen’s residential loan servicing portfolio grew from $102.2 billion in UPB to $203.7 billion in UPB. The 2012 growth is primarily from Ocwen’s acquisition of Homeward Residential in the fourth quarter and the acquisition of mortgage servicing rights and related assets from Saxon Mortgage Services, Inc. and from JP Morgan Chase portfolios in the second quarter of 2012. Additionally, in October 2012, Ocwen and Walter Investment Management Corporation presented the highest bid in the auction of ResCap’s servicing portfolio. We expect Ocwen to close the ResCap transaction in the first quarter of 2013. Excluding the approximately $120 billion of Ally Bank subservicing and master servicing, the ResCap transaction will increase Ocwen’s servicing portfolio UPB by approximately $203.7 billion. With these servicing platform acquisitions, Ocwen is now positioned as the fifth largest mortgage servicer in the United States. As the structured shift of servicing to non-banks continues, we expect Ocwen to continue to grow. Ocwen’s highly scalable platform and low cost operating structure positions it to be very competitive as additional mortgage servicing portfolios become available.
In connection with Ocwen’s acquisition of Homeward Residential and the anticipated acquisition of the ResCap servicing platform, we intend to acquire the fee based businesses associated with these servicing portfolios from Ocwen at a price that we believe will provide an unlevered pre-tax return of approximately 20%. The fee based business acquisitions are strategically valuable as they will help us maintain our business model with Ocwen, expand our footprint and provide us significant revenue and earnings growth.
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Separation of Residential Asset Businesses
On December 21, 2012, we completed the capitalization and distribution of Residential and AAMC to our shareholders. See “Separation of Residential Asset Businesses” in Item 1 of Part I, “Business”.
Residential and AAMC plan to enter the growing residential single-family rental market. Because of the different capital considerations and the operating metrics associated with owning and renting single-family homes, we believe these businesses are best suited to operate as separate stand-alone companies. Residential will acquire residential related assets, and AAMC will provide asset management and advisory services to Residential. We will provide property management, lease management and renovation management services to Residential once it begins acquiring assets. With $100 million of initial equity, we believe Residential is poised to execute on its strategy of achieving above market returns by (1) acquiring non-performing loans at a lower cost than directly acquiring REO and (2) operating at a lower cost than its competitors.
On December 24, 2012, the shares of Residential and AAMC were distributed to our shareholders of record as of December 17, 2012, in the form of a taxable pro rata stock distribution (the “Distribution”). Our shareholders received a pro rata distribution of:
·one share of Residential common stock for every three shares of Altisource common stock held;
·one share of AAMC common stock for every 10 shares of Altisource common stock held and
·received cash in lieu of fractional Residential and AAMC shares.
There are contractual agreements between Altisource, Residential and AAMC that govern certain ongoing relationships and provide for an orderly transition to the Separation,status of three independent companies. These agreements are described further in “Related Parties” at the end of this section.We did not report the historical operating results of Residential and AAMC as a discontinued operation because Residential and AAMC are development state companies that had not commenced operations as of the date of separation and because of the significance of the continuing involvement between these entities and Altisource under these agreements.
Although Residential and AAMC are separate companies from Altisource, these entities have the same Chairman. As a result, our Chairman has obligations to Altisource as well as to Residential and AAMC. As of December 31, 2012, our Chairman owns or controls approximately 23% of the common stock of Altisource, approximately 23% of the common stock of Residential and approximately 23% of the common stock of AAMC.
We eliminated the assets and liabilities of Residential and AAMC from our consolidated balance sheet effective at the close of business on December 21, 2012. As Residential and AAMC are development stage companies and have not commenced operations, these entities had no historical results include revenuesof operations. We don’t expect any negative impact on our future operations other than interest expense on the debt we borrowed in November 2012 to capitalize these entities.
The carrying value of net assets transferred by Altisource was as follows:
(in thousands) | | Residential | | AAMC | | Total | |
| | | | | | | |
Cash | | $ | 100,000 | | $ | 5,000 | | $ | 105,000 | |
| | | | | | | |
Reduction in Altisource retained earnings | | $ | 100,000 | | $ | 5,000 | | $ | 105,000 | |
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Growth Initiatives
During 2012, we focused on providing high quality services to Ocwen’s growing servicing portfolio while intensifying our efforts on our strategic initiatives to diversify and expand our revenue base. Because of our high margins and low capital requirements, we are very unique in that the faster we grow our revenue, the faster our net free cash flow grows. Our 2013 strategic growth initiatives are:
·maintaining and growing our services provided to Ocwen as it continues to grow its residential loan servicing portfolio and residential loan origination platform;
·growing our origination related services by leveraging our acquisition of MPA;
·providing property management, lease management and renovation services for single-family home rentals;
·deploying Hubzu, our consumer real estate portal, to the distressed and non-distressed home sales market;
·investing in our next generation software; and
·growing the Financial Services segment’s earnings.
Growing services provided to Ocwen — Our primary focus in 2013 will be boarding and providing services to Ocwen’s growing servicing portfolio. We are working diligently to prepare for the on-boarding of the Homeward Residential and ResCap servicing platforms. While we generally do not begin receiving Ocwen referrals until loans are boarded on our servicing system, we are exploring options to direct referrals to Altisource sooner for certain lines of business. We also revisited our staffing models in the fourth quarter of 2012 and determined we will need fewer additional Mortgage Services employees than originally anticipated to meet the heightened referral volumes. This is reflective of improvements in the operating leverage of our business model even without the deployment of our next generation technology.
While we provide a suite of default related services today, there continue to be opportunities to develop new services to complement our current offerings. In our Mortgage Services segment, we are developing short sale and deed-in-lieu processing offerings. We believe these services will not only accelerate our growth but will also help Ocwen extend its performance leadership.
Mortgage origination related services — With an objective of long-term growth in the origination services market, we acquired the manager of the Lenders One mortgage cooperative in February 2010. In 2012, the members of Lenders One originated approximately $183 billion of loans representing approximately 10.5% of the United States residential origination market. We estimate in excess of $3.0 billion was spent on origination related services in connection with these loans. The manager of the cooperative leverages the size of Lenders One, 241 members strong as of December 31, 2012, to obtain better execution on the sale of closed loans with third parties and to achieve lower costs on origination related services from third parties.
Leveraging our vendor network, technology, scale, global workforce and lower sales costs, we have begun offering origination related services directly to the members of Lenders One at a price we believe is below the current market. These services are similar to the services we provide in our default related business.
Our service revenue from origination related services grew to $37.8 million for the year ended December 31, 2012, an increase of 72% over 2011. This is reflective of Lenders One membership growth, strong origination volume and an increasing number of the Lenders One members retaining Altisource to provide them with origination related services. As of December 31, 2012, Lenders One membership increased to 241 members compared to 214 members as of December 31, 2011, and the number of signed agreements for origination related services with the members increased from 128 to 158. We believe that we can enhance the profitability and competitive position of the Lenders One members through the members’ retention of Altisource as their service provider. While we have taken a very deliberate approach in rolling out our origination related services to the Lenders One members, we are pleased with the initial progress we have made.
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Property management, lease management and renovation management services — Providing property management, lease management and renovation management services to Residential is a complementary extension of our existing service offerings leveraging our existing infrastructure, competencies and significant economies of scale. We know firsthand, through our ability to establish Altisource as one of the few nationwide single-family REO management and property inspection and preservation companies in the United States, property management can be executed on a national scale. Unlike most property management firms, we are not constrained by the location of the home. We have existing nationwide single-family asset management, property inspection and preservation, real estate brokerage and settlement services operations primarily performed from centralized lower cost locations.
We entered into a long-term service agreement with Residential to be their exclusive provider of property management, lease management and renovation management services. We believe our lower cost operating structure will allow us to attractively price our services to Residential to improve their competitive position in investing in single-family rental assets. This in-turn should generate additional business for us related to these services.
We believe that as Residential acquires assets, it will become a serial equity raiser. With Altisource as the exclusive provider of property management, lease management and renovation management services to Residential, Residential’s growth will, in turn, provide attractive growth and diversification to Altisource.
To support the development of the rental asset businesses, the Mortgage Services segment incurred non-recurring expenses directly attributableof $2.7 million related to the separation and distribution of Residential and AAMC. In addition, the Mortgage Services segment incurred $1.0 million of operating expenses to build out our rental property management capabilities to position us to provide the services to Residential and others. To finance the capitalization of Residential and AAMC and other growth initiatives, we borrowed $200 million in November 2012 under a senior secured term loan at an interest rate of 5.75% as of December 31, 2012. As a result, we incurred interest expense of $1.2 million in 2012. We believe that these expenses represent strategic investments in our future.
Hubzu — We continue to focus on deploying Hubzu, our online real estate transaction website, to the distressed and non-distressed home sales market as we believe there are opportunities to benefit from a shifting consumer preference for on-line transacting. Hubzu provides an automated, transparent and integrated on-line solution for buying and selling real estate and, eventually, related services. Based on our observations, we believe the industry is beginning to see a shift in consumer behavior and attitudes toward on-line transacting for homes. For the year ended December 31, 2012, we sold more than 25,000 homes through Hubzu, and our revenue has grown to $53.2 million, compared to $31.9 million for the year ended December 31, 2011 (Hubzu is part of our asset management services business in our Mortgage Services segment).
Our 2013 efforts to grow Hubzu will center on (1) offering Hubzu to other servicers to sell their REO and (2) providing Hubzu to individual listing agents and brokers. In this regard, we have started sales conversations with servicers and financial institutions to add them to our operationsmarketplace and allocationsfurther extend our leadership position in online home sales. Beginning in mid-February 2013, Hubzu is available to individual listing agents and brokers to lay the foundation for a broader entry into the non-distressed home sale market.
In the medium to longer term, we intend to explore the possibility of expense from Ocwen which may not necessarily reflect whatdistributing our consolidated resultsownership interest in this business creating a new public company. The consumer real estate portal has many of operations, financial position and cash flowsthe same characteristics as some of the other publicly-traded real estate related technology companies. Similar to these companies, we believe that we can create greater shareholder value with Hubzu operating as a separate stand-alone business. As a stand-alone company, Hubzu would have been hada singularly focused management team, and the performance of the business would be easier to compare with like companies.
With regard to Hubzu, there is no certainty at this time that the separation will actually occur. Further, the consummation of any spin-off or similar transaction will be subject to our reaching satisfactory conclusions with our financial, tax and legal advisors on all applicable issues and the receipt of any necessary approvals.
Next generation technology — In our Technology Services segment, we operated as an independent company duringplan on increasing our investment in personnel to support Ocwen and Altisource’s growing businesses and to accelerate the development of our next generation vendor management and spend management software, the effect of which will be a marginal decline in
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pre-tax income in this segment. We are continuing to first focus on the technologies that entire period.are critical to Ocwen’s operations. These include REALServicing, our loan servicing system, and REALDoc, our correspondence generation, intelligent document intake and image storage platform. Once these technologies are fully staffed and we are making meaningful progress with development, we will refocus our efforts on recruiting the staff to complete the development of our next generation vendor management and spend management software. The investment in these technologies should significantly improve our margins.
Financial Services segment — This segment includes our receivables management and customer relationship management businesses. We believe the Financial Services segment has meaningful expansion opportunities but generates lower earnings than we believe should be achieved. We are focusing on both sales growth and operating efficiencies to grow earnings in this segment. We believe 2013 will be a turning point in our earnings. By the second quarter of 2012, we will have completed a multi-year process of consolidating three operating platforms into one. This simplifies our operating infrastructure, improves our workforce efficiency and flexibility and lowers our technology costs. We also anticipate benefitting from our 2012 investment in a sales team to develop a pipeline of new business. We intend to pursue growth from existing customers and deeper penetration of the industries we currently serve, including our planned expansion of collections services for charged off mortgages.
Stock Repurchase Plan
In May 2010,2012, our shareholders approved a new stock repurchase program, which replaces the previous stock repurchase program. Under the new plan, we are authorized us to purchase 15% of our outstanding share capital, or 3.8up to 3.5 million shares of our common stock in the open market.market in addition to amounts previously purchased under the prior plan. From authorization of the prior plan in May 2010 through December 31, 2011,2012, we have purchased 2.3approximately 2.5 million shares of our common stock onin the open market at an average price of $34.55$37.49 per share leaving 1.5share. During the year ended December 31, 2012, we purchased 0.3 million shares of common stock at an average price of $63.25 per share. Since no common stock was repurchased following the approval of the new plan, 3.5 million shares of common stock remain available for purchaserepurchase under the program.plan. Luxembourg law limits share repurchases to approximately the balance of Altisource Portfolio Solutions S.A.’s retained earnings less treasury shares. The distribution of Residential and AAMC to our shareholders reduced our retained earnings which will limit our ability to repurchase shares for a period of time. Our debt agreement also contains limits on our ability to repurchase our common stock which will limit the amount we can spend on share repurchases in any year and may prevent repurchases in certain circumstances.
Factors Affecting Comparability
The following items may impact the comparability of our results:
Acquisitions·On average, Ocwen serviced 0.8 million loans for the year ended December 31, 2012 compared to 0.5 million and 0.4 million loans for the years ended December 31, 2011 and 2010, respectively;
·In December 2013, we separated the Residential Asset Businesses from Altisource and capitalized the Residential Asset Businesses with $105 million. In connection with the separation and distribution of Residential and AAMC, we incurred one-time expenses of $2.7 million in 2012. We also incurred $1.0 million of expenses related to the build out of our rental property management capabilities;
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·In November 2012, we borrowed $200.0 million under a senior secured term loan agreement. Interest expense, including amortization of debt issuance costs and debt discount, totaled $1.2 million in 2012 (no comparative amounts in 2011 or 2010);
·We repurchased 0.3 million and 1.6 million shares of our common stock under our stock repurchase program during the 2012 and 2011, respectively;
·Effective January 2011, we modified our pricing for IT infrastructure and support services within our Technology Services segment from a rate card model primarily based on headcount to a fully loaded cost plus mark-up where cost is allocated based on the underlying cost driver. This model applies to the IT infrastructure and support amounts charged to Ocwen as well as internal allocations. The impact of this change is discussed further in the Technology Services segment;
·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. 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 Comparabilityservices (“Tracmail”);
The following items may impact the comparability of our results:
Effective January 2011, we modified 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 Technology Services segment;
To further align the interests of management with shareholders, we expanded our use of equity compensation. For the years ended December 31, 2011, 2010 and 2009, we have recognized equity compensation expense of $4.0 million, $3.1 million and $0.3 million, 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 intangiblesintangible assets that exist for purposes of determining our taxable income. The ruling was retroactive to the date of Separation.Separation from Ocwen. As a result of the ruling, we recognized a $3.4 million credit attributable to 2009 in the second quarter 2010;2010 and
·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.One. The results of operations of Lenders One have been consolidated since the acquisition date underin accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 810;810, Consolidation.
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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.
CONSOLIDATED RESULTS OF OPERATIONS
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, 2011.2012, 2011 and 2010. For a more detailed discussion of the factors that affected the results of our business segments in these periods, see “SEGMENT RESULTS OF OPERATIONS”“Segment Results of Operations” below. Cooperative Non-controlling Interests is attributable to the members of Lenders One.
The following table sets forth information regarding our results of operations for the years ended December 31, 2011, 2010 and 2009.31:
| | | 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 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total Revenue | | | 423,687 | | | | 41 | | | | 301,378 | | | | 49 | | | | 202,812 | |
Cost of Revenue | | | 275,849 | | | | (46 | ) | | | 189,059 | | | | (49 | ) | | | 126,797 | |
| | | | | | | | | | | | | | | | | | | | |
Gross Profit | | | 147,838 | | | | 32 | | | | 112,319 | | | | 48 | | | | 76,015 | |
Selling, General and Administrative Expenses | | | 62,131 | | | | (8 | ) | | | 57,352 | | | | (45 | ) | | | 39,473 | |
| | | | | | | | | | | | | | | | | | | | |
Income from Operations | | | 85,707 | | | | 56 | | | | 54,967 | | | | 50 | | | | 36,542 | |
Other Income, net | | | 203 | | | | (75 | ) | | | 804 | | | | (22 | ) | | | 1,034 | |
| | | | | | | | | | | | | | | | | | | | |
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 | ) |
| | | | | | | | | | | | | | | | | | | | |
Net Income | | | 77,967 | | | | 39 | | | | 56,174 | | | | 116 | | | | 25,971 | |
| | | | | |
Net Income Attributable to Non-controlling Interests | | | (6,855 | ) | | | 1 | | | | (6,903 | ) | | | N/M | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Net Income Attributable to Altisource | | $ | 71,112 | | | | 44 | | | $ | 49,271 | | | | 90 | | | $ | 25,971 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | |
Diluted | | $ | 2.77 | | | | 47 | | | $ | 1.88 | | | | 76 | | | $ | 1.07 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
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 | |
| | | | % Increase | | | | % Increase | | | |
(in thousands, except per share data) | | 2012 | | / (decrease) | | 2011 | | / (decrease) | | 2010 | |
| | | | | | | | | | | |
Service revenue | | | | | | | | | | | |
Mortgage Services | | $ | 351,908 | | 56 | | $ | 224,942 | | 66 | | $ | 135,680 | |
Financial Services | | 63,979 | | (8 | ) | 69,231 | | (7 | ) | 74,718 | |
Technology Services | | 74,189 | | 32 | | 56,094 | | 8 | | 52,013 | |
Eliminations | | (23,147 | ) | (49 | ) | (15,509 | ) | (1 | ) | (15,385 | ) |
| | 466,929 | | 39 | | 334,758 | | 36 | | 247,026 | |
Reimbursable expenses | | 96,147 | | 17 | | 82,074 | | 73 | | 47,449 | |
Non-controlling interests | | 5,284 | | (23 | ) | 6,855 | | (1 | ) | 6,903 | |
Total revenue | | 568,360 | | 34 | | 423,687 | | 41 | | 301,378 | |
Cost of revenue | | 366,201 | | 33 | | 275,849 | | 46 | | 189,059 | |
Gross profit | | 202,159 | | 37 | | 147,838 | | 32 | | 112,319 | |
Selling, general and administrative expenses | | 74,712 | | 20 | | 62,131 | | 8 | | 57,352 | |
Income from operations | | 127,447 | | 49 | | 85,707 | | 56 | | 54,967 | |
Other (expense) income, net: | | | | | | | | | | | |
Interest expense | | (1,210 | ) | N/M | | (85 | ) | 29 | | (119 | ) |
Other (expense) income, net | | (1,588 | ) | N/M | | 288 | | (69 | ) | 923 | |
Total other (expense) income, net | | (2,798 | ) | N/M | | 203 | | (75 | ) | 804 | |
Income before income taxes and non-controlling interests | | 124,649 | | 45 | | 85,910 | | 54 | | 55,771 | |
Income tax (provision) benefit | | (8,738 | ) | (10 | ) | (7,943 | ) | N/M | | 403 | |
Net income | | 115,911 | | 49 | | 77,967 | | 39 | | 56,174 | |
Net income attributable to non-controlling interests | | (5,284 | ) | 23 | | (6,855 | ) | 1 | | (6,903 | ) |
Net income attributable to Altisource | | $ | 110,627 | | 56 | | $ | 71,112 | | 44 | | $ | 49,271 | |
| | | | | | | | | | | |
Margins: | | | | | | | | | | | |
Gross profit/service revenue | | 43 | % | | | 44 | % | | | 45 | % |
Income from operations/service revenue | | 27 | % | | | 26 | % | | | 22 | % |
| | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | |
Basic | | $ | 4.74 | | 62 | | $ | 2.92 | | 49 | | $ | 1.96 | |
Diluted | | $ | 4.43 | | 60 | | $ | 2.77 | | 47 | | $ | 1.88 | |
N/M — not meaningful.
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RevenueTable of Contents
The following table presents our revenues
Revenue
We recognized service revenue of $466.9 million, $334.8 million and $247.0 million for the years ended December 31, 2012, 2011 and 2010, and 2009:
| | | 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 | ) |
| | | | | | | | | | | | | | | | | | | | |
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 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total Reimbursable Expenses | | | 82,074 | | | | 73 | | | | 47,449 | | | | 195 | | | | 16,077 | |
| | | | | |
Cooperative Non-controlling Interests: | | | | | | | | | | | | | | | | | | | | |
Mortgage Services | | | 6,855 | | | | (1 | ) | | | 6,903 | | | | N/M | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total Revenue | | $ | 423,687 | | | | 41 | | | $ | 301,378 | | | | 49 | | | $ | 202,812 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
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 | |
N/M — not meaningful.
respectively. The increasegrowth in Service Revenue is directly attributable toservice revenue over the three year period was driven by the growth in Ocwen’s residential loanservicing portfolio serviced andcoupled with our developmentongoing expansion of mortgage and real estate portfolio management services. Service revenue growth was also driven by an increase in origination related services during the years presented. Theprovided to Lenders One members and growth in Ocwen’s residential loan portfolio serviced benefits both the Mortgage Services and Technology Services segments. In 2011, we principally invested in insurance services (e.g., title) and mortgage origination services.Financial Services’ customer relationship management business. Partially offsetting our Service Revenueservice revenue growth in Mortgage Services and Technology Services was a decline in the Financial Services segment. The declinesegment revenue in Financial Services is attributableour asset recovery management business. This business was impacted by lower credit card charge off placements and a shift of existing services from higher cost to overall economic conditions, the movement of some collection work to India atlower cost geographies with corresponding lower fees and collector performance particularly in 2009 and 2010 resulting in decreased total placements.from our customers for these services.
The increase in Reimbursable Expensesrevenue from reimbursable expenses over the three year period is due primarily to the expansion ofincrease in our asset management services and defaultclosing and insurance services businesses in the Mortgage Services segment over the same period.
Our revenues are seasonal.impacted by seasonality. More specifically, Financial Services asset recovery revenue tends to be higher in the first quarter as borrowers may utilize tax refunds to pay debts and generally declines throughout the year. Mortgage Services revenue is impacted by REO sales of residential homes which tend to be at their lowest level during the fall and winter months and highest during the spring and summer months.
Cost of Revenue and Gross Profit
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 the provision of services, reimbursable expenses, technology and telephony expenses as well as depreciation and amortization of operating assets. The components
We recognized cost of Costrevenue of Revenue were as follows$366.2 million, $275.8 million and $189.1 million for the years ended December 31, 2012, 2011 and 2010, and 2009:
| | | 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 | |
| | | | | | | | | | | | | | | | | | | | |
Cost of Revenue | | $ | 275,849 | | | | (46 | ) | | $ | 189,059 | | | | (49 | ) | | $ | 126,797 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Gross Profit Percentage: | | | | | | | | | | | | | | | | | | | | |
Gross Profit/Service Revenue | | | 44 | % | | | | | | | 45 | % | | | | | | | 41 | % |
| | | | | | | | | | | | | | | | | | | | |
respectively. The increase in Costcost of Revenuerevenue over the three year period is directly attributable to our investments in personnelcompensation, technology and technology principally to supportvendor costs associated with the increasegrowth in Ocwen’s residential loan servicing portfolio the development of new mortgage and real estate portfolio management services and growthhigher costs in third party vendor costs.
As a percent of Service Revenue, Compensation and Benefits declined for each period presentedour Technology Services segment as a result of investments in training, technology and process improvement and, in 2011, the weakening of the Indian Rupee. Two factors mitigate initiatives meantwe continue to improve employee productivity. First, in anticipation of Ocwen’s boarding of significant loan servicing portfolios (as occurred in September 2010, September 2011 and expectedinvest in the first half of 2012), we have had to hire personnel three to six months in advance in order to adequately train such persons in the delivery of our services. Second, as we develop new services, we invest heavily in personnel to ensure high quality delivery of services until such time as we deploy technology and process improvement to improve productivity at reduced costs.
Outside Fees and Services consists 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 2011 is principally due to the timing and magnitude of loans boarded by Ocwen during the year and the mix of mortgage services provided. We intend to reduce Outside Fees and Services as a percent of Service Revenue over time through deploymentdevelopment of our next generation vendortechnology and process management technologies, beginning ininfrastructure.
Gross profit as a percentage of service revenue was 43%, 44% and 45% for the second half ofyears ended December 31, 2012, 2011 and continuing through 2013.
2010, respectively. Our gross margins can vary significantly from period to period. The most significant factors contributing to variability include seasonality,the mix of services delivered, timing of investments in new services, and hiring of staff in advance of new business and the timing of when loans are boarded by our customers.
Gross profit as a percentage of service revenue decreased over the three year period primarily from higher costs in our Technology Services segment as we continue to invest in the development of our next generation technology. Gross profit as a percentage of service revenue further declined in 2012 from the costs incurred to develop the rental property management business and the growth of the lower margin origination services business.Selling, General and Administrative Expenses
Selling, General and Administrative Expenses includeand Income from Operations
SG&A includes payroll employee benefits, occupancy and other costs associated withfor personnel employed in executive, sales, marketing,finance, legal, human resources, vendor management, risk and financesix sigma roles. This category also includes occupancy costs, professional fees, depreciation and amortization on non-operating assets. The components
We recognized SG&A of Selling, General$74.7 million, $62.1 million and Administrative Expenses were as follows$57.4 million for the years ended December 31, 2012, 2011 and 2010, respectively. Our operating margins were 27%, 26% and 2009:
| | | 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 | |
| | | | | | | | | | | | | | | | | | | | |
Total Selling, General & Administrative Expenses | | $ | 62,131 | | | | (8 | ) | | $ | 57,352 | | | | (45 | ) | | $ | 39,473 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Operating Percentage: | | | | | | | | | | | | | | | | | | | | |
Income from Operations/Service Revenue | | | 26 | % | | | | | | | 22 | % | | | | | | | 20 | % |
| | | | | | | | | | | | | | | | | | | | |
N/M — not meaningful.
Selling, General and Administrative costs on22%, respectively, as a consolidated basis began to stabilizepercentage of each year’s service revenue. Income from operations as a percentage of service revenue is improving as SG&A is growing at a slower pace than service revenue. The benefit was partially offset in 2011. The significant increase over the periods presented is principally attributable to increased2012 by costs associated with being a newly formed public companythe separation of Residential and increased Occupancy Related Costs to support the growth in operations as previously described.AAMC.
Compensation and Benefits increased over the periods presented as we developed separate support functions including accounting, law and human resources. In addition, contributing to
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On an absolute basis, the increase in SG&A for the year ended December 31, 2012 compared to the year ended December 31, 2011 was primarily due to a $6.2 million increase in occupancy related costs primarily from the addition of new leased facilities and equipment to support our growth. In addition, other SG&A increased $4.2 million from higher marketing costs related to Hubzu, travel expenses primarily associated with the management of our global operations and higher bad debt expense. Finally, professional services increased primarily from $2.2 million of expenses incurred in connection with the Separation of the Residential Asset Businesses. Partially offsetting these increases was lower compensation expense of $1.2 million primarily due to the reversal in the first quarter of share-based compensation and incentive compensation expense related to the departure of an executive officer in March 2012.
Income Tax Provision (Benefit)
We recognized an income tax provision (benefit) of $8.7 million, $7.9 million and $(0.4) million in 2012, 2011 and 2010, was increased equity compensation for senior executives.
Professional Services expense decreasedrespectively. The effective tax rate in all three periods differs from the most recent period principally due toLuxembourg statutory tax rate of 28.8% primarily because of the effect of a focus on reduced legal costs through increased compliance, particularly within our Financial Services segment. The 2009 period includes one-time expenses associated with the Separation ($3.4 million) and litigation costs ($1.4 million).
Other costs principally include travel related expenditures, bank charges and reserves for doubtful accounts. In 2009, this category also includes one-time facility closure costs of $1.9 millionfavorable tax ruling in the Financial Services segment (see Note 11 to the consolidated financial statements).
Income from Operations as a percent of Service Revenue increased 330 basis points compared to 2010 principally as a result of our ability to leverage support costs as our revenue grew significantly.
Income Tax (Provision)/Benefit
Our income tax provision / (benefit) was $7.9 million, $(0.4) million and $11.6 millionLuxembourg in 2011, 2010 and 2009, respectively. Adjusting for the impactmix of net income attributable to Non-controlling Interests, ourand losses and varying tax rates in multiple taxing jurisdictions. Our effective tax rate was 10.0%7.0%, (0.8) 9.2% and (0.7)% for 2012, 2011 and 30.9% for 2011, 2010, and 2009, respectively.
Our consolidated effective income tax rate for financial reporting purposes may change periodically due to changes in enacted tax rates, fluctuations in the mix of income earned from our domestic and international operations which may be subject to differing tax rates and our ability to utilize net operating loss and tax credit carryforwards.
Our income tax provision computed by applying the Luxembourg statutory tax rate of 28.8% differs from our effective tax rate in all three periods because of the varying tax rates in multiple taxing jurisdictions, the calculation of taxable net income in certain jurisdictions and the impact of tax credit carryforwards. 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.
Recent Accounting Pronouncements
There are no pending accounting pronouncements that are expected to have a material impact upon adoption.
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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, 2012, 2011 2010 and 2009.2010. Transactions between segments are accounted for as third-party arrangements for purposes of presenting Segment Results of Operations. Intercompany transactions primarily consist of information technologyIT infrastructure services and charges for the use of certain REALSuite applications from our Technology Services segment to our other two segmentssegments. Generally, we reflect these charges within technology and Corporate.communications expense in the segment receiving the services, except for consulting services, which we reflect in professional services expense.
| | | 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 | |
| | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Selling, General and Administrative Expenses | | $ | — | | | $ | — | | | $ | — | | | $ | 1,893 | | | $ | 1,893 | |
| | | | | | | | | | | | | | | | | | | | |
| | | 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 | |
| | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | |
Income (Loss) from Operations | | | 55,724 | | | | 303 | | | | 18,119 | | | | (19,179 | ) | | | 54,967 | |
Other Income (Expense), net | | | 781 | | | | (50 | ) | | | (60 | ) | | | 133 | | | | 804 | |
| | | | | | | | | | | | | | | | | | | | |
Income (Loss) Before Income Taxes | | $ | 56,505 | | | $ | 253 | | | $ | 18,059 | | | $ | (19,046 | ) | | $ | 55,771 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Transactions with Related Parties: | | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 135,655 | | | $ | 166 | | | $ | 19,167 | | | $ | — | | | $ | 154,988 | |
| | | | | | | | | | | | | | | | | | | | |
Selling, General and Administrative Expenses | | $ | — | | | $ | — | | | $ | — | | | $ | 1,056 | | | $ | 1,056 | |
| | | | | | | | | | | | | | | | | | | | |
| | | 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 | |
| | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | |
Income (Loss) Before Income Taxes | | $ | 26,380 | | | $ | 4,009 | | | $ | 17,926 | | | $ | (10,739 | ) | | $ | 37,576 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Transactions with Related Parties: | | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | |
Mortgage Services
The following table presents our results of operationsFinancial information for our segments is as follows:
| | For the year ended December 31, 2012 | |
| | | | | | | | Corporate | | | |
| | Mortgage | | Financial | | Technology | | Items and | | Consolidated | |
(in thousands) | | Services | | Services | | Services | | Eliminations | | Altisource | |
| | | | | | | | | | | |
Revenue | | | | | | | | | | | |
Service revenue | | $ | 351,908 | | $ | 63,979 | | $ | 74,189 | | $ | (23,147 | ) | $ | 466,929 | |
Reimbursable expenses | | 95,604 | | 543 | | — | | — | | 96,147 | |
Non-controlling interests | | 5,284 | | — | | — | | — | | 5,284 | |
| | 452,796 | | 64,522 | | 74,189 | | (23,147 | ) | 568,360 | |
Cost of revenue | | 285,586 | | 46,737 | | 54,634 | | (20,756 | ) | 366,201 | |
Gross profit | | 167,210 | | 17,785 | | 19,555 | | (2,391 | ) | 202,159 | |
Selling, general and administrative expenses | | 25,099 | | 13,415 | | 8,888 | | 27,310 | | 74,712 | |
Income from operations | | 142,111 | | 4,370 | | 10,667 | | (29,701 | ) | 127,447 | |
Other expense, net | | (1,713 | ) | (27 | ) | (25 | ) | (1,033 | ) | (2,798 | ) |
Income before income taxes and non-controlling interests | | $ | 140,398 | | $ | 4,343 | | $ | 10,642 | | $ | (30,734 | ) | $ | 124,649 | |
| | | | | | | | | | | |
Margins: | | | | | | | | | | | |
Gross profit/service revenue | | 48 | % | 28 | % | 26 | % | N/M | | 43 | % |
Income from operations/service revenue | | 40 | % | 7 | % | 14 | % | N/M | | 27 | % |
| | | | | | | | | | | |
Transactions with related parties: | | | | | | | | | | | |
Revenue | | $ | 306,774 | | $ | 208 | | $ | 31,245 | | $ | — | | $ | 338,227 | |
Selling, general and administrative expenses | | $ | 57 | | $ | — | | $ | — | | $ | 2,373 | | $ | 2,430 | |
Other income | | $ | — | | $ | — | | $ | — | | $ | 86 | | $ | 86 | |
N/M — not meaningful.
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| | For the year ended December 31, 2011 | |
| | | | | | | | Corporate | | | |
| | Mortgage | | Financial | | Technology | | Items and | | Consolidated | |
(in thousands) | | Services | | Services | | Services | | Eliminations | | Altisource | |
| | | | | | | | | | | |
Revenue | | | | | | | | | | | |
Service revenue | | $ | 224,942 | | $ | 69,231 | | $ | 56,094 | | $ | (15,509 | ) | $ | 334,758 | |
Reimbursable expenses | | 80,124 | | 1,950 | | — | | — | | 82,074 | |
Non-controlling interests | | 6,855 | | — | | — | | — | | 6,855 | |
| | 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 from operations | | 94,608 | | 4,451 | | 14,353 | | (27,705 | ) | 85,707 | |
Other (expense) income, net | | 248 | | (34 | ) | (49 | ) | 38 | | 203 | |
Income before income taxes and non-controlling interests | | $ | 94,856 | | $ | 4,417 | | $ | 14,304 | | $ | (27,667 | ) | $ | 85,910 | |
| | | | | | | | | | | |
Margins: | | | | | | | | | | | |
Gross profit/service revenue | | 49 | % | 29 | % | 34 | % | N/M | | 44 | % |
Income from operations/service revenue | | 42 | % | 6 | % | 26 | % | N/M | | 26 | % |
| | | | | | | | | | | |
Transactions with related parties: | | | | | | | | | | | |
Revenue | | $ | 223,184 | | $ | 266 | | $ | 21,812 | | $ | — | | $ | 245,262 | |
Selling, general and administrative expenses | | $ | — | | $ | — | | $ | — | | $ | 1,893 | | $ | 1,893 | |
N/M — not meaningful.
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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 | | | | | | | | | | | |
Service revenue | | $ | 135,680 | | $ | 74,718 | | $ | 52,013 | | $ | (15,385 | ) | $ | 247,026 | |
Reimbursable expenses | | 44,550 | | 2,899 | | — | | — | | 47,449 | |
Non-controlling interests | | 6,903 | | — | | — | | — | | 6,903 | |
| | 187,133 | | 77,617 | | 52,013 | | (15,385 | ) | 301,378 | |
Cost of revenue | | 117,691 | | 56,575 | | 28,909 | | (14,116 | ) | 189,059 | |
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 | |
Income from operations | | 55,724 | | 303 | | 18,119 | | (19,179 | ) | 54,967 | |
Other (expense) income, net | | 781 | | (50 | ) | (60 | ) | 133 | | 804 | |
Income before income taxes and non-controlling interests | | $ | 56,505 | | $ | 253 | | $ | 18,059 | | $ | (19,046 | ) | $ | 55,771 | |
| | | | | | | | | | | |
Margins: | | | | | | | | | | | |
Gross profit/service revenue | | 51 | % | 28 | % | 44 | % | N/M | | 45 | % |
Income from operations/service revenue | | 41 | % | 0 | % | 35 | % | N/M | | 22 | % |
| | | | | | | | | | | |
Transactions with related parties: | | | | | | | | | | | |
Revenue | | $ | 135,655 | | $ | 166 | | $ | 19,167 | | $ | — | | $ | 154,988 | |
Selling, general and administrative expenses | | $ | — | | $ | — | | $ | — | | $ | 1,056 | | $ | 1,056 | |
N/M — not meaningful.
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Table of Contents
Mortgage Services segment
Revenue
Revenue by service line was as follows for the years ended December 31:
| | | 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 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total Revenue | | | 311,921 | | | | 67 | | | | 187,133 | | | | 113 | | | | 87,801 | |
Cost of Revenue | | | 202,035 | | | | (72) | | | | 117,691 | | | | (108) | | | | 56,539 | |
| | | | | | | | | | | | | | | | | | | | |
Gross Profit | | | 109,886 | | | | 58 | | | | 69,442 | | | | 122 | | | | 31,262 | |
Selling, General and Administrative Expenses | | | 15,278 | | | | (11) | | | | 13,718 | | | | (179) | | | | 4,913 | |
| | | | | | | | | | | | | | | | | | | | |
Income from Operations | | $ | 94,608 | | | | 70 | | | $ | 55,724 | | | | 111 | | | $ | 26,349 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | |
Selling, General and Administrative Expenses | | $ | — | | | | N/M | | | $ | — | | | | (100) | | | $ | 2,712 | |
| | | | | | | | | | | | | | | | | | | | |
Interest Expense | | $ | — | | | | N/M | | | $ | — | | | | (100) | | | $ | 30 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | % Increase | | | | % Increase | | | |
(in thousands) | | 2012 | | / (decrease) | | 2011 | | / (decrease) | | 2010 | |
| | | | | | | | | | | |
Service revenue | | | | | | | | | | | |
Asset management services | | $ | 107,480 | | 65 | | $ | 64,975 | | 75 | | $ | 37,079 | |
Closing and insurance services | | 85,601 | | 52 | | 56,496 | | 104 | | 27,754 | |
Residential property valuation | | 80,322 | | 55 | | 51,785 | | 55 | | 33,502 | |
Default management services | | 50,224 | | 52 | | 32,975 | | 54 | | 21,413 | |
Origination management services | | 28,281 | | 51 | | 18,711 | | 17 | | 15,932 | |
Total service revenue | | 351,908 | | 56 | | 224,942 | | 66 | | 135,680 | |
| | | | | | | | | | | |
Reimbursable expenses: | | | | | | | | | | | |
Asset management services | | 92,992 | | 22 | | 76,511 | | 83 | | 41,920 | |
Default management services | | 426 | | (88 | ) | 3,497 | | 50 | | 2,328 | |
Closing and insurance services | | 2,186 | | N/M | | 116 | | (62 | ) | 302 | |
Total reimbursable expenses | | 95,604 | | 19 | | 80,124 | | 80 | | 44,550 | |
| | | | | | | | | | | |
Non-controlling interests | | 5,284 | | (23 | ) | 6,855 | | (1 | ) | 6,903 | |
Total revenue | | $ | 452,796 | | 45 | | $ | 311,921 | | 67 | | $ | 187,133 | |
| | | | | | | | | | | |
Transactions with related parties: | | | | | | | | | | | |
Asset management services | | $ | 181,948 | | 33 | | $ | 136,685 | | 73 | | $ | 78,999 | |
Residential property valuation | | 73,406 | | 51 | | 48,734 | | 50 | | 32,525 | |
Closing and insurance services | | 37,849 | | 42 | | 26,733 | | 54 | | 17,379 | |
Default management services | | 13,548 | | 23 | | 11,032 | | 63 | | 6,752 | |
Origination management services | | 23 | | N/M | | — | | N/M | | — | |
Total | | $ | 306,774 | | 37 | | $ | 223,184 | | 65 | | $ | 135,655 | |
N/M — not meaningful.
Our Mortgage Services segment is the primary driver of growth for the periods presented. The
Revenue growth in Mortgage Services is directly attributable toall of the business lines, except origination management services, during the three year period was driven by the growth in Ocwen’s residential loan servicing portfolio and expansion in services provided. Additionally, a portion of the growth in closing and insurance services from 2010 to 2011 is from an increased capture rate of Ocwen’s referrals as we continued to expand our developmentgeographic presence. A portion of mortgage and real estate portfoliothe growth in asset management services that have allowed us tois from (1) a higher capture more Service Revenue per loan.
In 2011, we reorganized our reporting structure within this segmentrate of REO sales through the time-limit bidding process resulting in that certain services originally part of Component Servicesa higher percentage commission and Other are now classified as part of Customer Relationship Management in our Financial 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 Correspondent One which 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 anticipate this will result in improved capital markets execution for the members and facilitate the sale of our services to the members. Through July 2011, we fulfilled our funding obligations to Correspondent One and account for such investment under the equity method within this segment. In 2011, we recognized a net loss of $0.5 million attributable to Correspondent One. We expect Correspondent One to incur losses until the second half of 2012.
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 | |
| | | | | | | | | | | | | | | | | | | | |
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 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total Reimbursable Expenses | | | 80,124 | | | | 80 | | | | 44,550 | | | | 177 | | | | 16,077 | |
| | | | | |
Non-controlling Interests | | | 6,855 | | | | (1) | | | | 6,903 | | | | N/M | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total Revenue | | $ | 311,921 | | | | 67 | | | $ | 187,133 | | | | 113 | | | $ | 87,801 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | |
Total | | $ | 223,184 | | | | 65 | | | $ | 135,655 | | | | 83 | | | $ | 74,089 | |
| | | | | | | | | | | | | | | | | | | | |
N/M — not meaningful.
In our Mortgage Services segment, we generate the majority of our revenue by providing outsourced services that span the lifecycle of a mortgage loan primarily for Ocwen or with respect to the loan portfolio serviced by Ocwen.
Asset Management Services.Asset management services principally include property preservation, property inspection, REO asset management and REO brokerage. Asset Management Services has been the largest contributor to Service Revenue growth over the three year period which reflects(2) an increase in the number ofaverage REO sold, the number of REO for which we provide property preservationsales price.
The higher origination management services and an increase in pre-foreclosure inspection services.
Origination Management Services. Origination Management Services includes MPA and our developing fulfillment business. The increaserevenue over the three year period is principally duefrom higher overall originations volume, the increase in number of Lenders One members and the incremental roll-out and capture of origination related services to the inclusionmembers. The number of MPA’s results from the date of acquisition in February 2010. For the year ended December 31, 2011, MPA experienced a net increase of 35 members and had 214Lenders One members as of December 31, 2011.2012, 2011 and 2010 were 241 members, 214 members and 179 members, respectively.
34
Table of Contents
Residential Property Valuation Services.We provide our customers with a broad rangeCost of traditional appraisalRevenue and other valuation services. The increaseGross Profit
Cost of revenue consists of the following for the years ended December 31:
| | | | % Increase | | | | % Increase | | | |
(in thousands) | | 2012 | | / (decrease) | | 2011 | | / (decrease) | | 2010 | |
| | | | | | | | | | | |
Compensation and benefits | | $ | 53,842 | | 44 | | $ | 37,264 | | 81 | | $ | 20,584 | |
Outside fees and services | | 116,323 | | 57 | | 73,888 | | 64 | | 45,135 | |
Reimbursable expenses | | 95,604 | | 19 | | 80,124 | | 80 | | 44,550 | |
Technology and communications | | 18,509 | | 82 | | 10,150 | | 42 | | 7,160 | |
Depreciation and amortization | | 1,308 | | 115 | | 609 | | 132 | | 262 | |
| | | | | | | | | | | |
Cost of revenue | | $ | 285,586 | | 41 | | $ | 202,035 | | 72 | | $ | 117,691 | |
Cost of revenue increased over the three year period was primarily a result of Ocwen’s residential loan servicing portfoliofrom costs related to the growth and, in 2011, to a lesser degree from the Springhouse acquisition in April 2011.
Closing and Insurance Services. Closing and Insurance Services principally consists of title search, title agency and similar insured services. During 2011, we remained focused on increasing our referral capture rate in our operational states and rolling out insured title services nationwide, similar to what we accomplished with our title search and asset management businesses in 2010.
Default Management Services. We provide non-legal back-office support for foreclosure, bankruptcy and eviction attorneys as well as foreclosure trustee services. We do not execute or notarize foreclosure affidavits of debt or lost note affidavits. The increase over the three year period was a result of our continued rollout of a national platform as well as Ocwen’s loan servicing portfolio growth.
Cost of Revenue
| | | 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 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Cost of Revenue | | $ | 202,035 | | | | (72) | | | $ | 117,691 | | | | (108) | | | $ | 56,539 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Gross Margin Percentage: | | | | | | | | | | | | | | | | | | | | |
Gross Profit/Service Revenue | | | 49 | % | | | | | | | 51 | % | | | | | | | 44 | % |
| | | | | | | | | | | | | | | | | | | | |
N/M — Not meaningful.
Cost of Revenues increased for the periods presented due to investments in personnel and vendor costs to support the increase in Ocwen’s residential loan servicing portfolio as well as the development of closing and title services in 2011, new mortgageorigination related services in 2012 and real estate portfolionew rental property management services.services in 2012.
Gross profit as a percentage of service revenue was 48%, 49% and 51% for the years ended December 31, 2012, 2011 and 2010, respectively. The most significant factors impacting gross profit margins as a percent of Service Revenue are investmentsservice revenue were the mix of services provided (growth of the lower margin origination related appraisals in personnel2012 as we focused on the sale of these services to the Lenders One members during the periods presented); costs incurred in 2012 to develop the rental property management business including the separation of Residential and third party vendor costs.AAMC; use of outside providers in 2011 to support the growth in residential property valuation services and a higher level of technology expenses to support our continued growth. Although we have been able to generally maintain or improve our margins in a periodperiods of accelerated growth, over time we will seek to reduce employee and vendor costs as a percent of Service Revenueservice revenue principally through deployment of our next generation vendor, process and payment management technologies beginningwhich began in the second half of 2012 and continuingwill continue through 2013.2014.
Our margins also can vary substantially baseddepending upon when servicing is acquired by Ocwen. Typically, compensation and benefits will increase in anticipation of ana servicing portfolio acquisition as we hire and train personnel to deliver services in advance of the actual boarding of loans.loans by Ocwen. 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 Feesoutside fees and Servicesservices 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 boarding 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 our newer services including insurance and origination services. Gross profit margins as a percent of Service Revenue improved in 2010 when compared to 2009 as a result of services being more weighted towards asset management services which tend to have higher margins as a result of less Outside Fees and Services.
Selling, General and Administrative Expenses
| | | 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 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Selling, General and Administrative Expenses | | $ | 15,278 | | | | (11) | | | $ | 13,718 | | | | (179) | | | $ | 4,913 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Operating Margin Percentage: | | | | | | | | | | | | | | | | | | | | |
Income from Operations/Service Revenue | | | 42 | % | | | | | | | 41 | % | | | | | | | 37 | % |
| | | | | | | | | | | | | | | | | | | | |
N/M — Not meaningful.
Selling, General and Administrative Expenses and Income from Operations
SG&A expenses increased on an absolute basis over the three year period principally due to the exponential growth in the Mortgage Services segment which required investments in leased facilities and related occupancy costs, technology and other general and administrative costs. As this segment continuesAlso contributing to grow, we should begin to leverage Selling, General and Administrative Expenses resulting in increased margins.
Thethe increase in 2010both periods was also as a result of the classification of certain compensation and benefithigher marketing 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 thoseHubzu, travel expenses primarily associated with the external audit increasedmanagement of our global operations, higher bad debt expense in 2010line with our higher levels of revenue and costs in 2012 associated with the separation of Residential and AAMC.
Income from operations as a resultpercentage of beingservice revenue, however, declined in 2012 compared to 2011 due to the lower gross profit margins in 2012, costs associated with the separation of Residential and AAMC partially offset by stabilization of SG&A on higher service revenue. Excluding the costs to develop the rental property management business and the costs associated with the separation of Residential and AAMC, our income from operations as a public company for a full year.
percentage of service revenue would have been 44% in 2012.35
Table of Contents
Financial Services
The following table presents our results of operations for our Financial Services segment
Revenue
Revenue by service line was as follows for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | |
| | | Years Ended December 31, | |
| | | | | | % Better | | | | | | % Better | | | | |
(in thousands) | | 2011 | | | /(Worse) | | | 2010 | | | /(Worse) | | | 2009 | |
| | | | | |
Service Revenue | | $ | 69,231 | | | | (7 | ) | | $ | 74,718 | | | | (6 | ) | | $ | 79,731 | |
Reimbursable Expenses | | | 1,950 | | | | (33 | ) | | | 2,899 | | | | N/M | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total Revenue | | | 71,181 | | | | (8 | ) | | | 77,617 | | | | (3 | ) | | | 79,731 | |
Cost of Revenue | | | 51,096 | | | | 10 | | | | 56,575 | | | | 1 | | | | 57,067 | |
| | | | | | | | | | | | | | | | | | | | |
Gross Profit | | | 20,085 | | | | (5 | ) | | | 21,042 | | | | (7 | ) | | | 22,664 | |
Selling, General and Administrative Expenses | | | 15,634 | | | | 25 | | | | 20,739 | | | | (4 | ) | | | 19,979 | |
| | | | | | | | | | | | | | | | | | | | |
Income from Operations | | $ | 4,451 | | | | N/M | | | $ | 303 | | | | (89 | ) | | $ | 2,685 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Margins: | | | | | | | | | | | | | | | | | | | | |
Gross Profit/Service Revenue | | | 29 | % | | | | | | | 28 | % | | | | | | | 28 | % |
Income from Operations/Service Revenue | | | 6 | % | | | | | | | 0 | % | | | | | | | 3 | % |
| | | | | |
Transactions with Related Parties | | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 266 | | | | 60 | | | $ | 166 | | | | 69 | | | $ | 98 | |
| | | | | | | | | | | | | | | | | | | | |
Selling, General and Administrative Expenses | | $ | — | | | | N/M | | | $ | — | | | | (100 | ) | | $ | 467 | |
| | | | | | | | | | | | | | | | | | | | |
Interest Expense | | $ | — | | | | N/M | | | $ | — | | | | (100 | ) | | $ | 1,029 | |
| | | | | | | | | | | | | | | | | | | | |
N/M — not meaningful.
In 2011, we reorganized our reporting structure within this segment in that certain services originally part of Component Services and Other in the Mortgage Services segment are now classified as part of Customer Relationship Management in our Financial Services segment.
Our leadership team is focused on disciplined floor management, delivering more services over our global delivery platform, expanding our quality and analytical initiatives and investing in new technology.
In July 2011, we purchased the assembled workforce of a sub-contractor in India 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 Services. Since acquisition, the costs have been recorded as employee costs, technology or occupancy as appropriate which has resulted in movement between Cost of Revenue and Selling, General and Administrative Expense categories.
Revenue
| | | | % Increase | | | | % Increase | | | |
(in thousands) | | 2012 | | / (decrease) | | 2011 | | / (decrease) | | 2010 | |
| | | | | | | | | | | |
Service revenue | | | | | | | | | | | |
Asset recovery management | | $ | 29,582 | | (21 | ) | $ | 37,371 | | (17 | ) | $ | 45,151 | |
Customer relationship management | | 34,397 | | 8 | | 31,860 | | 8 | | 29,567 | |
Total service revenue | | 63,979 | | (8 | ) | 69,231 | | (7 | ) | 74,718 | |
| | | | | | | | | | | |
Reimbursable expenses: | | | | | | | | | | | |
Asset recovery management | | 543 | | (72 | ) | 1,950 | | (33 | ) | 2,899 | |
Total reimbursable expenses | | 543 | | (72 | ) | 1,950 | | (33 | ) | 2,899 | |
| | | | | | | | | | | |
Total revenue | | $ | 64,522 | | (9 | ) | $ | 71,181 | | (8 | ) | $ | 77,617 | |
| | | | | | | | | | | |
Transactions with related parties: | | | | | | | | | | | |
Asset recovery management | | $ | 208 | | (22 | ) | $ | 266 | | 60 | | $ | 166 | |
| | | 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 | |
| | | | | | | | | | | | | | | | | | | | |
Total Service Revenue | | | 69,231 | | | | (7 | ) | | | 74,718 | | | | (6 | ) | | | 79,731 | |
| | | | | |
Reimbursable Expenses: | | | | | | | | | | | | | | | | | | | | |
Asset Recovery Management | | | 1,950 | | | | (33 | ) | | | 2,899 | | | | N/M | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total Reimbursable Expenses | | | 1,950 | | | | (33 | ) | | | 2,899 | | | | N/M | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
Total Revenue | | $ | 71,181 | | | | (8 | ) | | $ | 77,617 | | | | (3 | ) | | $ | 79,731 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Transactions with Related Parties: | | | | | | | | | | | | | | | | | | | | |
Asset Recovery Management | | $ | 266 | | | | 60 | | | $ | 166 | | | | 69 | | | $ | 98 | |
| | | | | | | | | | | | | | | | | | | | |
N/M — not meaningful.
In our Financial Services segment, we generate revenue from asset recovery management fees we earn for collecting amounts due to our customers and from fees we earn for performing customer relationship management for our customers.
Financial Services revenue declined over the three year period due to a decline in revenue attributable tofrom asset recovery management services. The decline was primarily associated withdue to the shift of existing services for one of the segment’s largest customers. Thecustomers to a lower cost geography with corresponding lower fees from our customer for these services and a decline was due to the general economic environment which has kept collection rates depressed and also thein total placements as a result of lower credit card delinquencies. Partially offsetting this decline, service revenue in customer relationship management increased over the client shifting work to the Company’s global delivery platform.same periods. 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 lower employee cost structure. These declines were partially offset by growth
Cost of Revenue and Gross Profit
Cost of revenue consists of the following for the years ended December 31:
| | | | % Increase | | | | % Increase | | | |
(in thousands) | | 2012 | | / (decrease) | | 2011 | | / (decrease) | | 2010 | |
| | | | | | | | | | | |
Compensation and benefits | | $ | 32,700 | | 10 | | $ | 29,764 | | (4 | ) | $ | 30,948 | |
Outside fees and services | | 5,598 | | (52 | ) | 11,587 | | (25 | ) | 15,417 | |
Reimbursable expenses | | 543 | | (72 | ) | 1,950 | | (33 | ) | 2,899 | |
Technology and communications | | 7,221 | | (7 | ) | 7,784 | | 7 | | 7,298 | |
Depreciation and amortization | | 675 | | N/M | | 11 | | (15 | ) | 13 | |
| | | | | | | | | | | |
Cost of revenue | | $ | 46,737 | | (9 | ) | $ | 51,096 | | (10 | ) | $ | 56,575 | |
In July 2011, we purchased the assembled workforce of a sub-contractor in newIndia that performs asset recovery management accounts, which drove an increaseservices. For periods prior to the acquisition, the costs paid to the sub-contractor were included in associated revenues,outside fees and growth in our customer relationship management operations.services. Since the acquisition, these costs have been recorded according to the nature of the expenses and are
Cost36
Table of RevenueContents
| | | 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 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Cost of Revenue | | $ | 51,096 | | | | 10 | | | $ | 56,575 | | | | 1 | | | $ | 57,067 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Gross Margin Percentage: | | | | | | | | | | | | | | | | | | | | |
Gross Profit/Service Revenue | | | 29 | % | | | | | | | 28 | % | | | | | | | 28 | % |
| | | | | | | | | | | | | | | | | | | | |
N/M – Not meaningful.
included in compensation and benefits and technology and communications expenses (included in cost of revenue ) or occupancy related costs and other (included in SG&A).Cost of Revenuesrevenue as percenta percentage of Service Revenueservice revenue has remained flat over the periods 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 a 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 benefitsGross profit as a resultpercentage of service revenue remained consistent over the three year period. We are focusing on both sales growth and operating efficiencies to grow earnings in this segment. We believe 2013 will be a lower numberturning point in our earnings. By the second quarter of collectors2012, we will have completed a multi-year process of consolidating three operating platforms into one. This simplifies our operating infrastructure, improves our workforce efficiency and reduced commissions, partially offset by higher costs associated withflexibility and lowers our technology costs. We also anticipate benefitting from our 2012 investment in a sales team to develop a pipeline of new business. We intend to pursue growth from existing customers and deeper penetration of the utilizationindustries we currently serve, including our planned expansion of outside collectors.
Selling, General and Administrative Expensescollections services for charged off mortgages.
| | | 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 | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Selling, General and Administrative Expenses | | $ | 15,634 | | | | 25 | | | $ | 20,739 | | | | (4 | ) | | $ | 19,979 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Operating Margin Percentage: | | | | | | | | | | | | | | | | | | | | |
Income from Operations/Service Revenue | | | 6 | % | | | | | | | 0 | % | | | | | | | 3 | % |
| | | | | | | | | | | | | | | | | | | | |
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 and Income from Operations
On an absolute basis, SG&A expenses decreased over the three year period principally from lower compensation costs as a result of shifting work in 2011 primarily dueour global delivery platform as discussed in the revenue section above and as a result of decreased depreciation and amortization (related to assets no longer utilized by this segment). SG&A in 2010 includes a $2.8 million goodwill impairment recorded in the fourth quarter of 2010 (no impairment recorded in 2011)2011 or 2012).
Operating income as wella percentage of service revenue improved from 0% for the year ended December 31, 2010 to 7% for the year ended December 31, 2012 as a result of reduced occupancy costs and costs from our Technology Services segment following implementation of certain cost containment measures.
the declines in SG&A expenses.Technology Services
The following table presents our results of operations for our Technology Services segment
Revenue
Revenue by service line was as follows for the years ended December 31:
| | | 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 | |
| | | | | | | | | | | | | | | | | | | | |
Gross Profit | | | 19,220 | | | | (17 | ) | | | 23,104 | | | | 1 | | | | 22,976 | |
Selling, General and Administrative Expenses | | | 4,867 | | | | 2 | | | | 4,985 | | | | (5 | ) | | | 4,731 | |
| | | | | | | | | | | | | | | | | | | | |
Income from Operations | | $ | 14,353 | | | | (21 | ) | | $ | 18,119 | | | | (1 | ) | | $ | 18,245 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | % Increase | | | | % Increase | | | |
(in thousands) | | 2012 | | / (decrease) | | 2011 | | / (decrease) | | 2010 | |
| | | | | | | | | | | |
Revenue: | | | | | | | | | | | |
REALSuite | | $ | 41,702 | | 19 | | $ | 34,926 | | 12 | | $ | 31,214 | |
IT infrastructure services | | 32,487 | | 53 | | 21,168 | | 2 | | 20,799 | |
Total revenue | | $ | 74,189 | | 32 | | $ | 56,094 | | 8 | | $ | 52,013 | |
| | | | | | | | | | | |
Transactions with related parties: | | | | | | | | | | | |
REALSuite | | $ | 18,245 | | 38 | | $ | 13,253 | | 18 | | $ | 11,226 | |
IT infrastructure services | | 13,000 | | 52 | | 8,559 | | 8 | | 7,941 | |
Revenue | | $ | 31,245 | | 43 | | $ | 21,812 | | 14 | | $ | 19,167 | |
The primary focus
37
Table of the Technology Services segment today is to support the growth of Mortgage Services and Ocwen. In addition, Technology Services assists in cost reduction and quality initiatives within the Financial Services segment.
Effective January 1, 2011, we modified our pricing for IT Infrastructure Services within our Technology Services segment from a model based principally on a set charge per headcount per service to a fully loaded cost plus mark-up methodology. Mark-ups for infrastructure services are based upon economic studies performed that are generally consistent with our transfer pricing methodology. This new model applies to the infrastructure amounts charged to Ocwen as well as internal allocations of infrastructure costs.
In addition, in 2011 we now report our Consumer Analytics group within Technology Services (previously reported in our Corporate Segment). Our Consumer Analytics group seeks to expand our use of behavioral sciences by building proprietary algorithms and psychologically-optimized communications through a customized technology platform.
RevenuesContents
| | | 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 | |
| | | | | | | | | | | | | | | | | | | | |
Total Revenue | | $ | 56,094 | | | | 8 | | | $ | 52,013 | | | | 10 | | | $ | 47,453 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Transactions with Related Parties: | | | | | | | | | | | | | | | | | | | | |
REALSuite | | $ | 13,253 | | | | 18 | | | $ | 11,226 | | | | 13 | | | $ | 9,899 | |
IT Infrastructure Services | | | 8,559 | | | | 8 | | | | 7,941 | | | | (27 | ) | | | 10,811 | |
| | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 21,812 | | | | 14 | | | $ | 19,167 | | | | (7 | ) | | $ | 20,710 | |
| | | | | | | | | | | | | | | | | | | | |
The increase in REALSuite revenue is directly attributable toover the three year period was driven by the growth in Ocwen’s residential loan servicing portfolio. In addition,An increase in flood certification services to Lenders One members also contributed to the increase in 20102012 as compared to 2009 was driven2011. We began offering flood certification services in early 2011.
The increase in IT infrastructure services revenue over the three year period reflects the growth experienced by increasesour Mortgage Services segment and by Ocwen. IT infrastructure services are billed on a cost plus basis. As such, the increase in REALServicing attributablecost to an expanded five-year renewal agreement withsupport headcount growth in both Altisource and Ocwen resulted in a non-related customercorresponding increase in revenue in the second quarter of 2009.
As mentioned above, IT InfrastructureTechnology Services revenue is principally based on fully loaded costs. Thissegment. The increase in 2011 is duecompared to the growth in both our and Ocwen’s operations,2010 was partially offset by the change in pricing effective January 1, 2011 as discussed in “Factors Affecting Comparability” above.
The decrease in 2010 as comparedservices provided to 2009 was due a reduction in our internal expenditures (which we eliminateother segments are eliminated in consolidation but includeare included as revenue in Technology Services and as a component of technology and communications expense in our other segments for segment presentation) as well as thosepresentation purposes.
Cost of Ocwen. The primary driverRevenue and Gross Profit
Cost of revenue consists of the following for the reduction in revenue related to internal expenditures was in our Financial Services segment due in part to fewer collections, facility closures and other cost reduction efforts. The decrease in revenue in 2010 was partially offset by an increase in revenues in the second half of 2010 as Ocwen expanded their operations.
Cost of Revenueyears ended December 31:
| | | 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 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Cost of Revenue | | $ | 36,874 | | | | (28 | ) | | $ | 28,909 | | | | (18 | ) | | $ | 24,477 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Gross Margin Percentage: | | | | | | | | | | | | | | | | | | | | |
Gross Profit/Service Revenue | | | 34 | % | | | | | | | 44 | % | | | | | | | 48 | % |
| | | | | | | | | | | | | | | | | | | | |
| | | | % Increase | | | | % Increase | | | |
(in thousands) | | 2012 | | / (decrease) | | 2011 | | / (decrease) | | 2010 | |
| | | | | | | | | | | |
Compensation and benefits | | $ | 26,602 | | 71 | | $ | 15,519 | | 38 | | $ | 11,259 | |
Outside fees and services | | 1,690 | | 132 | | 727 | | N/M | | 31 | |
Technology and communications | | 18,159 | | 21 | | 14,994 | | 23 | | 12,206 | |
Depreciation and amortization | | 8,183 | | 45 | | 5,634 | | 4 | | 5,413 | |
| | | | | | | | | | | |
Cost of revenue | | $ | 54,634 | | 48 | | $ | 36,874 | | 28 | | $ | 28,909 | |
N/M — Notnot meaningful.
Cost of Revenuesrevenue increased forover the periods presented due to investments inthree year period from hiring additional and more expensive personnel and vendor costs to support the growthdevelopment of Ocwenour next generation REALSuite software, increased technology and communications costs from the addition of new facilities and the expansion of existing facilities. Outside fees and services increased in 2012 associated with the increase in flood certification services provided to Lenders One members. Technology and communications costs increased principally due to the addition of new facilities, expansion of existing facilities and increased licensing fees for software to support our operations. In addition, we continue to strengthen our technology design and development competencies as we investgrowth. We expect cost of revenue in the next generation of REALSuite technologies. We expect Technology Services’ Compensation and Benefits costsServices segment to increase as we continue to invest in personnel to support our development initiatives.
TechnologyGross profit as a percentage of service revenue declined during the three year period as we experienced faster growth in the lower margin IT infrastructure services and Communicationincurred higher costs increased principally due toin the additiondevelopment of new facilities, expansion of bandwidth at existing facilities and increased licensing fees for software to support our growth.next generation technology.
Selling, General and Administrative Expenses and Income from Operations
| | | 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 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Selling, General and Administrative Expenses | | $ | 4,867 | | | | 2 | | | $ | 4,985 | | | | (5 | ) | | $ | 4,731 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Operating Margin Percentage: | | | | | | | | | | | | | | | | | | | | |
Income from Operations/Service Revenue | | | 26 | % | | | | | | | 35 | % | | | | | | | 38 | % |
| | | | | | | | | | | | | | | | | | | | |
Selling, General and Administrative ExpensesOn an absolute basis, SG&A expenses increased in 2012 compared to 2011 primarily due to an increase in occupancy costs. SG&A expenses in 2011 were comparable to those in 2010. Selling, General and Administrative Expenses increased in 2010
Income from operations as a resultpercentage of increased occupancy charges associated with the new data center and as a result of costs incurred in preparing for Ocwen’s growth in loans serviced.
The operating margin decreasedservice revenue declined over the three year period as a result of the Revenuerevenue and Cost of Revenueexpense fluctuations described above.
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Table of Contents
Corporate Items and Eliminations
Our Corporate segment prior to the date of Separation includes expenditures recognized by us related to the Separation. Subsequent to the date of Separation, in addition to these items, this segment also includes costs recognized by us related to corporate support functions such asincluding executive, finance, legal, human resources, vendor management, risk and six sigma.
Selling, General and Administrative Expenses It also includes eliminations of transactions between the reporting segments.
| | | 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 | |
Corporate costs increased in 2012 compared to 2011 primarily due to increased lease costs related to the build out of new facilities to support our growth. We reflect initial lease costs in our Corporate segment until the facilities reach a certain level of occupancy by the business operations at which time the cost is reflected in the respective business unit’s financial statements. Partially offsetting the increase in 2012 was the reversal in the first quarter of 2012 of share-based compensation and incentive compensation expense of $1.0 million related to the departure of an Executive Officer in March 2012. As a percentage of total consolidated service revenue, Corporate operating expenses decreased from 8.3% in 2011 to 6.4% in 2012 as SG&A is growing at a slower pace than service revenue.
Corporate costs increased in 2011 as compared to 2010. 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 werein 2011were essentially flat compared to 2010.
The elimination of intercompany revenue increased over the three year period due to growth in 2011.
our operations over the same period. These transactions primarily consist of IT infrastructure services as well as charges for the use of certain REALSuite applications from our Technology Service segment to our other two segments. While the expenses are recognized in the Mortgage Services and Financial Services segments above, the elimination of these expenses are reflected in Corporate items and eliminations.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.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
We seek to deploy excess cash generated in a disciplined manner. Principally, we will continueintend to reinvestuse excess cash in developing compellingto repay our senior secured term loan (as described below) and develop complementary services and businesses that we believe will generate high margins. In addition,attractive margins in line with our core capabilities. Further, we may seekplan to evaluate potential acquisitions that align with our vision and accelerate the achievement of our strategic objectives.
On January 31 2013, we entered into letters of intent with Ocwen to acquire for a limited numbercombined purchase price of complementary companies that fit our strategic objectives. Finally, given$218.6 million certain fee based businesses associated with Ocwen’s acquisition of Homeward Residential and the tax inefficiency of dividends, the low returns earned on cash held and our current belief to pursue a limited number of acquisitions, we believe oneanticipated acquisition of the best ways to return value to shareholders is through a share repurchase program.ResCap servicing portfolio. The fee based business acquisitions are strategically valuable as they will help us maintain our business model with Ocwen, expand our footprint and provide significant revenue and earnings growth.
Senior Secured Term Loan
On May 19, 2010, our shareholders authorized usNovember 27, 2012, we entered into a seven-year senior secured term loan facility agreement (the “Credit Agreement”), with Bank of America, N.A. as administrative agent pursuant to purchase upwhich we borrowed $200 million (the “Senior Secured Term Loan”).
A portion of the proceeds was used to 3.8capitalize Residential and AAMC (as described in “Separation of Residential Asset Businesses” in Item 1 of Part I, “Business”) and to pay certain fees, commissions and expenses in connection with the Credit Agreement. On December 27, 2012, we also used a portion of the proceeds to advance $75.0 million sharesto Ocwen under a senior unsecured term loan agreement (the “Ocwen Term Loan”) (See Note 4 to the consolidated financial statements for further information). The proceeds may also be used for general corporate purposes including acquisitions and investments permitted under the Credit Agreement.
39
Table of our common stockContents
The Senior Secured Term Loan must be repaid in equal consecutive quarterly principal installments, commencing on March 29, 2013, equal to 0.25% of the open market. Throughinitial principal amount of such loans with final payment of all amounts outstanding, plus accrued and unpaid interest, due on November 27, 2019. Interest payments are due monthly. The interest rate as of December 31, 2011,2012 was 5.75%.
Our debt covenants limit, among other things, our ability to incur additional debt. In the event we purchased 2.3 million shares ofneeded additional liquidity, our common stock onability to obtain it may be limited by the open market at an average price of $34.55 leaving 1.5 million shares still available for purchase under the program.Senior Secured Term Loan.
Cash Flows
The following table presents our cash flows for the years ended December 31:
| | | 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 | |
| | | | | | | | | | | | | | | | | | | | |
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 | ) |
| | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | |
Cash at End of Period | | $ | 32,125 | | | | 45 | | | $ | 22,134 | | | | (27 | ) | | $ | 30,456 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | % Increase | | | | % Increase | | | |
(dollars in thousands) | | 2012 | | / (decrease) | | 2011 | | / (decrease) | | 2010 | |
| | | | | | | | | | | |
Net income adjusted for non-cash items | | $ | 145,672 | | 51 | | $ | 96,657 | | 30 | | $ | 74,564 | |
Working capital | | (29,143 | ) | N/M | | 14,954 | | 169 | | (21,752 | ) |
Cash flow from operating activities | | 116,529 | | 4 | | 111,611 | | 111 | | 52,812 | |
Cash flow from investing activities | | (110,563 | ) | (234 | ) | (33,070 | ) | 16 | | (39,489 | ) |
Cash flow from financing activities | | 67,411 | | 198 | | (68,550 | ) | (217 | ) | (21,645 | ) |
Net change in cash | | 73,377 | | N/M | | 9,991 | | 220 | | (8,322 | ) |
Cash and cash equivalents at beginning of period | | 32,125 | | 45 | | 22,134 | | (27 | ) | 30,456 | |
Cash and cash equivalents at end of period | | $ | 105,502 | | 228 | | $ | 32,125 | | 45 | | $ | 22,134 | |
N/M — Notnot meaningful.
Cash FlowFlows from Operating Activities
Cash flowflows from operating activities consistsare generally the cash effects of two components: (i)transactions and events that factor into the determination of net income adjusted for depreciation, amortization and certain other non-cash items and (ii) working capital.income. For the year ended December 31, 2011,2012, we generated $116.5 million in cash flows from operations, or approximately $0.25 per dollar of service revenue, compared to $111.6 million in positiveof cash flowflows from operations, or approximately $0.33 for everyper dollar of service revenue. Thisrevenue in 2011. The increase in cash flow from operating activities compared to 2011 is primarily due to the increase in net income substantially offset by a decline in working capital principally due to higher accounts receivable. The reduction in cash flow from operations per service revenue dollar when compared to 2011 is the result of higher growth in accounts receivable in 2012 compared to 2011. We anticipate a more normalized level of accounts receivable in the first quarter of 2013.
In periods of growth, operating cash flow per service revenue dollar can be negatively impacted because of the nature of some of our services. Certain services are performed immediately following or shortly after the referral, but the collection of the receivable does not occur until a specific event occurs (i.e., the foreclosure is complete, the REO asset is sold, etc.). As we continue to grow, our receivables will also grow, and our cash flow from operations may be negatively impacted when comparing one period to another.
The significant increase in operating cash flows in 2011 compared to 2010 primarily reflects our profitability, adjusted for non-cash items, as a result of our year-over-year growth in mortgage-related services as well as a focused effort to improve our working capital position.
The significant increase in operating cash flow in 2010 compared to 2009 was primarily driven by our increased profitability as our Mortgage Services segment has expanded.
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Table of Contents
Cash Flow Flows from Investing Activities
Cash flows used in investing activities in 2012 include $75.0 million that we loaned Ocwen. It also includes $35.6 million of capital expenditures related to investments in a disaster recovery center and capital expenditures associated with facility build-outs and investments in the next generation of our own REALSuite of products. Of the capital expenditure amount, approximately $12.0 million is for the new disaster recovery center.
During 2011, we invested $15.0 million in Correspondent One to facilitate the establishment of this business.One. 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 flowflows 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.
Cash Flows from Financing Activities
In addition,November 2012, we increased purchasesentered into a $200.0 million Senior Secured Term Loan and capitalized $4.3 million in related debt issuance costs. A total of premises and equipment and technology to support our expansion of operations and in anticipation$105.0 million of the growthproceeds were distributed in Ocwen’s residential loan servicing portfolio.December 2012 in connection with the Separation of the Residential Asset Businesses.
Cash Flow from Financing Activities
The largest use of cash flow fromflows in financing activities in the years ended December 31, 2011 and 2010 was the repurchase of shares for $62.2 million and $17.8 million, respectively. We also repurchased $16.8 million of shares in 2011 and 2010, respectively. 2012. Beginning in the second quarter of 2012, we temporarily halted our share buyback program as described in the “Overview” section above.
Additional activities in all three years include receipt of funds related toassociated with stock option exercises and payments to non-controlling interest owners as a result of the acquisition of MPA.interests.
In 2009, 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 primarily included payments on debt and the net change in our invested equity balance.
Liquidity Requirements after December 31, 20112012
We began limiting our repurchase of outstanding shares in the first quarter of 2012 and did not repurchase any shares during the remainder of 2012 in anticipation of cash needed to execute on our growth initiatives (see “Growth Initiatives” in the overview section of this MD&A). Assuming management concludes share repurchases remain an effective deployment of our capital, we may resume repurchases in 2013.
During the first quarter of 2012,2013, we expect to distribute $2.4$1.1 million to the Lenders One members representing non-controlling interests.
On January 31, 2013, we entered into letters of intent with Ocwen to acquire for a combined purchase price of $218.6 million certain fee based businesses associated with Ocwen’s acquisition of Homeward Residential and the anticipated acquisition of the ResCap servicing portfolio (see Note 23 of the accompanying consolidated financial statements).
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
We believe that we will generate sufficient cash flow which is sufficient to fund both current operations, as well as expansion activities, we require very limited capital.capital expenditures and required debt and interest payments. Were we to need additional capital, we believe that we have adequate access to both debt and equity capital markets.
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CRITICAL ACCOUNTING JUDGMENTS
The preparation of financial statements in conformity with generally accepted accounting principles of the United States (“GAAP”)GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenuesrevenue 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 revenuesrevenue from the services we provide in accordance with ASC Topic 605.605, Revenue Recognition. ASC Topic 605 sets forth guidance as to when revenue is realized or realizable and earned which is generally 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 revenuesrevenue 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 revenue, 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.Ocwen, HLSS, Residential and AAMC. 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 flowflows 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 2012 and 2011 analysis,analyses, 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 impairwe recognized a goodwill impairment loss of $2.8 million of goodwill inrelated to the Financial Services segment. This determination was made after consideringWe considered both quantitative and qualitative factors including past performance and execution risk.risk in arriving at the impairment.
Identifiable Intangible Assets. Identified intangible assets consist primarily of customer lists, acquired trade names and trademarks. IndentifiedDefinite-lived intangible assets that amortize are tested for impairment whenever events or changes in circumstances occur indicating that the carrying amount of the asset may not be recoverable. An impairment loss would be recognized for an intangible asset if its carrying value exceeds its fair value.
Given the performance
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Table 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.Contents
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 consist 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 feesdays and are maintained in segregated bank accounts, they are generally not included in the accompanying Consolidated Balance Sheets, theconsolidated balance of which issheets. Amounts held in escrow were $47.2 million and $17.7 million at December 31, 2011.2012 and 2011, respectively.
Contractual Obligations, Commitments and Contingencies
Our long-term contractual obligations generally include our long-term debt and 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, 2011:2012:
| | | 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 | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Total | | $ | 19,311 | | | $ | 10,223 | | | $ | 9,088 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | |
| | 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 | | $ | 27,819 | | $ | 9,022 | | $ | 12,326 | | $ | 6,471 | | $ | — | |
Capital lease obligations — principal | | 233 | | 233 | | — | | — | | — | |
Long-term debt | | 200,000 | | 2,000 | | 4,000 | | 4,000 | | 190,000 | |
Contractual interest payments(1) | | 83,126 | | 12,449 | | 24,456 | | 23,878 | | 22,343 | |
| | | | | | | | | | | | | | | | |
Total | | $ | 311,178 | | $ | 23,704 | | $ | 40,782 | | $ | 34,349 | | $ | 212,343 | |
(1) | Represents estimated future interest payments on capital leases, based on applicable interest rates as of December 31, 2011.
(1)Represents estimated future interest payments on our Senior Secured Term Loan and also our capital leases based on applicable interest rates as of December 31, 2012. |
For further information, see Note 18Notes 13 and 20 to the consolidated financial statements.
Related Party — Parties
Ocwen
For the year ended December 31, 2011,2012, we generated $223.2segment revenue from Ocwen of $306.8 million offor Mortgage Services, $0.3$0.2 million offor Financial Services and $21.8$31 million offor Technology Services segment revenue from Ocwen.Services. Services provided to Ocwen during such periods included residential property valuation, real estate asset management and sales, trustee management services, property inspection and preservation, closing and insurance services, charge-off second mortgage collections, core technology back office support and multiple business technologiestechnology services and license
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fees including for our REALSuite of products. We provided all services at rates we believe to be comparable to market rates.
For the year ended December 31, 2011, Altisource2012, we billed Ocwen $2.6$2.7 million and Ocwen billed Altisource $1.9us $2.4 million for support services provided under the Transition Services Agreement.agreements described in Note 4 to the consolidated financial statements. These amounts are reflected as a componentcomponents of Selling, Generalselling, general and Administrative Expensesadministrative expenses in the accompanying Consolidated Statementsconsolidated statements of Operations.operations.
On December 27, 2012, we loaned $75.0 million to Ocwen under an unsecured term loan agreement. Interest payments are due quarterly. The interest rate at December 31, 2012 was 8.25%. See Note 4 to the consolidated financial statements for further information.
Correspondent One and HLSS
For the year ended December 31, 2012, we billed Correspondent One $0.4 million under a services agreement. For the year ended December 31, 2012, we billed HLSS $0.6 million under a services agreement. These amounts are reflected as components of SG&A in the consolidated statements of operations.
We also provide certain origination related services to Correspondent One. We earned revenue of $0.3 million for the year ended December 31, 2012 from the provision of these services.
Residential and AAMC
For purposes of governing certain of the ongoing relationships between Altisource, Residential and AAMC after the Separation of the Residential Asset Businesses, and to provide for an orderly transition to the status of three independent companies, we entered into the following agreements with Residential and AAMC (see Note 4 to the consolidated financial statements for a description of these agreements):
·Separation Agreement(1);
·Master Services Agreement(2);
·Support Services Agreement(1);
·Tax Matters Agreement(1);
·Trademark License Agreement(1) and
·Technology Products Services Agreement(3).
(1) Separate agreements with Residential and AAMC
(2) Agreement with Residential only
(3) Agreement with AAMC only
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ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Our financial market risk consists primarily of interest rate risk and foreign currency exchange risk.
Interest Rate Risk
As of December 31, 2012, we are paying interest on the Senior Secured Term Loan at the Adjusted Eurodollar Rate (with a minimum floor of 1.25%) plus 4.5%.
As of December 31, 2012, we are receiving interest on the Ocwen Term Loan equal to the Eurodollar Rate (as defined in the agreement) plus 6.75% provided that the Eurodollar Rate shall at no time be less than 1.50%. In certain circumstances, we may require the Ocwen Term Loan to bear interest at the Base Rate (as defined in the agreement) which shall at no time be less than 8.25%.
Based on principal amounts outstanding at December 31, 2012, a one percent increase in the Eurodollar Rate would not impact our annual interest expense as the interest rate would remain below the minimum required rates under these agreements.
Foreign Currency Exchange Risk
We are exposed to currency risk from the potential changes in currency values of our foreign currency exchange rate risk in connection with our investment in non-U.S. dollar functionaldenominated assets, liabilities, and cash flows. Our most significant foreign currency operations which are limited,exposures relate to the extent that our foreign exchange positions remain unhedged.
Euro and Indian Rupee.45
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ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 20112012 and 2010,2011, and the related consolidated statements of operations, changes in stockholders’ and investedconsolidated statements of equity, and cash flows for each of the three years in the period ended December 31, 2011.2012. 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.
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, 20112012 and 2010,2011, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2011,2012, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 34 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, 2011,2012, 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 16, 201213, 2013 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s//s/ Deloitte & Touche LLP |
Atlanta, Georgia |
February 13, 2013 |
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Atlanta, Georgia
February 16, 2012
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2011,2012, 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, 2011,2012, 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, 20112012 of the Company and our report dated February 16, 201213, 2013 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding significant transactions with Ocwen Financial Corporation, a related party.
/s//s/ Deloitte & Touche LLP |
Atlanta, Georgia |
February 13, 2013 |
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Atlanta, Georgia
February 16, 2012
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Consolidated Balance Sheets
(In Thousands, Except Per Share Data)in thousands, except per share data)
| | | 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 | |
| | | | | | | | |
| | December 31, | |
| | 2012 | | 2011 | |
| | | | | |
ASSETS | | | | | |
Current assets: | | | | | |
Cash and cash equivalents | | $ | 105,502 | | $ | 32,125 | |
Accounts receivable, net | | 88,955 | | 52,005 | |
Prepaid expenses and other current assets | | 7,618 | | 5,002 | |
Deferred tax assets, net | | 1,775 | | 1,133 | |
Total current assets | | 203,850 | | 90,265 | |
| | | | | |
Premises and equipment, net | | 50,399 | | 25,600 | |
Deferred tax assets, net | | 4,073 | | 4,373 | |
Intangible assets, net | | 56,586 | | 64,950 | |
Goodwill | | 14,915 | | 14,915 | |
Investment in equity affiliate | | 12,729 | | 14,470 | |
Loan to Ocwen | | 75,000 | | — | |
Other assets | | 11,674 | | 9,586 | |
Total assets | | $ | 429,226 | | $ | 224,159 | |
| | | | | |
LIABILITIES AND EQUITY | | | | | |
Current liabilities: | | | | | |
Accounts payable and accrued expenses | | $ | 58,976 | | $ | 44,867 | |
Current portion of long-term debt | | 2,000 | | — | |
Current portion of capital lease obligations | | 233 | | 634 | |
Other current liabilities | | 10,423 | | 9,939 | |
Total current liabilities | | 71,632 | | 55,440 | |
| | | | | |
Long-term debt, less current portion | | 196,027 | | –– | |
Capital lease obligations, less current portion | | –– | | 202 | |
Other non-current liabilities | | 1,738 | | 2,574 | |
| | | | | |
Commitment and contingencies (Note 20) | | | | | |
| | | | | |
Equity: | | | | | |
Common stock ($1.00 par value; 100,000 shares authorized; | | | | | |
25,413 issued and 23,427 outstanding as of December 31, 2012; | | | | | |
25,413 issued and 23,405 outstanding as of December 31, 2011) | | 25,413 | | 25,413 | |
Additional paid-in-capital | | 86,873 | | 83,229 | |
Retained earnings | | 124,127 | | 126,161 | |
Treasury stock, at cost (1,986 shares as of December 31, 2012 and 2,008 shares as of December 31, 2011) | | (77,954 | ) | (72,048 | ) |
Altisource equity | | 158,459 | | 162,755 | |
| | | | | |
Non-controlling interests | | 1,370 | | 3,188 | |
Total equity | | 159,829 | | 165,943 | |
| | | | | |
Total liabilities and equity | | $ | 429,226 | | $ | 224,159 | |
See notes to consolidated and combined consolidated financial statements.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Consolidated Statements of Operations
(In Thousands, Except Per Share Data)in thousands, except per share data)
| | | 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 | |
| | For the years ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
| | | | | | | |
Revenue | | $ | 568,360 | | $ | 423,687 | | $ | 301,378 | |
Cost of revenue | | 366,201 | | 275,849 | | 189,059 | |
| | | | | | | |
Gross profit | | 202,159 | | 147,838 | | 112,319 | |
Selling, general and administrative expenses | | 74,712 | | 62,131 | | 57,352 | |
| | | | | | | |
Income from operations | | 127,447 | | 85,707 | | 54,967 | |
Other (expense) income, net: | | | | | | | |
Interest expense | | (1,210 | ) | (85 | ) | (119 | ) |
Other (expense) income, net | | (1,588 | ) | 288 | | 923 | |
Total other (expense) income, net | | (2,798 | ) | 203 | | 804 | |
| | | | | | | |
Income before income taxes and non-controlling interests | | 124,649 | | 85,910 | | 55,771 | |
Income tax (provision) benefit | | (8,738 | ) | (7,943 | ) | 403 | |
| | | | | | | |
Net income | | 115,911 | | 77,967 | | 56,174 | |
Net income attributable to non-controlling interests | | (5,284 | ) | (6,855 | ) | (6,903 | ) |
| | | | | | | |
Net income attributable to Altisource | | $ | 110,627 | | $ | 71,112 | | $ | 49,271 | |
| | | | | | | |
Earnings per share: | | | | | | | |
Basic | | $ | 4.74 | | $ | 2.92 | | $ | 1.96 | |
Diluted | | $ | 4.43 | | $ | 2.77 | | $ | 1.88 | |
| | | | | | | |
Weighted average shares outstanding: | | | | | | | |
Basic | | 23,358 | | 24,373 | | 25,083 | |
Diluted | | 24,962 | | 25,685 | | 26,259 | |
| | | | | | | |
Transactions with related parties included above: | | | | | | | |
Revenue | | $ | 338,227 | | $ | 245,262 | | $ | 154,988 | |
Selling, general and administrative expenses | | $ | 2,430 | | $ | 1,893 | | $ | 1,056 | |
Other income | | $ | 86 | | $ | — | | $ | — | |
See notes to consolidated and combined consolidated financial statements.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Consolidated Statements of Changes Equity
(in Stockholders’ and Invested Equitythousands)
(In Thousands)
| | | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common stock | | Additional
paid-in | | Retained | | Treasury stock, | | Non-
controlling | | | |
| | Shares | | | | capital | | earnings | | at cost | | interests | | Total | |
| | | | | | | | | | | | | | | |
Balance, January 1, 2010 | | 24,145 | | $ | 24,145 | | $ | 50,538 | | $ | 11,665 | | $ | — | | $ | — | | $ | 86,348 | |
Net Income | | — | | — | | — | | 49,271 | | — | | 6,903 | | 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 | | 2,708 | | (2,390 | ) | 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 | | 79,297 | | 58,546 | | (14,418 | ) | 3,060 | | 151,898 | |
| | | | | | | | | | | | | | | |
Net Income | | — | | — | | — | | 71,112 | | — | | 6,855 | | 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 | | 83,229 | | 126,161 | | (72,048 | ) | 3,188 | | 165,943 | |
| | | | | | | | | | | | | | | |
Net Income | | — | | — | | — | | 110,627 | | — | | 5,284 | | 115,911 | |
Contributions from non-controlling interest holders | | — | | — | | — | | — | | — | | 43 | | 43 | |
Distributions to non-controlling interest holders | | — | | — | | — | | — | | — | | (7,145 | ) | (7,145 | ) |
Net assets distributed in connection with the Separation of the Residential Asset Businesses | | — | | — | | — | | (105,000 | ) | — | | — | | (105,000 | ) |
Share-based compensation expense | | — | | — | | 3,644 | | — | | — | | — | | 3,644 | |
Exercise of stock options | | — | | — | | — | | (7,661 | ) | 10,875 | | — | | 3,214 | |
Repurchase of shares | | — | | — | | — | | — | | (16,781 | ) | — | | (16,781 | ) |
Balance, December 31, 2012 | | 25,413 | | $ | 25,413 | | $ | 86,873 | | $ | 124,127 | | $ | (77,954 | ) | $ | 1,370 | | $ | 159,829 | |
See notes to consolidated and combined consolidated financial statements.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Consolidated Statements of Cash Flows
(In Thousands)in thousands)
| | | 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 | |
| | For the years ended December 31, | |
| | 2012 | | 2011 | | 2010 | |
Cash flows from operating activities: | | | | | | | |
Net income | | $ | 115,911 | | $ | 77,967 | | $ | 56,174 | |
Reconciling items: | | | | | | | |
Depreciation and amortization | | 12,776 | | 8,351 | | 7,158 | |
Amortization of intangible assets | | 5,030 | | 5,291 | | 4,891 | |
Goodwill impairment | | — | | — | | 2,816 | |
Share-based compensation expense | | 3,644 | | 3,932 | | 3,110 | |
Equity in losses of and impairment loss on investment in affiliate | | 1,741 | | 530 | | — | |
Bad debt expense | | 3,049 | | 967 | | 1,534 | |
Amortization of debt discount | | 27 | | — | | — | |
Amortization of debt issuance costs | | 57 | | — | | — | |
Deferred income taxes | | 2,992 | | (381 | ) | (1,119 | ) |
Loss on sale or disposal of fixed assets | | 445 | | — | | — | |
Changes in operating assets and liabilities, net of acquisitions: | | | | | | | |
Accounts receivable | | (39,999 | ) | 812 | | (18,259 | ) |
Prepaid expenses and other current assets | | (2,616 | ) | 747 | | (9,851 | ) |
Other assets | | 2,172 | | (4,892 | ) | (2,799 | ) |
Accounts payable and accrued expenses | | 11,652 | | 14,760 | | 8,180 | |
Other current and non-current liabilities | | (352 | ) | 3,527 | | 977 | |
Net cash flows provided by operating activities | | 116,529 | | 111,611 | | 52,812 | |
| | | | | | | |
Cash flows from investing activities: | | | | | | | |
Additions to premises and equipment | | (35,563 | ) | (16,442 | ) | (11,614 | ) |
Acquisition of business, net of cash acquired | | — | | (2,515 | ) | (26,830 | ) |
Investment in equity affiliate | | — | | (15,000 | ) | — | |
Loan to Ocwen | | (75,000 | ) | — | | — | |
Change in restricted cash | | — | | 887 | | (1,045 | ) |
Net cash flows used in investing activities | | (110,563 | ) | (33,070 | ) | (39,489 | ) |
| | | | | | | |
Cash flows from financing activities: | | | | | | | |
Proceeds from issuance of long-term debt | | 198,000 | | — | | — | |
Distribution of cash in connection with the Separation of Residential Asset Businesses | | (105,000 | ) | — | | — | |
Debt issuance costs | | (4,317 | ) | — | | — | |
Principal payments on capital lease obligations | | (603 | ) | (696 | ) | (743 | ) |
Proceeds from stock option exercises | | 3,214 | | 1,024 | | 3,997 | |
Purchases of treasury stock | | (16,781 | ) | (62,151 | ) | (17,788 | ) |
Contributions from non-controlling interests | | 43 | | 49 | | 41 | |
Distributions to non-controlling interests | | (7,145 | ) | (6,776 | ) | (7,152 | ) |
Net cash flows provided by (used in) financing activities | | 67,411 | | (68,550 | ) | (21,645 | ) |
| | | | | | | |
Net increase (decrease) in cash and cash equivalents | | 73,377 | | 9,991 | | (8,322 | ) |
Cash and cash equivalents at the beginning of the period | | 32,125 | | 22,134 | | 30,456 | |
Cash and cash equivalents at the end of the period | | $ | 105,502 | | $ | 32,125 | | $ | 22,134 | |
| | | | | | | |
Supplemental cash flow information | | | | | | | |
Interest paid | | $ | 1,134 | | $ | 83 | | $ | 108 | |
Income taxes paid (refunded), net | | 4,912 | | (1,956 | ) | 6,069 | |
| | | | | | | |
Non-cash investing and financing activities | | | | | | | |
Amortization of tax-deductible goodwill | | 3,334 | | 3,367 | | 3,029 | |
Premises and equipment purchased on account | | 2,457 | | — | | — | |
See notes to consolidated and combined consolidated financial statementsstatements.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements
1.ORGANIZATION AND BASIS OF PRESENTATION
Altisource Portfolio Solutions S.A., together with its subsidiaries, (which may be referred to as Altisource™Altisource™, the Company, we, us or our) is a global provider of services focused on high value,high-value, technology-enabled, knowledge-based functionssolutions principally related to real estate and mortgage portfolio management, asset recovery and customer relationship management.
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 (“NASDAQ”) market under the symbol “ASPS” as of August 10, 2009 see “Separation” below.(the “Separation from Ocwen”). Prior to the Separation from Ocwen, our businesses were wholly-owned subsidiaries of Ocwen Financial Corporation (“Ocwen”).
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®”). 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 opportunities. In April 2011, we acquired Springhouse, LLC (“Springhouse™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 performedperforms asset recovery services (see Note 4)5).
On December 21, 2012, we completed the distribution of two wholly-owned subsidiaries via the spin-off of two separate publicly-traded companies, Altisource Residential Corporation (“Residential”) and Altisource Asset Management Corporation (“AAMC”). Residential’s common stock is listed on the New York Stock Exchange under the symbol “RESI,” and AAMC common stock is listed on the OTCQX market tier operated by OTC Markets Group, Inc. (the “OTC Market”) under the symbol “AAMC.” We distributed all of the shares of Residential common stock and AAMC common stock to Altisource’s shareholders of record as of December 17, 2012 (the “Record Date”) (see Note 3).
We conduct our operations through three reporting segments: Mortgage Services, Financial Services and Technology Services. In addition, we report our corporate related expenditures and eliminations as a separate segment (see Note 1921 for a description of our business segments).
Separation – On August 10, 2009, we became a stand-alone public company in connection with our separation from Ocwen Financial Corporation (“Ocwen®”) (the “Separation”). Prior to the Separation, our businesses were wholly-owned subsidiaries of Ocwen. On the date of Separation, 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 – Beginning August 10, 2009, after our assets and liabilities were formally contributed by Ocwen to Altisource pursuant to the terms of the Separation Agreement, our financial statements have been presented on a consolidated basis for financial reporting purposes. — Our consolidated financial statements include the assets, and liabilities, revenuesrevenue and expenses directly attributable to our operations.
For periods prior to the date of Separation, these financial statements include allocations of expenses from Ocwen for corporate functions including insurance, employee benefit plan expense All significant intercompany and allocations for certain centralized administration costs for executive management, treasury, real estate, accounting, auditing, tax, risk management, internal audit, human resourcesinter-segment transactions and benefits administration. For additional information, see Note 3.
The financial statements for the period ended December 31, 2009 also do not necessarily reflect what our consolidated results of operations, financial position and cash flows wouldaccounts have been had we 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.eliminated in consolidation.
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
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (continued)
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 it is the primary beneficiary of Lenders One as it 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 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 Membersmembers reflected as Non-controlling Interest on the Consolidated Balance Sheets.non-controlling interests. At December 31, 2011,2012, Lenders One had total assets of $5.2$2.3 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, revenuesrevenue 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.
Accounts Receivable, Net – — Accounts Receivablereceivable are net of an allowance for doubtful accounts that represent an amount that we estimate to be uncollectible. We have estimated the allowance for doubtful accounts based on our historical write-offs, our analysis of past due accounts based on the contractual terms of the receivables, and our assessment of the economic status of our customers, if known. The carrying value of Accounts Receivable,accounts receivable, net, approximates fair value.
Premises and Equipment, Net – — We report Premisespremises and Equipment,equipment, net 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 Fixturesfixtures | | | 5 years | |
Office Equipmentequipment | | | 5 years | |
Computer Hardware and Softwarehardware | | 5 years |
Computer software | 2 –3 | 3 years | |
Leasehold Improvementsimprovements | | | Shorter of useful life or term of lease | |
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements(continued)
We record payments for maintenanceMaintenance and repairsrepair costs are expensed as expenses when incurred. We recordcapitalize 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 Premisespremises and Equipmentequipment 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.
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Notes to Consolidated Financial Statements (continued)
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, Business Combinations. 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)equity income (loss) in Affiliates,affiliates, net which is included in Other Income (Expense)other income (expense), net in the Consolidated Statementsconsolidated statements of Operations.operations. We review the investment in equity affiliate for an other than temporary impairment whenever events or circumstances indicate that the carrying value is greater than the value of the investment and the loss is other than a temporary decline.
Goodwill —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 noyear. No impairment of goodwill was requiredrecorded for the years ended December 31, 2012 and 2011 and 2009 (inas the fair value exceeded the carrying value. In 2010, we recorded a $2.8 million impairment in our Financial Service segment).Services segment.
Intangible Assets, Net –— Identifiable intangible assets acquired in business combinations are recorded based on their fair values at the date of acquisition. We determine the useful lives of our identifiable Intangible Assetsintangible assets after considering the specific facts and circumstances related to each intangible asset. Factors we consider when determining useful lives include the contractual term of any arrangements, the history of the asset, our long-term strategy for use of the asset and other economic factors. We amortize intangible assets that we deem to have definite lives on a straight-line basis over their useful lives, generally ranging from 5 to 20 years.
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 Assetsintangible 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 the carrying amount exceeds fair value. No impairment was recognized during the periods presented.
Debt Issuance Costs— Debt issuance costs are capitalized and amortized to interest expense through maturity of the related debt using the effective interest method.
Long-term Debt— Long-term debt is reported net of applicable discount. The debt discount is amortized to interest expense through maturity of the related debt using the effective interest method.
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Notes to Consolidated Financial Statements(continued)
Fair Value of Financial Instruments– The fair value of— Our financial instruments which primarily include Cashcash and Cash Equivalents, Restricted Cash, Accounts Receivablecash equivalents, restricted cash, accounts receivable, the loan to Ocwen, accounts payable, accrued expenses and Accounts Payablelong-term debt. The carrying values of cash and Accrued Expensescash 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.instruments. The carrying amounts of the loan to Ocwen and long-term debt approximates fair value due to their variable interest rates.
Functional Currency—The currency of the primary economic environment in which our operations are conducted is the U.S.United States dollar. Therefore, the U.S.United States dollar has been determined to be our functional and reporting currency. Non-dollar transactions and balances have been measured in U.S.United States dollars in accordance with ASC Topic 830.830, Foreign Currency Matters. All transaction gains and losses from the measurement of monetary balance sheet items denominated in non-dollar currencies are reflected in the statement of operations as income or expenses, as appropriate.
Defined Contribution 401(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 $0.2 million, $0.1 million and $0.2 million in 2012, 2011 and $0.1 million in 2011, 2010, and 2009, respectively, related to our discretionary amounts contributed.
Equity-basedShare-based Compensation –— Equity-based Share-based compensation is accounted for under the provisions of ASC Topic 718.718, Compensation — Stock Compensation. Under ASC Topic 718, the cost of employee services received in exchange for an award of equity instruments is generally measured based on the grant-date fair value of the award. Equity-basedShare-based awards that do not require future service are expensed immediately. Equity-basedShare-based employee awards that require future service are recognized over the relevant service period. Further, as required under ASC Topic 718, we estimate forfeitures for equity-basedshare-based awards that are not expected to vest.
Earnings Per Share–— We compute Earnings Per Shareearnings per share (“EPS”) in accordance with ASC Topic 260.260, Earnings Per Share. Basic Net Incomenet income per Shareshare is computed by dividing Net Incomenet income attributable to Altisource by the weighted-average number of shares of common stock outstanding for the period. Diluted Net Income Per Sharenet income per share reflects the assumed conversion of all dilutive securities.
Revenue Recognition–— We recognize revenuesrevenue from the services we provide in accordance with ASC Topic 605.605, Revenue Recognition. ASC Topic 605 sets forth guidance as to when revenue is realized or realizable and earned, which is generally 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 revenuesrevenue 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 revenuesrevenue for the majority of the services we provide in this segment on completion of the service to our customer. 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. 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 $95.6 million, $80.1 million $44.6 million and $16.1$44.6 million incurred in 2012, 2011 2010 and 2009,2010, respectively, primarily in conjunction with our property preservation and default processing services are included in revenuesrevenue with an equal offsetting expense included in cost of revenues.revenue. These amounts are recognized on a gross basis, principally because we have complete control over selection of vendors.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (continued)
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 revenuesrevenue upon collection from the debtors. We also provide customer relationship management services for which we earn and recognize revenuesrevenue 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™ platform, we charge based on the number of our client’sclients’ loans processed on the system or on a per-transaction basis. We record transactional revenuesrevenue when the service is provided and other revenuesrevenue monthly based on the number of loans processed, employees serviced or services provided. Furthermore, we provide ITinformation technology (“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.
Income Taxes–— We account 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. The most significant temporary differences relate to accrued compensation, amortization, and 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. The effect on deferred assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion or all the deferred tax assets will not be realized.
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 740.740, Income Taxes.
3. SEPARATION OF RESIDENTIAL ASSET BUSINESSES
On December 21, 2012, we completed the spin-offs of two wholly-owned subsidiaries, Residential and AAMC, into separate publicly-traded companies (the “Separation of the Residential Asset Businesses”).
Altisource shareholders of record as of December 17, 2012 received a pro rata distribution of:
3.·one share of Residential common stock for every three shares of Altisource common stock held;
·one share of AAMC common stock for every ten shares of Altisource common stock held and
·received cash in lieu of Residential and AAMC fractional shares.
We eliminated the assets and liabilities of Residential and AAMC from our consolidated balance sheet effective at the close of business on December 21, 2012. As Residential and AAMC are development stage companies and have not commenced operations, these entities had no historical results of operations.
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Notes to Consolidated Financial Statements (continued)
The carrying value of the net assets transferred by Altisource was as follows:
(in thousands) | | Residential | | AAMC | | Total | |
| | | | | | | |
Cash | | $ | 100,000 | | $ | 5,000 | | $ | 105,000 | |
| | | | | | | |
Reduction in Altisource retained earnings | | $ | 100,000 | | $ | 5,000 | | $ | 105,000 | |
We incurred $2.7 million of expenses in 2012 representing salaries of certain employees who became employees of AAMC after the separation (included in cost of revenue) and advisory expenses (included in selling, general and administrative expenses) incurred in connection with the Separation of the Residential Asset Businesses. These expenses are included in our Mortgage Services segment.
Impact on Share-based Compensation
The exercise price of each outstanding stock option of Altisource was adjusted to reflect the value of Residential and AAMC common stock distributed to Altisource shareholders. On the separation date, all holders of Altisource stock options received the following:
·stock options (issued by Residential and AAMC) to acquire the number of shares of Residential or AAMC common stock equal to the product of (a) the number of Altisource stock options held on the separation date and (b) the distribution ratio of 1 share of Residential common stock for every 3 shares of Altisource common stock and 1 share of AAMC stock for every 10 shares of Altisource common stock and
·an adjusted Altisource stock option, with a reduced exercise price per stock option.
We determined the exercise price of the new Residential and AAMC stock option and the adjusted Altisource stock option in a manner so that the fair value of the adjusted Altisource stock award and the new Residential and AAMC stock options immediately following the Separation of the Residential Asset Businesses was equivalent to the fair value of such Altisource stock award immediately prior to the Separation of the Residential Asset Businesses. No incremental share-based compensation was recognized as a result of this adjustment.
As of December 31, 2012, AAMC employees held less than 0.1 million options to purchase Altisource common stock. As of December 31, 2012, our current employees held 0.5 million options to purchase Residential common stock and 0.2 million options to purchase AAMC common stock. In addition, our Chairman held 0.3 million options to purchase Residential common stock and 0.1 million options to purchase AAMC common stock.
We are responsible for fulfilling all stock options related to Altisource common stock, and Residential and AAMC are responsible for fulfilling all stock options related to their respective common stock, regardless of whether such stock options are held by our or AAMC’s employees. Notwithstanding the foregoing, our stock-based compensation expense, resulting from awards outstanding at the date of Separation of the Residential Asset Businesses, is based on the stock options held by our employees regardless of whether such awards were issued by Altisource, Residential or AAMC. Accordingly, stock-based compensation that we recognize as expense with respect to Residential and AAMC stock options is included in additional paid-in capital on our consolidated balance sheet. See Note 14 for additional information regarding our employee share-based compensation plans.
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Notes to Consolidated Financial Statements (continued)
4. TRANSACTIONS WITH RELATED PARTIES
Ocwen®
Ocwen remainsis our largest customer. Following the Separation, Ocwen, isincluding its wholly-owned subsidiary Ocwen Mortgage Servicing Inc. (“OMS”), are contractually obligated to purchase certain Mortgage Servicesmortgage services and Technology Servicestechnology services from us under service agreements. These agreements extend for eightOn October 1, 2012, the Ocwen agreement was extended by three years from the date of Separation subject to termination under certain provisions.through 2020. Separately, we signed a similar agreement on October 1, 2012 with OMS effective through 2020. Ocwen isand OMS are not restricted from redeveloping these services. We settle amounts with Ocwen on a daily, weekly or monthly basis baseddepending upon the nature of the servicesservice and when the service is completed.provided.
With respect to Ocwen, related
Related party revenues consistrevenue consists of revenuesrevenue earned directly from Ocwen and revenuesits subsidiaries and revenue earned from the loans serviced by Ocwen or its subsidiaries when Ocwen determines the service provider. We earn additional revenue on the loan portfolios serviced by Ocwen or its subsidiaries that are not considered related party revenues asrevenue when a party other than Ocwen does not have the ability to decideselects the service provider. As a percentage of each of our segment revenuesrevenue and as a percentage of consolidated revenues,revenue, related party revenue was as follows for the yearyears ended December 31:
| | | 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)
| | 2012 | | 2011 | | 2010 | |
| | | | | | | |
Mortgage Services | | 68 | % | 72 | % | 73 | % |
Technology Services | | 42 | % | 39 | % | 37 | % |
Financial Services | | < 1 | % | < 1 | % | < 1 | % |
Consolidated revenues | | 60 | % | 58 | % | 51 | % |
We record revenuesrevenue 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 ratesfees Ocwen pays to other service providers; fees commensurate with market surveys prepared by unaffiliated firms; and prices beingfees charged by our competitors. As of January 1, 2011, we modified our pricing for IT Infrastructure Servicesinfrastructure and support services within our Technology Services segment from a rate card model primarily based on headcount to a fully loaded cost plus mark-up methodology.where cost is allocated based on the underlying cost driver.
TransitionSupport Services
In connection
On August 10, 2012, we entered into a five-year support services agreement with OMS (the “Support Services Agreement”), setting forth certain services Altisource and OMS will provide to each other which are similar to the Separation,services Altisource and Ocwen entered intoprovided to each other pursuant to a Transition Services Agreement under whichtransition services inagreement. These services include 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 arecompliance. Payment for the services provided tois based on the counterparty for up to two years fromfully-allocated cost of providing the dateservice based on an estimate of Separation. The agreement was subsequently extended in August 2011 for certain services for an additional year.the time and expense of providing the service. For the years ended December 31, 2012, 2011 and 2010, Altisourcewe billed Ocwen $2.7 million, $2.6 million and $1.8 million, respectively, and Ocwen billed Altisourceus $2.4 million, $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, Generalselling, general and Administrativeadministrative expenses in the Consolidated Statementsconsolidated statements of Operations.operations.
Separation Related Expenditures
Included in Selling, General and Administrative ExpensesUnsecured Term Loan
On December 27, 2012, we entered into a senior unsecured term loan agreement with Ocwen (the “Ocwen Term Loan”) under which we loaned $75.0 million to Ocwen. Payments of interest are due quarterly at a rate per annum equal to the Eurodollar Rate (as defined in the accompanying Statementagreement) plus 6.75%, provided that the Eurodollar Rate shall at no
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Notes to Consolidated Financial Statements (continued)
time be less than 1.50%. In certain circumstances, we have recognized $3.4may require the Ocwen Term Loan to bear interest at the Base Rate (as defined in the agreement), which shall at no time be less than 8.25%. Interest income related to this loan was $0.1 million of Separation related expenses for the year ended December 31, 2009, primarily representing professional fees2012.
Ocwen is required to repay the entire outstanding principal amount of the Ocwen Term Loan plus all accrued and unpaid interest when it repays in full, refinances or replaces its Senior Credit Facility (as defined in the agreement). If its Senior Credit Facility is not repaid in full, refinanced or replaced on or prior to October 1, 2013, then we may require Ocwen to convert all or a portion of the outstanding principal amount and all or a portion of the unpaid interest accrued on the term loan into (i) an investment in or of Homeward Residential Holdings Inc. (“Homeward Residential”), a recent acquisition made by Ocwen, (ii) property or assets of Homeward Residential, (iii) equity interests of Homeward Residential, or (iv) if we and Ocwen agree, any other costsassets of Ocwen or its subsidiaries. The entire outstanding principal amount of the term loan is due on March 1, 2017 and may be prepaid earlier without penalty.
The Ocwen Term Loan agreement contains representations, warranties, covenants, terms and conditions customary for transactions of this type.
Acquisition of Fee Based Businesses
On January 31 2013, we entered into letters of intent with Ocwen to acquire certain fee based businesses associated with establishingOcwen’s acquisition of Homeward Residential and the Companyanticipated acquisition of the Residential Capital, LLC (“ResCap”) servicing portfolio (see Note 23 for additional information).
Correspondent One™ and HLSS™
In July 2011, we acquired an equity interest in Correspondent One (see Note 10). We provide Correspondent One certain finance, human resources, legal support, facilities, technology, vendor management and risk management services. For the years ended December 31, 2012 and 2011, we billed Correspondent One $0.4 million and $0.1 million, respectively, under a services agreement.
Home Loan Servicing Solutions, Ltd. (“HLSS”) is a public company whose primary objective is the acquisition of mortgage servicing rights and advances. In connection with the February 2012 HLSS initial public offering, HLSS acquired mortgage servicing related assets from Ocwen. Our Chairman is also the Chairman of HLSS. We provide HLSS certain finance, human resources and legal support services. For the year ended December 31, 2012, we billed HLSS $0.6 million under a services agreement (no comparative amounts in 2011 or 2010).
These amounts are reflected as a stand-alone entity. Priorcomponent of selling, general and administrative expenses in the consolidated statements of operations.
We also provide certain origination related services to Correspondent One. We earned revenue of $0.3 million for the year ended December 31, 2012 from the provision of these services (no comparative amounts in 2011 or 2010).
Residential and AAMC
For purposes of governing certain of the ongoing relationships between Altisource, Residential and AAMC after the Separation of the Residential Asset Businesses, and to provide for an orderly transition to the second quarterstatus of 2009, all previous coststhree independent companies, we entered into certain agreements with Residential and AAMC. A brief description of these agreements is as follows:
·Separation Agreement (with each of Residential and AAMC)—These agreements provide for, among other things, the principal corporate transactions required to effect the Separation of the Residential Asset
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Notes to Consolidated Financial Statements (continued)
Businesses and certain other agreements relating to the continuing relationship between Altisource and each of the separate companies and their respective affiliates after the Separation of the Residential Asset Businesses.
·Master Services Agreement (with Residential)—This agreement provides for Altisource’s offering of certain services to Residential in connection with their business for an initial term of 15 years, which will automatically renew for successive two-year terms unless either party sends a notice to the other party at least nine months before the completion of the initial or renewal term. Services provided by us under this agreement include property management, lease management and renovation management services associated with single-family rental assets acquired by Residential.
·Support Services Agreement (with each of Residential and AAMC)—Under these agreements, Altisource provide services to each entity, similar to those services provided to Ocwen described above, where Residential and AAMC may need assistance and support following the Separation were recognizedof the Residential Asset Businesses. The Support Services Agreement will extend for two years after the date of the Separation of the Residential Asset Businesses but may be terminated earlier under certain circumstances. Payment for the services provided is based on the fully-allocated cost of providing the service.
·Tax Matters Agreement (with each of Residential and AAMC)—These agreements set out each party’s rights and obligations with respect to deficiencies and refunds, if any, of Luxembourg, United States federal, state, local or other foreign taxes for periods before and after the date of Separation of the Residential Asset Businesses and related matters such as the filing of tax returns and the conduct of Internal Revenue Service (“IRS”) and other audits. In general, under these agreements, Residential and AAMC will be responsible for taxes attributable to their businesses incurred after the separation and we will be responsible for taxes attributable to their businesses incurred prior to the separation.
·Trademark License Agreement (with each of Residential and AAMC)—These agreements grant Residential and AAMC a non-exclusive, non-transferable, non-sublicensable, royalty free license to use the name “Altisource.” The agreement has no specified term and may be terminated by Ocwen.either party upon 30 days written notice.
4.·Technology Products Services Agreement (with AAMC)—This agreement provides for Altisource’s offering of certain technology products support services to AAMC in connection with its business, for a term of 15 years, but may be terminated earlier under certain circumstances. The price of these services is based on the fully-allocated cost of providing the service.
5. 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, Generalselling, general and Administrative Expensesadministrative expenses in the Consolidated Statementsconsolidated statements of Operations.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 performedperforms asset recovery services. Prior to acquisition, the costs paid to the sub-contractor were included in Outside Fees outside fees and Services (included in Costservices within cost of Revenuerevenue in the Consolidated Financial Statements).consolidated financial statements.
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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 | |
| | | | |
(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:
MPA
| | | 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, 20112012 consisted of 214241 members.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements(continued)
Consideration for the transaction consisted of cash, common stock and put option agreements:
| | | 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 | |
| | | | |
(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) was 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 hashad 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. All remaining put agreements expired in December 2011 due to the attainment of certain Altisource share price thresholds.
5.Acquisition of Fee Based Businesses from Ocwen
On January 31, 2013, we entered into letters of intent with Ocwen to acquire certain fee based businesses associated with Ocwen’s acquisition of Homeward Residential and the anticipated acquisition of the ResCap servicing portfolio (see Note 23 for additional information).
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Notes to Consolidated Financial Statements (continued)
6. ACCOUNTS RECEIVABLE, NET
Accounts Receivable,receivable, net consists of the following:following as of December 31:
| | | 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 | |
| | | | | | | | |
(in thousands) | | 2012 | | 2011 | |
| | | | | |
Billed | | | | | |
Third parties | | $ | 25,950 | | $ | 13,776 | |
Ocwen | | 19,817 | | 5,245 | |
Correspondent One | | 27 | | 123 | |
HLSS | | 163 | | 5 | |
AAMC | | 14 | | — | |
Other receivables | | 353 | | 350 | |
| | 46,324 | | 19,499 | |
Unbilled | | | | | |
Third parties | | 39,496 | | 31,831 | |
Ocwen | | 6,377 | | 2,722 | |
Correspondent One | | 32 | | — | |
| | 92,229 | | 54,052 | |
Allowance for doubtful accounts | | (3,274 | ) | (2,047 | ) |
| | | | | |
Total | | $ | 88,955 | | $ | 52,005 | |
Unbilled Feesfees consist primarily of Asset Managementasset management and Default Management Servicesdefault management services for which we recognize revenues over the service delivery period but bill atfollowing completion of the service. Based on the Company’s historical performance, the majority of unbilled fees are expected to be collected within one year.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements(continued)
A summary of the allowance for doubtful accounts, net of recoveries, for the years ended December 31, 2012, 2011 2010 and 20092010 is as follows:
| | | September 30, | | | (in thousands) | |
| | | (in thousands) | | | | |
| Balance, January 1, 2009 | | $ | 777 | | |
Bad Debt Expense | | | 338 | | |
Balance, January 1, 2010 | | | $ | 696 | |
Bad debt expense | | | 1,735 | |
Recoveries | | | (205 | ) | | (106 | ) |
Write-offs | | | (214 | ) | | (193 | ) |
| | | | |
Balance, December 31, 2009 | | | 696 | | |
Bad Debt Expense | | | 1,735 | | |
Balance, December 31, 2010 | | | $ | 2,132 | |
Bad debt expense | | | 967 | |
Recoveries | | | (106 | ) | | (54 | ) |
Write-offs | | | (193 | ) | | (998 | ) |
| | | | |
Balance, December 31, 2010 | | $ | 2,132 | | |
Bad Debt Expense | | | 967 | | |
Balance, December 31, 2011 | | | $ | 2,047 | |
Bad debt expense | | | 3,049 | |
Recoveries | | | (54 | ) | | (21 | ) |
Write-offs | | | (998 | ) | | (1,801 | ) |
| | | | |
Balance, December 31, 2011 | | $ | 2,047 | | |
| | | | |
Balance, December 31, 2012 | | | $ | 3,274 | |
6.7. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid Expensesexpenses and Other Current Assetsother current assets consist of the following:following as of December 31:
| | | 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 | |
| | | | | | | | |
(in thousands) | | 2012 | | 2011 | |
| | | | | |
Maintenance agreements, current portion | | $ | 3,636 | | $ | 1,903 | |
Income taxes receivable | | 1,814 | | — | |
Prepaid software license fees | | 453 | | 1,445 | |
Prepaid insurance | | 464 | | 544 | |
Prepaid facility costs | | 59 | | 72 | |
Other prepaid expenses | | 664 | | 247 | |
Cash held for clients | | 447 | | 759 | |
Other current assets | | 81 | | 32 | |
| | | | | |
Total | | $ | 7,618 | | $ | 5,002 | |
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (continued)
8. PREMISES AND EQUIPMENT, NET
Premises and Equipment,equipment, net, which include amounts recorded under capital leases, consists of the following:following as of December 31:
| | | 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 | ) |
| | | | | | | | |
| | |
Total | | $ | 25,600 | | | $ | 17,493 | |
| | | | | | | | |
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements(continued)
(in thousands) | | 2012 | | 2011 | |
| | | | | |
Computer hardware and software | | $ | 68,329 | | $ | 39,452 | |
Office equipment and other | | 15,592 | | 15,068 | |
Furniture and fixtures | | 5,344 | | 4,299 | |
Leasehold improvements | | 12,982 | | 7,014 | |
| | 102,247 | | 65,833 | |
Less: Accumulated depreciation and amortization | | (51,848 | ) | (40,233 | ) |
| | | | | |
Total | | $ | 50,399 | | $ | 25,600 | |
Depreciation and amortization expense, inclusive of capital lease obligations, amounted to $12.8 million, $8.4 million and $7.2 million for 2012, 2011 and $5.4 million for 2011, 2010, and 2009, respectively, and is included in Costcost of Revenuerevenue for operating assets and in Selling, Generalselling, general and Administrative expenseadministrative expenses for non-operating assets in the accompanying Consolidated Statementsconsolidated statements of Operations.operations.
8.9. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
Goodwill relates to the acquisitions of MPA, Springhouse, Tracmail and the company that developed the predecessor to our REALTrans® vendor management platform.
Changes in Goodwillgoodwill during the years ended December 31, 20112012 and 20102011 are summarized below:
| | | 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 | ) |
| | | | | | | | | | | | | | | | |
Balance, December 31, 2010 | | | 10,218 | | | | — | | | | 1,618 | | | | 11,836 | |
Acquisition of Springhouse | | | 701 | | | | — | | | | — | | | | 701 | |
Acquisition of Tracmail | | | — | | | | 2,378 | | | | — | | | | 2,378 | |
| | | | | | | | | | | | | | | | |
Balance, December 30, 2011 | | $ | 10,919 | | | $ | 2,378 | | | $ | 1,618 | | | $ | 14,915 | |
| | | | | | | | | | | | | | | | |
| | Mortgage | | Financial | | Technology | | | |
(in thousands) | | Services | | Services | | Services | | Total | |
| | | | | | | | | |
Gross value at January 1, 2011 | | $ | 10,218 | | $ | 13,544 | | $ | 1,618 | | $ | 25,380 | |
Accumulated amortization of tax-deductible goodwill (a) | | — | | (10,728 | ) | — | | (10,728 | ) |
Accumulated impairment losses | | — | | (2,816 | ) | — | | (2,816 | ) |
Balance, January 1, 2011 | | 10,218 | | — | | 1,618 | | 11,836 | |
Acquisition of Springhouse | | 701 | | — | | — | | 701 | |
Acquisition of Tracmail | | — | | 2,378 | | — | | 2,378 | |
| | | | | | | | | |
Balance, December 31, 2011 and 2012 | | $ | 10,919 | | $ | 2,378 | | $ | 1,618 | | $ | 14,915 | |
a) | See footnote (a) below Intangible Assets table
(a)See description under intangible assets, net section 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.
|
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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)5) and Nationwide Credit, Inc (“NCI®””). No impairment charges were taken during the periods presented.
Intangible Assets,assets, net duringconsist of the following as of December 31, 2012 and 2011:
| | Weighted
average
estimated
useful life | | Gross carrying amount | | Accumulated amortization | | Net book value | |
(dollars in thousands) | | (years) | | 2012 | | 2011 | | 2012 | | 2011 | | 2012 | | 2011 | |
| | | | | | | | | | | | | | | |
Definite-lived intangible assets | | | | | | | | | | | | | | | |
Trademarks | | 16 | | $ | 10,614 | | $ | 10,614 | | $ | (4,060 | ) | $ | (3,353 | ) | $ | 6,554 | | $ | 7,261 | |
Customer lists | | 19 | | 38,366 | | 38,366 | | (18,567 | )(a) | (13,010 | ) | 19,799 | | 25,356 | |
Operating agreement | | 20 | | 35,000 | | 35,000 | | (5,104 | ) | (3,354 | ) | 29,896 | | 31,646 | |
Non-compete agreement | | 4 | | 1,300 | | 1,300 | | (963 | ) | (613 | ) | 337 | | 687 | |
Total | | | | $ | 85,280 | | $ | 85,280 | | $ | (28,694 | ) | $ | (20,330 | ) | $ | 56,586 | | $ | 64,950 | |
(a)Prior to our acquisition of Nationwide Credit, Inc. (“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 resulted in our recording periodic reductions first to our book goodwill balance in our consolidated financial statements. As our book goodwill balance was fully written off at December 31, 2010, we continued to amortize the remaining Component 2 goodwill for United States tax purposes by reducing certain intangible assets by the remaining tax benefits of the Component 2 goodwill as they are realized in our tax returns. The reduction in intangible assets was $3.3 million and 3.4 million for of the years ended December 31, 2012 and 2011, and 2010 consist of the following:respectively. Component 2 goodwill was fully amortized in 2012.
| | | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Intangible Assets | | | | | | $ | 85,280 | | | $ | 84,100 | | | $ | 20,330 | | | $ | 11,672 | | | $ | 64,950 | | | $ | 72,428 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 resulted in our recording periodic reductions first to our book goodwill balance in our consolidated financial statements. As our book goodwill balance was fully written off at December 31, 2010 (see Goodwill section above), we continue to amortize the remaining Component 2 goodwill for U.S. tax purposes by reducing certain intangible assets by the remaining tax benefits of the Component 2 goodwill as they are realized in our tax returns. The amount amortized was $3.4 million for the year ended December 31, 2011. The balance of Component 2 goodwill remaining was $5.7 million as of December 31, 2011 which should generate $3.5 million of reductions of intangible assets when the benefit can be realized for U.S. tax purposes.
|
Amortization expense for definite lived intangible assets was $5.0 million, $5.3 million $4.9 million and $2.7$4.9 million for the fiscal years ended December 31, 2012, 2011 2010 and 2009,2010, respectively. Expected annual amortization for years 20122013 through 2016,2017, is $5.0 million, $4.8 million, $4.5 million, $4.4 million, $4.3 million and $4.3$4.0 million, respectively.
9.10. INVESTMENT IN EQUITY AFFILIATE
Correspondent One S.A. (“Correspondent One™”) facilitates the purchase ofpurchases closed conforming and government 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 weWe have no additional funding commitments to Correspondent One.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements(continued)
One as of December 31, 2012.
Correspondent One is in the initial phases of building its operations and therefore is expected to operate at a loss into 2012. TheOur net loss on this investment using the equity method was $1.2 million and $0.5 million for the yearyears ended December 31, 2011. 2012 and 2011 respectively.
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Notes to Consolidated Financial Statements (continued)
In the first quarter of 2013, we anticipate entering into an agreement to sell all of our equity interest in Correspondent One to Ocwen for approximately $12.7 million. As a result, we recorded a $0.6 million impairment loss as of December 31, 2012, representing the difference between the expected sales price and the carrying value as of December 31, 2012. The loss is included within equity loss in affiliate in other expense (income), net in the consolidated statements of operations.
The following table presents summarized financial information for Correspondent One which had no revenuesOne:
| | Year ended | |
(in thousands) | | December 31, 2012 | |
| | | |
Revenue | | $ | 578 | |
Expenses | | 2,944 | |
Net loss | | (2,366 | ) |
| | | |
| | | | |
| | As of
December 31, 2012 | |
Current assets | | $ | 30,096 | |
Non-current assets | | 796 | |
Current liabilities | | 3,595 | |
Equity | | 27,297 | |
| | | | |
11. OTHER ASSETS
Other assets consist of the following as of December 31, 2011 except for interest income as no loans were sold:31:
| | | 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 | |
(in thousands) | | 2012 | | 2011 | |
| | | | | |
Security deposits, net | | $ | 5,019 | | $ | 7,615 | |
Debt issuance costs, net | | 4,260 | | — | |
Maintenance agreements, non-current portion | | 1,614 | | — | |
Unbilled fees | | 423 | | 1,773 | |
Restricted cash | | 158 | | 158 | |
Other | | 200 | | 40 | |
| | | | | |
Total | | $ | 11,674 | | $ | 9,586 | |
10. OTHER NON-CURRENT ASSETS
Other Non-Current Assets consistDebt issuance costs of the following:$4.3 million were capitalized in November 2012 in connection with long-term debt (see Note 13).
| | | 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 | |
| | | | | | | | |
| | |
Total | | $ | 9,428 | | | $ | 4,536 | |
| | | | | | | | |
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (continued)
12. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accounts Payablepayable and Accrued Expensesaccrued expenses consist of the following:following as of December 31:
| | | 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 | |
| | | | | | | | |
| | |
Total | | $ | 44,867 | | | $ | 35,384 | |
| | | | | | | | |
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements(continued)
(in thousands) | | 2012 | | 2011 | |
| | | | | |
Accounts payable | | $ | 5,079 | | $ | 2,974 | |
Accrued expenses - general | | 16,528 | | 18,485 | |
Accrued salaries and benefits | | 19,613 | | 14,575 | |
Income taxes payable | | 8,750 | | 6,419 | |
Payable to Ocwen | | 8,865 | | 2,414 | |
Payable to AAMC | | 141 | | — | |
| | | | | |
Total | | $ | 58,976 | | $ | 44,867 | |
Other Current Liabilitiescurrent liabilities consist of the following:following as of December 31:
| | | September 30, | | | | September 30, | | |
| | | December 31, | | |
(in thousands) | | 2011 | | | 2010 | | | 2012 | | 2011 | |
| | | | | | |
Deferred Revenue | | $ | 4,581 | | | $ | 2,542 | | |
Facility Closure Cost Accrual, Current Portion | | | 131 | | | | 253 | | |
Collections Due to Clients | | | 768 | | | | 726 | | |
Deferred revenue | | | $ | 2,482 | | $ | 4,581 | |
Facility closure cost accrual, current portion | | | 138 | | 131 | |
Collections due to clients | | | 447 | | 768 | |
Book overdrafts | | | 5,229 | | 3,501 | |
Other | | | 4,459 | | | | 2,095 | | | 2,127 | | 958 | |
| | | | | | | | | | | |
| Total | | $ | 9,939 | | | $ | 5,616 | | | $ | 10,423 | | $ | 9,939 | |
| | | | | | | |
Facility Closure Costs
During 2009, we accrued facility closure costs (included in other current and other non-current liabilities in the Balance Sheetbalance sheet and in Selling, Generalselling, general and Administrative Expensesadministrative expenses in the Statementstatement of Operations)operations), all recorded in our Financial Services segment, primarily consisting of lease exit costs (expected to be paid through 2014) and severance (paid in 2009 and 2010) for the closure of two facilities.
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Notes to Consolidated Financial Statements (continued)
The following table summarizes the activity for severance and other charges, all recorded in our Financial Services segment,lease exit costs for the years ended December 31, 20112012 and 2010:2011:
| | | 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 | |
| | | | |
(in thousands) | | Total | |
| | | |
Balance, January 1, 2011 | | $ | 672 | |
Payments | | (217 | ) |
Balance, December 31, 2011 | | 455 | |
Less: long-term portion | | (324 | ) |
Facility closure cost accrual, current portion | | $ | 131 | |
| | | |
Balance, December 31, 2011 | | $ | 455 | |
Payments | | (161 | ) |
Balance, December 31, 2012 | | 294 | |
Less: long-term portion | | (156 | ) |
Facility closure cost accrual, current portion | | $ | 138 | |
We do not expect significant additional costs related to the closure of these facilities.
12.13.LONG-TERM DEBT
Long-term debt consists of the following as of December 31:
(in thousands) | | 2012 | | 2011 | |
| | | | | |
Senior Secured Term Loan | | $ | 200,000 | | $ | — | |
Less: original issue discount | | (1,973 | ) | — | |
Net long-term debt | | 198,027 | | — | |
Less: current portion | | (2,000 | ) | — | |
Long-term debt, less current portion | | $ | 196,027 | | $ | — | |
On November 27, 2012, we entered into a seven-year senior secured term loan facility agreement (the “Credit Agreement”) with Bank of America, N.A. as administrative agent and certain lenders, pursuant to which we borrowed $200.0 million (the “Senior Secured Term Loan”). The Senior Secured Term Loan was issued with a 1.0% original issue discount ($2.0 million), resulting in net proceeds of $198.0 million (the “Proceeds”), with certain wholly-owned subsidiaries acting as guarantors (collectively, the “Guarantors”).
The Proceeds were used to capitalize Residential and AAMC (as described in Note 3), and also to pay certain fees, commissions and expenses in connection with the Credit Agreement. The Proceeds may also be used for general corporate purposes, including acquisitions and investments permitted under the Credit Agreement.
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Notes to Consolidated Financial Statements (continued)
Payments under the Credit Agreement are guaranteed by the Guarantors and are secured by a pledge of all equity interests of certain subsidiaries, as well as a lien on substantially all of the assets of Altisource Solutions S.à r.l., a wholly-owned subsidiary of Altisource, and the Guarantors, subject to certain exceptions.
The Senior Secured Term Loan bears interest at rates based upon, at our option, the Adjusted Eurodollar Rate or the Base Rate (each as defined in the Credit Agreement). Eurodollar Rate loans will bear interest at a rate per annum equal to the sum of (i) the greater of (x) the Adjusted Eurodollar Rate for the applicable interest period and (y) 1.25% plus (ii) a 4.50% margin. Base Rate loans will bear interest at a rate per annum equal to the sum of (i) the greater of (x) the Base Rate and (y) 2.25% plus (ii) a 3.50% margin. The interest rate as of December 31, 2012 was 5.75%.
The Senior Secured Term Loan must be repaid in equal consecutive quarterly principal installments, commencing on March 29, 2013, equal to 0.25% of the initial principal amount of such loans, with final payment of all amounts outstanding, plus accrued and unpaid interest, becoming due on November 27, 2019.
The covenants restrict or limit, among other things, our ability to: create liens and encumbrances; incur additional indebtedness; make asset sales, transfers or dispositions; change lines of business; amend material debt agreements or other material contracts; engage in certain transactions with affiliates; enter into sale/leaseback transactions; grant negative pledges or agree to such other restrictions relating to subsidiary dividends and distributions; make changes to its fiscal year; and engage in mergers and consolidations.
In addition to the scheduled principal payments, the Senior Secured Term Loan is (with certain exceptions) subject to mandatory prepayment upon issuances of debt, casualty and condemnation events, and sales of assets, as well as from a percentage of excess cash flow (as defined in the Credit Agreement) if the leverage ratio (as defined in the Credit Agreement) is greater than 2.5x. No mandatory prepayments were owed for the year ended December 31, 2012. We are permitted to make voluntary prepayments without penalty after November 27, 2013. If prepayments are made prior to November 27, 2013, 1.00% of the principal amount of the prepaid term loans will be incurred.
The Credit Agreement contains certain events of default, including (i) failure to pay principal when due or interest or any other amount owing on any other obligation under the Credit Agreement within 5 days of becoming due, (ii) material incorrectness of representations and warranties when made, (iii) breach of covenants, (iv) failure to pay principal or interest on any other debt that equals or exceeds $40 million when due, (v) default on any other debt that equals or exceeds $40 million that causes, or gives the holder or holders of such debt the ability to cause, an acceleration of such debt, (vi) occurrence of a Change in Control (as defined in the Credit Agreement), (vii) bankruptcy and insolvency events (as defined in the Credit Agreement), (viii) entry by a court of one or more judgments against us (as defined in the Credit Agreement) in an amount in excess of $40 million that remain unbonded, undischarged or unstayed for a certain number of days after the entry thereof, (ix) the occurrence of certain ERISA events and (x) the failure of certain Loan Documents (as defined in the Credit Agreement) to be in full force and effect. If any event of default occurs and is not cured within applicable grace periods set forth in the Credit Agreement or waived, all loans and other obligations could become due and immediately payable and the facility could be terminated.
Legal fees and other direct expenses relating to the Senior Secured Term Loan were capitalized. At December 31, 2012, total debt issuance costs were $4.3 million, net of $0.1 million of accumulated amortization and are included in other assets in the accompanying consolidated balance sheet.
Interest expense on the Senior Secured Loan, including amortization of debt issuance costs and the debt discount, totaled $1.2 million in 2012 (no comparative amounts in 2011 or 2010).
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (continued)
Maturities of our long-term debt are as follows:
(in thousands) | | | |
| | | |
2013 | | $ | 2,000 | |
2014 | | 2,000 | |
2015 | | 2,000 | |
2016 | | 2,000 | |
2017 | | 2,000 | |
Thereafter | | 190,000 | |
| | 200,000 | |
Less: current portion | | (2,000 | ) |
| | $ | 198,000 | |
14. STOCKHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION
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, 2011,2012, we had authorized 100.0 million shares.shares authorized. At December 31, 2011,2012, we had 23.4 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 StatementsStock Repurchase Plan(continued)
Treasury Stock
OnIn May 19, 2010,2012, our shareholders approved a new stock repurchase program, which replaced the previous stock repurchase program. Under the new plan, we are authorized us to purchase up to 3.83.5 million shares of our common stock in the open market. Throughmarket in addition to amounts previously purchased under the prior plan. From authorization of the prior plan in May 2010 through December 31, 2011,2012, we purchased 2.3approximately 2.5 million shares of our common stock onin the open market at an average price of $34.55$37.49 per share, leaving 1.5share. During the year ended December 31, 2012, we purchased 0.3 million shares stillof common stock at an average price of $63.25 per share. Since no common stock has been repurchased following the new plan was approved, 3.5 million shares of common stock remain available for purchaserepurchase under the program.plan. Luxembourg law limits share repurchases to approximately the balance of Altisource Portfolio Solutions S.A.’s retained earnings less treasury shares. The distribution of Residential and AAMC to our shareholders reduced our retained earnings which will limit our ability to repurchase shares for a period of time. Our debt agreement also contains limits on our ability to repurchase our common stock which will limit the amount we can spend on share repurchases in any year and may prevent repurchases in certain circumstances.
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, we may grant up to 6.7 million Altisource share-based awards to officers, directors, key employees and certain Ocwen employees.to employees of our affiliates. As of December 31, 2011, 2.32012, 2.6 million share-based awards were available for future grant under the Plan. The shares will be issued from authorized and unissued shares of our
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (continued)
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-BasedShare-Based Compensation
We have issued stock-basedissue share-based awards in the form of stock options for certain employees and officers. We recorded total stockshare-based compensation expense of $3.7 million, $4.0 million $3.1 million and $0.3$3.1 million for the years ended December 31, 2012, 2011 and 2010, and 2009, respectively. The amount in 2012 includes the reversal of $0.8 million of share-based compensation expense in the first quarter related to the departure of an executive officer in March 2012. The total compensation expense for 2012, 2011 and 2010 includes $2.9 million, $3.0 million and $0.5 million, respectively, related to the vesting of performance awards that vested in 2012, 2011 and 2010, respectively.2010.
Outstanding equity basedshare-based compensation currently onlyprimarily consists of stock option grants that are a combination of service-based and market-based options:
Service-based Options.These options are granted at fair market value on the date of grant. The options generally vest over four years with equal annual cliff-vesting and expire on the earlier of 10 years after the date of grant or following termination of service. A total of 1.00.9 million service-based awards were outstanding at December 31, 2011.2012.
Market-based Options. These option grants have two components each of which vest only upon the achievement of certain criteria. The first component, which we refer to internally as “ordinary performance” grants, consists of two-thirds of the market-based grant and begins to vest if the stock price realizes a compounded annual gain of at least 20% over the exercise price, so long as the stock price is at least double the exercise price. The remaining third of the market-based options, which we refer to internally as “extraordinary performance” grants, begins to vest over three years if the stock price realizes a compounded annual gain of at least 25% over the exercise price, so long as it is at least triple the exercise price. The vesting schedule for all market-based awards is 25% upon achievement of the criterioncriteria and the remaining 75% in three equal annual installments. A total of 2.2 million market-based awards were outstanding at December 31, 2011.2012.
We
The Company granted 0.3 million stock options (at a weighted average exercise price of $69.48 per share), 0.2 million stock options (at ana weighted average exercise price of $33.15 per share) and 0.9 million stock options (at an averageexercise price of $23.58 per share) during the years ended December 31, 2012, 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:date for the years ended December 31:
| | | 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 | |
| | 2012 | | 2011 | | 2010 | |
| | Black-Scholes | | Binomial | | Black-
Scholes | | Binomial | | Black-Scholes | | Binomial | |
| | | | | | | | | | | | | |
Risk-free interest rate (%) | | 0.87 – 1.17 | | 0.08 – 2.04 | | 1.69 – 1.93 | | 0.04 – 3.03 | | 1.50 – 3.20 | | 0.02 – 3.66 | |
Expected stock price volatility (%) | | 34.22 – 34.65 | | 34.20 – 34.60 | | 48.00 | | 55.70 – 55.80 | | 47.00 – 50.00 | | 51.00 – 52.00 | |
Expected dividend yield | | — | | — | | — | | — | | — | | — | |
Expected option life (in years) | | 6.25 | | — | | 6.25 | | — | | 6.25 – 7.00 | | — | |
Contractual life (in years) | | — | | 14 | | — | | 14 | | — | | 13 | |
Fair value | | $19.25 – $29.80 | | $9.98 - $22.76 | | $16.33 – $17.85 | | $16.91 - $20.39 | | $11.95 – $13.24 | | $10.05 - $12.42 | |
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (continued)
The following table summarizes the weighted-average fair value of stock options granted, and the total intrinsic value of stock options exercised:exercised for the years ended December 31:
| | | 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 | |
| | | | 2012 | | 2011 | | 2010 | |
| | | | | | | | | |
Weighted-average fair value at date of grant | | | | $ | 20.77 | | $ | 17.66 | | $ | 18.18 | |
Intrinsic value of options exercised | | (in thousands) | | 17,598 | | 4,966 | | 7,530 | |
Fair value of options vested | | (in thousands) | | 2,790 | | 3,536 | | 926 | |
| | | | | | | | | | | | |
Stock-based compensation expense is recorded net of estimated forfeiture rates ranging from 1% to 3%10%.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements(continued)
As of December 31, 2011,2012, estimated unrecognized compensation costs related to share-based payments amounted to $5.8$4.7 million which we expect to recognize over a weighted-average remaining requisite service period of approximately 3.02.48 years.
The following table summarizes activity of our stock options:
| | | 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) | |
| | | 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 | | |
| | | | | | | | | | | |
Outstanding at December 31, 2011 | | | 3,243,958 | | $ | 14.19 | | 6.7 | | $ | 116,755 | |
Granted | | | 181,000 | | | | 33.15 | | | | | | | 278,500 | | 69.48 | | | | | |
Exercised | | | (231,908 | ) | | | 11.20 | | | | | | | (285,054 | ) | 12.19 | | | | | |
Forfeited | | | (156,747 | ) | | | 24.44 | | | | | | | (179,095 | ) | 28.35 | | | | | |
Outstanding at December 31, 2012 | | | 3,058,309 | | 17.69 | | 6.11 | | $ | 211,072 | |
| | | | | | | | | | | | | | | | | | |
Outstanding at December 31, 2011 | | | 3,243,958 | | | $ | 14.19 | | | | 6.7 | | | $ | 116,755 | | |
| | | | | | | | | | | | | |
| Exercisable at December 31, 2011 | | | 1,787,132 | | | $ | 10.92 | | | | 6.0 | | | $ | 70,165 | | |
| | | | | | | | | | | | | |
Exercisable at December 31, 2012 | | | 2,235,923 | | $ | 11.59 | | 5.52 | | $ | 167,885 | |
See Note 3 for information regarding the effect of the Separation of the Residential Asset Businesses on our share-based compensation plans.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (continued)
The following table summarizes information about stock options outstanding and exercisable at December 31, 2011:2012:
| | | 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 | | | | — | | | | — | | | | — | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | 3,243,958 | | | | | | | | | | | | 1,787,132 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 – $10.00(a) | | 1,901,386 | | 5.43 | | $ | 9.13 | | 1,771,805 | | 5.42 | | $ | 9.13 | |
$10.01 – $20.00(a) | | 187,912 | | 3.55 | | 12.50 | | 177,912 | | 3.37 | | 12.44 | |
$20.01 – $30.00(a) | | 611,561 | | 7.29 | | 22.94 | | 247,814 | | 7.28 | | 22.87 | |
$30.01 – $40.00(a) | | 108,950 | | 8.54 | | 34.16 | | 17,329 | | 8.53 | | 33.48 | |
$50.01 – $60.00(a) | | 10,000 | | 9.37 | | 53.15 | | 1,250 | | 9.37 | | 53.00 | |
$60.01 – $70.00(a) | | 158,500 | | 9.19 | | 60.66 | | 19,813 | | 9.19 | | 60.66 | |
$80.01 – $90.00(a) | | 80,000 | | 9.62 | | 80.89 | | — | | — | | — | |
| | 3,058,309 | | | | | | 2,235,923 | | | | | |
| | | | | | | | | | | | | | | |
(a) | These options contain market-based components as described above. All other options are time-based awards.
|
ALTISOURCE PORTFOLIO SOLUTIONS S.A.(a)
Notes to Consolidated Financial Statements(continued) These options contain market-based components as described above. All other options are time-based awards.
The following table summarizes the market prices necessary in order for the market performance options to begin to vest:
| | | 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 | |
| | | | | | | | |
| | | 44 | | | | 219 | |
| | | | | | | | |
| | |
Weighted Average Share Price | | $ | 67.45 | | | $ | 74.40 | |
| | | | | | | | |
| | Market Based Options | |
(in thousands, except share prices)
Vesting price | | Ordinary
performance | | Extraordinary
performance | |
| | | | | |
$150.00 – $160.00 | | — | | 3 | |
$160.01 – $170.00 | | 3 | | — | |
$180.01 – $190.00 | | — | | 45 | |
Over $190.01 | | — | | 1 | |
| | 3 | | 49 | |
| | | | | |
Weighted average share price | | $ | 80.89 | | $ | 61.00 | |
| | | | | | | |
Restricted Shares in AAMC
Prior to the separation of AAMC, certain Altisource employees were granted 0.1 million restricted AAMC shares. The restricted shares will vest in three tranches, subject to the achievement of the following performance hurdles:
13.·Twenty-five percent (25%) of the grant will vest in accordance with the vesting schedule set forth below if the market value of AAMC common stock meets all three of the following conditions: (i) the market value is at least equal to $250 million; (ii) the market value has realized a compounded annual gain of at least twenty percent (20%) over the market value on the date of the grant; and (iii) the market value is at least double the market value on the date of the grant;
·Fifty percent (50%) of the grant will vest in accordance with the vesting schedule set forth below if the market value of AAMC common stock meets all three of the following conditions: (i) the market value is at least equal to $500 million; (ii) the market value has realized a compounded annual gain of at least twentytwo
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (continued)
and a half percent (22.5%) over the market value on the date of the grant; and (iii) the market value is at least triple the market value on the date of the grant and
·Twenty-five percent (25%) of the grant will vest in accordance with the vesting schedule set forth below if the market value of AAMC common stock meets all three of the following conditions: (i) the market value is at least equal to $750 million; (ii) the market value has realized a compounded annual gain of at least twenty-five percent (25%) over the market value on the date of the grant; and (iii) the market value is at least quadruple the market value on the date of the grant.
After the performance hurdles for a tranche have been achieved, 25% of the restricted shares in that tranche will vest on each of the first four anniversaries of the date that the performance hurdles for that tranche were met.
If an award recipient’s service with Altisource is terminated prior to full vesting of the restricted shares, then the award recipient will forfeit all unvested restricted shares except that if (i) an award recipient’s service is terminated without cause or due to death or disability and (ii) the performance hurdles for a tranche have already been achieved or are achieved within 90 days of termination, unvested stock for the corresponding tranche will continue to vest according to the above vesting schedule.
Expense related to these restricted shares for the year ended December 31, 2012 was immaterial.
15. COST OF REVENUE
Cost of Revenuerevenue principally includes payroll and employee benefits associated with personnel employed in customer service and operations roles;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 Costcost of Revenuerevenue were as follows for the periodsyears 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 | |
| | | | | | | | | | | | |
Total | | $ | 275,849 | | | $ | 189,059 | | | $ | 126,797 | |
| | | | | | | | | | | | |
(in thousands) | | 2012 | | 2011 | | 2010 | |
| | | | | | | |
Compensation and benefits | | $ | 113,145 | | $ | 82,548 | | $ | 62,791 | |
Outside fees and services | | 123,338 | | 86,201 | | 60,583 | |
Reimbursable expenses | | 96,147 | | 82,074 | | 47,449 | |
Technology and communications | | 23,404 | | 18,772 | | 12,548 | |
Depreciation and amortization | | 10,167 | | 6,254 | | 5,688 | |
Total | | $ | 366,201 | | $ | 275,849 | | $ | 189,059 | |
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements(continued)
14.16. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, Generalgeneral and Administrative Expensesadministrative expenses include payroll for personnel employed in executive, sales, marketing, human resources and finance roles. This category also includes occupancy costs, professional fees and depreciation and amortization on non-operating assets. The components of Selling, Generalselling, general and Administrative Expensesadministrative expenses were as follows for the periodsyears 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 | |
| | | | | | | | | | | | |
Total | | $ | 62,131 | | | $ | 57,352 | | | $ | 39,473 | |
| | | | | | | | | | | | |
(in thousands) | | 2012 | | 2011 | | 2010 | |
| | | | | | | |
Compensation and benefits | | $ | 21,166 | | $ | 22,327 | | $ | 19,116 | |
Professional services | | 9,864 | | 6,658 | | 8,026 | |
Occupancy related costs | | 24,041 | | 17,824 | | 10,684 | |
Amortization of intangible assets | | 5,030 | | 5,291 | | 4,891 | |
Goodwill impairment | | — | | — | | 2,816 | |
Depreciation and amortization | | 2,609 | | 2,097 | | 1,470 | |
Other | | 12,002 | | 7,934 | | 10,349 | |
Total | | $ | 74,712 | | $ | 62,131 | | $ | 57,352 | |
Other in 2009 includes $1.4 million relating to a litigation settlement.
15.17. OTHER (EXPENSE) INCOME, (EXPENSE), NET
Other Income (Expense)(expense) income, net consists of the following:following for the years ended December 31:
| | | 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 | |
| | | | | | | | | | | | |
Total | | $ | 203 | | | $ | 804 | | | $ | 1,034 | |
| | | | | | | | | | | | |
(in thousands) | | 2012 | | 2011 | | 2010 | |
| | | | | | | |
Equity in losses of and impairment loss on investment in affiliate | | $ | (1,741 | ) | $ | (530 | ) | $ | — | |
Interest income | | 222 | | 32 | | 31 | |
Change in fair value of put option | | — | | 732 | | 557 | |
Other, net | | (69 | ) | 54 | | 335 | |
| | | | | | | |
Total | | $ | (1,588 | ) | $ | 288 | | $ | 923 | |
Through
Equity loss in affiliate represents our proportionate share of the date of Separation, Interest Expense included an interest charge from Ocwen which represented an allocation of Ocwen’s total interest expense calculated basedlosses in Correspondent One and impairment loss 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.investment (see Note 10).
The change in Fair Valuefair value of Put Optionput option relates to three put option agreements we entered into with certain of the sellers of MPA. The Put Optionput option expired in December 2011.2011 (see Note 5).
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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.
16.18. INCOME TAXES
The income tax provision (benefit) provision consists of the following:following for the years ended December 31:
| | | 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 | |
| | | | | | | | | | | | |
| | $ | 5,310 | | | $ | 716 | | | $ | 13,174 | |
| | | | | | | | | | | | |
| | | |
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 | |
| | | | | | | | | | | | |
| | $ | 2,633 | | | $ | (1,119 | ) | | $ | (1,569 | ) |
| | | | | | | | | | | | |
Total | | $ | 7,943 | | | $ | (403 | ) | | $ | 11,605 | |
| | | | | | | | | | | | |
(in thousands) | | 2012 | | 2011 | | 2010 | |
| | | | | | | |
Current: | | | | | | | |
Domestic - Luxembourg | | $ | 2,841 | | $ | 2,300 | | $ | (1,031 | ) |
Foreign - U.S. State | | 353 | | 119 | | 561 | |
Foreign - Non U.S. | | 2,552 | | 2,891 | | 1,186 | |
| | $ | 5,746 | | $ | 5,310 | | $ | 716 | |
| | | | | | | |
Deferred: | | | | | | | |
Domestic - Luxembourg | | $ | 388 | | $ | (387 | ) | $ | 395 | |
Foreign - U.S. Federal | | 2,419 | | 3,216 | | (1,014 | ) |
Foreign - U.S. State | | (23 | ) | (22 | ) | (68 | ) |
Foreign - Non U.S. | | 208 | | (174 | ) | (432 | ) |
| | 2,992 | | 2,633 | | (1,119 | ) |
Total | | $ | 8,738 | | $ | 7,943 | | $ | (403 | ) |
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 iswas retroactive to the date of Separation.Separation from Ocwen and expires December 31, 2018. 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 recognizedchanges in valuation allowance and minority interest.
We operate under tax holidays in India, which are effective through 2020, and may be extended if certain additional requirements are satisfied. The tax holidays are conditional upon our U.S. operations.meeting certain employment and investment thresholds. The impact of these tax holidays decreased foreign taxes by $1.4 million, $0.7 million, and $0.5 million in 2012, 2011, and 2010, respectively.
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.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements(continued)
A summary of the tax effects of the temporary differences is as follows:follows for the years ended December 31:
| | | 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 | ) |
| | | | | | | | |
Current Deferred Tax Asset, Net: | | $ | 1,133 | | | $ | 551 | |
| | | | | | | | |
| | |
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 | ) | | | — | |
| | | | | | | | |
| | | 6,582 | | | | 3,081 | |
Valuation Allowance | | $ | (2,209 | ) | | $ | (1,875 | ) |
| | | | | | | | |
Non-current Deferred Tax Asset, net | | $ | 4,373 | | | $ | 1,206 | |
| | | | | | | | |
Net Deferred Tax Asset | | $ | 5,506 | | | $ | 1,757 | |
| | | | | | | | |
(in thousands) | | 2012 | | 2011 | |
| | | | | |
Current deferred tax assets: | | | | | |
Allowance for doubtful accounts and other reserves | | $ | 40 | | $ | 72 | |
Accrued expenses | | 1,940 | | 1,294 | |
Current deferred tax liabilities: | | | | | |
Prepaid expenses | | (205 | ) | (233 | ) |
Current deferred tax asset, net: | | $ | 1,775 | | $ | 1,133 | |
| | | | | |
Non-current deferred tax assets: | | | | | |
Net operating loss carryforwards | | $ | 14,342 | | $ | 13,207 | |
Non-U.S. deferred tax asset | | 895 | | 1,479 | |
Share-based compensation | | 956 | | 533 | |
Other | | 7 | | 31 | |
Non-current deferred tax liabilities: | | | | | |
Intangible assets | | (6,869 | ) | (8,014 | ) |
Depreciation | | (2,845 | ) | (654 | ) |
| | 6,486 | | 6,582 | |
Valuation allowance | | (2,413 | ) | (2,209 | ) |
Non-current deferred tax asset, net | | 4,073 | | 4,373 | |
Net deferred tax asset | | $ | 5,848 | | $ | 5,506 | |
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, the tax character of gains and losses, 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 20112012 relates to additional state and foreign losses generated in the current year.and prior years.
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, 2011,2012, were $16$27.6 million.
As of December 31, 2011,2012, the Company had a deferred tax asset of $13.2$14.3 million relating to U.S.United States Federal, state and Stateforeign net operating losses. Of this amount, $2.2$1.5 million relating to state, and $0.9 million relating to Luxembourg net operating losses were subject to a valuation allowance.allowances. The gross amount of net operating losses available for carryover to future years approximates $33$36.1 million. Of this amount, $15.9$14.7 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 these 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 of the Company during 2009 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
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (continued)
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 Provisionincome tax provision (benefit) to the Luxembourg statutory income tax rate:rate for the years ended December 31:
| | | 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 | ) | | | — | |
| | | | | | | | | | | | |
| | | 10.05 | % | | | (0.80 | )% | | | 30.90 | % |
| | | | | | | | | | | | |
| | 2012 | | 2011 | | 2010 | |
| | | | | | | |
Statutory tax rate | | 28.80 | % | 28.80 | % | 28.60 | % |
Foreign rate differential | | (23.30 | ) | (20.03 | ) | (23.71 | ) |
Tax adjustment for retroactive ruling | | — | | — | | (6.13 | ) |
Change in valuation allowance | | 0.16 | | — | | 0.44 | |
State tax expense | | 0.17 | | 0.06 | | 0.26 | |
Other | | 1.18 | | 0.42 | | (0.18 | ) |
| | 7.01 | % | 9.25 | % | (0.72 | )% |
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, Generalselling, general and Administrative Expensesadministrative expenses in the Statementsconsolidated statements of Operations.operations. As of December 31, 20112012 and 2010,2011, 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)
17.19. EARNINGS PER SHARE
Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the assumed conversion of dilutive securities.
Basic and diluted EPS are calculated as follows for the years ended December 31, 2011, 2010 and 2009 are calculated as follows:31:
| | | 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 | |
| | | | | | | | | | | | |
| | | |
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 | |
| | | | | | | | | | | | |
Weighted-Average Common Shares Outstanding, | | | | | | | | | | | | |
Diluted | | | 25,685 | | | | 26,259 | | | | 24,261 | |
| | | | | | | | | | | | |
| | | |
Earnings Per Share | | | | | | | | | | | | |
Basic | | $ | 2.92 | | | $ | 1.96 | | | $ | 1.08 | |
| | | | | | | | | | | | |
Diluted | | $ | 2.77 | | | $ | 1.88 | | | $ | 1.07 | |
| | | | | | | | | | | | |
(in thousands, except per share data) | | 2012 | | 2011 | | 2010 | |
| | | | | | | |
Net income attributable to Altisource | | $ | 110,627 | | $ | 71,112 | | $ | 49,390 | |
| | | | | | | |
Weighted-average common shares outstanding, basic | | 23,358 | | 24,373 | | 25,083 | |
Dilutive effect of stock options | | 1,604 | | 1,312 | | 1,176 | |
| | | | | | | |
Weighted-average common shares outstanding, diluted | | 24,962 | | 25,685 | | 26,259 | |
| | | | | | | |
Earnings per share | | | | | | | |
Basic | | $ | 4.74 | | $ | 2.92 | | $ | 1.96 | |
Diluted | | $ | 4.43 | | $ | 2.77 | | $ | 1.88 | |
A total
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Table of 0.1 millionContents
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (continued)
An immaterial amount of options that were anti-dilutive have been excluded from the computation of diluted EPS for each of the yearsyear ended December 31, 2012 (0.1 million for 2011 and 2010 (negligible amount for 2009)2010). 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, 2011,0.3 million and 0.7 million options for each ofthe years ended December 31, 2012, 2011 and 2010, and 2009 respectively, granted for shares that are issuable upon the achievement of certain market and performance criteria related to our common stock price and an annualized rate of return to investors that have not been met at this point.
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements(continued)
18.20. COMMITMENTS AND CONTINGENCIES
Litigation
From time to time, we are 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 to the extent 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 financial condition, results of operations or cash flows.
Leases
We lease certain premises and equipment under various capital and operating lease agreements. Future minimum lease payments at December 31, 20112012 under non-cancelable capital and operating leases with an original term exceeding one year are as follows:
| | | 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 | |
| | | | | | | | |
| | | 863 | | | $ | 18,448 | |
| | | | | | | | |
Less: Amounts Representing Interest | | | (27 | ) | | | | |
| | | | | | | | |
Capital Lease Obligations | | | 836 | | | | | |
Less: Current Portion Under Capital Lease Obligation | | | (634 | ) | | | | |
| | | | | | | | |
Long-term Portion Under Capital Lease Obligation | | $ | 202 | | | | | |
| | | | | | | | |
(in thousands) | | Capital Lease
Obligations | | Operating
Lease
Obligations | |
| | | | | |
2013 | | $ | 236 | | $ | 9,022 | |
2014 | | — | | 5,123 | |
2015 | | — | | 3,553 | |
2016 | | — | | 3,650 | |
2017 | | | | 3,557 | |
Thereafter | | — | | 2,914 | |
| | 236 | | $ | 27,819 | |
Less: Amounts representing interest | | (3 | ) | | |
Current portion of capital lease obligations | | $ | 233 | | | |
Total operating lease expense, net of sublease income, was $10.9 million, $10.8 million $7.8 million and $4.2$7.8 million for the years ended December 31, 2012, 2011, 2010, and 2009,2010, respectively. The operating leases generally relate to office locations and reflect customary lease terms which range from 1 to 7 years in duration.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (continued)
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 feesdays and are maintained in segregated bank accounts, they are generally not included in the Consolidated Balance Sheets, theconsolidated balance of which issheets. Amounts held in escrow were $47.2 and $17.7 million atas of December 31, 2011.2012 and 2011 respectively.
19.21. SEGMENT REPORTING
Our business segments are 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.
We classifyconduct our businesses intooperations through three reportable segments. The Mortgage Services consists of mortgage portfolio managementsegment provides services that span the mortgage lifecycle.and real estate lifecycle and are typically outsourced by loan servicers, originators and investors in single family homes. The Financial Services segment provides collection and customer relationship management services primarily to debt originators and servicers (e.g., credit card, auto lending, retail credit, mortgages) and the utility and insurance industries. The Technology Services segmentprincipally consists of unsecured asset recovery and customer relationship management.Technology Services consists of modular, comprehensiveour REALSuite
ALTISOURCE PORTFOLIO SOLUTIONS S.A.TM
Notes to Consolidated Financial Statements(continued)
integrated technological solutions for loan servicing, vendor management and invoice presentment and payment applications as well as providingour information technology (“IT”) infrastructure support.services. The REALSuiteTM platform provides a fully integrated set of software applications and technologies that manage the end-to-end lifecycle for residential and commercial mortgage loan servicing including the automated management and payment of a distributed network of vendors. In addition, ourCorporate Items and Eliminationssegment includes eliminations of transactions between the reporting segments and this segment also includes costs recognized by us related to corporate support functions such asincluding executive, finance, legal, human resources, vendor management, risk and six sigma. Prior to the date of Separation, this segment included expenditures recognized by us related to the Separation.
Financial information for our segments is as follows:
| | | 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 | |
| | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | |
Selling, General and Administrative Expenses | | $ | — | | | $ | — | | | $ | — | | | $ | 1,893 | | | $ | 1,893 | |
| | | | | | | | | | | | | | | | | | | | |
| | For the year ended December 31, 2012 | |
| | | | | | | | Corporate | | | |
| | Mortgage | | Financial | | Technology | | Items and | | Consolidated | |
(in thousands) | | Services | | Services | | Services | | Eliminations | | Altisource | |
| | | | | | | | | | | |
Revenue | | $ | 452,796 | | $ | 64,522 | | $ | 74,189 | | $ | (23,147 | ) | $ | 568,360 | |
Cost of revenue | | 285,586 | | 46,737 | | 54,634 | | (20,756 | ) | 366,201 | |
Gross profit | | 167,210 | | 17,785 | | 19,555 | | (2,391 | ) | 202,159 | |
Selling, general and administrative expenses | | 25,099 | | 13,415 | | 8,888 | | 27,310 | | 74,712 | |
Income from operations | | 142,111 | | 4,370 | | 10,667 | | (29,701 | ) | 127,447 | |
Other expense, net | | (1,713 | ) | (27 | ) | (25 | ) | (1,033 | ) | (2,798 | ) |
Income before income taxes and non-controlling interests | | $ | 140,398 | | $ | 4,343 | | $ | 10,642 | | $ | (30,734 | ) | $ | 124,649 | |
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements(continued)
| | | 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 | |
| | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | |
Income (Loss) from Operations | | | 55,724 | | | | 303 | | | | 18,119 | | | | (19,179 | ) | | | 54,967 | |
Other Income (Expense), net | | | 781 | | | | (50 | ) | | | (60 | ) | | | 133 | | | | 804 | |
| | | | | | | | | | | | | | | | | | | | |
Income (Loss) Before Income Taxes | | $ | 56,505 | | | $ | 253 | | | $ | 18,059 | | | $ | (19,046 | ) | | $ | 55,771 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Transactions with Related Parties: | | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 135,655 | | | $ | 166 | | | $ | 19,167 | | | $ | — | | | $ | 154,988 | |
| | | | | | | | | | | | | | | | | | | | |
Selling, General and Administrative Expenses | | $ | — | | | $ | — | | | $ | — | | | $ | 1,056 | | | $ | 1,056 | |
| | | | | | | | | | | | | | | | | | | | |
| | 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 from operations | | 94,608 | | 4,451 | | 14,353 | | (27,705 | ) | 85,707 | |
Other (expense) income, net | | 248 | | (34 | ) | (49 | ) | 38 | | 203 | |
Income before income taxes and non-controlling interests | | $ | 94,856 | | $ | 4,417 | | $ | 14,304 | | $ | (27,667 | ) | $ | 85,910 | |
| | | 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 | |
| | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | |
Income (Loss) Before Income Taxes | | $ | 26,380 | | | $ | 4,009 | | | $ | 17,926 | | | $ | (10,739 | ) | | $ | 37,576 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | |
Transactions with Related Parties: | | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | |
| | 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 | |
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 | |
Income from operations | | 55,724 | | 303 | | 18,119 | | (19,179 | ) | 54,967 | |
Other (expense) income, net | | 781 | | (50 | ) | (60 | ) | 133 | | 804 | |
Income before income taxes and non-controlling interests | | $ | 56,505 | | $ | 253 | | $ | 18,059 | | $ | (19,046 | ) | $ | 55,771 | |
(in thousands) | | Mortgage
Services | | Financial
Services | | Technology
Services | | Corporate
Items and
Eliminations | | Consolidated
Altisource | |
| | | | | | | | | | | |
Total Assets: | | | | | | | | | | | |
December 31, 2012 | | $ | 132,924 | | $ | 37,782 | | $ | 64,570 | | $ | 193,950 | | $ | 429,226 | |
December 31, 2011 | | $ | 112,780 | | $ | 41,276 | | $ | 32,279 | | $ | 37,824 | | $ | 224,159 | |
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to 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 | |
| | | | | | | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | | | | | | |
20.22. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables contain selected unaudited statement of operations information for each quarter of 20112012 and 2010.2011. 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:
| | | 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 | |
| | | | | | | | | | | | | | | | |
| | 2012 quarter ended(1) | |
(in thousands, except per share data) | | December 31, | | September 30, | | June 30, | | March 31, | |
| | | | | | | | | |
Revenue | | $ | 141,101 | | $ | 143,988 | | $ | 144,205 | | $ | 139,066 | |
Gross profit | | 53,685 | | 49,701 | | 51,467 | | 47,306 | |
Income before income taxes and non-controlling interests | | 31,599 | | 30,982 | | 32,128 | | 29,940 | |
Net income | | 31,354 | | 28,084 | | 29,352 | | 27,121 | |
Net income attributable to Altisource | | 30,293 | | 27,024 | | 28,081 | | 25,229 | |
| | | | | | | | | |
Net income per share | | | | | | | | | |
Basic | | $ | 1.30 | | $ | 1.16 | | $ | 1.20 | | $ | 1.08 | |
Diluted | | $ | 1.20 | | $ | 1.08 | | $ | 1.13 | | $ | 1.02 | |
Weighted average shares outstanding | | | | | | | | | |
Basic | | 23,389 | | 23,338 | | 23,316 | | 23,381 | |
Diluted | | 25,162 | | 25,016 | | 24,846 | | 24,844 | |
| | 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 | |
(1)The sum of quarterly amounts, including per share amounts, may not equal amounts reported for year-to-date periods. This is due to the effects of rounding and changes in the number of weighted-average shares outstanding for each period.
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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 | |
23. SUBSEQUENT EVENTS
(1) | The sum of quarterly amounts, including per share amounts, may not equal amounts reported for year- to-date periods. This is due to the effects of rounding and changes in the number of weighted- average shares outstanding for each period.
|
Acquisition of Fee Based Business from Ocwen
On January 31, 2013, we entered into letters of intent with Ocwen to acquire for a combined purchase price of $218.6 million certain fee-based businesses associated with Ocwen’s acquisition of Homeward Residential and the anticipated acquisition of the ResCap servicing portfolio. In connection with the intended acquisitions, the term of certain services agreements between Altisource and Ocwen (see Note 4) will be extended from 2020 to 2025. Additionally, Ocwen will not develop similar fee-based businesses that would directly or indirectly compete with the services provided by Altisource to the Homeward Residential and ResCap servicing portfolios. Consummation of the transactions is subject to customary contingencies including various third party and regulatory consents and approvals.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURESITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES |
None.
None.
ITEM 9A. CONTROLS AND PROCEDURES EvaluationITEM 9A. | CONTROLS AND PROCEDURES |
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, 2011.2012. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of December 31, 2011,2012, 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’sManagement’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, 20112012 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, 2011,2012, 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.
ChangesChanges in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 20112012 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
LimitationsLimitations 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.
ITEM 9B. | OTHER INFORMATION |
ITEM 9B.OTHER INFORMATION
None.
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Table of ContentsPART III
PART III
ITEM 10. | DIRECTORS, EXECUTIVEOFFICERS AND CORPORATE GOVERNANCE |
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item is incorporated herein by reference to our definitive 2012 proxy statement to be filed pursuant to Regulation 14A under the Exchange Act.
ITEM 11. | EXECUTIVE COMPENSATION |
ITEM 11.EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to our definitive 2012 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 |
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 2012 proxy statement to be filed pursuant to Regulation 14A under the Exchange Act.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated herein by reference to our definitive 2012 proxy statement to be filed pursuant to Regulation 14A under the Exchange Act.
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
ITEM 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this item is incorporated herein by reference to our definitive 2012 proxy statement to be filed pursuant to Regulation 14A under the Exchange Act.
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PART IV
ITEM 15. |
| EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) | | The following documents are filed as part of this annual report. |
See Item 8 above.
|
2. | | | | | 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.
| | | Exhibit
Number
| | | | | 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. |
| Exhibit DescriptionExhibits:
| |
|
| 2.1Exhibit |
|
| 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 –— Amendment No. 1 to Form 10, as filed with the Commission on June 29, 2009) | | | | 3.12.2 | | Separation Agreement, dated as of December 21, 2012, between Altisource Residential Corporation and Altisource Portfolio Solutions S.A. (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on December 21, 2012) | | | | 2.3 | | Separation Agreement, dated as of December 21, 2012, between Altisource Asset Management Corporation and Altisource Portfolio Solutions S.A. (incorporated by reference to Exhibit 2.2 to the Company’s Form 8-K filed on December 21, 2012) | | | | 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 –— Amendment No. 1 to Form 10, as filed with the Commission on June 29, 2009) | | | | 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) |
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Table of Contents 10.5 | | 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) |
| | | Exhibit
Number
| | Exhibit Description
| 10.7 | | 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 (incorporated by reference to Exhibit 10.12 of the Company’s 10-K as filed with the Commission on March 17, 2010) | | | | 10.13† | | Form of Put Option Agreements (incorporated by reference to Exhibit 10.13 of the Company’s 10-K as filed with the Commission on March 17, 2010) | | | | 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) | | | | 21.1*10.16† | | Separation Agreement dated February 22, 2012 between Altisource Portfolio Solutions S.à r.l., Altisource Portfolio Solutions S.A. and Robert D. Stiles (incorporated by reference to Exhibit 10.1 to the Company’s 8-K as filed with the Commission on February 23, 2012) | | | | 10.17† | | Employment Agreement dated March 13, 2012 between Altisource Portfolio Solutions S.à r.l. and Michelle D. Esterman (incorporated by reference to Exhibit 10.1 to the Company’s 8-K as filed with the Commission on March 16, 2012) | | | | 10.18 | | Support Services Agreement, dated as of August 10, 2012, by and between Ocwen Mortgage Servicing, Inc. and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on August 16, 2012) |
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Table of Contents 10.19† | | First Amendment to the Employment Contract dated as of August 15, 2012 between Altisource Solutions S.à r.l. and William B. Shepro (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on August 20, 2012) | | | | 10.20† | | First Amendment to the Employment Contract dated as of August 15, 2012 between Altisource Solutions S.à r.l. and Kevin J. Wilcox (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on August 20, 2012) | | | | 10.21 | | Services Agreement, dated as of October 1, 2012, by and between Ocwen Mortgage Servicing, Inc. and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on October 5, 2012) | | | | 10.22 | | Technology Products Services Agreement, dated as of October 1, 2012, by and between Ocwen Mortgage Servicing, Inc. and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on October 5, 2012) | | | | 10.23 | | Data Center and Disaster Recovery Agreement, dated as of October 1, 2012, by and between Ocwen Mortgage Servicing, Inc. and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed on October 5, 2012) | | | | 10.24 | | Intellectual Property Agreement, dated as of October 1, 2012, by and between Ocwen Mortgage Servicing, Inc. and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.4 to the Company’s Form 8-K filed on October 5, 2012) | | | | 10.25 | | First Amendment to Support Services Agreement, dated as of October 1, 2012, by and between Ocwen Mortgage Servicing, Inc. and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.5 to the Company’s Form 8-K filed on October 5, 2012) | | | | 10.26 | | First Amendment to Services Agreement, dated as of October 1, 2012, by and between Ocwen Financial Corporation and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.6 to the Company’s Form 8-K filed on October 5, 2012) | | | | 10.27 | | First Amendment to Technology Products and Services Agreement, dated as of October 1, 2012, by and between Ocwen Financial Corporation and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.7 to the Company’s Form 8-K filed on October 5, 2012) | | | | 10.28 | | First Amendment to Data Center and Disaster Recovery Agreement, dated as of October 1, 2012, by and between Ocwen Financial Corporation and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.8 to the Company’s Form 8-K filed on October 5, 2012) | | | | 10.29 | | First Amendment to Intellectual Property Agreement, dated as of October 1, 2012, by and between Ocwen Financial Corporation and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.9 to the Company’s Form 8-K filed on October 5, 2012) | | | | 10.30 | | Credit Agreement, dated as of November 27, 2012, among Altisource Solutions S.à r.l., as borrower, the Company and certain of the Company’s wholly-owned subsidiaries, as guarantors, Bank of America, N.A, as Administrative Agent and Collateral Agent, Bank of America, N.A., Barclays Bank PLC and Citigroup Global Markets Inc., as Lead Arrangers and Barclays Bank PLC and Citigroup Global Markets Inc., as Co-Syndication Agents, and certain lenders party thereto from time to time. (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on December 3, 2012) | | | | 10.31 | | Support Services Agreement, dated as of December 21, 2012, between Altisource Residential Corporation and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on December 28, 2012) | | | | 10.32 | | Tax Matters Agreement, dated as of December 21, 2012, between Altisource Residential Corporation and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed on December 28, 2012) |
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Table of Contents 10.33** | | Master Services Agreement, dated as of December 21, 2012, between Altisource Residential Corporation and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.5 to the Company’s Form 8-K filed on December 28, 2012) | | | | 10.34 | | Trademark License Agreement, dated as of December 21, 2012, between Altisource Residential Corporation and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.6 to the Company’s Form 8-K filed on December 28, 2012) | | | | 10.35 | | Support Services Agreement, dated as of December 21, 2012, between Altisource Asset Management Corporation and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on December 28, 2012) | | | | 10.36 | | Tax Matters Agreement, dated as of December 21, 2012, between Altisource Asset Management Corporation and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.4 to the Company’s Form 8-K filed on December 28, 2012) | | | | 10.37 | | Trademark License Agreement, dated as of December 21, 2012, between Altisource Asset Management Corporation and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.7 to the Company’s Form 8-K filed on December 28, 2012) | | | | 10.38 | | Technology Products Services Agreement, between Altisource Asset Management Corporation and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.8 to the Company’s Form 8-K filed on December 28, 2012) | | | | 10.39 | | Senior Unsecured Term Loan Agreement, dated as of December 27, 2012, among Altisource Solutions S.à r.l., as Lender, Ocwen Financial Corporation, as Borrower, and certain subsidiaries of Ocwen Financial Corporation, as Guarantors. (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on December 31, 2012) | | | | 21.1* | | Subsidiaries of the Registrant. | | | | 23.1* | | Consent of Independent Registered Public Accounting Firm (Deloitte & Touche LLP). | | | | 31.1* | | Section 302 Certification of the Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a). | | | | 31.2* | | Section 302 Certification of the Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a). | | | | 32.1* | | 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. | | | | 32.2* | | 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. |
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Table of Contents 101 | | 101 | | Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company'sCompany’s Annual Report on Form 10-K for the period ended December 31, 2011,2012, is formatted in XBRL interactive data files: (i) Consolidated StatementBalance Sheets at December 31, 2012, and December 31, 2011; (ii) Consolidated Statements 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;2012; (iii) Consolidated StatementStatements of Changes in Stockholders’ Equity and Invested Equity for each of the years in the three-year period ended December 31, 2011;2012; (iv) Consolidated StatementStatements of Cash Flows for each of the years in the three-year period ended December 31, 2011;2012; 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). |
† | Denotes management contract or compensatory arrangement
|
*Filed herewith ** Portions of this exhibit have been redacted pursuant to a request for confidential treatment. The non-public information has been filed separately with the Securities and Exchange Commission. †Denotes management contract or compensatory arrangement 91
Table of Contents SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Date: February 16, 2012
Date: February 13, 2013 | | | | | | | | | |
| 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/ RobertMichelle D. StilesEsterman | | | | | Name: | | RobertMichelle D. StilesEsterman | | | | | 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 16, 2012.13, 2013. Signature |
| Title |
| Date | Signature
| | Title
| | Date
| | | | /s/ William C. Erbey William C. Erbey
| | Chairman of the Board of Directors | | February 16, 201213, 2013 | William C. Erbey | | | | | | | | | | /s/ William B. Shepro William B. Shepro
| | Director and Chief Executive Officer | | February 13, 2013 | William B. Shepro | | (Principal Executive Officer) | | February 16, 2012 | | | | | | /s/ W. Michael Linn | | Director | | February 13, 2013 | W. Michael Linn | | | | | | | | | | /s/ Roland Müller-Ineichen | | Director | | February 16, 201213, 2013 | | | | /s/ Roland Müller-Ineichen
Roland Müller-Ineichen | | Director
| | February 16, 2012 | | | | | | /s/ Timo Vättö | | Director | | February 13, 2013 | Timo Vättö | | Director
| | February 16, 2012 | | | | | | /s/ RobertMichelle D. Stiles Robert D. StilesEsterman
| | Chief Financial Officer | | February 13, 2013 | Michelle D. Esterman | | (Principal Financial Officer and Principal
Accounting Officer)
| | February 16, 2012 |
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