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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 FOR THE FISCAL YEAR ENDED DECEMBER 31, 20122013
OR
o TRANSITION 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 (State or other jurisdiction of incorporation or organization) | | Not Applicable98-0554932
(I.R.S. Employer Identification No.) |
291, Route d’Arlon40, avenue Monterey
L-1150L-2163 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 o
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”,filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | | | | Accelerated filer | o |
| | |
Non-accelerated filer o
| | Smaller reporting company o
| |
Non-accelerated filer | o | | (Do not check if a smaller reporting company) | | Smaller reporting company | o |
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, 20122013 was $1,269,084,321$1,602,571,543 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, 2013,2014, there were 23,426,76322,628,618 outstanding shares of the Registrant’s shares of beneficial interest (excluding 1,985,9852,784,130 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 Securities and Exchange Commission pursuant to Regulation 14A in connection with the registrant’s Annual Meeting of Stockholders to be held on May 15, 201321, 2014 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, 2012.2013.
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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 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”, “believe”, “predict”, “potential”,“anticipate,” “intend,” “expect,” “may,” “could,” “should,” “would,” “plan,” “estimate,” “believe,” “predict,” “potential,” or “continue” or the negative of these terms and comparable 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 I “Risk Factors”.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,™,” “we,” “us,” “our” and the “Company” refer to Altisource Portfolio Solutions S.A., a Luxembourg société anonyme, or public limited company, and its wholly-owned subsidiaries.
ITEM 1. BUSINESS
The Company
Altisource Portfolio Solutions S.A.®, together with its subsidiaries, is a globalpremier marketplace and transaction solutions provider of services focused on high-value, technology-enabled, knowledge-based solutions principally related tofor the 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 practicedebt industries offering both distribution and high-quality, cost effective global human resources.content. We leverage proprietary business process, vendor and electronic payment management software and behavioral science based analytics to improve outcomes for marketplace participants.
We are publicly traded on the NASDAQ Global Select Market under the symbol “ASPS”.“ASPS.” We wereare 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.Luxembourg. On August 10, 2009, we became a stand-alone public company in connection with our separation from Ocwen Financial Corporation (“Ocwen®”Ocwen”) (the “Separation from Ocwen”). Prior to our Separation from Ocwen®, our businesses were wholly-owned subsidiaries of Ocwen.
20122013 Highlights
Our 20122013 highlights include:
· Recognized revenue of $568.4$768.4 million, representing a 34%35% increase overcompared to the year ended December 31, 2011;2012;
· Recognized service revenue of $466.9$662.1 million, representing a 39%42% increase overcompared to the year ended December 31, 2011;2012;
· Recognized diluted earnings per share of $4.43 representing$5.19, a 60%17% increase overcompared to the year ended December 31, 2011;2012;
· Generated cash flows from operations of $116.5 million;$185.5 million, a 59% increase compared to the year ended December 31, 2012;
·The average number of loans serviced by Ocwen on REALServicing totaled 1.2 million, a 57% increase compared to the year ended December 31, 2012;
·On November 15, 2013, we acquired Equator, LLC (“Equator”), a national leader in mortgage and real estate related business process management solutions, for an initial purchase price of $63.4 million plus
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contingent earn-out consideration of up to an additional $80 million over three years, subject to Equator achieving annual performance targets;
· RelaunchedOn March 29, 2013, we completed the consumer real estate portal underacquisition of the new HubzuTM brand; over 25,000 real estate ownedHomeward Residential, Inc. (“REO”Homeward”) assets were sold through Hubzu during the year;fee-based businesses from Ocwen for an aggregate purchase price of $75.8 million;
· Recognized origination related service revenueOn April 12, 2013, we completed the Residential Capital, LLC (“ResCap”) fee-based business transaction with Ocwen for an aggregate purchase price of $37.8 million, representing a 72% increase over the year ended December 31, 2011;$128.8 million;
· CompletedOn May 7, 2013, we increased borrowings under our senior secured term loan agreement to $400 million. Furthermore, on December 9, 2013, we refinanced the spin-offssenior secured term loan which included, among other changes, lowering the interest rate 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” belowthe term loans and
· Prepared for 2013 growth from Ocwen’s December 28, 2012 acquisitionWe repurchased 1.2 million shares of Homeward Residential Holdings, Inc. (“Homeward Residential”) and their anticipated acquisition of a portion 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 Residential Asset Businesses”). Residential’sour common stock is listed onunder our stock repurchase program during 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 allyear ended December 31, 2013 at an average price 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 single-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 Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.$116.99 per share.
Reportable Segments
We classify our businesses into the following three reportable segments:
Mortgage Services: 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 portfolios serviced by Ocwen. We also have longstanding relationships with some of the leading capital markets firms, commercial banks, hedge funds, insurance companies and mortgage bankers. Within the Mortgage Services segment, we provide the following services:
Asset management — Asset management services principally include property preservation, property inspection, REOreal estate owned (“REO”) asset management, our consumer real estate portal - Hubzu®and REO brokerage operations. With the Separation of the Residential Asset Businesses, we plan toservices. We also provide property management, lease management and renovation management services for single-familysingle family rental properties.
Insurance services — Insurance services include an array of title insurance services, including pre-foreclosure and REO title searches, title commitments, settlement and escrow services and other title insurance services including title insurance for loan originations. We also provide insurance program management and insurance agency and brokerage services applicable to lenders and residential loan servicers.
Residential property valuation — Residential property valuation services principally include traditional appraisal products through our licensed appraisal management company and alternative valuation products primarily through our network of real estate professionals. We generally provide these services for loan servicers, lenders and mortgage bankers.
Closing and insurance services — Closing and insurance services principally include an array of title search, closing and title agency services, including document preparation, pre-foreclosure and REO title searches, escrow and title insurance, program management and other insurance related services applicable to residential loan servicers. We also began providing closing and title agency services for loan originations.investors in single family homes.
Default management services — Default management services principally include foreclosure trustee services for loan servicers and non-legal processing and related services for and under the supervision of foreclosure, bankruptcy and eviction attorneys.
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Origination management services -— Origination management services principally include Mortgage Partnership of America, L.L.C.’s (“MPA™”MPA”) operations and our contract underwriting and quality control businesses. MPA serves as the manager of Best Partners Mortgage Cooperative, Inc. (“BPMC™”BPMC”) doing business, which is referred to as the Lenders One Mortgage Cooperative (“Lenders One®”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 provide other origination related services in the residential property valuation business. In addition, some of the origination related reseller businesses, including the flood certification business, are included in the Technology Services REALSuite business.
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Financial Services: Provides collection and customer relationship management services primarily to debt originators and servicers (e.g., credit card, auto lending, retail credit mortgages)and mortgage) and the utility and insurance industries. Within the Financial Services segment, we provide the following services:
Asset recovery management — Asset recovery management principally includes post-charge-off consumer debt collection services on a contingency fee basis.
Customer relationship management — Customer relationship management principally includes customer care and early stage collections services as well as insurance and claims processing, call center services and analytical support.
Technology Services: Comprises our REALSuiteTM of software applications, as well asEquator’s software applications and our information technology (“IT”) infrastructure services. We currently provide our IT infrastructure services to Ocwen and its subsidiaries, Home Loan Servicing Solutions, Ltd. (“HLSS”), Correspondent One S.A.Altisource Residential Corporation (“Correspondent One”Residential”), Residential, AAMCAltisource Asset Management Company (“AAMC”) and ourselves.our other segments. 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 REALSuite and Equator’s software products is below:
REALServicing® — An enterprise residential mortgage loan servicing product that offers an efficient and effective platform for loan servicing including default administration. This technology solution features automated workflows a dialogue engine and robust reporting capabilities. The solution spans the loan servicing lifecycle from loan boarding to satisfaction including all collections, payment processing and reporting. We also offer the REALSynergy®, an enterprise commercial loan servicing system.
REALTrans®—A patented electronic business-to-business exchange that automates and simplifies the ordering, tracking and fulfilling of vendor provided services principally related to mortgages. This technology solution, whether web-based or integrated into a servicing system, connects multiple service providers through a single platform and forms an efficient method for managing a large scale network of vendors.
REALRemit® — A patented electronic 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.
REALDoc® — A correspondence management platform that extracts, stores and generates correspondence and is capable of integrating with commercially available servicing, origination and process management applications.
Equator’s Solutions — The EQ Workstation®, EQ Marketplace®, EQ Midsource® and EQ Portal™ platforms can be used a la carte or together as an end-to-end solution. EQ Workstation provides comprehensive, end-to-end workflow and transaction services to manage real estate related activities. EQ Marketplace provides a coordinated means of purchasing a variety of real estate services from vendors including realtors, title, closing, inspection and valuation. EQ Midsource allows users of EQ Workstation to outsource all or specific components of real estate related activities. EQ Portal provides realtors direct access to process real estate transactions with secure exchange of data and documents along with realtor marketing, training and certification.
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Corporate Items and Eliminations: Includes costs related to corporate support functions including executive, finance, legal, human resources, vendor management, risk and six sigmaoperational effectiveness and also includes eliminations of transactions between the reporting segments. Corporate Items and Eliminations also include the cost of facilities until approximately 40% of the facilities are occupied by the business units, at which time costs are allocated to the business units.
We classify revenue in three categories: service revenue, revenue from reimbursable expenses and non-controlling interests. In evaluating our performance, we focus on service revenue. Service revenue which consists of amounts attributable to our fee basedfee-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 basedfee-based services, but we pass such costs directly on to our customers without any additional markup. Non-controlling interests represent the earnings of Lenders One, a consolidated entity not owned by Altisource. It isAltisource, and are included in revenue and reduced from net income to arrive at net income attributable to Altisource.
5Separation of the Residential Asset Businesses
TableOn December 21, 2012, we completed the spin-offs of Contentstwo wholly-owned subsidiaries, Residential and AAMC, into separate publicly traded companies (the “Separation of the Residential 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 New York Stock Exchange’s NYSE MKT 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 is focused on acquiring and managing single family rental properties by acquiring portfolios of sub-performing and non-performing residential mortgage loans throughout the United States. AAMC provides asset management and certain corporate governance services to Residential. Residential and AAMC are further described in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Customers
We provide services to some of the most respected organizations in their industries, including one of the United States’ largest sub-prime servicers, a government-sponsored enterprise (“GSE”), utility companies, commercial banks, servicers, investors, mortgage bankers and financial service companies and hedge funds across the United States.
Our three largest customers in 20122013 accounted for 71%76% of our total revenue. Our largest customer, Ocwen, accounted for 60%65% of our total revenue in 2012. During 2012,2013. From January 1 through September 30, 2013, Ocwen’s residential loan servicing portfolio grew from $102.2$203.7 billion in unpaid principal balance (“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$434.8 billion. With these servicing platform acquisitions, Ocwen is now positioned as the fifthfourth largest mortgage servicer in the United States. As the structured shift of servicing to non-banks continues, we expect Ocwen to continue to grow.We believe 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 services and technology services from us under service agreements. In October 2012, the Ocwen agreement 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 depending upon the nature of the service and when the service is provided.
Related party revenue primarily consists of revenue earned directly from Ocwen and its subsidiaries and revenue earned from the loans serviced by Ocwen orand its subsidiaries when Ocwen determinesdesignates us as the service provider. We earn additional revenue on the portfolios serviced by Ocwen orand its subsidiaries that are not considered related party revenue when a party other than Ocwen selects Altisource as the service provider. As a percentage of each of our segmentRelated party revenue and as a percentage of segment and consolidated revenue, related party revenue was as follows for the years ended December 31:
| | 2012 | | 2011 | | 2010 | | | 2013 | | 2012 | | 2011 | |
| | | | | | | | | | | | | | |
Mortgage Services | | 68 | % | 72 | % | 73 | % | | 71% | | 68% | | 72% | |
Financial Services | | | 30% | | < 1% | | < 1% | |
Technology Services | | 42 | % | 39 | % | 37 | % | | 49% | | 42% | | 39% | |
Financial Services | | < 1 | % | < 1 | % | < 1 | % | |
Consolidated revenue | | 60 | % | 58 | % | 51 | % | | 65% | | 60% | | 58% | |
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We record revenue we earn from Ocwen and its subsidiaries under 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 fees Ocwen pays to other service providers; fees commensurate with market surveys prepared by unaffiliated firms; and fees charged by our competitors.
Our services are provided to customers primarily located in the United States. Financial information for our segments can be found in Note 22 to our consolidated financial statements.
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 requestrequests 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 aOur primary sales and marketing perspective, our primary focus is supporting the growth of Ocwen and its subsidiaries, expanding relationships with existing MPAMPA’s members and Equator customers and targeting new customers that could have a material positive impact on our results of operations. Given the highly concentrated nature of the industries 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, 2012,2013, we have been awarded twoone patent that expires in 2023, three patents that expire in 2024, and fivesix patents that expire in 2025.2025, one patent that expires in 2027 and one patent that expires in 2030. In addition, we 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 eight other countries or groups of countries. These trademarks generally can be renewed 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 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 orand 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 and in-house technology and software operations of other loan servicers.
Given the diverse nature of services we and our competitors offer, we cannot determine our position in the market with certainty, but we believe we represent only a small portion of very large-sized markets. Given our size, some of our competitors may offer more diversified services, operate in broader geographic markets or have greater financial resources than we do. In addition, some of our larger customers retain multiple providers and continuously evaluate our performance against our competitors.
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Competitive factors in our Mortgage Services business include the compliance, 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 compliance, quality and personal nature of the service; the consistency and professionalism of the serviceservice; and the recruitment, training and the retention of our workforce. Competitive factors in our Technology Services business include the quality of the technology-based applicationapplications or service;services; application features and functions; ease of delivery and integration; our ability to maintain, enhance and support the applications or services; our ability to recruit and retain software and other technical employeesemployees; and the cost of obtaining, maintaining and enforcing our patents.
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Employees
As of December 31, 2012,2013, we had the following number of employees:
| | | United | | | | | | | | Consolidated | |
| | United States | | India | | Other | | Consolidated
Altisource | | | States | | India | | Philippines | | Luxembourg | | Altisource | |
| | | | | | | | | | | | | | | | | | | | |
Mortgage Services | | 277 | | 2,054 | | 24 | | 2,355 | | | 346 | | 2,532 | | 204 | | 6 | | 3,088 | |
Financial Services | | 651 | | 1,613 | | — | | 2,264 | | | 920 | | 1,768 | | 30 | | 2 | | 2,720 | |
Technology Services | | 80 | | 647 | | — | | 727 | | | 458 | | 901 | | 8 | | 1 | | 1,368 | |
Corporate | | 50 | | 364 | | 10 | | 424 | | | 109 | | 443 | | 9 | | 10 | | 571 | |
| | | | | | | | | | | | |
Total employees | | 1,058 | | 4,678 | | 34 | | 5,770 | | | 1,833 | | 5,644 | | 251 | | 19 | | 7,747 | |
We have not experienced any work stoppages, and we consider our relations with employees to be good. We believe our future success will depend, in part, on our ability to continue to attract, hire and retain skilled and experienced personnel.
Seasonality
Our revenues are seasonal. More specifically, Financial Services’ 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 and lawn maintenance, which tend to be at their lowest levellevels 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 mortgagemortgage-related services and collection 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 Secure 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 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 FrankThe Dodd-Frank Act, among other things, iscreated the creation of the Consumer Financial Protection Bureau,CFPB, 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 onaffecting us or our customers that may curtail or restrict the business as it is currently conducted. The Mortgage Act generally requires implementing regulations be issued before many
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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 SEC. These filings are available to the public over the Internet at the SEC’s web sitewebsite at http://www.sec.gov. You may also read and copy any document we file at the SEC’s public reference room located at 100 F Street, N.E., Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room.
Our principal Internet address is www.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 we file or furnish with the SEC, corporate governance information (including our Code of Business Conduct and Ethics) and, select press releases.releases and other related information available on this website. 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, 2012,2013, our Chairman owns or controls more than 13% of Ocwen’s common stock and 23%26% of our common stock. We derived 60%65% of our 2013 revenue in 2012 from Ocwen or the servicing portfolio managed by Ocwen.and its subsidiaries. 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 a certain key customer relationships,relationship, the loss of which or their inability to payreduction in the size of which could affect our business and results of operations.
We currently generate approximately 60%65% of our revenue from Ocwen. Following the Separation from Ocwen and its subsidiaries. Ocwen is contractually obligated to purchase certain services from our Mortgage Services, Financial Services and Technology Services segments under service agreements that extend through August 20202025 subject to termination under certain provisions. The loss of Ocwen as a customer or their failure to pay us would significantly reduce our revenue and adversely affect our results of operations. Further, Ocwen has grown significantly in recent years through acquisitions of mortgage servicing rights and acquisitions of companies with mortgage servicing rights and mortgage origination platforms. As a result of Ocwen’s growth, we have grown. If Ocwen does not continue to acquire mortgage
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servicing rights or does not grow its mortgage origination business, our business and results of operations could be negatively impacted.
Significant regulatory scrutiny of foreclosure practices of the servicing industry has resulted in settlements between banks and servicers and government entities, on-going monitoring of banks and servicers by regulatory authorities, investigations of banks and servicers and private lawsuits. If Ocwen were to be negatively impacted in a significant way by this regulatory scrutiny or other actions, Altisource’s business and results of operations could be negatively impacted.
We have key customer relationships, other than Ocwen, the loss of which could affect our business and results of operations.
While no other individual client, other than Ocwen, represents more than 10% of our consolidated 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 revenue and adversely affect results of operations.
The strength of the economy and the housing market can affect demand for our services.
The performance and growth of our origination services business is dependent on the volume of loan originations by third parties. In the event of an economic slowdown, increase in interest rates or any other factor that would likely lead to a decrease in the level of origination transactions, including refinancing transactions, our origination services growth prospects could be adversely affected. Further, in the event that adverse economic conditions or other factors lead to a decline in levels of home ownership and a reduction in the aggregate number of United States mortgage loans outstanding, our revenues from our software applications could be adversely affected.
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 which they seek to use as a competitive advantage to drive sales of other products and services. In addition, we expect 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 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 or challenges to our right to use them could reduce the value of our services.services or increase our costs.
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 an issued patent may be deemed invalid or unenforceable.
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Further, as our technology solutions and services develop, we may become increasingly subject to infringement claims by others. Any claims, whether with or without merit, could:
·be expensive and time-consuming to defend;
·cause us to cease making, licensing or using technology solutions that incorporate the challenged intellectual property;
·require us to redesign our technology solutions, if feasible;
·divert management’s attention and resources and/or
·require us to enter into royalty or licensing agreements in order to obtain the right to use necessary technologies.
Technology failures or defects, development delays or installation difficulties could damage our business operations and increase our costs.
System disruptionsDisruptions, failures or failuresdefects in our technology or delays in the development of, or installation difficulties with, our next generation technology 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 and our customers’ results of operations.
As part of our business and operation of our technology, we electronically receive, process, store and transmit confidential and sensitive business information of our customers. In addition, we collect personal consumer data such as names and addresses, social security numbers, driver’s license numbers and payment history records. The secure transmission of confidentialthis 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 we use to protect our customers’ business and personal information and transaction data and could result in the assessment of penalties.penalties or could otherwise cause interruptions in our operations. Furthermore, Congress or individual states could enact new laws regulating electronic commerce that could adversely affect us and our results of operations.
We have a long sales cycle for many of our services and technology solutions and if we fail to close sales after expending significant time and resources to do so, our business, financial condition and results of operations may be adversely affected.
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.
Delays due to the length of our sales cycle or costs 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 FTC, the CFPB, the SEC and the state and local agencies that license or oversee certain of our mortgage related services, including insurance services, and collection 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,RESPA, TILA, the Fair Credit Reporting Act, the Telephone Consumer Protection Act, the Homeowners Protection Act, the California Homeowner’s Bill of Rights, the Secure and Fair Enforcement for Mortgage LicensingSAFE Act, the Mortgage Reform and Anti-Predatory Lending Act and the Foreign Corrupt Practices Act.FCPA. These requirements can and do change as statutes and regulations are enacted, promulgated or amended.
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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 enacted regulation is the Dodd-Frank Act (see further description in the “Government Regulation” section 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 our business as it is currently conducted.
We are subject to certain additional certain federal, state and local consumer protection 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, agent and 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.
As a result of increased federal and state governmental scrutiny of the mortgage industry, legislation has been enacted to address the mortgage market, with particular focus on loans that are in default. In addition, national servicing standards have been implemented that, among other things, require very specific loan modification and foreclosure procedures to be followed. This legislation and these standards have further reduced the number of loans entering the foreclosure process and have negatively impacted our default services revenue and profit. It is unclear when or if volumes will increase in the future.
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.us by increasing our costs or requiring changes in our services.
Our customers are subject to government regulation, requiring our customers to, among other things, oversee their vendors and maintain documentation that demonstrates their oversight. If our performance does not meet our customers’ standards, our results of operations could be adversely affected.
Our customers are subject to a variety of government regulations, including those promulgated by the CFPB. Certain regulations require our customers to oversee their vendors and document the procedures performed to demonstrate that oversight. Altisource, as a vendor, is subject to oversight by our customers. If we do not meet the standards established by our customers or if any other oversight procedures result in a negative outcome for Altisource, we may lose customers or may no longer be granted referrals for certain services, negatively impacting our business and results of operations.
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We rely on third party vendors for many aspects of our business. If our vendor oversight process is ineffective or we face difficulties managing our relationships with third party vendors, our results of operations could be adversely affected.
We rely on third party vendors to provide goods and services in relation to many aspects of our operations. Our dependence on these vendors makes our operations vulnerable to such third parties’ failure to perform adequately under our contracts with them. In addition, where a vendor provides services that we are required to provide under a contract with a client, we are responsible for such performance and could be held accountable by the client for any failure of performance by our vendors. We evaluate the competency and solvency of our third party vendors. Additionally, we perform ongoing vendor oversight activities to identify any performance or other issues related to these vendors. If a vendor fails to provide the services that we require or expect, or fails to meet contractual requirements, such as service levels or compliance with applicable laws, the failure could negatively impact our business by adversely affecting our ability to serve our customers and/or subjecting us to litigation and regulatory risk for ineffective vendor oversight. Such a failure could adversely affect the reliability and quality of the services we provide our customers and could adversely affect our results of operations.
If financial institutions at which we hold escrow and trust funds fail, it could have a material adverse impact on our company.
We hold customers’ assets in escrow and trust accounts at various financial institutions, pending completion of certain real estate.estate activities. We also hold cash in trust accounts at various financial institutions where contractual obligations mandate maintaining dedicated bank accounts for Financial Services collections. These amounts are held in escrow and trust accounts for limited periods of time generally consisting of a few days, and are generally not included in the accompanying consolidated balance sheets. FailureWe may become liable for funds owed to third parties as a result of the 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, our clients’ customers, vendors, competitors and/or other large groups of plaintiffs and, if resulting in findings of violations, could result in substantial damages. Alternatively, we may be forced to settle some claims out of court and change existing company practices, services and processes that are currently revenue generating. This could lead to unexpected costs or a loss of revenue.
Our debt makes us more sensitive to the effects of economic change; ourlevel 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 flowflows 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 compete and
· placing us at a competitive disadvantage by limiting our ability to invest in the business.
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Our ability to make payments on our indebtedness depends on our ability to generate cash in the future. If we do not generate sufficient cash flowflows 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
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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.
Our debt agreement requires us to comply 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 holders of the defaulted debt could cause all amounts outstanding with respect to that debt to be immediately due and payable. We cannot assure you that our assets or cash flowflows 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 be able to refinance or restructure the payments on those debt instruments.
Our financial resultsfailure to maintain certain debt to EBITDA ratios contained in our debt agreement could be negatively affected if Ocwen failsresult in required payments to repaythe lenders of a percentage of our loanexcess cash flow, which could materially and adversely affect our ability to them as expected.use our excess cash flow for other purposes.
On December 27, 2012,Our debt agreement requires us to distribute 50% of our excess cash flow, as defined in the debt agreement, if our debt to EBITDA ratio exceeds 3.50 to 1.00 and 25% of our excess cash flow if our debt to EBITDA ratio is 3.50 to 1.00 or less, but greater than 2.75 to 1.00. If we loaned $75.0 millionwere required to Ocwen underdistribute a senior unsecured term loan agreement (the “Ocwen Term Loan”). If Ocwen defaults onportion of our loan or on debt seniorexcess cash flow to our loan,lenders, we may be limited in our ability to grow our business through acquisitions or investments in the event of insolvency, liquidation, dissolution, reorganization, or bankruptcy of Ocwen, holders oftechnology and we may be limited in our ability to repurchase our common stock. We cannot assure you that we will maintain debt instruments ranking senior to our loan would typically be entitledEBITDA ratios at levels that will not require us to receive payment in full before we receive any distribution in respectdistribute a portion of our loan. After repaying such senior creditors, Ocwen may not have any remaining assetsexcess cash flow to use for repaying its obligation to us.lenders.
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 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 compliance and quality of services we provide to our customers;
· maintainmeet or improveexceed the levelexpectations of attention expected by our customers;
· successfully leverage our existing client relationships to sell additional services and
· attract other servicers and non-distressed home sellers as new customers on our consumer real estate portal.customers.
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.
Our ability to expand existing relationships and attract new customers is also affected by broader economic factors and the strength of the overall housing market, which can reduce demand for our services and increase competition for each customer’s business. See “The strength of the economy and the housing market can affect demand for our services.”
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If we do not adapt our services to changes in technology or in the marketplace, or if our ongoing efforts to upgrade our technology and particularly our efforts to complete development of our next generation 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. We are currently in the process of developing and introducing our next generation technology. Our future success will be significantly affected by our ability to complete our current efforts and in the future 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.demands or completing the development of our next generation technology. 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 towardtowards outsourcing.
Our continued growth at historical rates is dependent on the industry trend towardtowards outsourced services. There can be no assurance 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 throughto make acquisitions and mergersto accelerate growth initiatives involves potential risks.
During 2013, we acquired fee-based businesses from Ocwen and acquired Equator. We intend to continue to consider acquisitions of other businesses that could complement our business. In addition to considering acquisitions that could offer us greater access in our current markets, we also consider acquisitionacquisitions of entities offering greater access and expertise in other asset types and markets that are related to ours but we do not currently serve. We also intend to acquire certain fee based businesses from Ocwen in connection with their acquisitions of servicing platforms. IfAs we acquire businesses, we may face a number of risks including diverting management’s attention froma loss of focus on our daily operations, to the need for additional management, operational andconstraints on operating resources, constraints on financial resources along withfrom integration and system conversions andconversion costs, the inability to maintain key pre-acquisition relationships with customers, suppliers and employees.employees and other integration risks. 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 separationcontinued relationship with Residential following the Separation of Residential.the Residential Asset Businesses.
We may not be able to fully achieve the strategic and financial benefits we expect from our relationship with Residential following the spin-offSeparation of the Residential Asset Businesses, or such benefits may be delayed. These outcomes may occur if, among other things, Residential is not successful in fully executing its strategy to acquire non-performing loan portfolios with a portion of the portfolios converting to single-familysingle family rental assets or if Residential is not successful in raisingcontinuing to raise equity and debt to grow.support its growth.
Risks Related to International Business
Our international operations subject us to additional risks which could have an adverse effect on our results of operations.
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We have reduced our costsoperating expenses by utilizing lower cost labor in foreign countries such as India and the Philippines. As of December 31, 2012, over 4,6002013, 5,895 of our employees were based in 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 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 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 United States courts against Altisource or its directors based on the civil liability provisions of the United States securities laws or to enforce, in Luxembourg, judgments obtained in other jurisdictions including the United States.
A significant change of the Luxembourg tax regime or of its interpretation by the Luxembourg tax authorities could adversely affect our results of operations.
Altisource is organized under the laws of, and headquartered in, Luxembourg. This allows Altisource to benefit from a favorable tax treatment. It is possible that changes in Luxembourg taxation statutes, administrative practice or applicable regulations may cause a reduction in, or an elimination of, the benefits we receive under the existing Luxembourg tax treatment, which could result in a significant increase to our income tax expense and adversely affect our results of operations.
Risks Related to Our Employees
Our success depends on our directors, executive officers and key personnelpersonnel.
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, financial services and technology 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 of operations 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
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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.
Risks Related to Our Relationships
We could have conflicts of interest with Ocwen, HLSS, Residential, AAMC, our Chairman, our CEO or AAMC, and the Chairman or other members of our Board of Directors could have conflicts of interestmanagement due to his, her or their relationship with Ocwen, HLSS, Residential or AAMC, which may be resolved in a manner adverse to us.
We do a substantial amount of business with Ocwen, Residential and AAMC and provide certain services to HLSS. Conflicts may arise between Ocwen, HLSS, Residential or AAMC and us as a resultbecause of our ongoing agreements with them and because of 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 maycould 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. Our Chairman also has substantial investments in Ocwen, HLSS, Residential and AAMC, and certain of our other officers and directors own stock or options in one or more of Ocwen, HLSS, Residential and AAMC. Such ownership interests could create, or appear to create, conflicts of interest with respect to matters potentially or actually involving or affecting us and Ocwen, HLSS, Residential and AAMC, as the case may be.
We follow policies, procedures and practices to avoid potential conflicts with respect to our dealings with Ocwen, HLSS, AAMC and Residential, including our Chairman recusing himself from negotiations regarding, and approvals of, transactions with these entities. We also manage potential conflicts of interest through oversight by independent members of our Board of Directors (independent directors constitute a majority of our Board of Directors), and 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.AAMC. 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 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, 20122013 and the segments primarily occupying each location is as follows:
| | Mortgage
Services | | Financial
Services | | Technology
Services | | Corporate and
Support Services |
| | | | | | | | |
Luxembourg Luxembourg | | X | | X | | X | | X |
| | | | | | | | |
United States | | | | | | | | |
Atlanta, GA | | X | | X | | X | | X |
Boston, MA | | | | | | X | | |
Dallas, TX | | X | | | | X
| | |
Irvine, CA | | X | | | | X | | |
Los Angeles, CA | | | | | | X | | |
Louisville, KY | | X | | | | X | | |
Plano, TX | | | | | | X | | |
Sacramento, CA | | | | X | | | | |
Seattle, WA | | | | | | X | | |
St. Louis, MO | | X | | | | | | |
Tempe, AZ | | | | X | | | | |
Vestal, NY | | | | X | | | | |
Winston-Salem, NC | | | | | | X | | X |
| | | | | | | | |
Pasay City, Philippines | | X | | X | | X | | X |
| | | | | | | | |
India | | | | | | | | |
Bangalore | | X | | X | | X | | X |
Goa | | | | 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
We are, fromFrom 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. Our businesses are also subject to extensive regulation which may result in regulatory proceedings against us. See Item 1A of Part I, “Risk Factors” above.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
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 “ASPS”.“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:
| | 2012 | | | 2013 | |
Quarter ended | | Low | | High | | | Low | | High | |
| | | | | | | | | | |
March 31 | | | $ | 67.35 | | $ | 96.02 | |
June 30 | | | 69.43 | | 100.15 | |
September 30 | | | 95.22 | | 142.30 | |
December 31 | | $ | 84.56 | | $ | 124.33 | | | 132.88 | | 170.19 | |
September 30 | | 70.70 | | 91.06 | | |
June 30 | | 52.35 | | 73.23 | | |
March 31 | | 48.55 | | 64.78 | | |
|
| | 2011 | | | 2012 | |
Quarter ended | | Low | | High | | | Low | | High | |
| | | | | | | | | | |
March 31 | | | $ | 48.55 | | $ | 64.78 | |
June 30 | | | 52.35 | | 73.23 | |
September 30 | | | 70.70 | | 91.06 | |
December 31 | | $ | 34.41 | | $ | 50.70 | | | 84.56 | | 124.33 | |
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, 20132014 was 87.70. 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 anticipate 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
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.
No shares were repurchased under our stock repurchase program during the months of October 2012 through December 2012.agreement.
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Stock Performance Graph
The graph below compares the cumulative total stockholder return on our common stock with the cumulative total return on the S&P’s 500 Index for the period commencing on August 10, 2009, the first trading day of our common stock, and ending on December 31, 2012.2013. The graph assumes an investment of $100 at the beginning of such period.this period and does not include the effects of the post-distribution values of Residential and AAMC, which were distributed to Altisource shareholders in December 2012. The comparisons in the graphs below are based upon historical data and are not indicative of, nor intended to forecast, future performance of our common stock.
| | 8/10/2009 | | 12/31/2009 | | 06/30/10 | | 12/31/10 | | 06/30/11 | | 12/31/11 | | 06/30/12 | | 12/31/12 | | | 08/10/09 | | 12/31/09 | | 06/30/10 | | 12/31/10 | | 06/30/11 | | 12/31/11 | | 06/30/12 | | 12/31/12 | | 06/30/13 | | 12/31/13 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Altisource | | $ | 100.00 | | $ | 172.05 | | $ | 202.79 | | $ | 235.33 | | $ | 301.64 | | $ | 411.31 | | $ | 600.25 | | $ | 710.25 | | | $ | 100.00 | | $ | 172.05 | | $ | 202.79 | | $ | 235.33 | | $ | 301.64 | | $ | 411.31 | | $ | 600.25 | | $ | 710.25 | | $ | 772.95 | | $ | 1,300.25 | |
S&P 500 | | 100.00 | | 110.72 | | 102.34 | | 124.88 | | 131.13 | | 124.87 | | 135.26 | | 141.46 | | | 100.00 | | 110.72 | | 102.34 | | 124.88 | | 131.13 | | 124.87 | | 135.26 | | 141.46 | | 159.50 | | 183.53 | |
NASDAQ Composite | | 100.00 | | 113.90 | | 105.87 | | 133.16 | | 139.22 | | 130.76 | | 147.32 | | 151.56 | | | 100.00 | | 113.90 | | 105.87 | | 133.16 | | 139.22 | | 130.76 | | 147.32 | | 151.56 | | 170.83 | | 209.64 | |
|
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Securities Authorized for Issuance under Equity Compensation Plans
The information required by this item is incorporated herein by reference to our definitive proxy statement in connection with our 2014 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Securities Exchange Act of 1934.
Issuer Purchases of Equity Securities
In May 2012, our shareholders approved a new stock repurchase program, which replaced the previous stock repurchase program. Under the program, 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 program. From authorization of the previous program in May 2010 through December 31, 2013, we have purchased approximately 3.7 million shares of our common stock in the open market at an average price of $63.04 per share. We purchased 1.2 million shares of common stock at an average price of $116.99 per share during the year ended December 31, 2013 and 0.3 million shares at an average price of $63.25 per share during the year ended December 31, 2012. As of December 31, 2013, approximately 2.3 million shares of common stock remain available for repurchase under the program. Luxembourg law limits share repurchases to approximately the balance of Altisource Portfolio Solutions S.A. (unconsolidated parent company) retained earnings, less shares repurchased. As of December 31, 2013, approximately $14 million was available to repurchase our common stock under Luxembourg law. Our senior secured term loan also limits the amount we can spend on share repurchases in any year and may prevent repurchases in certain circumstances. As of December 31, 2013, approximately $55 million was available to repurchase our common stock under our senior secured term loan.
The following table presents information related to our repurchases of our equity securities during the three months ended December 31, 2013:
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(2) | | Maximum number
of shares that may
yet be purchased
under the
plans or programs | |
| | | | | | | | | |
Common stock: | | | | | | | | | |
October 1 — 31, 2013 | | 79,172 | | $ | 148.13 | | 79,172 | | 2,572,335 | |
November 1 — 30, 2013 | | 280,405 | | 149.02 | | 280,405 | | 2,291,930 | |
December 1 — 31, 2013 | | — | | — | | — | | 2,291,930 | |
| | | | | | | | | |
Total shares of common stock | | 359,577 | | $ | 148.82 | | 359,577 | | 2,291,930 | |
(1)Includes shares withheld from employees to satisfy tax withholding obligations that arose from the exercise of stock options.
(2)In May 2012, our shareholders authorized us to purchase up to 3.5 million shares of our common stock in the open market.
The provisions of our senior secured term loan agreement, as amended, limit, among other things, our ability to incur additional debt, pay dividends and repurchase stock.
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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following selected financial data as of and for the years ended December 31, 2013, 2012, 2011, 2010 and 2009 has been derived from our audited consolidated financial statements. The following selected financial data as of and for the year ended December 31, 2008 has been derived from our audited 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, 20082009 and results of operations for the yearsyear ended December 31, 2009 and 2008 would have been had we operated as a separate, stand-alone entity for periods endedthe period prior to the 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 DataData.”.
| | Years ended December 31, | | | For the years ended December 31, | |
(in thousands, except per share data) | | 2012 | | 2011 | | 2010 | | 2009 | | 2008 | | | 2013 | | 2012 | | 2011 | | 2010 | | 2009 | |
| | | | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 568,360 | | $ | 423,687 | | $ | 301,378 | | $ | 202,812 | | $ | 160,363 | | | $ | 768,357 | | $ | 568,360 | | $ | 423,687 | | $ | 301,378 | | $ | 202,812 | |
Cost of revenue | | 366,201 | | 275,849 | | 189,059 | | 126,797 | | 115,048 | | | 492,480 | | 366,201 | | 275,849 | | 189,059 | | 126,797 | |
Gross profit | | 202,159 | | 147,838 | | 112,319 | | 76,015 | | 45,315 | | | 275,877 | | 202,159 | | 147,838 | | 112,319 | | 76,015 | |
Selling, general and administrative expenses | | 74,712 | | 62,131 | | 57,352 | | 39,473 | | 28,088 | | | 113,810 | | 74,712 | | 62,131 | | 57,352 | | 39,473 | |
Income from operations | | 127,447 | | 85,707 | | 54,967 | | 36,542 | | 17,227 | | | 162,067 | | 127,447 | | 85,707 | | 54,967 | | 36,542 | |
Other (expense) income, net | | (2,798 | ) | 203 | | 804 | | 1,034 | | (2,626 | ) | |
Other income (expense), net: | | | | | | | | | | | | |
Interest expense | | | (20,291 | ) | (1,210 | ) | (85 | ) | (119 | ) | (1,660 | ) |
Other income (expense), net | | | 557 | | (1,588 | ) | 288 | | 923 | | 2,694 | |
Total other income (expense), net | | | (19,734 | ) | (2,798 | ) | 203 | | 804 | | 1,034 | |
Income before income taxes and non-controlling interests | | 124,649 | | 85,910 | | 55,771 | | 37,576 | | 14,601 | | | 142,333 | | 124,649 | | 85,910 | | 55,771 | | 37,576 | |
Income tax (provision) benefit | | (8,738 | ) | (7,943 | ) | 403 | | (11,605 | ) | (5,382 | ) | | (8,540 | ) | (8,738 | ) | (7,943 | ) | 403 | | (11,605 | ) |
Net income | | 115,911 | | 77,967 | | 56,174 | | 25,971 | | 9,219 | | | 133,793 | | 115,911 | | 77,967 | | 56,174 | | 25,971 | |
Net income attributable to non-controlling | | | | | | | | | | | | |
interests | | (5,284 | ) | (6,855 | ) | (6,903 | ) | — | | — | | |
Net income attributable to non-controlling interests | | | (3,820 | ) | (5,284 | ) | (6,855 | ) | (6,903 | ) | — | |
| | | | | | | | | | | | |
Net income attributable to Altisource | | $ | 110,627 | | $ | 71,112 | | $ | 49,271 | | $ | 25,971 | | $ | 9,219 | | | $ | 129,973 | | $ | 110,627 | | $ | 71,112 | | $ | 49,271 | | $ | 25,971 | |
| | | | | | | | | | | | | | | | | | | | | | |
Earnings per share(1): | | | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | | |
Basic | | $ | 4.74 | | $ | 2.92 | | $ | 1.96 | | $ | 1.08 | | $ | 0.38 | | | $ | 5.63 | | $ | 4.74 | | $ | 2.92 | | $ | 1.96 | | $ | 1.08 | |
Diluted | | $ | 4.43 | | $ | 2.77 | | $ | 1.88 | | $ | 1.07 | | $ | 0.38 | | | $ | 5.19 | | $ | 4.43 | | $ | 2.77 | | $ | 1.88 | | $ | 1.07 | |
| | | | | | | | | | | | | | | | | | | | | | |
Transactions with related parties included above: | | | | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 338,227 | | $ | 245,262 | | $ | 154,988 | | $ | 94,897 | | $ | 64,251 | | | $ | 502,087 | | $ | 338,227 | | $ | 245,262 | | $ | 154,988 | | $ | 94,897 | |
Selling, general and administrative expenses | | $ | 2,430 | | $ | 1,893 | | $ | 1,056 | | $ | 4,308 | | $ | 6,208 | | | 2,921 | | 2,430 | | 1,893 | | 1,056 | | 4,308 | |
Other (expense) income | | $ | 86 | | $ | — | | $ | — | | $ | (1,290 | ) | $ | (2,269 | ) | |
Other income (expense) | | | 773 | | 86 | | — | | — | | (1,290 | ) |
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| | 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.
| | December 31, | |
(in thousands) | | 2013 | | 2012 | | 2011 | | 2010 | | 2009 | |
| | | | | | | | | | | |
Cash and cash equivalents | | $ | 130,324 | | $ | 105,502 | | $ | 32,125 | | $ | 22,134 | | $ | 30,456 | |
Accounts receivable, net | | 101,297 | | 88,955 | | 52,005 | | 53,495 | | 30,497 | |
Premises and equipment, net | | 87,252 | | 50,399 | | 25,600 | | 17,493 | | 11,408 | |
Intangible assets, net | | 276,162 | | 56,586 | | 64,950 | | 72,428 | | 33,719 | |
Goodwill | | 97,375 | | 14,915 | | 14,915 | | 11,836 | | 9,324 | |
Loan to Ocwen | | — | | 75,000 | | — | | — | | — | |
Total assets | | 724,838 | | 429,226 | | 224,159 | | 197,800 | | 120,556 | |
Long term debt, net | | 395,256 | | 198,027 | | — | | — | | — | |
Capital lease obligations | | — | | 233 | | 836 | | 1,532 | | 664 | |
Total liabilities | | 567,097 | | 269,397 | | 58,216 | | 45,902 | | 34,208 | |
| | | | | | | | | | | | | | | | |
20Note: Significant events affecting our historical earnings trends in 2011 through 2013, including acquisitions, are described in Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is a supplement to the accompanying consolidated financial statements and is intended to provide a reader of our financial statements with a narrative from the perspective of management on our businesses, current developments, financial condition, results of operations and liquidity. Significant sections of MD&A are as follows:
Overview. This section, beginning on page 22,24, provides a description of recent developments we believe are important in understanding theour results of operations and financial condition or inas well as understanding anticipated future trends. It also provides a brief description of significant transactions and events that affect the comparability of financial results and a discussion of the progress being made on our growth initiatives.
Consolidated Results of Operations. This section, beginning on page 28,27, provides an analysis of our consolidated results of operations for the three years ended December 31, 2012.2013.
Segment Results of Operations. This section, beginning on page 31,29, provides an analysis of each business segment for the three years ended December 31, 20122013 as well as our Corporate Items and Eliminations segment.Eliminations. 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 39,37, provides an analysis of our cash flows for the three years ended December 31, 2012.2013. We also discuss restrictions on cash movements, future commitments and capital resources.
Critical Accounting Judgments.Policies. This section, beginning on page 42,40, 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 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”, “believe”, “predict”, “potential”, or “continue” or the negative of these terms and comparable 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 I, “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.
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OVERVIEW
Our Business
We, through our subsidiaries, are a globalpremier marketplace and transaction solutions provider of services focused on high-value, technology-enabled, knowledge-based solutions principally related tofor the real estate, mortgage and mortgage portfolioconsumer debt industries offering both distribution and content. We leverage proprietary business process, vendor and electronic payment management asset recoverysoftware and customer relationship management.behavioral science based analytics to improve outcomes for marketplace participants.
Our business segments are based upon our organizational structure, which focuses primarily on the services offered, and are consistent with the internal reporting used by our Chief Executive Officer to evaluate operating performance and to assess the allocation of our resources.
We conductclassify our operations throughbusiness into three reportable segments. The Mortgage Services segment provides services that span the mortgage and real estate lifecycle and are typically outsourced by loan servicers, loan 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 mortgage) and the utility and insurance industries. The Technology Services segmentprincipally consists of our REALSuiteTM software applications, Equator’s software applications as well as our information technology (“IT”)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. Equator’s software applications provide comprehensive, end-to-end workflow and transaction services to manage real estate related activities and purchase related services from vendors. In addition, our Corporate Items and Eliminations segment includesinclude eliminations of transactions between the reporting segments and costs related to corporate support functions including 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”.operational effectiveness.
We classify revenue in three categories: service revenue, revenue from reimbursable expenses and non-controlling interests. In evaluating our performance, we focus on service revenue. Service revenue which consists of amounts attributable to our fee basedfee-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 basedfee-based services, but we pass such costs directly on to our customers without any additional markup. Non-controlling interests represent the earnings of Lenders One, a consolidated entity not owned by Altisource. It isAltisource and are included in revenue and reduced from net income to arrive at net income attributable to Altisource.
Basis of Presentation
We have prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
Recent Acquisitions by OcwenAltisource’s Vision and Growth Initiatives
During 2012, Ocwen’s residential loan servicing portfolio grewSince our separation 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 acquisitionOcwen, Altisource has become a company providing a full suite of mortgage, servicing rightsreal estate and related assets from Saxon Mortgage Services, Inc.consumer debt services, leveraging our technology and from JP Morgan Chase portfolios in the second quarter of 2012. Additionally, in October 2012,global operations. Our relationship with 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,provided a foundation on which 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 maintainbuilt our business modeland remains an important priority for us. Altisource’s vision has evolved to become the premier provider of real estate and mortgage marketplaces offering both distribution and content. Within these industries, we are facilitating transactions related to home sales, home rentals, home maintenance, mortgage origination and mortgage servicing. The Equator acquisition, with Ocwen, expandits marketplace, real estate and servicing transaction solutions, is in line with this vision and accelerates our footprintevolution and provide us significant revenue and earnings growth.
We believe there are significant growth opportunities for Altisource in the real estate and mortgage markets, leveraging our distribution and transaction solutions. Our strategic growth initiatives are:
Real estate market:
22·supporting Ocwen’s growth
·deploying Hubzu to other institutions and the non-distressed home sales market
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·providing property management, lease management and renovation management services to the single family rental market
Mortgage market:
·maintaining and growing our services provided to Ocwen as it continues to grow its residential loan servicing portfolio
·growing our origination related services by providing services to the members of Lenders One and Ocwen’s origination platform
·developing our next generation REALServicing technology
Distribution and transaction solutions:
·developing our next generation vendor, invoice and document management technologies through REALTrans, REALRemit and REALDoc
Stock Repurchase Plan
In May 2012, our shareholders approved a new stock repurchase program, which replaced the previous stock repurchase program. Under the program, 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 program. From authorization of the previous program in May 2010 through December 31, 2013, we have purchased approximately 3.7 million shares of our common stock in the open market at an average price of $63.04 per share. We purchased 1.2 million shares of common stock at an average price of $116.99 per share during the year ended December 31, 2013 and 0.3 million shares at an average price of $63.25 per share during the year ended December 31, 2012. As of December 31, 2013, approximately 2.3 million shares of common stock remain available for repurchase under the program. Luxembourg law limits share repurchases to approximately the balance of Altisource Portfolio Solutions S.A. (unconsolidated parent company) retained earnings, less shares repurchased. As of December 31, 2013, approximately $14 million was available to repurchase our common stock under Luxembourg law. Our senior secured term loan also limits the amount we can spend on share repurchases in any year and may prevent repurchases in certain circumstances. As of December 31, 2013, approximately $55 million was available to repurchase our common stock under our senior secured term loan.
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 the Residential Asset Businesses” in Item 1 of Part I, “BusinessBusiness.”.
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”).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.
ThereResidential is focused on acquiring and managing single family rental properties by acquiring portfolios of sub-performing and non-performing residential mortgage loans throughout the United States. AAMC provides asset management and certain corporate governance services to Residential. We are contractual agreements between Altisource,providing property management, lease management and renovation management services to Residential. Prior to the separation, we capitalized Residential with $100 million of cash and AAMC that govern certain ongoing relationships and provide for an orderly transition to the statuswith $5 million 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.cash.
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 arewere development stage companies and havehad not yet commenced operations at the time of separation, these entities had no historical results of operations. We don’tdo not expect any negative impact on our future operations other than interest expense on the debt we borrowed in November 2012 to capitalize these entities.
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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 of $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 marketplace and further 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 distributing our ownership interest in this business creating a new public company. The consumer real estate portal has many of the 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 a 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 plan 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 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 2012, our shareholders approved a new stock repurchase program, which replaces 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.
Factors Affecting Comparabilityaffecting comparability
The following additional items may impact the comparability of our results:
· OnThe average number of loans serviced by Ocwen serviced 0.8on REALServicing totaled 1.2 million loans for the year ended December 31, 20122013 compared to 0.50.7 million and 0.40.5 million loans for the years ended December 31, 2012 and 2011, respectively. The average number of delinquent non-Government-Sponsored Enterprise (“non-GSE”) loans serviced by Ocwen on REALServicing totaled 296 thousand for the year ended December 31, 2013 compared to 211 thousand and 2010,137 thousand for the years ended December 31, 2012 and 2011, respectively;
· In DecemberOn November 15, 2013, we separated the Residential Asset Businesses from Altisource and capitalized the Residential Asset Businesses with $105 million. In connection with the separation and distributionacquired Equator for an initial purchase price of Residential and AAMC, we incurred one-time expenses$63.4 million plus contingent consideration of $2.7up to an additional $80 million in 2012. We also incurred $1.0 million of expenses relatedover three years, subject to the build out of our rental property management capabilities;Equator achieving annual performance targets;
26·On March 29, 2013, we completed the acquisition of the Homeward fee-based businesses from Ocwen for an aggregate purchase price of $75.8 million;
Table·On April 12, 2013, we completed the ResCap fee-based business transaction with Ocwen for an aggregate purchase price of Contents$128.8 million;
· In November 2012, we borrowed $200.0$200 million under a senior secured term loan agreement.agreement and increased our borrowings to $400 million on May 7, 2013. On December 9, 2013, we refinanced the senior secured term loan which included, among other changes, lowering the interest rate of the term loans. Interest expense including amortization of debt issuance costs and debt discount, totaled $20.3 million for the year ended December 31, 2013 compared to $1.2 million infor the year ended December 31, 2012 (no comparative amountsamount in 2011 or 2010)2011);
· We repurchased 0.3 million and 1.61.2 million shares of our common stock under our stock repurchase program during the year ended December 31, 2013 compared to 0.3 million shares and 1.6 million shares during the years ended December 31, 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, LLC, 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 and
· In July 2011, we acquired the assembled workforce of Tracmail, a sub-contractor in India that performs asset recovery services (“Tracmail”);services.
·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 intangible assets that exist for purposes of determining our taxable income. The ruling was retroactive to the date of Separation from Ocwen. As a result of the ruling, we recognized a $3.4 million credit attributable to 2009 in the second quarter 2010 and
·In February 2010, we acquired all of the outstanding membership interest of MPA which was formed for the purpose of managing Lenders One. The results of operations of Lenders One have been consolidated since the acquisition date in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC”) Topic 810, Consolidation.
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CONSOLIDATED RESULTS OF OPERATIONS
Summary Consolidated Results
Following is a discussion of our consolidated results of operations for the years ended December 31, 2013, 2012 2011 and 2010.2011. For a more detailed discussion of the factors that affected the results of our business segments in these periods, see “Segment Results of Operations” below.
The following table sets forth information regardingon our results of operations for the years ended December 31:
| | | | % Increase | | | | % Increase | | | | |
(in thousands, except per share data) | | 2012 | | / (decrease) | | 2011 | | / (decrease) | | 2010 | | | 2013 | | % Increase
(decrease) | | 2012 | | % Increase
(decrease) | | 2011 | |
| | | | | | | | | | | | | | | | | | | | | | |
Service revenue | | | | | | | | | | | | | | | | | | | | | | |
Mortgage Services | | $ | 351,908 | | 56 | | $ | 224,942 | | 66 | | $ | 135,680 | | | $ | 490,333 | | 39 | | $ | 351,908 | | 56 | | $ | 224,942 | |
Financial Services | | 63,979 | | (8 | ) | 69,231 | | (7 | ) | 74,718 | | | 92,479 | | 45 | | 63,979 | | (8 | ) | 69,231 | |
Technology Services | | 74,189 | | 32 | | 56,094 | | 8 | | 52,013 | | | 103,891 | | 40 | | 74,189 | | 32 | | 56,094 | |
Eliminations | | (23,147 | ) | (49 | ) | (15,509 | ) | (1 | ) | (15,385 | ) | | (24,644 | ) | (6 | ) | (23,147 | ) | (49 | ) | (15,509 | ) |
| | 466,929 | | 39 | | 334,758 | | 36 | | 247,026 | | | 662,059 | | 42 | | 466,929 | | 39 | | 334,758 | |
Reimbursable expenses | | 96,147 | | 17 | | 82,074 | | 73 | | 47,449 | | | 102,478 | | 7 | | 96,147 | | 17 | | 82,074 | |
Non-controlling interests | | 5,284 | | (23 | ) | 6,855 | | (1 | ) | 6,903 | | | 3,820 | | (28 | ) | 5,284 | | (23 | ) | 6,855 | |
Total revenue | | 568,360 | | 34 | | 423,687 | | 41 | | 301,378 | | | 768,357 | | 35 | | 568,360 | | 34 | | 423,687 | |
Cost of revenue | | 366,201 | | 33 | | 275,849 | | 46 | | 189,059 | | | 492,480 | | 34 | | 366,201 | | 33 | | 275,849 | |
Gross profit | | 202,159 | | 37 | | 147,838 | | 32 | | 112,319 | | | 275,877 | | 36 | | 202,159 | | 37 | | 147,838 | |
Selling, general and administrative expenses | | 74,712 | | 20 | | 62,131 | | 8 | | 57,352 | | | 113,810 | | 52 | | 74,712 | | 20 | | 62,131 | |
Income from operations | | 127,447 | | 49 | | 85,707 | | 56 | | 54,967 | | | 162,067 | | 27 | | 127,447 | | 49 | | 85,707 | |
Other (expense) income, net: | | | | | | | | | | | | |
Other income (expense), net: | | | | | | | | | | | | |
Interest expense | | (1,210 | ) | N/M | | (85 | ) | 29 | | (119 | ) | | (20,291 | ) | N/M | | (1,210 | ) | N/M | | (85 | ) |
Other (expense) income, net | | (1,588 | ) | N/M | | 288 | | (69 | ) | 923 | | |
Total other (expense) income, net | | (2,798 | ) | N/M | | 203 | | (75 | ) | 804 | | |
Other income (expense), net | | | 557 | | 135 | | (1,588 | ) | N/M | | 288 | |
Total other income (expense), net | | | (19,734 | ) | N/M | | (2,798 | ) | N/M | | 203 | |
Income before income taxes and non-controlling interests | | 124,649 | | 45 | | 85,910 | | 54 | | 55,771 | | | 142,333 | | 14 | | 124,649 | | 45 | | 85,910 | |
Income tax (provision) benefit | | (8,738 | ) | (10 | ) | (7,943 | ) | N/M | | 403 | | |
Income tax provision | | | (8,540 | ) | 2 | | (8,738 | ) | (10 | ) | (7,943 | ) |
Net income | | 115,911 | | 49 | | 77,967 | | 39 | | 56,174 | | | 133,793 | | 15 | | 115,911 | | 49 | | 77,967 | |
Net income attributable to non-controlling interests | | (5,284 | ) | 23 | | (6,855 | ) | 1 | | (6,903 | ) | | (3,820 | ) | 28 | | (5,284 | ) | 23 | | (6,855 | ) |
| | | | | | | | | | | | |
Net income attributable to Altisource | | $ | 110,627 | | 56 | | $ | 71,112 | | 44 | | $ | 49,271 | | | $ | 129,973 | | 17 | | $ | 110,627 | | 56 | | $ | 71,112 | |
| | | | | | | | | | | | | | | | | | | | | | |
Margins: | | | | | | | | | | | | | | | | | | | | | | |
Gross profit/service revenue | | 43 | % | | | 44 | % | | | 45 | % | | 42 | % | | | 43 | % | | | 44 | % |
Income from operations/service revenue | | 27 | % | | | 26 | % | | | 22 | % | | 24 | % | | | 27 | % | | | 26 | % |
| | | | | | | | | | | | | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | 4.74 | | 62 | | $ | 2.92 | | 49 | | $ | 1.96 | | | $ | 5.63 | | 19 | | $ | 4.74 | | 62 | | $ | 2.92 | |
Diluted | | $ | 4.43 | | 60 | | $ | 2.77 | | 47 | | $ | 1.88 | | | $ | 5.19 | | 17 | | $ | 4.43 | | 60 | | $ | 2.77 | |
N/M — not meaningful.
28Revenue
We recognized service revenue of $662.1 million, $466.9 million and $334.8 million for the years ended December 31, 2013, 2012 and 2011, respectively. The growth in service revenue over the three year period was primarily driven by Ocwen’s continued growth, expansion of services we provide to the loans in Ocwen’s servicing portfolio and growth in our Financial Services business from new customer relationship management customers and, in 2013, expansion of our charge-off mortgage collection services.
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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, respectively. The growth in service revenue over the three year period was driven by the growth in Ocwen’s servicing portfolio coupled with our ongoing expansion of mortgage and real estate portfolio management services. Service revenue growth was also driven by an increase in origination related services provided to Lenders One members and growth in Financial Services’ customer relationship management business. Partially offsetting our service revenue growth was a decline in Financial Services segment revenue in our 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 lower cost geographies with corresponding lower fees from our customers for these services.
The increase in revenue from reimbursable expenses overduring the three year period is due primarily to the increase in our asset managementgrowth of Ocwen’s loan servicing portfolio, although reimbursable expenses can vary significantly from year to year based on the mix of services and closing and insurance services businesses in the Mortgage Services segment over the same period.
Our revenues are impacted by seasonality. More specifically, Financial Services asset recovery revenue tends to be higher in the first quarter and generally declines throughout the year. Mortgage Services revenue is impacted by REO sales which tend to be at their lowest level during the fall and winter months and highest during the spring and summer months.ordered.
Cost of Revenue and Gross Profit
Cost of revenue principally includes payroll and employee benefits associated with personnel employed in customer service and operations roles, fees paid to external providers related to the provision of services, reimbursable expenses, technology and telephonytelecommunications expenses as well as depreciation and amortization of operating assets.
We recognized cost of revenue of $492.5 million, $366.2 million $275.8 million and $189.1$275.8 million for the years ended December 31, 2013, 2012 2011 and 2010,2011, respectively. The increase in cost of revenue overduring the three year period is directlyprimarily attributable to compensation, technology and vendor costs associated with the growth in Ocwen’s loan servicing portfolio and higher costs in our Technology Services segment as we continue to invest in the development of our next generation technology and infrastructure.infrastructure to support our growth. Additionally, we have been carrying excess staff in the Mortgage Services segment since late 2012 in anticipation of the ResCap and Homeward non-GSE loans, the majority of which were boarded in 2013.
Gross profit as a percentage of service revenue was 43%42%, 44%43% and 45%44% for the years ended December 31, 2013, 2012 and 2011, and 2010, respectively. OurThe decreases in gross margins can vary significantly frommargin percentages during this period are primarily attributable to period. The most significant factors contributing to variability include the mix of services delivered,service revenue, the timing of investments in new services hiring of staff in advance of new businessand technology and the timing of when loans are boarded by our customers. Gross profit as a percentage of service revenue decreased overboarding new loans. In 2013, we experienced higher growth in the three year period primarilylower margin property inspection and preservation services from the initial referrals from the Homeward and ResCap portfolios and higher costs in our Technology Services segment as we continue to invest in the development of our next generation technology. Gross profit as a percentagetechnology to support our growth initiatives, partially offset by improved performance in our Financial Services segment from the growth of service revenue further declinedhigher margin mortgage charge-off and customer relationship management services. In 2012, we reported higher costs in 2012our Technology Services segment from investments in the development of our next generation technology, costs incurred to develop the rental property management business and the growth of the lower margin origination services business.
Selling, General and Administrative Expenses and Income from Operations
Selling, general and administrative expenses (“SG&A&A”) includes payroll for personnel employed in executive, finance, legal, human resources, vendor management, risk and six sigmaoperational effectiveness roles. This category also includes occupancy costs, professional fees, depreciation on non-operating assets and amortization on non-operatingof intangible assets.
We recognized SG&A of $113.8 million, $74.7 million $62.1 million and $57.4$62.1 million for the years ended December 31, 2013, 2012 and 2011, respectively. The increase in SG&A during the three year period includes expansion of some of our corporate functions, including occupancy costs, to support Altisource’s growth, and 2010, respectively. Our operating margins were 27%, 26%higher marketing costs related to Hubzu. In 2013, amortization expense was $23.1 million higher than 2012 from the 2013 Homeward, ResCap and 22%, respectively, as a percentageEquator transactions. In 2012, we reported higher professional services primarily from expenses incurred in connection with the Separation of each year’s service revenue. the Residential Asset Businesses.
Income from operations as a percentage of service revenue is improvingwas 24%, 27% and 26% for the years ended December 31, 2013, 2012 and 2011, respectively. Income from operations as a percentage of service revenue declined in 2013 compared to 2012 as a result of the mix of service revenue, the timing of investments in new services and technology, the timing of boarding new loans and increases in amortization expense from the Homeward and ResCap fee-based business acquisitions and the Equator acquisition. Income from operations as a percentage of service revenue increased in 2012 compared to 2011 because SG&A is growinggrew at a slower pace than service revenue. The benefit wasrevenue, partially offset in 2012 by costs associated with the separationSeparation of the Residential Asset Businesses.
Other Income (Expense), net
Other income (expense), net principally includes interest expense and AAMC.interest income. Interest expense for the year ended December 31, 2013 increased by $19.1 million compared to the year ended December 31, 2012 from the
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On an absolute basis,senior secured term loan borrowed in the increasefourth quarter of 2012 (no comparative amount in SG&A2011). We recognized interest income of $0.8 million for the year ended December 31, 2013 compared to $0.1 million for the year ended December 31, 2012 compared(no comparative amount in 2011) from a fourth quarter 2012 $75.0 million loan to Ocwen. Ocwen repaid the year ended December 31, 2011 was primarily due to a $6.2 million increaseloan 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.February 2013.
Income Tax Provision (Benefit)
We recognized an income tax provision (benefit) of $8.5 million, $8.7 million and $7.9 million for the years ended December 31, in 2013, 2012 and $(0.4) million in2011, respectively. Our effective tax rate was 6.0%, 7.0% and 9.2% for the years ended December 31, 2013, 2012 2011 and 2010,2011, respectively. The effective tax rate in all three periods differs from the Luxembourg statutory tax rate of(29.2% in 2013 and 28.8% in 2012 and 2011) primarily because of the effect of a favorable tax ruling in Luxembourg in 2010 and the mix of income and losses andwith varying tax rates in multiple taxing jurisdictions. Our effective tax rate was 7.0%, 9.2% and (0.7)% for 2012, 2011 and 2010, 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.
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, 2013, 2012 2011 and 2010.2011. Transactions between segments are accounted for as third-partythird party arrangements for purposes of presenting Segment Resultssegment results of Operations.operations. Intercompany transactions primarily consist of IT infrastructure services and charges for the use of certain REALSuite applications from our Technology Services segment to our other two segments. Generally, we reflect these charges withinas service revenue in the Technology Services segment and technology and communicationstelecommunications expense within cost of revenue and SG&A in the segment receiving the services. Consulting services except for consultingare reflected in outside fees and services which we reflect in professional services expense.within cost of revenue. Certain prior year amounts have been reclassified to conform to the current period presentation.
Financial information for our segments is as follows:
| | For the year ended December 31, 2012 | | | For the year ended December 31, 2013 | |
| | | | | | | | Corporate | | | | | | | | | | | Corporate | | | |
| | Mortgage | | Financial | | Technology | | Items and | | Consolidated | | | Mortgage | | Financial | | Technology | | Items and | | Consolidated | |
(in thousands) | | Services | | Services | | Services | | Eliminations | | Altisource | | | Services | | Services | | Services | | Eliminations | | Altisource | |
| | | | | | | | | | | | | | | | | | | | | | |
Revenue | | | | | | | | | | | | | | | | | | | | | | |
Service revenue | | $ | 351,908 | | $ | 63,979 | | $ | 74,189 | | $ | (23,147 | ) | $ | 466,929 | | | $ | 490,333 | | $ | 92,479 | | $ | 103,891 | | $ | (24,644 | ) | $ | 662,059 | |
Reimbursable expenses | | 95,604 | | 543 | | — | | — | | 96,147 | | | 101,999 | | 479 | | — | | — | | 102,478 | |
Non-controlling interests | | 5,284 | | — | | — | | — | | 5,284 | | | 3,820 | | — | | — | | — | | 3,820 | |
| | 452,796 | | 64,522 | | 74,189 | | (23,147 | ) | 568,360 | | | 596,152 | | 92,958 | | 103,891 | | (24,644 | ) | 768,357 | |
Cost of revenue | | 285,586 | | 46,737 | | 54,634 | | (20,756 | ) | 366,201 | | | 374,713 | | 55,328 | | 84,538 | | (22,099 | ) | 492,480 | |
Gross profit | | 167,210 | | 17,785 | | 19,555 | | (2,391 | ) | 202,159 | | | 221,439 | | 37,630 | | 19,353 | | (2,545 | ) | 275,877 | |
Selling, general and administrative expenses | | 25,099 | | 13,415 | | 8,888 | | 27,310 | | 74,712 | | | 46,515 | | 15,571 | | 12,442 | | 39,282 | | 113,810 | |
Income from operations | | 142,111 | | 4,370 | | 10,667 | | (29,701 | ) | 127,447 | | | 174,924 | | 22,059 | | 6,911 | | (41,827 | ) | 162,067 | |
Other expense, net | | (1,713 | ) | (27 | ) | (25 | ) | (1,033 | ) | (2,798 | ) | |
Other income (expense), net | | | (136 | ) | (10 | ) | 7 | | (19,595 | ) | (19,734 | ) |
Income before income taxes and non-controlling interests | | $ | 140,398 | | $ | 4,343 | | $ | 10,642 | | $ | (30,734 | ) | $ | 124,649 | | | $ | 174,788 | | $ | 22,049 | | $ | 6,918 | | $ | (61,422 | ) | $ | 142,333 | |
| | | | | | | | | | | | | | | | | | | | | | |
Margins: | | | | | | | | | | | | | | | | | | | | | | |
Gross profit/service revenue | | 48 | % | 28 | % | 26 | % | N/M | | 43 | % | | 45 | % | 41 | % | 19 | % | N/M | | 42 | % |
Income from operations/service revenue | | 40 | % | 7 | % | 14 | % | N/M | | 27 | % | | 36 | % | 24 | % | 7 | % | N/M | | 24 | % |
| | | | | | | | | | | | | | | | | | | | | | |
Transactions with related parties: | | | | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 306,774 | | $ | 208 | | $ | 31,245 | | $ | — | | $ | 338,227 | | | $ | 423,969 | | $ | 27,591 | | $ | 50,527 | | $ | — | | $ | 502,087 | |
Selling, general and administrative expenses | | $ | 57 | | $ | — | | $ | — | | $ | 2,373 | | $ | 2,430 | | | 86 | | — | | — | | 2,835 | | 2,921 | |
Other income | | $ | — | | $ | — | | $ | — | | $ | 86 | | $ | 86 | | | — | | — | | — | | 773 | | 773 | |
N/M — not meaningful.
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| | For the year ended December 31, 2011 | | | For the year ended December 31, 2012 | |
| | | | | | | | Corporate | | | | | | | | | | | Corporate | | | |
| | Mortgage | | Financial | | Technology | | Items and | | Consolidated | | | Mortgage | | Financial | | Technology | | Items and | | Consolidated | |
(in thousands) | | Services | | Services | | Services | | Eliminations | | Altisource | | | Services | | Services | | Services | | Eliminations | | Altisource | |
| | | | | | | | | | | | | | | | | | | | | | |
Revenue | | | | | | | | | | | | | | | | | | | | | | |
Service revenue | | $ | 224,942 | | $ | 69,231 | | $ | 56,094 | | $ | (15,509 | ) | $ | 334,758 | | | $ | 351,908 | | $ | 63,979 | | $ | 74,189 | | $ | (23,147 | ) | $ | 466,929 | |
Reimbursable expenses | | 80,124 | | 1,950 | | — | | — | | 82,074 | | | 95,604 | | 543 | | — | | — | | 96,147 | |
Non-controlling interests | | 6,855 | | — | | — | | — | | 6,855 | | | 5,284 | | — | | — | | — | | 5,284 | |
| | 311,921 | | 71,181 | | 56,094 | | (15,509 | ) | 423,687 | | | 452,796 | | 64,522 | | 74,189 | | (23,147 | ) | 568,360 | |
Cost of revenue | | 202,035 | | 51,096 | | 36,874 | | (14,156 | ) | 275,849 | | | 285,586 | | 46,737 | | 54,634 | | (20,756 | ) | 366,201 | |
Gross profit | | 109,886 | | 20,085 | | 19,220 | | (1,353 | ) | 147,838 | | | 167,210 | | 17,785 | | 19,555 | | (2,391 | ) | 202,159 | |
Selling, general and administrative expenses | | 15,278 | | 15,634 | | 4,867 | | 26,352 | | 62,131 | | | 25,099 | | 13,415 | | 8,888 | | 27,310 | | 74,712 | |
Income from operations | | 94,608 | | 4,451 | | 14,353 | | (27,705 | ) | 85,707 | | | 142,111 | | 4,370 | | 10,667 | | (29,701 | ) | 127,447 | |
Other (expense) income, net | | 248 | | (34 | ) | (49 | ) | 38 | | 203 | | |
Other income (expense), net | | | (1,713 | ) | (27 | ) | (25 | ) | (1,033 | ) | (2,798 | ) |
Income before income taxes and non-controlling interests | | $ | 94,856 | | $ | 4,417 | | $ | 14,304 | | $ | (27,667 | ) | $ | 85,910 | | | $ | 140,398 | | $ | 4,343 | | $ | 10,642 | | $ | (30,734 | ) | $ | 124,649 | |
| | | | | | | | | | | | | | | | | | | | | | |
Margins: | | | | | | | | | | | | | | | | | | | | | | |
Gross profit/service revenue | | 49 | % | 29 | % | 34 | % | N/M | | 44 | % | | 48 | % | 28 | % | 26 | % | N/M | | 43 | % |
Income from operations/service revenue | | 42 | % | 6 | % | 26 | % | N/M | | 26 | % | | 40 | % | 7 | % | 14 | % | N/M | | 27 | % |
| | | | | | | | | | | | | | | | | | | | | | |
Transactions with related parties: | | | | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 223,184 | | $ | 266 | | $ | 21,812 | | $ | — | | $ | 245,262 | | | $ | 306,774 | | $ | 208 | | $ | 31,245 | | $ | — | | $ | 338,227 | |
Selling, general and administrative expenses | | $ | — | | $ | — | | $ | — | | $ | 1,893 | | $ | 1,893 | | | 57 | | — | | — | | 2,373 | | 2,430 | |
Other income | | | — | | — | | — | | 86 | | 86 | |
N/M — not meaningful.
| | 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 income (expense), 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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Mortgage Services
Revenue
Revenue by service line was as follows for the years ended December 31:
| | | | % Increase | | | | % Increase | | | | |
(in thousands) | | 2012 | | / (decrease) | | 2011 | | / (decrease) | | 2010 | | | 2013 | | % Increase
(decrease) | | 2012 | | % Increase
(decrease) | | 2011 | |
| | | | | | | | | | | | | | | | | | | | | | |
Service revenue | | | | | | | | | | | | | | | | | | | | | | |
Asset management services | | $ | 107,480 | | 65 | | $ | 64,975 | | 75 | | $ | 37,079 | | | $ | 197,999 | | 84 | | $ | 107,480 | | 65 | | $ | 64,975 | |
Closing and insurance services | | 85,601 | | 52 | | 56,496 | | 104 | | 27,754 | | |
Insurance services | | | 119,835 | | 40 | | 85,601 | | 52 | | 56,496 | |
Residential property valuation | | 80,322 | | 55 | | 51,785 | | 55 | | 33,502 | | | 103,300 | | 29 | | 80,322 | | 55 | | 51,785 | |
Default management services | | 50,224 | | 52 | | 32,975 | | 54 | | 21,413 | | | 41,812 | | (17 | ) | 50,224 | | 52 | | 32,975 | |
Origination management services | | 28,281 | | 51 | | 18,711 | | 17 | | 15,932 | | | 27,387 | | (3 | ) | 28,281 | | 51 | | 18,711 | |
Total service revenue | | 351,908 | | 56 | | 224,942 | | 66 | | 135,680 | | | 490,333 | | 39 | | 351,908 | | 56 | | 224,942 | |
| | | | | | | | | | | | | | | | | | | | | | |
Reimbursable expenses: | | | | | | | | | | | | | | | | | | | | | | |
Asset management services | | 92,992 | | 22 | | 76,511 | | 83 | | 41,920 | | | 96,944 | | 4 | | 92,992 | | 22 | | 76,511 | |
Default management services | | 426 | | (88 | ) | 3,497 | | 50 | | 2,328 | | | 3,177 | | N/M | | 426 | | (88 | ) | 3,497 | |
Closing and insurance services | | 2,186 | | N/M | | 116 | | (62 | ) | 302 | | |
Insurance services | | | 1,647 | | (25 | ) | 2,186 | | N/M | | 116 | |
Origination management services | | | 231 | | N/M | | — | | N/M | | — | |
Total reimbursable expenses | | 95,604 | | 19 | | 80,124 | | 80 | | 44,550 | | | 101,999 | | 7 | | 95,604 | | 19 | | 80,124 | |
| | | | | | | | | | | | | | | | | | | | | | |
Non-controlling interests | | 5,284 | | (23 | ) | 6,855 | | (1 | ) | 6,903 | | | 3,820 | | (28 | ) | 5,284 | | (23 | ) | 6,855 | |
| | | | | | | | | | | | |
Total revenue | | $ | 452,796 | | 45 | | $ | 311,921 | | 67 | | $ | 187,133 | | | $ | 596,152 | | 32 | | $ | 452,796 | | 45 | | $ | 311,921 | |
| | | | | | | | | | | | | | | | | | | | | | |
Transactions with related parties: | | | | | | | | | | | | | | | | | | | | | | |
Asset management services | | $ | 181,948 | | 33 | | $ | 136,685 | | 73 | | $ | 78,999 | | | $ | 264,350 | | 45 | | $ | 181,948 | | 33 | | $ | 136,685 | |
Residential property valuation | | 73,406 | | 51 | | 48,734 | | 50 | | 32,525 | | | 98,959 | | 35 | | 73,406 | | 51 | | 48,734 | |
Closing and insurance services | | 37,849 | | 42 | | 26,733 | | 54 | | 17,379 | | |
Insurance services | | | 42,483 | | 12 | | 37,849 | | 42 | | 26,733 | |
Default management services | | 13,548 | | 23 | | 11,032 | | 63 | | 6,752 | | | 16,452 | | 21 | | 13,548 | | 23 | | 11,032 | |
Origination management services | | 23 | | N/M | | — | | N/M | | — | | | 1,725 | | N/M | | 23 | | N/M | | — | |
| | | | | | | | | | | | |
Total | | $ | 306,774 | | 37 | | $ | 223,184 | | 65 | | $ | 135,655 | | | $ | 423,969 | | 38 | | $ | 306,774 | | 37 | | $ | 223,184 | |
N/M — not meaningful.
RevenueWe recognized service revenue of $490.3 million for the year ended December 31, 2013, a 39% increase compared to the year ended December 31, 2012. The growth in all business lines, except default management services and origination management services, is primarily driven by Ocwen’s growth as loans from its servicing platform acquisitions are boarded on REALServicing. During 2013, we assisted Ocwen with the boarding of 1.1 million loans onto REALServicing from Ocwen’s acquisitions of Homeward, ResCap and OneWest Bank FSB servicing rights. Typically, the initial services ordered immediately following loan boardings are lower margin property inspection and preservation services, which is a significant driver of the 84% growth of asset management service revenue. Asset management service revenue also increased from new services introduced in 2013, from expanding the percentage of homes sold through auction on Hubzu and from capturing referrals for certain services before the loans were boarded on REALServicing. Growth in the insurance services and residential property valuation businesses also reflects Ocwen’s larger loan portfolio, but doesn’t yet reflect the normalized referral volume we expect from the new portfolios. Default management services revenue was lower as one of Ocwen’s subservicing customers is continuing its temporary moratorium on the foreclosure of its loans, the requirements under the “Making Homes Affordable” program limit servicers’ ability to initiate a foreclosure while pursuing other avenues of resolution and a greater percentage of loans pending foreclosure actions are being placed on hold for modification
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consideration or stopped due to modification. Origination management service revenue only declined 3% in 2013 over 2012, despite the estimated 14% decline in overall U.S. origination volume.
We recognized service revenue of $351.9 million for the year ended December 31, 2012, a 56% increase compared to the year ended December 31, 2011. This growth in all of the business lines, except origination management services, during the three year period was driven by the growth in Ocwen’s 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 geographic presence. A portion of the growth in asset management services is from (1) a higher capture rate of REO sales on Hubzu sold through the time-limit bidding processauction resulting in a higher percentage commission and (2) an increase in the average REO sales price.
The higher origination management services revenue over the three year periodin 2012 is fromdue to higher overall originations volume, the increase in the number of Lenders One members and the incremental roll-out and capture of origination related services to the members. The number of Lenders One members as of December 31, 2013, 2012 and 2011 and 2010 were 271 members, 241 members 214 members and 179214 members, respectively.
34
TableCertain of Contentsour Mortgage Services businesses are impacted by seasonality. REO sales and lawn maintenance services are generally lowest during the fall and winter months and highest during the spring and summer months.
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 | | | 2013 | | % Increase
(decrease) | | 2012 | | % Increase
(decrease) | | 2011 | |
| | | | | | | | | | | | | | | | | | | | | | |
Compensation and benefits | | $ | 53,842 | | 44 | | $ | 37,264 | | 81 | | $ | 20,584 | | | $ | 64,644 | | 20 | | $ | 53,842 | | 44 | | $ | 37,264 | |
Outside fees and services | | 116,323 | | 57 | | 73,888 | | 64 | | 45,135 | | | 187,139 | | 61 | | 116,323 | | 57 | | 73,888 | |
Reimbursable expenses | | 95,604 | | 19 | | 80,124 | | 80 | | 44,550 | | | 101,999 | | 7 | | 95,604 | | 19 | | 80,124 | |
Technology and communications | | 18,509 | | 82 | | 10,150 | | 42 | | 7,160 | | |
Technology and telecommunications | | | 19,150 | | 3 | | 18,509 | | 82 | | 10,150 | |
Depreciation and amortization | | 1,308 | | 115 | | 609 | | 132 | | 262 | | | 1,781 | | 36 | | 1,308 | | 115 | | 609 | |
| | | | | | | | | | | | | | | | | | | | | | |
Cost of revenue | | $ | 285,586 | | 41 | | $ | 202,035 | | 72 | | $ | 117,691 | | | $ | 374,713 | | 31 | | $ | 285,586 | | 41 | | $ | 202,035 | |
Cost of revenue for the year ended December 31, 2013 of $374.7 million increased over the three year period from costs relatedby 31% compared to the year ended December 31, 2012, driven primarily by the growth inof Ocwen’s loan servicing portfolio. Outside fees and services increased at a greater rate than service revenue due to revenue mix, primarily the higher level of property inspection and preservation referrals. Compensation and benefits increased at a lower rate than service revenue as we began to experience the benefit of our workforce efficiency initiatives on higher referral volumes even after carrying excess employees for a part of the year to support Mortgage Services’ anticipated growth.
Cost of revenue for the year ended December 31, 2012 of $285.6 million increased by 41% compared to the year ended December 31, 2011, driven primarily by the growth of Ocwen’s loan servicing portfolio as well asand the development of closing and title services in 2011, new origination related services in 2012 and new rental property management services in 2012.
Gross profit as a percentage of service revenue was 48%45%, 49%48% and 51%49% for the years ended December 31, 2013, 2012 2011 and 2010,2011, respectively. The decreases in gross margin percentages during this period are primarily attributable to revenue mix of services delivered and the timing of boarding new loans. In 2013, we experienced higher growth in the lower margin property inspection and preservation services from the early referrals from the Homeward and ResCap portfolios, partially offset by lower compensation and benefits costs as a percentage of service revenue from process efficiencies and higher utilization. Property inspections are generally higher following the boarding of a new portfolio. Generally, we have been able to maintain our margins in a period of accelerated growth, and we anticipate that, going forward, we will improve margins as we receive referrals for the full suite of default related services on newly boarded loans, reduce employee and vendor costs as a percent of service revenue through our workforce efficiency initiatives, displace vendors with internal personnel at a lower cost and deploy vendor, process and payment management technologies. In 2012, the most significant factors impacting gross profit as a percent of
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service revenue were the mix of services provided, (growthincluding growth of the lower margin origination related appraisals in 2012 as we focused on the sale of these services to the Lenders One members during the periods presented);appraisals. We also incurred costs incurred in 2012 to develop the rental property management business, including the separationSeparation of the Residential and 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 our margins in periods of accelerated growth, over time we will seek to reduce employee and vendor costs as a percent of service revenue principally through deployment of our next generation vendor, process and payment management technologies which began in the second half of 2012 and will continue through 2014.Asset Businesses.
Our margins can vary substantially depending upon when servicing isrights are acquired and boarded to REALServicing by Ocwen. Typically, compensation and benefits will increase in anticipation of a servicing portfolio acquisitionboarding as we hire and train personnel to deliver services in advance of the actual boarding of loans by Ocwen.loans. Subsequently, as new loans are boarded, for the first couple ofinitial months post boarding,post-boarding, we tend to deliver an elevated level of lower margin valuations and pre-foreclosure services for which we incur substantially more outside feesproperty inspection and services when compared to asset managementpreservation services.
Selling, General and Administrative Expenses and Income from Operations
We recognized SG&A expenses increased on an absolute basis overof $46.5 million, $25.1 million and $15.3 million for the three year period principally due to the growth in the Mortgage Services segment which required investments in leased facilitiesyears ended December 31, 2013, 2012 and related occupancy costs, technology and other general and administrative costs. Also contributing to the2011, respectively. The increase in both periods wasSG&A from 2012 to 2013 primarily relates to an $18.4 million increase in amortization expense from the 2013 acquisitions of the Homeward and ResCap fee-based businesses. In 2012, we incurred higher marketingprofessional services costs related to Hubzu, travel expenses primarily associated withas a result of the managementSeparation of our global operations, higher bad debt expense in line with our higher levels of revenue and costs in 2012 associated with the separation of Residential and AAMC.Asset Businesses.
Income from operations as a percentage of service revenue however,was 36%, 40% and 42% for the years ended December 31, 2013, 2012 and 2011, respectively. Income from operations as a percentage of service revenue declined in 2012 compared to 2011 due to the2013 as a result of lower gross profit margins inand higher amortization expense from the 2013 Homeward and ResCap fee-based business acquisitions. 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 percentage of service revenue would have been 44% in 2012.
35
Tabledeclined as gross margins declined and SG&A grew at a higher pace than service revenue due to the 2012 costs associated with the Separation of Contentsthe Residential Asset Businesses.
Financial Services
Revenue
Revenue by service line was as follows for the years ended December 31:
| | | | % Increase | | | | % Increase | | | | | | | % Increase | | | | % Increase | | | |
(in thousands) | | 2012 | | / (decrease) | | 2011 | | / (decrease) | | 2010 | | | 2013 | | (decrease) | | 2012 | | (decrease) | | 2011 | |
| | | | | | | | | | | | | | | | | | | | | | |
Service revenue | | | | | | | | | | | | | | | | | | | | | | |
Asset recovery management | | $ | 29,582 | | (21 | ) | $ | 37,371 | | (17 | ) | $ | 45,151 | | | $ | 46,799 | | 58 | | $ | 29,582 | | (21 | ) | $ | 37,371 | |
Customer relationship management | | 34,397 | | 8 | | 31,860 | | 8 | | 29,567 | | | 45,680 | | 33 | | 34,397 | | 8 | | 31,860 | |
Total service revenue | | 63,979 | | (8 | ) | 69,231 | | (7 | ) | 74,718 | | | 92,479 | | 45 | | 63,979 | | (8 | ) | 69,231 | |
| | | | | | | | | | | | | | | | | | | | | | |
Reimbursable expenses: | | | | | | | | | | | | | | | | | | | | | | |
Asset recovery management | | 543 | | (72 | ) | 1,950 | | (33 | ) | 2,899 | | | 479 | | (12 | ) | 543 | | (72 | ) | 1,950 | |
Total reimbursable expenses | | 543 | | (72 | ) | 1,950 | | (33 | ) | 2,899 | | | 479 | | (12 | ) | 543 | | (72 | ) | 1,950 | |
| | | | | | | | | | | | | | | | | | | | | | |
Total revenue | | $ | 64,522 | | (9 | ) | $ | 71,181 | | (8 | ) | $ | 77,617 | | | $ | 92,958 | | 44 | | $ | 64,522 | | (9 | ) | $ | 71,181 | |
| | | | | | | | | | | | | | | | | | | | | | |
Transactions with related parties: | | | | | | | | | | | | | | | | | | | | | | |
Asset recovery management | | $ | 208 | | (22 | ) | $ | 266 | | 60 | | $ | 166 | | | $ | 27,591 | | N/M | | $ | 208 | | (22 | ) | $ | 266 | |
Financial ServicesN/M — not meaningful.
We recognized service revenue declined overof $92.5 million for the three year periodended December 31, 2013, a 45% increase compared to the year ended December 31, 2012 primarily due to increased charge-off mortgage collections and growth in customer relationship management revenues from the addition of two new clients during 2013 and expansion of services provided to existing clients. The increases were partially offset by lower credit card charge-off placements
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from the continuing record low credit card delinquency rates. With respect to the charge-off mortgage business, we expanded our capabilities in connection with the ResCap fee-based business transaction, and in the second quarter of 2013, we began providing these services to the ResCap loans serviced by Ocwen and a greater portion of the other loans in the Ocwen portfolio.
We recognized service revenue of $64.0 million for the year ended December 31, 2012, an 8% decrease compared to the year ended December 31, 2011 due to a decline in service revenue from asset recovery management services. The decline was primarily due to the shift of existing services for one of the segment’s largest customers to a lower cost geography with corresponding lower fees from our customer for these services and a decline in total placements as a result of lower credit card delinquencies. Partially offsetting this decline, service revenue in customer relationship management increased over the 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.
Certain of our Financial Services businesses are impacted by seasonality. Asset recovery management revenue tends to be higher in the first quarter of each year as borrowers utilize tax refunds and bonuses to pay debts.
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 | |
| | | | % Increase | | | | % Increase | | | |
(in thousands) | | 2013 | | (decrease) | | 2012 | | (decrease) | | 2011 | |
| | | | | | | | | | | |
Compensation and benefits | | $ | 41,800 | | 28 | | $ | 32,700 | | 10 | | $ | 29,764 | |
Outside fees and services | | 4,401 | | (21 | ) | 5,598 | | (52 | ) | 11,587 | |
Reimbursable expenses | | 479 | | (12 | ) | 543 | | (72 | ) | 1,950 | |
Technology and telecommunications | | 7,704 | | 7 | | 7,221 | | (7 | ) | 7,784 | |
Depreciation and amortization | | 944 | | 40 | | 675 | | N/M | | 11 | |
| | | | | | | | | | | |
Cost of revenue | | $ | 55,328 | | 18 | | $ | 46,737 | | (9 | ) | $ | 51,096 | |
N/M — not meaningful.
Cost of revenue for the year ended December 31, 2013 of $55.3 million increased by 18% compared to the year ended December 31, 2012, driven primarily by higher mortgage charge-off and customer relationship management employees in connection with new business. These increases were partially offset by lower outside fees and services.
Cost of revenue for the year ended December 31, 2012 of $46.7 million decreased by 9% compared to the year ended December 31, 2011, driven primarily by lower outside fees and services due to the reduction in account placements. 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 in outside fees and services. SinceSubsequent to the acquisition, these costs have been recorded according to the nature of the expenses and are
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included in compensation and benefits and technology and communicationstelecommunications expenses (included in cost of revenue ) or occupancy related costs and other (included in SG&A).
Cost of revenueGross profit as a percentage of service revenue haswas 41%, 28% and 29% for the years ended December 31, 2013, 2012 and 2011, respectively. In 2013, gross profit as a percentage of service revenue increased due to growth of higher margin mortgage charge-off and customer relationship management services. In 2012, gross profit as a percentage of service revenue remained flat over the periods presentedcompared to 2011 as we have actively worked to manage our cost structure in athat period of declining revenue environment.revenue. 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.
Gross profit as a percentage34
Table 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 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.Contents
Selling, General and Administrative Expenses and Income from Operations
On an absolute basis,We recognized SG&A of $15.6 million, $13.4 million and $15.6 million for the years ended December 31, 2013, 2012 and 2011, respectively. SG&A increased in 2013 principally from a $3.8 million increase in amortization expense from the acquisition of the ResCap fee-based businesses. In 2012, SG&A expenses decreased over the three year period principally from lower compensation costs as a result of shifting work in our global delivery platform as discussed in the revenue section above and as a result of decreasedfrom lower depreciation and amortization (relatedexpense 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 or 2012).Financial Services.
Operating incomeIncome from operations as a percentage of service revenue improved from 0%was 24%, 7% and 6% for the yearyears ended December 31, 2010 to 7% for the year ended December 31,2013, 2012 and 2011, respectively. Income from operations as a resultpercentage of service revenue increased in 2013 due to higher gross margins and slower SG&A growth, despite the increase in amortization expense from the acquisition of the declines inResCap fee-based business. In 2012, income from operations as a percentage of service revenue increased as lower SG&A expenses.more than offset decreased gross margins.
Technology Services
Revenue
Revenue by service line was as follows for the years ended December 31:
| | | | % Increase | | | | % Increase | | | | | | | % Increase | | | | % Increase | | | |
(in thousands) | | 2012 | | / (decrease) | | 2011 | | / (decrease) | | 2010 | | | 2013 | | (decrease) | | 2012 | | (decrease) | | 2011 | |
| | | | | | | | | | | | | | | | | | | | | | |
Revenue: | | | | | | | | | | | | | | | | | | | | | | |
REALSuite | | $ | 41,702 | | 19 | | $ | 34,926 | | 12 | | $ | 31,214 | | |
REALSuite and Equator | | | $ | 67,319 | | 41 | | $ | 47,773 | | 25 | | $ | 38,336 | |
IT infrastructure services | | 32,487 | | 53 | | 21,168 | | 2 | | 20,799 | | | 36,572 | | 38 | | 26,416 | | 49 | | 17,758 | |
| | | | | | | | | | | | |
Total revenue | | $ | 74,189 | | 32 | | $ | 56,094 | | 8 | | $ | 52,013 | | | $ | 103,891 | | 40 | | $ | 74,189 | | 32 | | $ | 56,094 | |
| | | | | | | | | | | | | | | | | | | | | | |
Transactions with related parties: | | | | | | | | | | | | | | | | | | | | | | |
REALSuite | | $ | 18,245 | | 38 | | $ | 13,253 | | 18 | | $ | 11,226 | | |
REALSuite and Equator | | | $ | 34,032 | | 63 | | $ | 20,894 | | 38 | | $ | 15,165 | |
IT infrastructure services | | 13,000 | | 52 | | 8,559 | | 8 | | 7,941 | | | 16,495 | | 59 | | 10,351 | | 56 | | 6,647 | |
Revenue | | $ | 31,245 | | 43 | | $ | 21,812 | | 14 | | $ | 19,167 | | |
| | | | | | | | | | | | |
Total | | | $ | 50,527 | | 62 | | $ | 31,245 | | 43 | | $ | 21,812 | |
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TableWe recognized service revenue of Contents
The$103.9 million for the year ended December 31, 2013, a 40% increase in REALSuite revenue overcompared to the three year period was driven by theended December 31, 2012 primarily due to growth in Ocwen’s loan servicing portfolio. An increaseportfolio on REALServicing. Revenue also increased from the November 15, 2013 acquisition of Equator. Equator’s revenue for the period from November 15, 2013 through December 31, 2013 is included in flood certification services to Lenders One members also contributed to the increase in 2012 as compared to 2011. We began offering flood certification services in early 2011.
The increase inTechnology Services segment. IT infrastructure services revenue over the three year period reflects theincreased in 2013 due to an increase in cost to support strategic initiatives and headcount growth experienced by our Mortgage Services segmentat both Ocwen and by Ocwen.Altisource. IT infrastructure services are billed on a cost plus basis. As such, the increase in cost to support headcount growth in both Altisource and Ocwen resulted in a corresponding increase in revenue in the Technology Services segment.
We recognized service revenue of $74.2 million for the year ended December 31, 2012, a 32% increase compared to the year ended December 31, 2011 due to the growth in Ocwen’s loan servicing portfolio on REALServicing. An increase in flood certification services to Lenders One members also contributed to the increase in 2012 compared to 2011. We began offering flood certification services in early 2011. The increase in 2011 compared to 2010 was partially offsetIT infrastructure services revenue in 2012 reflects the growth experienced by the change in pricing effective January 1, 2011 as discussed in “Factors Affecting Comparability” above.our Mortgage Services segment and by Ocwen.
The servicesServices provided to our other segments are eliminated in consolidation but are included as revenue in the Technology Services segment and as technology and telecommunications expense, a component of technology and communications expensecost of revenue, in our other segments for segment presentation purposes.segments.
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Cost of Revenue and Gross Profit
Cost of revenue consists of the following for the years ended December 31:
| | | | % Increase | | | | % Increase | | | | | | | % Increase | | | | % Increase | | | |
(in thousands) | | 2012 | | / (decrease) | | 2011 | | / (decrease) | | 2010 | | | 2013 | | (decrease) | | 2012 | | (decrease) | | 2011 | |
| | | | | | | | | | | | | | | | | | | | | | |
Compensation and benefits | | $ | 26,602 | | 71 | | $ | 15,519 | | 38 | | $ | 11,259 | | | $ | 50,368 | | 89 | | $ | 26,602 | | 71 | | $ | 15,519 | |
Outside fees and services | | 1,690 | | 132 | | 727 | | N/M | | 31 | | | 1,926 | | 14 | | 1,690 | | 132 | | 727 | |
Technology and communications | | 18,159 | | 21 | | 14,994 | | 23 | | 12,206 | | |
Technology and telecommunications | | | 20,546 | | 13 | | 18,159 | | 21 | | 14,994 | |
Depreciation and amortization | | 8,183 | | 45 | | 5,634 | | 4 | | 5,413 | | | 11,698 | | 43 | | 8,183 | | 45 | | 5,634 | |
| | | | | | | | | | | | | | | | | | | | | | |
Cost of revenue | | $ | 54,634 | | 48 | | $ | 36,874 | | 28 | | $ | 28,909 | | | $ | 84,538 | | 55 | | $ | 54,634 | | 48 | | $ | 36,874 | |
N/M — not meaningful.Cost of revenue for the year ended December 31, 2013 of $84.5 million increased by 55% compared to the year ended December 31, 2012 primarily due to hiring more and higher cost personnel to support the development of our next generation REALSuite software. We expect cost of revenue in the Technology Services segment to increase as we continue to invest in personnel to support our development and growth initiatives. In addition, we acquired Equator on November 15, 2013 and recognized Equator’s cost of revenue from the date of acquisition. Depreciation and amortization increased in 2013 primarily as a result of our 2012 investment in a disaster recovery center. Outside fees and services and technology and telecommunications also increased consistent with the growth in headcount.
Cost of revenue for the year ended December 31, 2012 of $54.6 million increased overby 48% compared to the three year period fromended December 31, 2011, driven primarily by hiring additionalmore and more expensivehigher cost personnel to support the development of our next generation REALSuite software, increased technology and communicationstelecommunications costs from the addition of new facilities and the expansion of existing facilities. Outside fees and services increased in 2012 associated withas a result of the increase in flood certification services provided to Lenders One members. Technology and communicationstelecommunications costs increased principally due to the addition of new facilities, expansion of existing facilities and increased licensing fees for software to support our growth. We expect cost of revenue in the Technology Services segment to increase as we continue to invest in personnel to support our development initiatives.
Gross profit as a percentage of service revenue was 19%, 26% and 34% for the years ended December 31, 2013, 2012 and 2011, respectively. In 2013, gross profit as a percentage of service revenue declined duringas we continued to invest in the three year perioddevelopment of our next generation technologies. Gross profit as a percentage of service revenue declined in 2012 as we experienced faster growth in the lower margin IT infrastructure services and incurred higher costs in the development of our next generation technology. We invest in the development of our next generation technologies to support our continued expansion and growth initiatives.
Selling, General and Administrative Expenses and Income from Operations
On an absolute basis,We recognized SG&A of $12.4 million, $8.9 million and $4.9 million for the years ended December 31, 2013, 2012 and 2011, respectively. SG&A increased in 2013 principally from a $1.0 million increase in amortization expense from the 2013 acquisitions of the Homeward and ResCap fee-based businesses and Equator, higher administrative employee costs and increased depreciation from increased administrative assets. In 2012, 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.
Income from operations as a percentage of service revenue declined overwas 7%, 14% and 26% for the three year periodyears ended December 31, 2013, 2012 and 2011, respectively. Income from operations as a resultpercentage of theservice revenue decreased in 2013 and expense fluctuations2012 due to lower gross margins and higher SG&A as described above.
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Corporate Items and Eliminations
Our Corporate segment includesItems and Eliminations include costs recognized by us related to corporate support functions including executive, finance, legal, human resources, vendor management, risk, operational effectiveness and six sigma.interest expense. It also includes eliminations of transactions between the reporting segments.
Corporate costs for the year ended December 31, 2013 increased in 2012 compared to 2011the year ended December 31, 2012 primarily due to increasedhigher compensation and employee-related costs, consulting, depreciation and amortization, lease costs relatedand interest expense. We incurred higher compensation and employee-related costs as we expanded certain corporate functions in 2013 to support our continued growth. The higher depreciation and amortization and lease costs relate to the build out of new facilities to support our growth.continued expansion. We reflect initial lease and other facility-related costs in our Corporate segment until the facilities reach a certain level of occupancyare approximately 40% occupied by the business operationsunits, at which time the cost is reflected in the respective business unit’ssegment’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 asfor the year ended December 31, 2012 compared to 2010. Duringthe year ended December 31, 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. Asprimarily as a result our expenses associated with related professional fees decreased. In addition, lease costs increased related toof the build outbuild-out of new facilities to support Ocwen’sour growth. As a percentage
Interest expense for the year ended December 31, 2013 increased by $19.1 million from the $200 million senior secured term loan borrowed in the fourth quarter of total consolidated Service Revenue, Corporate expenses2012 and increased to $400 million on May 7, 2013. Interest expense in 2011were essentially flat2012 related to the senior secured term loan was recorded from the date of borrowing on November 27, 2012 (no comparative amount in 2011).
We recognized interest income of $0.8 million for the year ended December 31, 2013 compared to 2010.$0.1 million for the year ended December 31, 2012 (no comparative amount in 2011) from a fourth quarter 2012 $75.0 million loan to Ocwen. Ocwen repaid the loan in February 2013.
The eliminationamount of intercompany revenue eliminated in consolidation increased over the three year period ended December 31, 2013 due to growth in our operations over the same period. These intercompany transactions primarily consistconsisted of IT infrastructure services as well as charges for the use of certain REALSuite applications from our Technology Service segment to our other two business segments. While the expenses are recognized in the Mortgage Services and Financial Services segments above, the elimination of these expenses are reflected in Corporate itemsItems and eliminations.Eliminations.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
Our primary source of liquidity is cash flows from operations. We seek to deploy excess cash generated in a disciplined manner. Principally, we intend to use excess cash to repay our senior secured term loan (as described below) and develop complementary services and businesses that we believe will generate attractive margins in line with our core capabilities. Further, we plan to evaluate potential acquisitions that alignare aligned with our vision and can accelerate the achievement of our strategic objectives. We also intend to use excess cash to repurchase shares of our common stock.
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. 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 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 million. On May 7, 2013, we amended the senior secured term loan agreement to increase the principal amount of the senior secured term loan by $200 million (the “Senior Secured Term Loan”and to provide additional share repurchase capacity, among other changes. Under the terms of the senior secured term loan, as amended, we have the ability to borrow an additional $200 million under an accordion provision. On December 9, 2013, we entered into Amendment No. 2 (“Second Amendment”). to the senior secured term loan agreement in which we incurred indebtedness in the form of Refinancing Debt (as defined in the senior secured term loan agreement), the proceeds of which were used to refinance, in full, the $397.5 million of term loans outstanding under the senior secured term loan agreement immediately prior to the effectiveness of the Second Amendment. The Refinancing Debt bears interest at lower rates and has a maturity date approximately one year
A portion of the proceeds was used to capitalize 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 to 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.
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later than the prior term loans. Generally, the margin applied to either the Adjusted Eurodollar rate or the Base Rate, as defined in the senior secured term loan agreement, was reduced by 1 percentage point and the floor was reduced by 0.25 percentage points. The Senior Secured Term LoanSecond Amendment further modified the senior secured term loan agreement to, among other changes, increase the maximum permitted amount of Restricted Junior Payments (as defined in the senior secured term loan agreement), including share repurchases by the Company.
The refinanced term loans under the senior secured term loan agreement must be repaid in equal consecutive quarterly principal installments of $1.0 million commencing on March 29,December 31, 2013, equalwith the balance due at maturity. After giving effect to 0.25%the Second Amendment, all amounts outstanding under the senior secured term loan agreement will become due on the earlier of (i) December 9, 2020, being the seventh anniversary of the initialclosing date of the Second Amendment and (ii) the date on which the loans are declared to be due and owing by the administrative agent at the request (or with the consent) of the Required Lenders (as defined in the senior secured term loan agreement) upon the occurrence of any event of default under the senior secured term loan agreement. However, if leverage ratios, as defined in the senior secured term loan agreement, exceed 2.75 to 1.00, a percentage of cash flow must be used to repay principal. No mandatory prepayments were owed for the year ended December 31, 2013. We are permitted to make voluntary prepayments without penalty after June 9, 2014. If prepayments are made prior to June 9, 2014, 1.0% of the principal amount of such loans with final payment of all amounts outstanding, plus accrued and unpaid interest, due on November 27, 2019.the prepaid term loan will be incurred. Interest payments are due monthly. The interest rate as of December 31, 20122013 was 5.75%4.50%.
OurThe debt covenants in the senior secured term loan agreement limit, among other things, our ability to incur additional debt.debt, pay dividends and repurchase stock. In the event we neededrequire additional liquidity, our ability to obtain it may be limited by the Senior Secured Term Loan.senior secured term loan.
Cash Flows
The following table presents our cash flows for the years ended December 31:
| | | | | % | | | | % | | | |
| | | | % Increase | | | | % Increase | | | | | | | Increase | | | | Increase | | | |
(dollars in thousands) | | 2012 | | / (decrease) | | 2011 | | / (decrease) | | 2010 | | | 2013 | | (decrease) | | 2012 | | (decrease) | | 2011 | |
| | | | | | | | | | | | | | | | | | | | | | |
Net income adjusted for non-cash items | | $ | 145,672 | | 51 | | $ | 96,657 | | 30 | | $ | 74,564 | | | $ | 190,655 | | 31 | | $ | 145,672 | | 51 | | $ | 96,657 | |
Working capital | | (29,143 | ) | N/M | | 14,954 | | 169 | | (21,752 | ) | | (5,181 | ) | 82 | | (29,143 | ) | N/M | | 14,954 | |
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 cash flows provided by operating activities | | | 185,474 | | 59 | | 116,529 | | 4 | | 111,611 | |
Net cash flows used in investing activities | | | (215,944 | ) | (95 | ) | (110,563 | ) | (234 | ) | (33,070 | ) |
Net cash flows provided by (used in) financing activities | | | 55,292 | | (18 | ) | 67,411 | | 198 | | (68,550 | ) |
Net change in cash | | 73,377 | | N/M | | 9,991 | | 220 | | (8,322 | ) | | 24,822 | | (66 | ) | 73,377 | | N/M | | 9,991 | |
Cash and cash equivalents at beginning of period | | 32,125 | | 45 | | 22,134 | | (27 | ) | 30,456 | | | 105,502 | | 228 | | 32,125 | | 45 | | 22,134 | |
| | | | | | | | | | | | |
Cash and cash equivalents at end of period | | $ | 105,502 | | 228 | | $ | 32,125 | | 45 | | $ | 22,134 | | | $ | 130,324 | | 24 | | $ | 105,502 | | 228 | | $ | 32,125 | |
N/M — not meaningful.
Cash Flows from Operating Activities
Cash flows from operating activities are generally consist of the cash effects of transactions and events that factor into the determination of net income. For the year ended December 31, 2012,2013, we generated $185.5 million of cash flows from operations, or approximately $0.28 for every dollar of service revenue compared to $116.5 million inof cash flows from operations, or approximately $0.25 per dollar of service revenue compared toin 2012 and $111.6 million of cash flows from operations, or approximately $0.33 per dollar of service revenue in 2011. The increase in cash flowflows from operating activities during 2013 compared to 2012 is primarily due to the increase in net income, after adding back depreciation and amortization, including amortization of intangible assets and favorable changes in working capital. The increase in cash flows from operating activities during 2012 compared to 2011 is primarily due to the increase in net income, after adding back depreciation and amortization, 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
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Table 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.Contents
In periods of growth, operating cash flowflows 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 flowflows 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.
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Cash Flows from Investing Activities
Cash flows usedOn March 29, 2013, we acquired the Homeward fee-based business from Ocwen for $75.8 million, after a working capital and net income adjustment. On April 12, 2013, we entered into an agreement with Ocwen to establish additional terms related to the existing servicing arrangements between Altisource and Ocwen in investing activitiesconnection with Ocwen’s acquisition of certain mortgage servicing platform assets of ResCap. The cash consideration paid by Altisource to Ocwen under the ResCap agreement totaled $128.8 million. On November 15, 2013, we acquired Equator for initial consideration of $63.4 million and up to $80 million in potential additional consideration (the “Earn Out”).
On February 15, 2013, Ocwen repaid the $75.0 million loan that was borrowed from us in December 2012. Capital expenditures for the years ended December 31, 2013, 2012 and 2011 were $34.1 million, $35.6 million and $16.4 million, respectively. Capital expenditures in 2013, 2012 and 2011 primarily related to facility build-outs and investments in infrastructure and the next generation of our REALSuite software applications. Capital expenditures in 2012 include $75.0 million that we loaned Ocwen. It also includes $35.6 million of capital expenditures related toincluded investments in a disaster recovery center and capital expenditures associated with facility build-outs and investmentsthat continued, to a lesser degree, 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.2013.
On March 31, 2013, we sold our 49% interest in Correspondent One S.A. (“Correspondent One”) to Ocwen for $12.6 million. During 2011, we invested $15.0 million in Correspondent 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 flows for investing activities in 2010 was the acquisition of MPA for $26.8 million, net of cash acquired.
Cash Flows from Financing Activities
Cash flows from financing activities for the year ended December 31, 2013 primarily included activity associated with debt proceeds, debt issuance costs, share repurchases, stock option exercises and payments to non-controlling interests. On May 7, 2013, we amended our senior secured term loan agreement to increase the principal amount of the senior secured term loan by $200 million and received $201.0 million, including a $1.0 million original issue premium. We also incurred debt issuance costs of $2.4 million in connection with the amendment. On December 9, 2013, we entered into the Second Amendment, the proceeds of which were used to refinance, in full, the $397.5 million of term loans outstanding and included an original issue discount of $0.5 million. We incurred an additional $0.8 million of debt issuance costs in connection with the Second Amendment. In 2013, we spent $141.0 million to repurchase our common stock and stock option exercises provided proceeds of $6.9 million. Also during 2013, we repaid $3.5 million of the borrowings under the senior secured term loan and distributed $4.2 million to non-controlling interests.
Cash flows from financing activities for the year ended December 31, 2012 primarily included activity associated with debt proceeds, debt issuance costs, the distribution of cash in connection with the Separation of the Residential Asset Businesses, share repurchases, stock option exercises and payments to non-controlling interests. On November 27, 2012, we entered into a $200.0$200 million Senior Secured Term Loansenior secured term loan, which included an original issue discount of $2.0 million, and capitalized $4.3 million inincurred related debt issuance costs.costs of $4.3 million. A total of $105.0 million of the senior secured term loan proceeds were distributed in December 2012 in connection with the Separation of the Residential Asset Businesses. In 2012, we spent $16.8 million to repurchase our common stock and stock option exercises provided proceeds of $3.2 million. Also during 2012, we distributed $7.1 million to non-controlling interests.
The largest use of cashCash flows infrom financing activities infor the yearsyear 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 2012. Beginning in the second quarter of 2012, we temporarily halted ourprimarily included activity associated with share buyback program as described in the “Overview” section above.
Additional activities in all three years include receipt of funds associated withrepurchases, stock option exercises and payments to non-controlling interests. In 2011, we spent $62.2 million to repurchase our common stock, and stock option exercises provided proceeds of $1.0 million. Also during 2011, we distributed $6.8 million to non-controlling interests.
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Liquidity Requirements after December 31, 20122013
We began limiting our repurchaseOn November 15, 2013, we completed the acquisition of outstanding sharesEquator and paid $63.4 million at closing in cash (net of closing working capital adjustments), subject to certain post-closing adjustments based on current assets and current liabilities of Equator at closing, to be settled within 90 days of the closing date. Additionally, the Purchase and Sale Agreement (the “Purchase Agreement”) provides for the payment of up to $80 million in potential additional consideration determined based on Equator Adjusted EBITA (as defined 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”Purchase Agreement) in the overview sectionthree consecutive 12-month periods following closing. Up to $22.5 million of this MD&A). Assuming management concludes share repurchases remain an effective deploymentpotential additional consideration can be earned in each of the first two 12-month periods, and up to $35.0 million can be earned in the third 12-month period. Any amounts earned upon the achievement of Adjusted EBITA thresholds are payable through 2017. We may, in our capital, we may resume repurchasesdiscretion, pay up to 20% of each payment of any of this potential additional consideration in 2013.shares of Company restricted stock, with the balance to be paid in cash.
During the first quarter of 2013,2014, we expect to distribute $1.1$0.7 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
We believe that we will generate sufficient cash flowflows to fund operations, capital expenditures, and required debt, interest and interestEarn Out 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 JUDGMENTSPOLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS
The preparation ofWe prepare our consolidated financial statements in conformityaccordance with GAAP requiresGAAP. In applying many of these accounting principles, we need to make assumptions, estimates and assumptionsjudgments that affect the reported amounts of assets, and liabilities, revenue and expenses and related disclosures of contingent assets and liabilities in theour consolidated financial statementsstatements. We base our estimates and accompanying notes. The SEC has defined a company’s critical accounting policies asjudgments on historical experience and other assumptions that we believe are reasonable under the ones thatcircumstances. These assumptions, estimates and judgments, however, are most important tooften subjective. Actual results may be affected negatively based on changing circumstances. If actual amounts are ultimately different from our estimates, the portrayal of the company’s financial condition andrevisions are included in our results of operations andfor the period in 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, weactual amounts become known. We have identified the critical accounting policies and judgmentsestimates addressed below. We also have other key accounting policies, which involve the use of assumptions, estimates judgments, and assumptionsjudgments that are significant to understanding our results. For additional information, see Note 2 to the consolidated financial statements. Although we believe that our assumptions, 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 revenue from the services we provide in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification ASC Topic 605, Revenue Recognition (“ASC Topic 605”). 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 revenue as the services are performed either on a per unit or a fixed price basis. Our
At Mortgage Services, we recognize revenue for the majority of the services we provide in this segment on completion of the service to our customers. 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 policieson 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.
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At Financial Services, we generally earn our fees for asset recovery management services as a percentage of the amount we collect on delinquent consumer receivables and charged-off mortgages on behalf of our clients and recognize revenue upon collection from the debtors. We also earn fees for packaging and selling charged-off mortgages and recognize revenue after the sale of the notes and once the risks and rewards of the mortgage notes are detailed in Note 2transferred to the consolidated financial statements. purchasers. In addition, we provide customer relationship management services for which we earn and recognize revenue on a per-call, per-person or per-minute basis as the related services are performed.
At Technology Services, we charge fees for our REALSuite platform based on the number of our clients’ loans processed on the system or on a per-transaction basis. We record transactional revenue when the service is provided and other revenue monthly based on the number of loans processed, employees serviced or services provided. We provide IT infrastructure services to Ocwen and its subsidiaries, HLSS, Residential and AAMC 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 and its subsidiaries, HLSS, Residential and AAMC. We record revenue associated with implementation services upon completion and maintenance ratably over the related service period. For Equator’s software applications, we recognize revenue from arrangements with multiple deliverables in accordance with ASC Subtopic 605-25, Revenue Recognition: Multiple-Element Arrangements (“ASC 605-25”), and Securities and Exchange Commission Staff Accounting Bulletin Topic 13, Revenue Recognition (“SAB Topic 13”). ASC 605-25 and SAB Topic 13 require each deliverable within a multiple-deliverable revenue arrangement to be accounted for as a separate unit if both of the following criteria are met: (1) the delivered item or items have value to the customer on a standalone basis and (2) for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the seller’s control. Deliverables not meeting the criteria for accounting treatment as a separate unit are combined with a deliverable that meets that criterion. Equator derives its revenue from platform services fees, professional services fees and other services. Equator does not begin to recognize revenue for platform services fees until these fees become billable, as the services fees are not fixed and determinable until such time. Platform services fees are recognized ratably over the shorter of the term of the contract with the customer or the minimum cancellation period. Professional services fees consist primarily of configuration services related to customizing the platform for individual customers and are generally billed as the hours are worked. Due to the essential and specialized nature of the configuration services, these services do not qualify as separate units of accounting separate from the platform services as the delivered services do not have value to the customer on a standalone basis. Therefore, the related fees are recorded as deferred revenue until the project configuration is complete and then recognized ratably over the longer of the term of the agreement or the estimated expected customer life. Other services consist primarily of training, including agent certification, and consulting services. These services are generally sold separately and are recognized as revenue as the services are performed and earned.
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 we provide Ocwen and its subsidiaries, HLSS, Residential and AAMC. Management considers historical information and other third-partythird 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 the carrying value may not be recoverable. We first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value as a basis for determining whether we need to perform the quantitative two-step goodwill impairment test. Only if we determine, based on qualitative assessment, that it is more likely than not that a reporting unit’s fair value is less than its carrying value will we calculate the fair value of the reporting unit. We would then 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 expected category expansion,estimated pricing, sales volumes, market segment share, cost trends and
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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 2013, 2012 and 2011 qualitative and quantitative analyses, management concluded no impairment was indicated given that the fair value for the associated reporting units was substantially in excess of the book value.
In 2010, we recognized avalue and no impairments of goodwill impairment loss of $2.8 million related towere recorded for the Financial Services segment. We considered both quantitativeyears ended December 31, 2013, 2012 and qualitative factors including past performance and execution risk in arriving at the impairment.2011.
Identifiable Intangible Assets.
Identified intangible assets consist primarily of customer lists,relationships, acquired trade names and trademarks. Definite-lived intangible assets are testedWe perform tests for impairment whenever events or changes in circumstances occur indicatingif conditions exist that indicate the carrying amount of the assetvalue may not be recoverable. An impairment loss would be recognized for an intangible asset if itsWhen facts and circumstances indicate that the carrying value of intangible assets determined to have definite lives may not be recoverable, management assesses the recoverability of the carrying value by preparing estimates of cash flows of discrete intangible assets consistent with models utilized for internal planning purposes. If the sum of the undiscounted expected future cash flows is less than the carrying value, we would recognize an impairment to the extent the carrying amount exceeds its fair value.
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Table Based on the fourth quarter 2013, 2012 and 2011 cash flow analyses prepared by management for certain of Contentsthe intangible assets, no impairments of intangible assets were recorded for the years ended December 31, 2013, 2012 and 2011.
Acquisitions
For those acquisitions that meet the definition of a business combination, we allocate the purchase price, including any contingent consideration, to the assets acquired and the liabilities assumed at their estimated fair values as of the date of the acquisition with any excess of the purchase price paid over the estimated fair value of net assets acquired recorded as goodwill. The fair value of the assets acquired and liabilities assumed is typically determined by using either estimates of replacement costs or discounted cash flow valuation methods. When determining the fair value of tangible assets acquired, we estimate the cost to replace the asset with a new asset taking into consideration such factors as age, condition and the economic useful life of the asset. When determining the fair value of intangible assets acquired, we estimate the applicable discount rate and the timing and amount of future cash flows, including rate and terms of renewal and attrition. The determination of the final purchase price and the fair values on the acquisition date of the identifiable assets acquired and liabilities assumed may extend over more than one period and result in adjustments to the preliminary estimate recognized.
Accounting for Income Taxes
We are subject to income taxes principally in Luxembourg, the United States, India and Uruguay.the Philippines. 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 auditaudits 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.
Recent Accounting Pronouncement
Effective January 1, 2012, the Company adopted new guidance on goodwill impairment testing that simplifies how an entity tests goodwill for impairment. This new guidance allows an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value as a basis for determining whether it needs to perform the quantitative two-step goodwill impairment test. Only if an entity determines, based on qualitative assessment, that it is more likely than not that a reporting unit’s fair value is less than its carrying value will it be required to calculate the fair value of the reporting unit. The qualitative
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assessment is optional and the Company is permitted to bypass it for any reporting unit in any period and begin its impairment analysis with the quantitative calculation. In 2013, the Company determined that, based upon the qualitative assessment, the fair value of its reporting units’ goodwill was not less than the carrying values. The Company is permitted to perform the qualitative assessment in any subsequent period.
Future Adoption of New Accounting Pronouncement
In July 2013, the FASB issued guidance on the disclosure requirements for unrecognized tax benefits, or a portion of an unrecognized tax benefit. This new guidance requires the Company to present an unrecognized tax benefit as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, with some exceptions. This new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We do not anticipate a material impact on our consolidated financial statements as a result of this guidance.
OTHER MATTERS
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements consist of escrow and trust arrangements and operating leases.
We hold customers’ assets in escrow and trust accounts at various financial institutions pending completion of certain real estate activities. We also hold cash in trust accounts at various financial institutions where contractual obligations mandate maintaining dedicated bank accounts for Financial Services collections. These amounts are held in escrow and trust accounts for limited periods of time generally consisting of a few days and are not included in the accompanying consolidated balance sheets. Amounts held in escrow and trust accounts were $47.2$71.8 million and $17.7$47.2 million at December 31, 20122013 and 2011,2012, 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, 2012:2013:
| | Payments due by period | | | Payments due by period | |
(in thousands) | | Total | | Less than
1 year | | 1-3 years | | 3-5 years | | More than
5 years | | | 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 | | $ | — | | | $ | 34,408 | | $ | 9,142 | | $ | 15,594 | | $ | 9,534 | | $ | 138 | |
Capital lease obligations — principal | | 233 | | 233 | | — | | — | | — | | |
Long-term debt | | 200,000 | | 2,000 | | 4,000 | | 4,000 | | 190,000 | | | 396,503 | | 3,975 | | 7,950 | | 7,950 | | 376,628 | |
Contractual interest payments(1) | | 83,126 | | 12,449 | | 24,456 | | 23,878 | | 22,343 | | | 119,702 | | 17,776 | | 35,014 | | 34,299 | | 32,613 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 311,178 | | $ | 23,704 | | $ | 40,782 | | $ | 34,349 | | $ | 212,343 | | | $ | 550,613 | | $ | 30,893 | | $ | 58,558 | | $ | 51,783 | | $ | 409,379 | |
(1) Represents estimated future interest payments on our Senior Secured Term Loan and also our capital leasessenior secured term loan based on applicable interest rates as of December 31, 2012.2013.
For further information, see Notes 13 and 2021 to the consolidated financial statements.
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Related Parties
Ocwen
For the yearyears ended December 31, 2013, 2012 and 2011, we generated Mortgage Services segment revenue from Ocwen and its subsidiaries of $424.0 million, $306.8 million for Mortgageand $223.2 million, respectively. For the years ended December 31, 2013, 2012 and 2011, we generated Financial Services segment revenue from Ocwen and its subsidiaries of $27.6 million, $0.2 million and $0.3 million, respectively. Also, for Financialthe years ended December 31, 2013, 2012 and 2011, we generated Technology Services segment revenue from Ocwen and $31its subsidiaries of $50.5 million, for Technology Services.$31.2 million and $21.8 million, respectively. Services provided to Ocwen and its subsidiaries during such periodsthis period 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 technology services and license
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feestechnologies including for our REALSuite of products. We provided all services at rates we believe to be comparable to market rates.
For the yearyears ended December 31, 2013, 2012 and 2011, we billed Ocwen and its subsidiaries $2.6 million, $2.7 million and $2.6 million, respectively, and Ocwen and its subsidiaries billed us $2.9 million, $2.4 million and $1.9 million, respectively, for support services provided under the agreements described insuch as human resources, vendor management, corporate services, operational effectiveness, quality assurance, quantitative analytics and treasury. See Note 4 to the consolidated financial statements.statements for further information. These amounts are reflected as components of selling, general and administrative expensesSG&A in the consolidated statements of operations.
On December 27, 2012, we entered into a senior unsecured term loan agreement with Ocwen pursuant to which we loaned $75.0 million to Ocwen. Interest income related to this loan for the years ended December 31, 2013 and 2012 was $0.8 million and $0.1 million, respectively (no comparative amount in 2011). On February 15, 2013, Ocwen under an unsecuredrepaid the entire outstanding principal amount of this loan plus all accrued and unpaid interest and the term loan agreement. Interest payments are due quarterly.was terminated. The interest rate at December 31, 2012 was 8.25%. See Note 4 to the consolidated financial statements for further information.
On January 31, 2013, we entered into non-binding letters of intent with Ocwen to acquire certain fee-based businesses associated with Ocwen’s acquisitions of the Homeward and the ResCap servicing portfolios. Ocwen acquired the Homeward servicing portfolio on December 27, 2012 and the ResCap servicing portfolio on February 15, 2013. Altisource acquired the Homeward fee-based businesses from Ocwen on March 29, 2013 for $75.8 million, after a working capital and net income adjustment. Altisource entered into an agreement with Ocwen on April 12, 2013 to establish additional terms related to our services in connection with the ResCap fee-based businesses and paid Ocwen $128.8 million for the ResCap fee-based businesses. See Note 5 to the consolidated financial statements for further information.
Correspondent One and HLSS
In July 2011, we acquired an equity interest in Correspondent One. On March 31, 2013, we sold our 49% interest in Correspondent One to Ocwen for $12.6 million. For the yearyears ended December 31, 2013, 2012 and 2011, we billed Correspondent One less than $0.1 million, $0.4 million under a services agreement. For the year ended December 31, 2012, we billed HLSS $0.6and $0.1 million, under a services agreement. These amounts are reflected as components of SG&A in the consolidated statements of operations.
respectively. We also provideprovided certain origination related services to Correspondent One. We earned revenue of $0.1 million and $0.3 million for the yearyears ended December 31, 2013 and 2012, from the provision ofrespectively, for these services (no comparative amount in 2011).
For the years ended December 31, 2013 and 2012, we billed HLSS $0.7 million and $0.6 million, respectively (no comparative amount in 2011) for services under a support services agreement. These amounts are reflected as a component of SG&A in the consolidated statements of operations.
Residential and AAMC
For purposes of governing certain of the ongoing relationships between Altisource, Residential and AAMC after the were established, capitalized and their equity was distributed to our shareholders on December 21, 2012 and each are separate publicly traded companies (the “Separation of the Residential Asset Businesses”). For the year ended December 31, 2013, we billed Residential $2.6 million, and to provide for an orderly transition to the status of three independent companies, we entered into the followingbilled AAMC less than $0.1 million under services and support services agreements with Residential(no comparative amounts in 2012 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)2011).
(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
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 paying2013, the interest rate charged on the Senior Secured Term Loan atsenior secured term loan was 4.50%. The interest rate is calculated based on 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 senior secured term loan agreement) with a minimum floor of 1.00% 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%3.5%.
Based on the principal amountsamount outstanding at December 31, 2012,2013, a one percent1 percentage point increase in the Eurodollar Raterate would not impactincrease our annual interest expense asby approximately $0.7 million, based on the interest rate would remain below the minimum required rates under these agreements.December 31, 2013 Adjusted Eurodollar Rate.
Foreign Currency Exchange Risk
We are exposed to currency risk from the potential changes in currency values of our foreign currency denominated assets, liabilities and cash flows. Our most significant foreign currency exposures relate to the Euro and Indian Rupee.Rupee; however, the balances in Euros and Indian Rupees on our consolidated balance sheets are immaterial.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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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, 20122013 and 2011,2012, and the related consolidated statements of operations, consolidated statements of equity, and cash flows for each of the three years in the period ended December 31, 2012.2013. 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, 20122013 and 2011,2012, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2012,2013, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 4 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, 2012,2013, 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 13, 20132014 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/Deloitte & Touche LLP | |
Atlanta, Georgia | |
February 13, 20132014 | |
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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 internal control over financial reporting of Altisource Portfolio Solutions S.A. and subsidiaries (the “Company”) as of December 31, 2012,2013, based on criteria established in Internal Control — Integrated Framework issued 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.
As described in Management’s Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Equator, LLC, which was acquired on November 15, 2013 and whose financial statements constitute 17% of total assets and less than 1% of revenues and net income attributable to Altisource of the consolidated financial statement amounts as of and for the year ended December 31, 2013. Accordingly, our audit did not include the internal control over financial reporting at Equator, LLC.
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, 2012,2013, based on the criteria established in Internal Control — Integrated Framework issued 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, 20122013 of the Company and our report dated February 13, 20132014 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding significant transactions with Ocwen Financial Corporation, a related party.
/s/Deloitte & Touche LLP | |
Atlanta, Georgia | |
February 13, 20132014 | |
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Consolidated Balance Sheets
(in thousands, except per share data)
| | December 31, | | |
| | 2012 | | 2011 | | | December 31, | |
| | | | | | | 2013 | | 2012 | |
ASSETS | | | | | | ASSETS | |
Current assets: | | | | | | | | | | |
Cash and cash equivalents | | $ | 105,502 | | $ | 32,125 | | | $ | 130,324 | | $ | 105,502 | |
Accounts receivable, net | | 88,955 | | 52,005 | | | 101,297 | | 88,955 | |
Prepaid expenses and other current assets | | 7,618 | | 5,002 | | | 11,389 | | 7,618 | |
Deferred tax assets, net | | 1,775 | | 1,133 | | | 2,837 | | 1,775 | |
Total current assets | | 203,850 | | 90,265 | | | 245,847 | | 203,850 | |
| | | | | | | | | | |
Premises and equipment, net | | 50,399 | | 25,600 | | | 87,252 | | 50,399 | |
Deferred tax assets, net | | 4,073 | | 4,373 | | | 622 | | 4,073 | |
Intangible assets, net | | 56,586 | | 64,950 | | | 276,162 | | 56,586 | |
Goodwill | | 14,915 | | 14,915 | | | 97,375 | | 14,915 | |
Investment in equity affiliate | | 12,729 | | 14,470 | | |
Investment in Correspondent One | | | — | | 12,729 | |
Loan to Ocwen | | 75,000 | | — | | | — | | 75,000 | |
Other assets | | 11,674 | | 9,586 | | | 17,580 | | 11,674 | |
| | | | | | |
Total assets | | $ | 429,226 | | $ | 224,159 | | | $ | 724,838 | | $ | 429,226 | |
| | | | | | | | | | |
LIABILITIES AND EQUITY | | | | | | LIABILITIES AND EQUITY | |
Current liabilities: | | | | | | | | | | |
Accounts payable and accrued expenses | | $ | 58,976 | | $ | 44,867 | | | $ | 79,492 | | $ | 58,976 | |
Current portion of long-term debt | | 2,000 | | — | | | 3,975 | | 2,000 | |
Current portion of capital lease obligations | | 233 | | 634 | | | — | | 233 | |
Deferred revenue | | | 36,742 | | 2,482 | |
Other current liabilities | | 10,423 | | 9,939 | | | 10,131 | | 7,941 | |
Total current liabilities | | 71,632 | | 55,440 | | | 130,340 | | 71,632 | |
| | | | | | | | | | |
Long-term debt, less current portion | | 196,027 | | –– | | | 391,281 | | 196,027 | |
Capital lease obligations, less current portion | | –– | | 202 | | |
Other non-current liabilities | | 1,738 | | 2,574 | | | 45,476 | | 1,738 | |
| | | | | | | | | | |
Commitment and contingencies (Note 20) | | | | | | |
Commitments and contingencies (Note 21) | | | | | | |
| | | | | | | | | | |
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 | | |
Common stock ($1.00 par value; 100,000 shares authorized; 25,413 issued and 22,629 outstanding as of December 31, 2013; 25,413 issued and 23,427 outstanding as of December 31, 2012) | | | 25,413 | | 25,413 | |
Additional paid-in-capital | | 86,873 | | 83,229 | | | 89,273 | | 86,873 | |
Retained earnings | | 124,127 | | 126,161 | | | 239,561 | | 124,127 | |
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 | ) | |
Treasury stock, at cost (2,784 shares as of December 31, 2013 and 1,986 shares as of December 31, 2012) | | | (197,548 | ) | (77,954 | ) |
Altisource equity | | 158,459 | | 162,755 | | | 156,699 | | 158,459 | |
| | | | | | | | | | |
Non-controlling interests | | 1,370 | | 3,188 | | | 1,042 | | 1,370 | |
Total equity | | 159,829 | | 165,943 | | | 157,741 | | 159,829 | |
| | | | | | | | | | |
Total liabilities and equity | | $ | 429,226 | | $ | 224,159 | | | $ | 724,838 | | $ | 429,226 | |
See notes to consolidated financial statements.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Consolidated Statements of Operations
(in thousands, except per share data)
| | For the years ended December 31, | | | For the years ended December 31, | |
| | 2012 | | 2011 | | 2010 | | | 2013 | | 2012 | | 2011 | |
| | | | | | | | | | | | | | |
Revenue | | $ | 568,360 | | $ | 423,687 | | $ | 301,378 | | | $ | 768,357 | | $ | 568,360 | | $ | 423,687 | |
Cost of revenue | | 366,201 | | 275,849 | | 189,059 | | | 492,480 | | 366,201 | | 275,849 | |
| | | | | | | | | | | | | | |
Gross profit | | 202,159 | | 147,838 | | 112,319 | | | 275,877 | | 202,159 | | 147,838 | |
Selling, general and administrative expenses | | 74,712 | | 62,131 | | 57,352 | | | 113,810 | | 74,712 | | 62,131 | |
| | | | | | | | | | | | | | |
Income from operations | | 127,447 | | 85,707 | | 54,967 | | | 162,067 | | 127,447 | | 85,707 | |
Other (expense) income, net: | | | | | | | | |
Other income (expense), net: | | | | | | | | |
Interest expense | | (1,210 | ) | (85 | ) | (119 | ) | | (20,291 | ) | (1,210 | ) | (85 | ) |
Other (expense) income, net | | (1,588 | ) | 288 | | 923 | | |
Total other (expense) income, net | | (2,798 | ) | 203 | | 804 | | |
Other income (expense), net | | | 557 | | (1,588 | ) | 288 | |
Total other income (expense), net | | | (19,734 | ) | (2,798 | ) | 203 | |
| | | | | | | | | | | | | | |
Income before income taxes and non-controlling interests | | 124,649 | | 85,910 | | 55,771 | | | 142,333 | | 124,649 | | 85,910 | |
Income tax (provision) benefit | | (8,738 | ) | (7,943 | ) | 403 | | |
Income tax provision | | | (8,540 | ) | (8,738 | ) | (7,943 | ) |
| | | | | | | | | | | | | | |
Net income | | 115,911 | | 77,967 | | 56,174 | | | 133,793 | | 115,911 | | 77,967 | |
Net income attributable to non-controlling interests | | (5,284 | ) | (6,855 | ) | (6,903 | ) | | (3,820 | ) | (5,284 | ) | (6,855 | ) |
| | | | | | | | | | | | | | |
Net income attributable to Altisource | | $ | 110,627 | | $ | 71,112 | | $ | 49,271 | | | $ | 129,973 | | $ | 110,627 | | $ | 71,112 | |
| | | | | | | | | | | | | | |
Earnings per share: | | | | | | | | | | | | | | |
Basic | | $ | 4.74 | | $ | 2.92 | | $ | 1.96 | | | $ | 5.63 | | $ | 4.74 | | $ | 2.92 | |
Diluted | | $ | 4.43 | | $ | 2.77 | | $ | 1.88 | | | $ | 5.19 | | $ | 4.43 | | $ | 2.77 | |
| | | | | | | | | | | | | | |
Weighted average shares outstanding: | | | | | | | | | | | | | | |
Basic | | 23,358 | | 24,373 | | 25,083 | | | 23,072 | | 23,358 | | 24,373 | |
Diluted | | 24,962 | | 25,685 | | 26,259 | | | 25,053 | | 24,962 | | 25,685 | |
| | | | | | | | | | | | | | |
Transactions with related parties included above: | | | | | | | | | | | | | | |
Revenue | | $ | 338,227 | | $ | 245,262 | | $ | 154,988 | | | $ | 502,087 | | $ | 338,227 | | $ | 245,262 | |
Selling, general and administrative expenses | | $ | 2,430 | | $ | 1,893 | | $ | 1,056 | | | 2,921 | | 2,430 | | 1,893 | |
Other income | | $ | 86 | | $ | — | | $ | — | | | 773 | | 86 | | — | |
See notes to consolidated financial statements.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Consolidated Statements of Equity
(in thousands)
| | Common stock | | Additional
paid-in | | Retained | | Treasury stock, | | Non-
controlling | | | | | Common stock | | Additional
paid-in
capital | | Retained
earnings | | Treasury stock,
at cost | | Non-
controlling
interests | | Total | |
| | Shares | | | | capital | | earnings | | at cost | | interests | | Total | | | Shares | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 | | |
Balance, January 1, 2011 | | | 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 | | | — | | — | | — | | — | | — | | 49 | | 49 | |
Distributions to non-controlling interest holders | | — | | — | | — | | — | | — | | (6,776 | ) | (6,776 | ) | | — | | — | | — | | — | | — | | (6,776 | ) | (6,776 | ) |
Share-based compensation expense | | — | | — | | 3,932 | | — | | — | | — | | 3,932 | | | — | | — | | 3,932 | | — | | — | | — | | 3,932 | |
Exercise of stock options | | — | | — | | — | | (3,497 | ) | 4,521 | | — | | 1,024 | | | — | | — | | — | | (3,497 | ) | 4,521 | | — | | 1,024 | |
Repurchase of shares | | — | | — | | — | | — | | (62,151 | ) | — | | (62,151 | ) | | — | | — | | — | | — | | (62,151 | ) | — | | (62,151 | ) |
Balance, December 31, 2011 | | 25,413 | | 25,413 | | 83,229 | | 126,161 | | (72,048 | ) | 3,188 | | 165,943 | | | 25,413 | | 25,413 | | 83,229 | | 126,161 | | (72,048 | ) | 3,188 | | 165,943 | |
| | | | | | | | | | | | | | | | |
Net Income | | — | | — | | — | | 110,627 | | — | | 5,284 | | 115,911 | | |
Net income | | | — | | — | | — | | 110,627 | | — | | 5,284 | | 115,911 | |
Contributions from non-controlling interest holders | | — | | — | | — | | — | | — | | 43 | | 43 | | | — | | — | | — | | — | | — | | 43 | | 43 | |
Distributions to non-controlling interest holders | | — | | — | | — | | — | | — | | (7,145 | ) | (7,145 | ) | | — | | — | | — | | — | | — | | (7,145 | ) | (7,145 | ) |
Net assets distributed in connection with the Separation of the Residential Asset Businesses | | — | | — | | — | | (105,000 | ) | — | | — | | (105,000 | ) | | — | | — | | — | | (105,000 | ) | — | | — | | (105,000 | ) |
Share-based compensation expense | | — | | — | | 3,644 | | — | | — | | — | | 3,644 | | | — | | — | | 3,644 | | — | | — | | — | | 3,644 | |
Exercise of stock options | | — | | — | | — | | (7,661 | ) | 10,875 | | — | | 3,214 | | | — | | — | | — | | (7,661 | ) | 10,875 | | — | | 3,214 | |
Repurchase of shares | | — | | — | | — | | — | | (16,781 | ) | — | | (16,781 | ) | | — | | — | | — | | — | | (16,781 | ) | — | | (16,781 | ) |
Balance, December 31, 2012 | | 25,413 | | $ | 25,413 | | $ | 86,873 | | $ | 124,127 | | $ | (77,954 | ) | $ | 1,370 | | $ | 159,829 | | | 25,413 | | 25,413 | | 86,873 | | 124,127 | | (77,954 | ) | 1,370 | | 159,829 | |
Net income | | | — | | — | | — | | 129,973 | | — | | 3,820 | | 133,793 | |
Contributions from non-controlling interest holders | | | — | | — | | — | | — | | — | | 28 | | 28 | |
Distributions to non-controlling interest holders | | | — | | — | | — | | — | | — | | (4,176 | ) | (4,176 | ) |
Share-based compensation expense | | | — | | — | | 2,400 | | — | | — | | — | | 2,400 | |
Exercise of stock options | | | — | | — | | — | | (14,539 | ) | 21,424 | | — | | 6,885 | |
Repurchase of shares | | | — | | — | | — | | — | | (141,018 | ) | — | | (141,018 | ) |
Balance, December 31, 2013 | | | 25,413 | | $ | 25,413 | | $ | 89,273 | | $ | 239,561 | | $ | (197,548 | ) | $ | 1,042 | | $ | 157,741 | |
See notes to consolidated financial statements.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Consolidated Statements of Cash Flows
(in thousands)
| | For the years ended December 31, | | | For the years ended December 31, | |
| | 2012 | | 2011 | | 2010 | | | 2013 | | 2012 | | 2011 | |
Cash flows from operating activities: | | | | | | | | | | | | | | |
Net income | | $ | 115,911 | | $ | 77,967 | | $ | 56,174 | | | $ | 133,793 | | $ | 115,911 | | $ | 77,967 | |
Reconciling items: | | | | | | | | |
Adjustments to reconcile net income to net cash provided by
operating activities: | | | | | | | | |
Depreciation and amortization | | 12,776 | | 8,351 | | 7,158 | | | 19,056 | | 12,776 | | 8,351 | |
Amortization of intangible assets | | 5,030 | | 5,291 | | 4,891 | | | 28,176 | | 5,030 | | 5,291 | |
Goodwill impairment | | — | | — | | 2,816 | | |
Share-based compensation expense | | 3,644 | | 3,932 | | 3,110 | | | 2,400 | | 3,644 | | 3,932 | |
Equity in losses of and impairment loss on investment in affiliate | | 1,741 | | 530 | | — | | | 176 | | 1,741 | | 530 | |
Bad debt expense | | 3,049 | | 967 | | 1,534 | | | 2,549 | | 3,049 | | 967 | |
Amortization of debt discount | | 27 | | — | | — | | | 223 | | 27 | | — | |
Amortization of debt issuance costs | | 57 | | — | | — | | | 958 | | 57 | | — | |
Deferred income taxes | | 2,992 | | (381 | ) | (1,119 | ) | | 2,015 | | 2,992 | | (381 | ) |
Loss on sale or disposal of fixed assets | | 445 | | — | | — | | | 1,309 | | 445 | | — | |
Changes in operating assets and liabilities, net of acquisitions: | | | | | | | | | | | | | | |
Accounts receivable | | (39,999 | ) | 812 | | (18,259 | ) | | (5,602 | ) | (39,999 | ) | 812 | |
Prepaid expenses and other current assets | | (2,616 | ) | 747 | | (9,851 | ) | | (2,817 | ) | (2,616 | ) | 747 | |
Other assets | | 2,172 | | (4,892 | ) | (2,799 | ) | | (1,586 | ) | 2,172 | | (4,892 | ) |
Accounts payable and accrued expenses | | 11,652 | | 14,760 | | 8,180 | | | 7,381 | | 11,652 | | 14,760 | |
Other current and non-current liabilities | | (352 | ) | 3,527 | | 977 | | | (2,557 | ) | (352 | ) | 3,527 | |
Net cash flows provided by operating activities | | 116,529 | | 111,611 | | 52,812 | | | 185,474 | | 116,529 | | 111,611 | |
| | | | | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | | | | |
Additions to premises and equipment | | (35,563 | ) | (16,442 | ) | (11,614 | ) | | (34,134 | ) | (35,563 | ) | (16,442 | ) |
Acquisition of business, net of cash acquired | | — | | (2,515 | ) | (26,830 | ) | |
Acquisition of businesses, net of cash acquired | | | (267,946 | ) | — | | (2,515 | ) |
Investment in equity affiliate | | — | | (15,000 | ) | — | | | (50 | ) | — | | (15,000 | ) |
Proceeds from sale of equity affiliate | | | 12,648 | | — | | — | |
Proceeds from loan to Ocwen | | | 75,000 | | — | | — | |
Loan to Ocwen | | (75,000 | ) | — | | — | | | — | | (75,000 | ) | — | |
Change in restricted cash | | — | | 887 | | (1,045 | ) | | (1,462 | ) | — | | 887 | |
Net cash flows used in investing activities | | (110,563 | ) | (33,070 | ) | (39,489 | ) | | (215,944 | ) | (110,563 | ) | (33,070 | ) |
| | | | | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | | | | |
Proceeds from issuance of long-term debt | | 198,000 | | — | | — | | | 200,502 | | 198,000 | | — | |
Distribution of cash in connection with the Separation of Residential Asset Businesses | | (105,000 | ) | — | | — | | |
Repayment of long-term debt | | | (3,496 | ) | — | | — | |
Distribution of cash in connection with the Separation of the Residential Asset Businesses | | | — | | (105,000 | ) | — | |
Debt issuance costs | | (4,317 | ) | — | | — | | | (3,200 | ) | (4,317 | ) | — | |
Principal payments on capital lease obligations | | (603 | ) | (696 | ) | (743 | ) | | (233 | ) | (603 | ) | (696 | ) |
Proceeds from stock option exercises | | 3,214 | | 1,024 | | 3,997 | | | 6,885 | | 3,214 | | 1,024 | |
Purchases of treasury stock | | (16,781 | ) | (62,151 | ) | (17,788 | ) | | (141,018 | ) | (16,781 | ) | (62,151 | ) |
Contributions from non-controlling interests | | 43 | | 49 | | 41 | | | 28 | | 43 | | 49 | |
Distributions to non-controlling interests | | (7,145 | ) | (6,776 | ) | (7,152 | ) | | (4,176 | ) | (7,145 | ) | (6,776 | ) |
Net cash flows provided by (used in) financing activities | | 67,411 | | (68,550 | ) | (21,645 | ) | | 55,292 | | 67,411 | | (68,550 | ) |
| | | | | | | | | | | | | | |
Net increase (decrease) in cash and cash equivalents | | 73,377 | | 9,991 | | (8,322 | ) | |
Net increase in cash and cash equivalents | | | 24,822 | | 73,377 | | 9,991 | |
Cash and cash equivalents at the beginning of the period | | 32,125 | | 22,134 | | 30,456 | | | 105,502 | | 32,125 | | 22,134 | |
| | | | | | | | |
Cash and cash equivalents at the end of the period | | $ | 105,502 | | $ | 32,125 | | $ | 22,134 | | | $ | 130,324 | | $ | 105,502 | | $ | 32,125 | |
| | | | | | | | | | | | | | |
Supplemental cash flow information | | | | | | | | |
Supplemental cash flow information: | | | | | | | | |
Interest paid | | $ | 1,134 | | $ | 83 | | $ | 108 | | | $ | 19,325 | | $ | 1,134 | | $ | 83 | |
Income taxes paid (refunded), net | | 4,912 | | (1,956 | ) | 6,069 | | | 3,671 | | 4,912 | | (1,956 | ) |
| | | | | | | | | | | | | | |
Non-cash investing and financing activities | | | | | | | | |
Non-cash investing and financing activities: | | | | | | | | |
Amortization of tax-deductible goodwill | | 3,334 | | 3,367 | | 3,029 | | | — | | 3,334 | | 3,367 | |
Premises and equipment purchased on account | | 2,457 | | — | | — | | | 4,552 | | 2,457 | | — | |
See notes to consolidated financial statements.
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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“Company,” “we,” “us” or our)“our”) is a globalpremier marketplace and transaction solutions provider of services focused on high-value, technology-enabled, knowledge-based solutions principally related tofor the real estate, mortgage and mortgage portfolioconsumer debt industries offering both distribution and content. We leverage proprietary business process, vendor and electronic payment management asset recoverysoftware 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 (the “Separation from Ocwen”). Priorbehavioral science based analytics 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 was formed as a Missouri limited liability company to serve as the manager of Best Partners Mortgage Cooperative, Inc. (“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™”) 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 performs asset recovery services (see Note 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).improve outcomes for marketplace participants.
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 2122 for a description of our business segments).
Basis of Presentation — Our consolidated financial statements include the assets, liabilities, revenue and expenses directly attributable to our operations. All significant intercompany and inter-segment transactions and accounts have been eliminated in consolidation.
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 acquisitionThe Mortgage Partnership of MPA, MPA andAmerica, L.L.C. (“MPA”), a wholly-owned subsidiary of Altisource, serves as the manager of Best Partners Mortgage Cooperative, Inc. (“BPMC”) doing business as Lenders One entered intoMortgage Cooperative (“Lenders One”). MPA provides services to Lenders One under a management agreement that ends on December 31, 2025. MPA was formed to actacts on behalf of Lenders One and its Membersmembers principally to provide its Membersmembers 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 paymentpayments from Lenders One, and in some instances the vendors, based upon the benefits achieved for the Members.members. The management agreement provides MPA with broad powers such as recruiting members for Lenders One, collection of fees and other obligations from Membersmembers 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 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 members reflected as non-controlling interests. At December 31, 2013, Lenders One had total assets of $4.6 million and liabilities of $3.5 million. At December 31, 2012, Lenders One had total assets of $2.3 million and liabilities of less than $0.1$1.0 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, revenue 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-basedshare-based compensation, income taxes, collectability of receivables, valuation of acquired intangibles and goodwill, depreciable lives of fixed assets and contingencies. Actual results could differ materially from those estimates.
Cash and Cash Equivalents — We classify all highly liquid instruments with an original maturity of three months or less at the time of purchase as cash equivalents.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
Accounts Receivable, Net — Accounts receivable are net of an allowance for doubtful accounts that representrepresents 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, net, approximates fair value.
Premises and Equipment, Net — We report premises and equipment, net at cost or estimated fair value at acquisition and depreciate themthese assets over their estimated useful lives using the straight-line method as follows:
| Furniture and fixtures | | 5 years |
| Office equipment | | 5 years |
| Computer hardware | | 5 years |
| Computer software | | 33-7 years
|
| Leasehold improvements | | Shorter of useful life, 10 years or the term of the lease |
Maintenance and repair costs are expensed as incurred. We capitalize expenditures for significant improvements and new equipment and depreciate themthe assets over the shorter of the capitalized asset’s life or the life of the lease.
We review premises and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. We measure recoverability of assets to be held and used by comparison of the carrying amount of an asset or asset group to estimated undiscounted future cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset or asset group exceeds its estimated future cash flows, we recognize an impairment charge infor the amount by whichthat the carrying amountvalue of the assets exceeds the fair value of the asset or asset group.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
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 the Financial Accounting Standards Board’s Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. The purchase price of thean 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 AffiliateAffiliates— 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) inlosses of affiliates, net which is included in other income (expense), net in the consolidated statements of operations. We review the investmentinvestments in equity affiliateaffiliates 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 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 first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value as a basis for determining whether we need to perform the quantitative two-step goodwill impairment test. Only if we determine, based on our qualitative assessment, that it is more likely than not that a reporting unit’s fair value is less than its carrying value will we calculate the fair value of the reporting unit. 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, sales volumes, market segment share, cost trends and general economic conditions.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
We conduct our annual impairment testassessment as of November 30 each year. No impairmentimpairments of goodwill waswere recorded for the years ended December 31, 2013, 2012 and 2011 as the fair value exceeded the carrying value. In 2010, we recorded a $2.8 million impairment in our Financial Services segment.2011.
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 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 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 duringBased on the periods presented.fourth quarter 2013, 2012 and 2011 cash flow analyses prepared by management for certain of the intangible assets, no impairments of intangible assets were recorded for the years ended December 31, 2013, 2012 and 2011.
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-termLong-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 InstrumentsMeasurements — Our financial instrumentsassets and liabilities primarily include cash and cash equivalents, restricted cash, accounts receivable, the loan to Ocwen, accounts payable, accrued expenseslong-term debt and long-term debt. The carrying values of cashacquisition-related contingent consideration. Cash and cash equivalents and 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 instruments. The carrying amountsfair value was determined by level 1 of the loan to Ocwen andthree level hierarchy established by ASC Topic 820, Fair Value Measurement, using quoted prices in active markets for identical assets. The carrying amount of long-term debt approximates fair value due to theirthe variable interest rates.rate. The fair value was determined by level 2 of the three level hierarchy in ASC Topic 820 using inputs other than quoted prices that are observable, either directly or indirectly. The carrying amount of acquisition-related contingent consideration, related to the acquisition of Equator, LLC (“Equator”) on November 15, 2013 (see Note 5), approximates fair value due to the recent closing of the transaction and purchase price allocation calculations. The fair value was determined by level 3 of the three level hierarchy in ASC Topic 820 using unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company may be required to pay up to $80 million in potential additional consideration under the terms of the Equator Purchase and Sale Agreement based on Equator Adjusted EBITA (as defined in the Purchase and Sale Agreement) in the three consecutive 12-month periods following closing. Acquisition-related contingent consideration was initially measured and recorded at fair value as an element of consideration paid in connection with an acquisition, with any subsequent adjustments recognized in operating expenses in the consolidated statements of operations. The Company determines the fair value of acquisition-related contingent consideration, and any subsequent changes in fair value, using a discounted probability-weighted approach. This approach takes into consideration level 3 unobservable inputs including probability assessments of expected future cash flows over the period in which the obligation is expected to be settled and applies a discount factor that captures the uncertainties associated with the obligation. Changes in these unobservable inputs could significantly impact the fair value of the liabilities recorded in the accompanying consolidated balance sheets and operating expenses in the consolidated statements of operations. As of December 31, 2013, the Company estimates the value of the Equator acquisition-related contingent consideration required payments to be $46.0 million.
Functional Currency — The currency of the primary economic environment in which our operations are conducted is the United States dollar. Therefore, the United States dollar has been determined to be our functional and reporting currency. Non-dollarNon-United States dollar transactions and balances have been measured in United States dollars in accordance with ASC Topic 830, Foreign Currency Matters. All transaction gains and losses from the
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Notes to Consolidated Financial Statements (Continued)
measurement of monetary balance sheet items denominated in non-dollarnon-United States 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 $0.4 million, $0.2 million and $0.1 million for the years ended December 31, 2013, 2012 and $0.2 million in 2012, 2011, and 2010, respectively, related to our discretionary amounts contributed.
Share-basedShare-Based Compensation — Share-based compensation is accounted for under the provisions of ASC Topic 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. Share-based awards that do not require future service are expensed immediately. Share-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 share-based awards that are not expected to vest.
Earnings Per Share — We compute earnings per share (“EPS”) in accordance with ASC Topic 260, Earnings Per Share. Basic net income per share is computed by dividing net income attributable to Altisource by the weighted-averageweighted average number of shares of common stock outstanding for the period. Diluted net income per share reflects the assumed conversion of all dilutive securities.
Revenue Recognition — We recognize revenue from the services we provide in accordance with ASC Topic 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 revenue 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 revenue for the majority of the services we provide in this segment on completion of the service to our customer.customers. 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 $102.0 million, $95.6 million and $80.1 million incurred for the years ended December 31, 2013, 2012 and $44.6 million incurred in 2012, 2011, and 2010, respectively, primarily in conjunction with our property preservation and default processing services are included in revenue with an equal offsetting expense included in cost of revenue.revenue primarily related to our property preservation and default processing services. These amounts are recognized on a gross basis, principally because we have complete control over selection of vendors.vendors and the vendor relationship is with us, rather than with our customers.
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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 and charged-off mortgages on behalf of our clients and recognize revenue upon collection from the debtors. We also earn fees for packaging and selling charged-off mortgages and recognize revenue after the sale of the notes and once the risks and rewards of the mortgage notes are transferred to the purchasers. In addition, we provide customer relationship management services for which we earn and recognize revenue on a per-call, per-person or per minuteper-minute basis as the related services are performed.
Technology Services: For our REALSuite™ platform, we charge based on the number of our clients’ loans processed on the system or on a per-transaction basis. We record transactional revenue when the service is provided and other revenue monthly based on the number of loans processed, employees serviced or services provided. Furthermore, we provide information technology (“IT”) infrastructure services to Ocwen Financial Corporation (“Ocwen”) and its subsidiaries, Home Loan Servicing Solutions, Ltd. (“HLSS”), Altisource Residential Corporation (“Residential”) and Altisource Asset Management Corporation (“AAMC”) 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.Ocwen and its subsidiaries, HLSS, Residential and AAMC. We
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Notes to Consolidated Financial Statements (Continued)
record revenue associated with implementation services upon completion and maintenance ratably over the related service period.
For Equator’s software applications, we recognize revenue from arrangements with multiple deliverables in accordance with ASC Subtopic 605-25, Revenue Recognition: Multiple-Element Arrangements (“ASC 605-25”), and Securities and Exchange Commission Staff Accounting Bulletin Topic 13, Revenue Recognition (“SAB Topic 13”). ASC 605-25 and SAB Topic 13 require each deliverable within a multiple-deliverable revenue arrangement to be accounted for as a separate unit if both of the following criteria are met: (1) the delivered item or items have value to the customer on a standalone basis and (2) for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in the seller’s control. Deliverables not meeting the criteria for accounting treatment as a separate unit are combined with a deliverable that meets that criterion. Equator derives its revenue from platform services fees, professional services fees and other services. Equator does not begin to recognize revenue for platform services fees until these fees become billable, as the services fees are not fixed and determinable until such time. Platform services fees are recognized ratably over the shorter of the term of the contract with the customer or the minimum cancellation period. Professional services fees consist primarily of configuration services related to customizing the platform for individual customers and are generally billed as the hours are worked. Due to the essential and specialized nature of the configuration services, these services do not qualify as separate units of accounting separate from the platform services as the delivered services do not have value to the customer on a standalone basis. Therefore, the related fees are recorded as deferred revenue until the project configuration is complete and then recognized ratably over the longer of the term of the agreement or the estimated expected customer life. Other services consist primarily of training, including agent certification, and consulting services. These services are generally sold separately and are recognized as revenue as the services are performed and earned.
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 recoveranticipate recovery or settlesettlement of those temporary differences. The effect on deferred tax 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 of 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, Income Taxes.
Adoption of New Accounting Pronouncement
Effective January 1, 2012, the Company adopted new guidance on goodwill impairment testing that simplifies how an entity tests goodwill for impairment. This new guidance allows an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value as a basis for determining whether it needs to perform the quantitative two-step goodwill impairment test. Only if an entity determines, based on qualitative assessment, that it is more likely than not that a reporting unit’s fair value is less than its carrying value will it be required to calculate the fair value of the reporting unit. The qualitative assessment is optional and the Company is permitted to bypass it for any reporting unit in any period and begin its impairment analysis with the quantitative calculation. In 2013, the Company determined that, based upon the qualitative assessment, the fair value of its reporting units’ goodwill was not less than the carrying values. The Company is permitted to perform the qualitative assessment in any subsequent period.
Future Adoption of New Accounting Pronouncement
In July 2013, the Financial Accounting Standards Board issued guidance on the disclosure requirements for unrecognized tax benefits, or a portion of an unrecognized tax benefit. This new guidance requires the Company to present an unrecognized tax benefit as a reduction to a deferred tax asset for a net operating loss carryforward, a
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Notes to Consolidated Financial Statements (Continued)
similar tax loss, or a tax credit carryforward, with some exceptions. This new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. We do not anticipate a material impact on our consolidated financial statements as a result of this guidance.
3. SEPARATION OF RESIDENTIAL ASSET BUSINESSES
On December 21, 2012, we completed the spin-offs of two wholly-owned subsidiaries, ResidentialAAMC and AAMC,Residential, into separate publicly-tradedpublicly traded companies (the “Separation of the Residential Asset Businesses”).
Altisource shareholders of record as of December 17, 2012 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 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 arewere development stage companies and havehad not commenced operations at the date of separation, 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 infor the year ended December 31, 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-basedShare-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 determined4. TRANSACTIONS WITH RELATED PARTIES
Ocwen
Ocwen, together with its subsidiaries, is our largest customer. Our Chairman is also the exercise priceChairman of Ocwen. Ocwen is contractually obligated to purchase certain mortgage services and technology services from us through August 2025 under the new Residentialterms of a master services agreement 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 equivalentamendments to the fair value of such Altisource stock award immediately prior tomaster services agreement (collectively, 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,“Service Agreements”). In connection with 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, resultingacquisition 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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4. TRANSACTIONS WITH RELATED PARTIES
Ocwen®
Ocwen isof the fee-based businesses of Homeward Residential, Inc. (“Homeward”) that closed on March 29, 2013 and the acquisition from Ocwen related to the fee-based businesses of Residential Capital, LLC (“ResCap”) that closed on April 12, 2013 (see Note 5), our largest customer.Service Agreements with Ocwen including its wholly-owned subsidiarywere amended to extend the term from 2020 to 2025. Further, as part of the amendments, we are the exclusive provider of services to Ocwen Mortgage Servicing Inc. (“OMS”), are contractually obligatedwith respect to purchase certain mortgagethe Homeward and ResCap servicing portfolios, and Ocwen agreed not to establish similar fee-based businesses that would directly or indirectly compete with Altisource’s services with respect to the Homeward and technology services from us under service agreements. On October 1, 2012, the Ocwen agreement was extended by three years through 2020. Separately, we signed a similar agreement on October 1, 2012 with OMS effective through 2020. Ocwen and OMS are not restricted from redeveloping these services.ResCap businesses. We settle amounts with Ocwen on a daily, weekly or monthly basis depending upon the nature of the service and when the service is provided.
Related party revenue consists of revenue earned directly from Ocwen and its subsidiaries and revenue earned from the loans serviced by Ocwen orand its subsidiaries when Ocwen determinesdesignates us as the service provider. We earn additional revenue on the portfolios serviced by Ocwen orand its subsidiaries that are not considered related party revenue when a party other than Ocwen selects Altisource as the service provider. As a percentage of each of our segmentRelated party revenue and as a percentage of segment and consolidated revenue, related party revenue was as follows for the years ended December 31:
| | 2012 | | 2011 | | 2010 | | | 2013 | | 2012 | | 2011 | |
| | | | | | | | | | | | | | |
Mortgage Services | | 68 | % | 72 | % | 73 | % | | 71% | | 68% | | 72% | |
Financial Services | | | 30% | | < 1% | | < 1% | |
Technology Services | | 42 | % | 39 | % | 37 | % | | 49% | | 42% | | 39% | |
Financial Services | | < 1 | % | < 1 | % | < 1 | % | |
Consolidated revenues | | 60 | % | 58 | % | 51 | % | |
Consolidated revenue | | | 65% | | 60% | | 58% | |
We record revenue we earn from Ocwen and its subsidiaries under 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;services, the fees Ocwen pays to other service providers; fees commensurate with market surveys prepared by unaffiliated firms;providers and fees charged by our competitors. As of January 1, 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.
Support Services
On August 10, 2012, we entered into a five-yearWe have support services agreementagreements with OMS (the “Support Services Agreement”), setting forth certain services AltisourceOcwen and OMS will provide to each other which are similar to the services Altisource and Ocwen provided to each other pursuant to a transition services agreement.its subsidiaries. These services include such areas as human resources, vendor management, corporate services, six sigma,operational effectiveness, quality assurance, quantitative analytics treasury, accounting, risk management, legal, strategic planning and compliance.treasury. Payment for the services provided is based on the fully-allocated cost of providing the service based on an estimate of the time and expense of providing the service. For the years ended December 31, 2013, 2012 2011 and 2010,2011, we billed Ocwen and its subsidiaries $2.6 million, $2.7 million $2.6 million and $1.8$2.6 million, respectively, and Ocwen and its subsidiaries billed us $2.9 million, $2.4 million $1.9 million and $1.1$1.9 million, respectively, for services provided under this agreement.these agreements. These amounts are reflected as a component of selling, general and administrative expenses in the consolidated statements of operations.
Unsecured 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 arewere due quarterly at a rate per annum 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%. On February 15, 2013, Ocwen repaid the outstanding principal amount of $75.0 million, plus all accrued and unpaid interest and the term loan was terminated. Interest income related to this loan was $0.8 million and $0.1 million for the years ended December 31, 2013 and 2012, respectively (no comparative amount for 2011).
Transactions Related to Fee-Based Businesses
On January 31, 2013, we entered into non-binding letters of intent with Ocwen to acquire certain fee-based businesses associated with Ocwen’s acquisitions of the Homeward and ResCap servicing portfolios. Ocwen acquired the Homeward servicing portfolio on December 27, 2012 and the ResCap servicing portfolio on February 15, 2013. Altisource acquired the Homeward fee-based businesses from Ocwen on March 29, 2013 (see Note 5). Altisource entered into an agreement with Ocwen on April 12, 2013 to establish additional terms related to our services in connection with the ResCap fee-based businesses (see Note 5).
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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%. Interest income related to this loan was $0.1 million for the year ended December 31, 2012.
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 assets 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 Ocwen’s acquisition of Homeward Residential and the anticipated 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 S.A. (“Correspondent One”) (see Note 10). We provideCorrespondent One purchased closed conforming and government guaranteed residential mortgages from approved mortgage bankers. On March 31, 2013, we sold our 49% interest in Correspondent One to Ocwen for $12.6 million. Under a support services agreement, we provided Correspondent One certain finance, human resources, legal support, facilities, technology, vendor management and risk management services. For the years ended December 31, 2013, 2012 and 2011, we billed Correspondent One less than $0.1 million, $0.4 million and $0.1 million, respectively. We also provided certain origination related services to Correspondent One. We earned revenue of $0.1 million and $0.3 million for the years ended December 31, 2013 and 2012, respectively, under afor these services agreement(no comparative amount in 2011).
Home Loan Servicing Solutions, Ltd. (“HLSS”)HLSS is a publicpublicly traded company whose primary objective is the acquisition of mortgage servicing rights and advances. In connection with the February 2012 HLSS initial public offering and subsequent thereto, HLSS acquired mortgage servicing related assets from Ocwen. Our Chairman is also the Chairman of HLSS. WeUnder a support services agreement, we provide HLSS certain finance, human resources and legal support services. For the yearyears ended December 31, 2013 and 2012, we billed HLSS $0.7 million and $0.6 million, under a services agreementrespectively (no comparative amountsamount in 2011 or 2010)2011).
These amounts are reflected as a component 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
Residential and AAMC were established, capitalized and their equity was distributed to our shareholders on December 21, 2012 and are each separate publicly traded companies. Residential is focused on acquiring and managing single family rental properties by acquiring portfolios of sub-performing and non-performing residential mortgage loans throughout the United States. AAMC is an asset management company providing portfolio management and corporate governance services to Residential. Our Chairman is also the Chairman of 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 certain agreements with Residential and AAMC. A brief description ofWe have agreements to provide Residential with renovation management, lease management and property management services. In addition, we have agreements with Residential and AAMC to provide support services such as finance, human resources, legal support, facilities, technology, vendor management and risk management. Further, we have separate agreements for certain services related to income tax matters, trademark licenses and technology products and services. For the year ended December 31, 2013, we billed Residential $2.6 million, and we billed AAMC less than $0.1 million, under these agreements is as follows:(no comparative amounts in 2012 and 2011).
·5. ACQUISITIONS
Separation Agreement Homeward Fee-Based Businesses(
On March 29, 2013, we acquired certain fee-based businesses associated with eachOcwen’s acquisition of Residential and AAMC)—These agreements provide for, among other things, the principal corporate transactions required to effect the SeparationHomeward. As part of the Residential Assetacquisition, Ocwen agreed not to develop similar fee-based businesses that would directly or indirectly compete with services provided by Altisource relative to the Homeward servicing portfolio. Additionally, the terms of our service agreements with Ocwen were amended to extend the term from 2020 to 2025 (see Note 4). We paid $75.8 million, after a working capital and net income adjustment of $11.1 million, for the Homeward fee-based businesses. From the acquisition date through December 31, 2013, we recorded service revenue of $108.8 million and we estimate pre-tax income is $24.3 million related to these businesses.
Since the acquisition date, management adjusted the preliminary purchase price allocation and assigned associated asset lives based upon information that has become available. In addition to the working capital adjustment, we also reduced premises and equipment by $1.2 million based on a post-acquisition detailed analysis of software licenses received. The purchase price allocation and assessment of asset lives will continue to be revised as additional
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Notes to Consolidated Financial Statements (continued)(Continued)
Businessesinformation about the fair value of assets and certain other agreements relatingliabilities becomes available. Such assessment must be completed within 12 months from the acquisition date.
The preliminary adjusted allocation of the purchase price is estimated as follows:
(in thousands) | | | |
| | | |
Premises and equipment | | $ | 1,559 | |
Customer relationship | | 75,609 | |
| | 77,168 | |
Accounts payable and accrued expenses | | (1,351 | ) |
| | | |
Purchase price | | $ | 75,817 | |
|
| Estimated
life
(in years) |
|
| | | |
Premises & equipment | | 3 - 5 | |
Customer relationship | | 7 | |
ResCap Fee-Based Businesses
On April 12, 2013, we entered into an agreement with Ocwen to establish additional terms related to the continuing relationshipexisting servicing arrangements between Altisource and eachOcwen in connection with certain mortgage servicing platform assets of ResCap (the “ResCap Business”). The Service Agreements provide that (i) Altisource will be 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 offeringexclusive provider, except as prohibited by applicable law, to Ocwen of certain services related to Residentialthe ResCap Business, (ii) Ocwen will not establish similar fee-based businesses that would directly or indirectly compete with Altisource’s services as they relate to the ResCap Business and (iii) Ocwen will market and promote the utilization of Altisource’s services to their various third party relationships. Additionally, the parties agreed to use commercially reasonable best efforts to ensure that the loans associated with the ResCap Business are boarded onto Altisource’s mortgage servicing platform. We paid $128.8 million ($80.0 million on April 12, 2013 and $48.8 million on May 10, 2013) for the ResCap fee-based businesses. From the acquisition date through December 31, 2013, we recorded service revenue of $59.4 million and we estimate pre-tax income is $19.9 million related to these businesses.
We acquired no tangible assets and assumed no liabilities 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 noticethe acquisition. However, certain employees as well as practices and processes developed to support the other party at least nine months before the completionResCap servicing portfolio were components of the initial or renewal term. Services provided by us undertransaction. We accounted for this agreement include property management, lease managementtransaction as a business combination in accordance with ASC Topic 805.
Management prepared a final purchase price allocation and renovation management servicesassigned 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 followingasset lives based upon available information at the Separationtime of the Residential Asset Businesses. The Support Services Agreement will extend for two years afteragreement and through the date of the Separationfiling. The agreement consideration 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$128.8 million was fully allocated to the separation.
·Trademark License Agreement (customer relationship intangible asset with eachan estimated average useful life 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 either party upon 30 days written notice.
·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.7 years.
5. ACQUISITIONSEquator Acquisition
The resultsOn November 15, 2013, we completed the acquisition of operationsall of the following acquisitions have been includedoutstanding limited liability company interests of Equator pursuant to the previously reported Purchase and Sale Agreement dated as of August 19, 2013 (the “Purchase Agreement”). Pursuant to the terms of the Purchase Agreement, we paid $63.4 million at closing in our consolidated results fromcash (net of closing working capital adjustments), subject to certain post-closing adjustments based on current assets and current liabilities of Equator at closing, to be settled within 90 days of the respective acquisition dates.closing date. Additionally, the Purchase Agreement provides for the payment of up to $80 million in potential additional consideration (the “Earn Out”). The acquisitions did not have a material effectEarn Out consideration is determined based on our financial position, results of operations or cash flows.
Acquisition-related transaction costs are included in selling, general and administrative expensesEquator Adjusted EBITA (as defined in the consolidated statements of operations.
Springhouse and Tracmail
In April 2011, we acquired Springhouse, an appraisal management company that utilizes a nationwide panel of appraisers to provide real estate appraisals principally to mortgage originators, including the members of Lenders One, and real estate asset managers.
In July 2011, we acquired the assembled workforce of Tracmail, a sub-contractor in India that performs asset recovery services. Prior to acquisition, the costs paid to the sub-contractor were included in outside fees and services within cost of revenuePurchase Agreement) in the consolidated financial statements.three consecutive 12-month periods following closing. Up to $22.5 million of the Earn Out consideration can be earned in each of the first two 12-month periods, and up to $35.0 million can be earned in the third 12-month period.
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Any amounts earned upon the achievement of Adjusted EBITA thresholds are payable through 2017. We may, in our discretion, pay up to 20% of each payment of any Earn Out consideration in shares of Company restricted stock, with the balance to be paid in cash. From the acquisition date through December 31, 2013, we recorded service revenue of $7.5 million, and pre-tax loss is $1.0 million.
The preliminary adjusted allocation of the purchase price for these transactions is estimated as follows:
(in thousands) | | | | | | |
| | | | | | |
Accounts receivable | | $ | 289 | | | $ | 9,293 | |
Prepaid expenses and other current assets | | | 954 | |
Premises and equipment | | 16 | | | 16,974 | |
Identifiable intangible assets | | 1,180 | | |
Customer relationships and trade names | | | 43,393 | |
Goodwill | | 3,079 | | | 82,460 | |
Other non-current assets | | | 242 | |
Assets acquired | | | 153,316 | |
Accounts payable and accrued expenses | | | (7,232 | ) |
Deferred revenue | | | (36,689 | ) |
Liabilities assumed | | | (43,921 | ) |
| | 4,564 | | | | |
Accounts payable and accrued expenses | | (2,049 | ) | |
Total consideration | | $ | 2,515 | | |
Purchase price | | | $ | 109,395 | |
MPA
The Equator purchase price includes the fair value of the Earn Out of $46.0 million, determined based on the present value of future estimated Earn Out payments. |
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, 2012 consisted of 241 members.
Consideration for the transaction consisted of cash, common stock and put option agreements:
(in thousands) | | Consideration | |
| | | |
Cash | | $ | 29,000 | |
Common stock | | 23,900 | |
Put option agreements at fair value | | 1,289 | |
Working capital adjustment | | 835 | |
| | | |
Total consideration | | $ | 55,024 | |
|
| Estimated
life
(in years) |
|
| | | |
Premises and equipment (excluding internally developed software) | | 3 - 5 | |
Internally developed software (included in premises and equipment) | | 7 | |
Customer relationships | | 7 - 15 | |
Trade names | | 4 | |
The common stock consistedfollowing tables present the unaudited pro forma consolidated results of 1.0 million sharesoperations as if the Homeward, ResCap Business and Equator transactions had occurred at the beginning of Altisource’s common stock valued at $24.92 per share based on the closing priceearliest period presented.
| | Year ended
December 31, 2013 | |
(in thousands, except per share amounts) | | As reported | | Pro forma | |
Revenue | | $ | 768,357 | | $ | 854,098 | |
Net income attributable to Altisource | | 129,973 | | 132,907 | |
Earnings per share — diluted | | 5.19 | | 5.31 | |
| | | | | | | |
| | Year ended
December 31, 2012 | |
(in thousands, except per share amounts) | | As reported | | Pro forma | |
Revenue | | $ | 568,360 | | $ | 781,834 | |
Net income attributable to Altisource | | 110,627 | | 129,229 | |
Earnings per share — diluted | | 4.43 | | 5.18 | |
| | | | | | | |
The unaudited pro forma information presents the combined operating results 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 had 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 put agreements expired in December 2011 due to the attainment of certain Altisource share price thresholds.
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 ofHomeward, ResCap Business and Equator transactions. The Homeward, ResCap Business and Equator operating results were derived from their historical financial statements for the ResCap servicing portfolio (see Note 23 for additional information).most comparable periods available. The results prior to the
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Notes to Consolidated Financial Statements (continued)(Continued)
acquisition dates have been adjusted to include the pro forma impact of the adjustment of amortization of the acquired intangible assets based on the preliminary purchase price allocations, the adjustment of interest expense reflecting the portion of our $200 million senior secured term loan, increased to $400 million on May 7, 2013, and Amendment No. 2 to the senior secured term loan agreement dated as of December 9, 2013 used in the Homeward, ResCap Business and Equator transactions and to reflect the impact of income taxes on the pro forma adjustments utilizing Altisource’s effective income tax rate in each period presented.
The unaudited pro forma results are presented for illustrative purposes only and do not reflect additional revenue opportunities, the realization of any potential cost savings and any related integration costs. Certain revenue opportunities and cost savings may result from the transactions and the conversion to the Altisource model; however, there can be no assurance that these revenue opportunities and cost savings will be achieved. These pro forma results do not purport to be indicative of the results that would have actually been obtained if the transactions occurred as of the beginning of each of the periods presented, nor is the pro forma data intended to be a projection of results that may be obtained in the future.
6. ACCOUNTS RECEIVABLE, NET
Accounts receivable, net consists of the following as of December 31:
(in thousands) | | 2012 | | 2011 | | | 2013 | | 2012 | |
| | | | | | | | | | |
Billed | | | | | | | | | | |
Third parties | | $ | 25,950 | | $ | 13,776 | | |
Non-related parties | | | $ | 39,588 | | $ | 25,950 | |
Ocwen | | 19,817 | | 5,245 | | | 11,410 | | 19,817 | |
Correspondent One | | 27 | | 123 | | | — | | 27 | |
HLSS | | 163 | | 5 | | | 83 | | 163 | |
AAMC | | 14 | | — | | | 1,347 | | 14 | |
Residential | | | 547 | | — | |
Other receivables | | 353 | | 350 | | | 1,642 | | 353 | |
| | 46,324 | | 19,499 | | | 54,617 | | 46,324 | |
Unbilled | | | | | | | | | | |
Third parties | | 39,496 | | 31,831 | | |
Non-related parties | | | 42,284 | | 39,496 | |
Ocwen | | 6,377 | | 2,722 | | | 10,027 | | 6,377 | |
Correspondent One | | 32 | | — | | | — | | 32 | |
| | 92,229 | | 54,052 | | | 106,928 | | 92,229 | |
Allowance for doubtful accounts | | (3,274 | ) | (2,047 | ) | | (5,631 | ) | (3,274 | ) |
| | | | | | | | | | |
Total | | $ | 88,955 | | $ | 52,005 | | | $ | 101,297 | | $ | 88,955 | |
Unbilled fees consist primarily of asset management and default management services for which we recognize revenues over the service delivery period but bill following 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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Notes to Consolidated Financial Statements (continued)(Continued)
A summary of the allowance for doubtful accounts, net of recoveries, for the years ended December 31, 2013, 2012 2011 and 20102011 is as follows:
| | (in thousands) | | | (in thousands) | |
| | | | | | |
Balance, January 1, 2010 | | $ | 696 | | |
Bad debt expense | | 1,735 | | |
Recoveries | | (106 | ) | |
Write-offs | | (193 | ) | |
Balance, December 31, 2010 | | $ | 2,132 | | |
Balance, January 1, 2011 | | | $ | 2,132 | |
Bad debt expense | | 967 | | | 967 | |
Recoveries | | (54 | ) | | (54 | ) |
Write-offs | | (998 | ) | | (998 | ) |
Balance, December 31, 2011 | | $ | 2,047 | | | | 2,047 | |
Bad debt expense | | 3,049 | | | 3,049 | |
Recoveries | | (21 | ) | | (21 | ) |
Write-offs | | (1,801 | ) | | (1,801 | ) |
Balance, December 31, 2012 | | $ | 3,274 | | | | 3,274 | |
Bad debt expense | | | 2,549 | |
Recoveries | | | (21 | ) |
Write-offs | | | (171 | ) |
| | | | |
Balance, December 31, 2013 | | | $ | 5,631 | |
7. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consist of the following as of December 31:
(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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(in thousands) | | 2013 | | 2012 | |
| | | | | |
Maintenance agreements, current portion | | $ | 4,600 | | $ | 3,636 | |
Income taxes receivable | | 1,645 | | 1,814 | |
Prepaid expenses | | 4,191 | | 1,640 | |
Other current assets | | 953 | | 528 | |
| | | | | |
Total | | $ | 11,389 | | $ | 7,618 | |
8. PREMISES AND EQUIPMENT, NET
Premises and equipment, net, which include amounts recorded under capital leases, consists of the following as of December 31:
(in thousands) | | 2012 | | 2011 | | | 2013 | | 2012 | |
| | | | | | | | | | |
Computer hardware and software | | $ | 68,329 | | $ | 39,452 | | | $ | 103,400 | | $ | 68,329 | |
Office equipment and other | | 15,592 | | 15,068 | | | 28,057 | | 15,592 | |
Furniture and fixtures | | 5,344 | | 4,299 | | | 8,391 | | 5,344 | |
Leasehold improvements | | 12,982 | | 7,014 | | | 17,574 | | 12,982 | |
| | 102,247 | | 65,833 | | | 157,422 | | 102,247 | |
Less: Accumulated depreciation and amortization | | (51,848 | ) | (40,233 | ) | | (70,170 | ) | (51,848 | ) |
| | | | | | | | | | |
Total | | $ | 50,399 | | $ | 25,600 | | | $ | 87,252 | | $ | 50,399 | |
Depreciation and amortization expense, inclusive of capital lease obligations, amounted to $19.1 million, $12.8 million and $8.4 million for the years ended December 31, 2013, 2012 and $7.2 million for 2012, 2011, and 2010, respectively, and is included in cost of revenue for operating assets and in selling, general and administrative expenses for non-operating assets in the accompanying consolidated statements of operations.
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 goodwill during the years ended December 31, 2012 and 2011 are summarized below:
| | 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 description under intangible assets, net section below.
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Notes to Consolidated Financial Statements (continued)(Continued)
9. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
Goodwill primarily relates to the acquisitions of Equator, MPA, Springhouse, LLC and Tracmail. Changes in goodwill during the years ended December 31, 2013 and 2012 are summarized below:
| | Mortgage | | Financial | | Technology | | | |
(in thousands) | | Services | | Services | | Services | | Total | |
| | | | | | | | | |
Balance, January 1, 2012 and December 31, 2012 | | $ | 10,919 | | $ | 2,378 | | $ | 1,618 | | $ | 14,915 | |
Acquisition of Equator | | — | | — | | 82,460 | | 82,460 | |
| | | | | | | | | |
Balance, December 31, 2013 | | $ | 10,919 | | $ | 2,378 | | $ | 84,078 | | $ | 97,375 | |
Intangible Assets, Net
Intangible assets relate to our acquisitions of the Homeward and ResCap fee-based businesses, Equator, MPA and Nationwide Credit, Inc. (“NCI”) (see Note 5) and Nationwide Credit, Inc (“NCI®”). No impairment charges were taken during the periods presented.
Intangible assets, net consist of the following as of December 31, 20122013 and 2011:2012:
| | | Weighted | | | | | | | | | | | | | |
| | | average | | | | | | | | | | | | | |
| | | estimated | | | | | | Accumulated | | | | | |
| | Weighted
average
estimated
useful life | | Gross carrying amount | | Accumulated amortization | | Net book value | | | useful life | | Gross carrying amount | | amortization | | Net book value | |
(dollars in thousands) | | (years) | | 2012 | | 2011 | | 2012 | | 2011 | | 2012 | | 2011 | | | (years) | | 2013 | | 2012 | | 2013 | | 2012 | | 2013 | | 2012 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Definite-lived intangible assets | | | | | | | | | | | | | | | | |
Definite lived intangible assets | | | | | | | | | | | | | | | | |
Trademarks | | 16 | | $ | 10,614 | | $ | 10,614 | | $ | (4,060 | ) | $ | (3,353 | ) | $ | 6,554 | | $ | 7,261 | | | 14 | | $ | 12,249 | | $ | 10,614 | | $ | (4,534 | ) | $ | (4,060 | ) | $ | 7,715 | | $ | 6,554 | |
Customer lists | | 19 | | 38,366 | | 38,366 | | (18,567 | )(a) | (13,010 | ) | 19,799 | | 25,356 | | |
Customer-related intangible assets | | | 10 | | 284,484 | | 38,366 | | (44,208 | ) | (18,567 | )(a) | 240,276 | | 19,799 | |
Operating agreement | | 20 | | 35,000 | | 35,000 | | (5,104 | ) | (3,354 | ) | 29,896 | | 31,646 | | | 20 | | 35,000 | | 35,000 | | (6,854 | ) | (5,104 | ) | 28,146 | | 29,896 | |
Non-compete agreement | | 4 | | 1,300 | | 1,300 | | (963 | ) | (613 | ) | 337 | | 687 | | | 4 | | 1,300 | | 1,300 | | (1,275 | ) | (963 | ) | 25 | | 337 | |
| | | | | | | | | | | | | | | | |
Total | | | | $ | 85,280 | | $ | 85,280 | | $ | (28,694 | ) | $ | (20,330 | ) | $ | 56,586 | | $ | 64,950 | | | | | $ | 333,033 | | $ | 85,280 | | $ | (56,871 | ) | $ | (28,694 | ) | $ | 276,162 | | $ | 56,586 | |
(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$3.4 million for of the years ended December 31, 2012 and 2011, respectively. Component 2 goodwill was fully amortized in 2012.
Amortization expense for definite lived intangible assets was $28.2 million, $5.0 million $5.3 million and $4.9$5.3 million for the years ended December 31, 2013, 2012 2011 and 2010,2011, respectively. Expected annual amortization for 20132014 through 2017,2018, is $4.8$44.2 million, $4.5$40.3 million, $4.4$34.4 million, $4.3$29.1 million and $4.0$24.0 million, respectively.
10. INVESTMENT IN EQUITY AFFILIATE
Correspondent One purchases 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. We have no funding commitments to Correspondent One as of December 31, 2012.
Our net loss on this investment using the equity method was $1.2 million and $0.5 million for the years ended December 31, 2012 and 2011 respectively.
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10. INVESTMENT IN EQUITY AFFILIATES
Correspondent One purchased closed conforming and government guaranteed residential mortgages from approved mortgage bankers. Prior to the sale of our interest in Correspondent One to Ocwen on March 31, 2013 (see Note 4), we had significant influence over the general operations of Correspondent One consistent with our 49% ownership level, and therefore, accounted for our investment under the equity method. On March 31, 2013, we sold our 49% interest in Correspondent One to Ocwen for $12.6 million.
Our loss in equity affiliates was $0.2 million, $1.2 million and $0.5 million for the years ended December 31, 2013, 2012 and 2011, respectively.
In the first quarter of 2013, we anticipateanticipated 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 iswas included within equity loss in affiliateequity affiliates in other expense (income)income (expense), net in the consolidated statements of operations.
The following table presents summarized financial information for Correspondent One:
| | 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:
(in thousands) | | 2012 | | 2011 | | | 2013 | | 2012 | |
| | | | | | | | | | |
Security deposits, net | | $ | 5,019 | | $ | 7,615 | | | $ | 7,291 | | $ | 5,019 | |
Debt issuance costs, net | | 4,260 | | — | | | 6,687 | | 4,260 | |
Maintenance agreements, non-current portion | | 1,614 | | — | | | 1,465 | | 1,614 | |
Unbilled fees | | 423 | | 1,773 | | |
Restricted cash | | 158 | | 158 | | | 1,620 | | 158 | |
Other | | 200 | | 40 | | | 517 | | 623 | |
| | | | | | | | | | |
Total | | $ | 11,674 | | $ | 9,586 | | | $ | 17,580 | | $ | 11,674 | |
Debt issuance costs of $3.2 million and $4.3 million were capitalized in Novemberfor the years ended December 31, 2013 and 2012, respectively, in connection with issuing and refinancing our long-term debt (see Note 13).
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Notes to Consolidated Financial Statements (continued)Equator (see Note 5), we executed a standby letter of credit in the amount of $1.5 million, secured by a restricted cash balance.
12. ACCOUNTS PAYABLE, ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accounts payable and accrued expenses consist of the following as of December 31:
(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 liabilities consist of the following as of December 31:
(in thousands) | | 2012 | | 2011 | |
| | | | | |
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 | | 2,127 | | 958 | |
| | | | | |
Total | | $ | 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 sheet and in selling, general and administrative expenses in the statement of 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.
(in thousands) | | 2013 | | 2012 | |
| | | | | |
Accounts payable | | $ | 11,600 | | $ | 5,079 | |
Accrued expenses - general | | 21,547 | | 16,528 | |
Accrued salaries and benefits | | 29,805 | | 19,613 | |
Income taxes payable | | 11,211 | | 8,750 | |
Payable to Ocwen | | 5,322 | | 8,865 | |
Payable to AAMC | | 7 | | 141 | |
| | | | | |
Total | | $ | 79,492 | | $ | 58,976 | |
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TheOther current liabilities consist of the following table summarizes the activity for lease exit costs for the years endedas of December 31, 2012 and 2011:31:
(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.
(in thousands) | | 2013 | | 2012 | |
| | | | | |
Book overdrafts | | $ | 4,232 | | $ | 5,229 | |
Other | | 5,899 | | 2,712 | |
| | | | | |
Total | | $ | 10,131 | | $ | 7,941 | |
13. LONG-TERM DEBT
Long-term debt consists of the following as of December 31:
(in thousands) | | 2012 | | 2011 | | | 2013 | | 2012 | |
| | | | | | | | | | |
Senior Secured Term Loan | | $ | 200,000 | | $ | — | | |
Less: original issue discount | | (1,973 | ) | — | | |
Senior secured term loan | | | $ | 396,503 | | $ | 200,000 | |
Less: unamortized discount, net | | | (1,247 | ) | (1,973 | ) |
Net long-term debt | | 198,027 | | — | | | 395,256 | | 198,027 | |
Less: current portion | | (2,000 | ) | — | | | (3,975 | ) | (2,000 | ) |
| | | | | | |
Long-term debt, less current portion | | $ | 196,027 | | $ | — | | | $ | 391,281 | | $ | 196,027 | |
On November 27, 2012, we entered into a seven-year senior secured term loan facility agreement, (the “Credit Agreement”)as subsequently amended, 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”).$200 million. The Senior Secured Term Loansenior secured term loan was issued with a 1.0% original issue discount ($2.0 million),of $2.0 million, resulting in net proceeds of $198.0 million (the “Proceeds”“Initial Proceeds”), with the Company and certain wholly-owned subsidiaries acting as guarantors (collectively, the “Guarantors”).
The Initial Proceeds were used to capitalize Residential and AAMC (as described in(see Note 3), and also to pay certain fees, commissions and expenses in connection with the Credit Agreement.senior secured term loan agreement. The Initial Proceeds maywere also be used for general corporate purposes, including acquisitions and investments permitted under the Credit Agreement.senior secured term loan agreement.
On May 7, 2013, we amended the senior secured term loan agreement to increase the principal amount of the senior secured term loan by $200 million (the “Incremental Term Loan”), which was issued with a $1.0 million original issue premium, resulting in gross proceeds to the Company of $201.0 million.
The Incremental Term Loan was used to fund a portion of the Company’s previously announced transaction with Ocwen related to the ResCap servicing portfolio (see Note 5), with the remainder to be used for stock repurchases and for general corporate purposes, including additional acquisitions. The Incremental Term Loan was also used to pay certain fees, commissions and expenses in connection with the Incremental Term Loan. The Company paid costs associated with the Incremental Term Loan of $2.4 million, which were recorded as debt issuance costs in other assets in the accompanying consolidated balance sheets.
Additionally, the Incremental Term Loan amended the senior secured term loan agreement to, among other changes, provide for an additional $200 million incremental term loan facility accordion borrowings and increase the maximum amount of Restricted Payments (as defined in the senior secured term loan) that may be made by us, including increasing the amount of Company share repurchases permitted.
On December 9, 2013, we entered into an Amendment No. 2 (“Second Amendment”) to the senior secured term loan agreement in which we incurred indebtedness in the form of Refinancing Debt (as defined in the senior secured term loan agreement), the proceeds of which were used to refinance, in full, the $397.5 million of term loans outstanding under the senior secured term loan agreement immediately prior to the effectiveness of the Second Amendment. The Refinancing Debt bears interest at lower rates and has a maturity date approximately one year
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later than the prior term loans. The Second Amendment further modified the senior secured term loan agreement to, among other changes, increase the maximum permitted amount of Restricted Junior Payments (as defined in the senior secured term loan agreement), including share repurchases by the Company.
The refinanced term loans under the senior secured term loan agreement must be repaid in equal consecutive quarterly principal installments of $1.0 million commencing on December 31, 2013, with the balance due at maturity. After giving effect to the Second Amendment, all amounts outstanding under the senior secured term loan agreement will become due on the earlier of (i) December 9, 2020, being the seventh anniversary of the closing date of the Second Amendment and (ii) the date on which the loans are declared to be due and owing by the administrative agent at the request (or with the consent) of the Required Lenders (as defined in the senior secured term loan agreement) upon the occurrence of any event of default under the senior secured term loan agreement.
In addition to the scheduled principal payments, the Refinanced Debt 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 senior secured term loan agreement) if the leverage ratio (as defined in the senior secured term loan agreement) is greater than 2.75 to 1.00. No mandatory prepayments were owed for the year ended December 31, 2013. We are permitted to make voluntary prepayments without penalty after June 9, 2014. If prepayments are made prior to June 9, 2014, a fee of 1.0% of the principal amount of the prepaid term loans will be incurred.
After giving effect to the Second Amendment, all of the term loans outstanding under the senior secured term loan bear interest at rates based upon, at our option, the Adjusted Eurodollar Rate or the Base Rate (each as defined in the senior secured term loan agreement). Adjusted Eurodollar Rate loans 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) 1.00% plus (ii) a 3.50% margin. Base Rate loans bear interest at a rate per annum equal to the sum of (i) the greater of (x) the Base Rate and (y) 2.00% plus (ii) a 2.50% margin. The interest rate at December 31, 2013 was 4.50%.
Payments under the Credit Agreementsenior secured term loan 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.
Thesenior secured term loan agreement includes covenants that restrict or limit, among other things, our ability to: create liens and encumbrances; incur additional indebtedness; make asset sales, transferssell, transfer or dispositions;dispose of assets; 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;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 prepaidThe senior secured term loans will be incurred.
The Credit Agreementloan 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 Agreementsenior secured term loan 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$40.0 million when due, (v) default on any other debt that equals or exceeds $40$40.0 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)senior secured term loan agreement), (vii) bankruptcy and insolvency events (as defined in the Credit Agreement)senior secured term loan agreement), (viii) entry by a court of one or more judgments against us (as defined in the Credit Agreement)senior secured term loan agreement) in an amount in excess of $40$40.0 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)senior secured term loan 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 Agreementsenior secured term loan 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 LoanAt December 31, 2013, debt issuance costs were capitalized.$6.7 million, net of $1.0 million of accumulated amortization. At December 31, 2012, total debt issuance costs were $4.3 million, net of $0.1 million of accumulated amortization andamortization. Debt issuance costs 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).sheets.
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Interest expense on the term loans, including amortization of debt issuance costs and the net debt discount, totaled $20.3 million and $1.2 million for the years ended December 31, 2013 and 2012, respectively (no comparative amount in 2011).
Maturities of our long-term debt are as follows:
(in thousands) | | | | | | |
| | | | | | |
2013 | | $ | 2,000 | | |
2014 | | 2,000 | | | $ | 3,975 | |
2015 | | 2,000 | | | 3,975 | |
2016 | | 2,000 | | | 3,975 | |
2017 | | 2,000 | | | 3,975 | |
2018 | | | 3,975 | |
Thereafter | | 190,000 | | | 376,628 | |
| | 200,000 | | | 396,503 | |
Less: current portion | | (2,000 | ) | | (3,975 | ) |
| | $ | 198,000 | | | | |
| | | $ | 392,528 | |
14. OTHER NON-CURRENT LIABILITIES
Other non-current liabilities consist of the following as of December 31:
(in thousands) | | 2013 | | 2012 | |
| | | | | |
Contingent consideration | | $ | 42,946 | | $ | — | |
Other non-current liabilities | | 2,530 | | 1,738 | |
| | | | | |
Total | | $ | 45,476 | | $ | 1,738 | |
15. 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, 2012,2013, we had 100.0 million shares authorized. At December 31, 2012,2013, we had 23.422.6 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.
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,program, 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.program. From authorization of the prior planprevious program in May 2010 through December 31, 2012,2013, we have purchased approximately 2.53.7 million shares of our common stock in the open market at an average price of $37.49$63.04 per share. During the year ended December 31, 2012, weWe purchased 0.31.2 million shares of common stock at an average price of $116.99 per share during the year ended December 31, 2013 and 0.3 million shares at an average price of $63.25 per share. Since no common stock has been repurchased followingshare during the new plan was approved, 3.5year ended December 31, 2012. As of December 31, 2013, approximately 2.3 million shares of common stock remain available for repurchase under the plan.program. Luxembourg law limits share repurchases to approximately the balance of Altisource Portfolio Solutions S.A.’s (unconsolidated parent company) retained earnings, less treasury shares. The distributionshares repurchased. As 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 abilityDecember 31, 2013, approximately $14 million was available to repurchase our common stock which will limitunder Luxembourg law. Our senior secured term loan also limits the amount we can spend on share repurchases in any year and may prevent
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repurchases in certain circumstances. As of December 31, 2013, approximately $55 million was available to repurchase our common stock under our senior secured term loan.
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 to employees of our affiliates. As of December 31, 2012, 2.62013, 2.5 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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common stock. Expired and forfeited awards are available for re-issuance.reissuance. Vesting and exercise of share-based awards are generally contingent on continued employment.
Share-Based Compensation
We issue share-based awards in the form of stock options and certain other equity-based awards for certain employees and officers. We recorded share-based compensation expense of $3.7$2.4 million, $4.0$3.6 million and $3.1$3.9 million for the years ended December 31, 2013, 2012 2011 and 2010,2011, respectively. The amount infor the year ended December 31, 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 performance awards that vested in 2012, 2011 and 2010.
Outstanding share-based compensation currently consists primarily consists of stock option grants that are a combination of service-based and market-based options:options.
Service-based Options. Service-Based Options. These options are granted at fair 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 0.90.8 million service-based awards were outstanding at December 31, 2012.2013.
Market-basedMarket-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 is at least double the exercise price, as long as 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 if the stock price is at least triple the exercise price, as long as 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 criteria and the remaining 75% in three equal annual installments. A total of 2.21.8 million market-based awards were outstanding at December 31, 2012.2013.
The Company granted less than 0.1 million stock options (at a weighted average exercise price of $104.84 per share), 0.3 million stock options (at a weighted average exercise price of $69.48 per share), and 0.2 million stock options (at a weighted average exercise price of $33.15 per share) and 0.9 million stock options (at an exercise price of $23.58 per share) during the years ended December 31, 2013, 2012 2011 and 2010,2011, respectively.
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 for the years ended December 31:
| | 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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The fair value of the service-based options was determined using the Black-Scholes option pricing model, and a lattice (binomial) model was used to determine the fair value of the market-based options, using the following assumptions as of the grant date:
| | 2013 | | 2012 | | 2011 | |
| | Black-Scholes | | Binomial | | Black-Scholes | | Binomial | | Black-Scholes | | Binomial | |
| | | | | | | | | | | | | |
Risk-free interest rate (%) | | 1.02 — 1.81 | | 0.01 — 2.71 | | 0.87 — 1.17 | | 0.08 — 2.04 | | 1.69 — 1.93 | | 0.04 — 3.03 | |
Expected stock price volatility (%) | | 36.35 — 36.76 | | 36.40 — 36.80 | | 34.22 — 34.65 | | 34.20 — 34.60 | | 48.00 | | 55.70 — 55.80 | |
Expected dividend yield | | — | | — | | — | | — | | — | | — | |
Expected option life (in years) | | 6.25 | | — | | 6.25 | | — | | 6.25 | | — | |
Contractual life (in years) | | — | | 14 | | — | | 14 | | — | | 14 | |
| | | | | | | | | | | | | |
Fair value | | $31.33 — $49.14 | | $16.12 — $41.72 | | $19.25 — $29.80 | | $9.98 — $22.76 | | $16.33 — $17.85 | | $16.91 — $20.39 | |
The following table summarizes the weighted-average fair value of stock options granted and the total intrinsic value of stock options exercised for the years ended December 31:
| | | | 2012 | | 2011 | | 2010 | | | | | 2013 | | 2012 | | 2011 | |
| | | | | | | | | | | | | | | | | | |
Weighted-average fair value at date of grant | | | | $ | 20.77 | | $ | 17.66 | | $ | 18.18 | | |
Weighted average fair value at date of grant | | | | | $ | 32.59 | | $ | 20.77 | | $ | 17.66 | |
Intrinsic value of options exercised | | (in thousands) | | 17,598 | | 4,966 | | 7,530 | | | (in thousands) | | 40,761 | | 17,598 | | 4,966 | |
Fair value of options vested | | (in thousands) | | 2,790 | | 3,536 | | 926 | | | (in thousands) | | 3,156 | | 2,790 | | 3,536 | |
|
Stock-based compensation expense is recorded net of estimated forfeiture rates ranging from 1% to 10%.
As of December 31, 2012,2013, estimated unrecognized compensation costs related to share-based payments amounted to $4.7$2.5 million which we expect to recognize over a weighted-averageweighted average remaining requisite service period of approximately 2.482.9 years.
The following table summarizes activity of our stock options:
| | Number of
options | | Weighted
average
exercise
price | | Weighted
average
contractual
term
(in years) | | Aggregate
intrinsic
value
(in
thousands) | |
| | | | | | | | | |
Outstanding at December 31, 2011 | | 3,243,958 | | $ | 14.19 | | 6.7 | | $ | 116,755 | |
Granted | | 278,500 | | 69.48 | | | | | |
Exercised | | (285,054 | ) | 12.19 | | | | | |
Forfeited | | (179,095 | ) | 28.35 | | | | | |
Outstanding at December 31, 2012 | | 3,058,309 | | 17.69 | | 6.11 | | $ | 211,072 | |
| | | | | | | | | |
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.
| | Number of
options | | Weighted
average
exercise
price | | Weighted
average
contractual
term
(in years) | | Aggregate
intrinsic value
(in thousands) | |
| | | | | | | | | |
Outstanding at December 31, 2012 | | 3,058,309 | | $ | 17.69 | | 6.11 | | $ | 211,072 | |
Granted | | 75,000 | | 104.84 | | | | | |
Exercised | | (401,718 | ) | 16.48 | | | | | |
Forfeited | | (142,248 | ) | 55.35 | | | | | |
| | | | | | | | | |
Outstanding at December 31, 2013 | | 2,589,343 | | 18.33 | | 5.20 | | 363,293 | |
| | | | | | | | | |
Exercisable at December 31, 2013 | | 2,194,755 | | 12.68 | | 4.79 | | 320,326 | |
| | | | | | | | | | | |
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Notes to Consolidated Financial Statements (continued)(Continued)
The following table summarizes information about stock options outstanding and exercisable at December 31, 2012:2013:
| | 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 | | | | | |
| | | | | | | | | | | | | | | |
| | 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) | | 1,700,112 | | 4.49 | | $ | 9.14 | | 1,700,112 | | 4.49 | | $ | 9.14 | |
$10.01 — $20.00(a) | | 97,737 | | 2.80 | | 12.45 | | 97,737 | | 2.80 | | 12.45 | |
$20.01 — $30.00(a) | | 502,686 | | 6.30 | | 23.07 | | 328,625 | | 6.31 | | 23.15 | |
$30.01 — $40.00(a) | | 61,058 | | 6.98 | | 33.54 | | 23,874 | | 7.30 | | 33.44 | |
$50.01 — $60.00(a) | | 10,000 | | 8.37 | | 53.00 | | 3,750 | | 8.37 | | 53.00 | |
$60.01 — $70.00(a) | | 142,750 | | 8.19 | | 60.67 | | 40,657 | | 8.19 | | 60.67 | |
$80.01 — $90.00(a) | | 15,000 | | 9.12 | | 83.86 | | — | | — | | — | |
$90.01 — $100.00(a) | | 30,000 | | 9.21 | | 94.19 | | — | | — | | — | |
$120.01 — $130.00(a) | | 30,000 | | 9.62 | | 125.98 | | — | | — | | — | |
| | | | | | | | | | | | | |
| | 2,589,343 | | | | | | 2,194,755 | | | | | |
| | | | | | | | | | | | | | | |
(a)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:
| | 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 | |
| | | | | | | |
| | Market-based options | |
Vesting price | | Ordinary
performance | | Extraordinary
performance | |
| | | | | |
$160.01 — $170.00 | | 7,500 | | — | |
Over $170.00 | | 22,500 | | 52,125 | |
| | | | | |
| | 30,000 | | 52,125 | |
| | | | | |
Weighted average share price | | $ | 107.27 | | $ | 74.08 | |
| | | | | | | |
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:
·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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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.
15.16. COST OF REVENUE
Cost of revenue principally includes payroll and employee benefits associated with personnel employed in customer service and operations roles, fees paid to external providers related to provision of services, reimbursable expenses, technology and telephonytelecommunications expenses as well as depreciation and amortization of operating assets. The components of cost of revenue were as follows for the years ended December 31:
(in thousands) | | 2012 | | 2011 | | 2010 | | | 2013 | | 2012 | | 2011 | |
| | | | | | | | | | | | | | |
Compensation and benefits | | $ | 113,145 | | $ | 82,548 | | $ | 62,791 | | | $ | 156,812 | | $ | 113,145 | | $ | 82,548 | |
Outside fees and services | | 123,338 | | 86,201 | | 60,583 | | | 193,233 | | 123,338 | | 86,201 | |
Reimbursable expenses | | 96,147 | | 82,074 | | 47,449 | | | 102,478 | | 96,147 | | 82,074 | |
Technology and communications | | 23,404 | | 18,772 | | 12,548 | | |
Technology and telecommunications | | | 25,534 | | 23,404 | | 18,772 | |
Depreciation and amortization | | 10,167 | | 6,254 | | 5,688 | | | 14,423 | | 10,167 | | 6,254 | |
| | | | | | | | |
Total | | $ | 366,201 | | $ | 275,849 | | $ | 189,059 | | | $ | 492,480 | | $ | 366,201 | | $ | 275,849 | |
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Notes to Consolidated Financial Statements (continued)(Continued)
16.17. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses include payroll for personnel employed in executive, sales, marketing,finance, legal, human resources, vendor management, risk and financeoperational effectiveness roles. This category also includes occupancy costs, professional fees and depreciation and amortization on non-operating assets. The components of selling, general and administrative expenses were as follows for the years ended December 31:
(in thousands) | | 2012 | | 2011 | | 2010 | | | 2013 | | 2012 | | 2011 | |
| | | | | | | | | | | | | | |
Compensation and benefits | | $ | 21,166 | | $ | 22,327 | | $ | 19,116 | | | $ | 27,864 | | $ | 21,166 | | $ | 22,327 | |
Professional services | | 9,864 | | 6,658 | | 8,026 | | | 8,022 | | 9,864 | | 6,658 | |
Occupancy related costs | | 24,041 | | 17,824 | | 10,684 | | | 28,424 | | 24,041 | | 17,824 | |
Amortization of intangible assets | | 5,030 | | 5,291 | | 4,891 | | | 28,176 | | 5,030 | | 5,291 | |
Goodwill impairment | | — | | — | | 2,816 | | |
Depreciation and amortization | | 2,609 | | 2,097 | | 1,470 | | | 4,633 | | 2,609 | | 2,097 | |
Other | | 12,002 | | 7,934 | | 10,349 | | | 16,691 | | 12,002 | | 7,934 | |
| | | | | | | | |
Total | | $ | 74,712 | | $ | 62,131 | | $ | 57,352 | | | $ | 113,810 | | $ | 74,712 | | $ | 62,131 | |
17.18. OTHER INCOME (EXPENSE) INCOME,, NET
Other income (expense) income,, net consists of the following for the years ended December 31:
(in thousands) | | 2012 | | 2011 | | 2010 | | | 2013 | | 2012 | | 2011 | |
| | | | | | | | | | | | | | |
Equity in losses of and impairment loss on investment in affiliate | | $ | (1,741 | ) | $ | (530 | ) | $ | — | | |
Loss in equity affiliates, including impairment loss | | | $ | (176 | ) | $ | (1,741 | ) | $ | (530 | ) |
Interest income | | 222 | | 32 | | 31 | | | 899 | | 222 | | 32 | |
Change in fair value of put option | | — | | 732 | | 557 | | | — | | — | | 732 | |
Other, net | | (69 | ) | 54 | | 335 | | | (166 | ) | (69 | ) | 54 | |
| | | | | | | | | | | | | | |
Total | | $ | (1,588 | ) | $ | 288 | | $ | 923 | | | $ | 557 | | $ | (1,588 | ) | $ | 288 | |
Equity lossLoss in affiliateequity affiliates primarily represents our proportionateproportional share of the losses in Correspondent One and impairment loss on the investment (see Note 10).
The change in fair value of put option relates to three put option agreements we entered into with certain of the sellers of MPA. The put option expired in December 2011 (see Note 5).2011.
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Notes to Consolidated Financial Statements (continued)(Continued)
18.19. INCOME TAXES
The income tax provision (benefit) consists of the following for the years ended December 31:
(in thousands) | | 2012 | | 2011 | | 2010 | | | 2013 | | 2012 | | 2011 | |
| | | | | | | | | | | | | | |
Current: | | | | | | | | | | | | | | |
Domestic - Luxembourg | | $ | 2,841 | | $ | 2,300 | | $ | (1,031 | ) | | $ | 2,516 | | $ | 2,841 | | $ | 2,300 | |
Foreign - U.S. Federal | | | 6 | | — | | — | |
Foreign - U.S. State | | 353 | | 119 | | 561 | | | 403 | | 353 | | 119 | |
Foreign - Non U.S. | | 2,552 | | 2,891 | | 1,186 | | | 3,600 | | 2,552 | | 2,891 | |
| | $ | 5,746 | | $ | 5,310 | | $ | 716 | | | | | | | | |
| | | | | | | | | $ | 6,525 | | $ | 5,746 | | $ | 5,310 | |
Deferred: | | | | | | | | | | | | | | |
Domestic - Luxembourg | | $ | 388 | | $ | (387 | ) | $ | 395 | | | $ | — | | $ | 388 | | $ | (387 | ) |
Foreign - U.S. Federal | | 2,419 | | 3,216 | | (1,014 | ) | | 2,506 | | 2,419 | | 3,216 | |
Foreign - U.S. State | | (23 | ) | (22 | ) | (68 | ) | | 84 | | (23 | ) | (22 | ) |
Foreign - Non U.S. | | 208 | | (174 | ) | (432 | ) | | (575 | ) | 208 | | (174 | ) |
| | 2,992 | | 2,633 | | (1,119 | ) | | 2,015 | | 2,992 | | 2,633 | |
| | | | | | | | |
Total | | $ | 8,738 | | $ | 7,943 | | $ | (403 | ) | | $ | 8,540 | | $ | 8,738 | | $ | 7,943 | |
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 was retroactive to the date of 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 diddoes 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%29.22% differs from income tax computed at the effective tax rate primarily because of the effect of the favorable tax ruling, differing tax rates in multiple jurisdictions, changes in valuation allowance and minority interest.
We operate under tax holidays in certain geographies in India whichand the Philippines. The India tax holidays are effective through 2020, and may be extended if certain additional requirements are satisfied. The Philippines tax holiday is effective through 2016, and may also be extended. The tax holidays are conditional upon our meeting certain employment and investment thresholds. The impact of these tax holidays decreased foreign taxes by $1.4$0.2 million $0.7($0.01 per diluted share), $1.5 million ($0.06 per diluted share), and $0.5$0.6 million ($0.02 per diluted share) for the years ended December 31, 2013, 2012 and 2011, respectively. The Philippines tax holiday commenced in 2012, 2011,2013 and 2010, respectively.had no impact on taxes for the year ended December 31, 2013.
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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Notes to Consolidated Financial Statements (continued)(Continued)
A summary of the tax effects of the temporary differences is as follows for the years ended December 31:
(in thousands) | | 2012 | | 2011 | | | 2013 | | 2012 | |
| | | | | | | | | | |
Current deferred tax assets: | | | | | | | | | | |
Allowance for doubtful accounts and other reserves | | $ | 40 | | $ | 72 | | | $ | 43 | | $ | 40 | |
Accrued expenses | | 1,940 | | 1,294 | | | 3,183 | | 1,940 | |
Current deferred tax liabilities: | | | | | | | | | | |
Prepaid expenses | | (205 | ) | (233 | ) | | (389 | ) | (205 | ) |
Current deferred tax asset, net: | | $ | 1,775 | | $ | 1,133 | | |
| | | | | | |
Current deferred tax assets, net | | | $ | 2,837 | | $ | 1,775 | |
| | | | | | | | | | |
Non-current deferred tax assets: | | | | | | | | | | |
Net operating loss carryforwards | | $ | 14,342 | | $ | 13,207 | | | $ | 12,439 | | $ | 14,342 | |
Non-U.S. deferred tax asset | | 895 | | 1,479 | | |
Non-U.S. deferred tax assets | | | 1,471 | | 895 | |
Share-based compensation | | 956 | | 533 | | | 784 | | 956 | |
Other | | 7 | | 31 | | | 7 | | 7 | |
Non-current deferred tax liabilities: | | | | | | | | | | |
Intangible assets | | (6,869 | ) | (8,014 | ) | | (6,035 | ) | (6,869 | ) |
Depreciation | | (2,845 | ) | (654 | ) | | (4,855 | ) | (2,845 | ) |
| | 6,486 | | 6,582 | | | 3,811 | | 6,486 | |
Valuation allowance | | (2,413 | ) | (2,209 | ) | | (3,189 | ) | (2,413 | ) |
Non-current deferred tax asset, net | | 4,073 | | 4,373 | | |
Net deferred tax asset | | $ | 5,848 | | $ | 5,506 | | |
| | | | | | |
Non-current deferred tax assets, net | | | $ | 622 | | $ | 4,073 | |
| | | | | | |
Net deferred tax assets | | | $ | 3,459 | | $ | 5,848 | |
A valuation allowance is provided when it is deemed more-likely-than-notmore 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. The increase in valuation allowance of $0.8 million during 20122013 relates to state and foreign losses generated in the current and prior years.year.
We have not provided Luxembourg deferred taxes on cumulative earnings of non-Luxembourg affiliates as we have chosen to indefinitely reinvest these earnings have been indefinitely reinvested.earnings. The earnings relate to ongoing operations and atreinvested as of December 31, 2012,2013 were $27.6approximately $38.5 million.
As of December 31, 2012, theThe Company had a deferred tax asset of $14.3$12.4 million as of December 31, 2013 relating to United States Federal,federal, state and foreign net operating losses.losses compared to $14.3 million as of December 31, 2012. Of this amount, $1.4 million as of December 31, 2013 related to state net operating losses subject to a valuation allowance compared to $1.5 million relating to state,as of December 31, 2012, and $0.9$1.8 million relatingas of December 31, 2013 related to Luxembourg net operating losses were subject to a valuation allowances.allowance compared to $0.9 million as of December 31, 2012. The Company has not recognized federal net operating loss carry forwards of $9.5 million as of December 31, 2013 related to stock options exercised compared to $2.2 million as of December 31, 2012. If realized, the benefit would be an increase to additional paid-in-capital. The gross amount of net operating losses available for carryover to future years approximatesis approximately $32.6 million as of December 31, 2013 compared to $36.1 million.million as of December 31, 2012. Of this amount, $13.5 million as of December 31, 2013 compared to $14.7 million as of December 31, 2012 relates to NCI for periods prior to our acquisition of NCI 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 Distributiondistribution of the Company in connection with the separation from Ocwen 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 hashad in the assets that comprisecomprised Altisource as a result of the restructuring. To the extent Ocwen does recognize tax under Section 355 of the Code, Altisource has agreed to indemnify Ocwen. In addition, we have agreed to indemnify Ocwen should the expected tax treatments not be upheld upon review or audit to the extent
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Notes to Consolidated Financial Statements (continued)(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 provision (benefit) to the Luxembourg statutory income tax rate for the years ended December 31:
| | 2012 | | 2011 | | 2010 | | | 2013 | | 2012 | | 2011 | |
| | | | | | | | | | | | | | |
Statutory tax rate | | 28.80 | % | 28.80 | % | 28.60 | % | | 29.22 | % | 28.80 | % | 28.80 | % |
Foreign rate differential | | (23.30 | ) | (20.03 | ) | (23.71 | ) | | (24.97 | ) | (23.30 | ) | (20.03 | ) |
Tax adjustment for retroactive ruling | | — | | — | | (6.13 | ) | |
Change in valuation allowance | | 0.16 | | — | | 0.44 | | | 0.76 | | 0.16 | | — | |
State tax expense | | 0.17 | | 0.06 | | 0.26 | | | 0.24 | | 0.17 | | 0.06 | |
Other | | 1.18 | | 0.42 | | (0.18 | ) | | 0.75 | | 1.18 | | 0.42 | |
| | 7.01 | % | 9.25 | % | (0.72 | )% | | | | | | | |
| | | 6.00 | % | 7.01 | % | 9.25 | % |
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.
We recognize accrued interest and penalties related to uncertain tax positions in selling, general and administrative expenses in the consolidated statements of operations. As of December 31, 20122013 and 2011,2012, we did not have a liability recorded for payment of interest and penalties associated with uncertain tax positions.
19.20. 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:
(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 | |
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Notes to Consolidated Financial Statements (continued)
(in thousands, except per share data) | | 2013 | | 2012 | | 2011 | |
| | | | | | | |
Net income attributable to Altisource | | $ | 129,973 | | $ | 110,627 | | $ | 71,112 | |
| | | | | | | |
Weighted average common shares outstanding, basic | | 23,072 | | 23,358 | | 24,373 | |
Dilutive effect of stock options | | 1,981 | | 1,604 | | 1,312 | |
| | | | | | | |
Weighted average common shares outstanding, diluted | | 25,053 | | 24,962 | | 25,685 | |
| | | | | | | |
Earnings per share: | | | | | | | |
Basic | | $ | 5.63 | | $ | 4.74 | | $ | 2.92 | |
Diluted | | $ | 5.19 | | $ | 4.43 | | $ | 2.77 | |
An immaterial amount of options for the years ended December 31, 2013 and 2012 and 0.1 million options for the year ended December 31, 2011 that were anti-dilutive have been excluded from the computation of diluted EPS for the year ended December 31, 2012 (0.1 million for 2011 and 2010).EPS. 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 0.30.1 million, 0.3 million and 0.70.3 million options for the years ended December 31, 2013, 2012 2011 and 2010,2011, 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 yet been met at this point.met.
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Notes to Consolidated Financial Statements (Continued)
21. 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, 20122013 under non-cancelable capital and operating leases with an original term exceeding one year are as follows:
(in thousands) | | Capital Lease
Obligations | | Operating
Lease
Obligations | | | Operating lease
obligations | |
| | | | | | | | |
2013 | | $ | 236 | | $ | 9,022 | | |
2014 | | — | | 5,123 | | | $ | 9,142 | |
2015 | | — | | 3,553 | | | 8,517 | |
2016 | | — | | 3,650 | | | 7,077 | |
2017 | | | | 3,557 | | | 5,148 | |
2018 | | | 4,386 | |
Thereafter | | — | | 2,914 | | | 138 | |
| | 236 | | $ | 27,819 | | | | |
Less: Amounts representing interest | | (3 | ) | | | |
Current portion of capital lease obligations | | $ | 233 | | | | |
| | | $ | 34,408 | |
Total operating lease expense, net of sublease income, was $12.8 million, $10.9 million $10.8 million and $7.8$10.8 million for the years ended December 31, 2013, 2012 2011, and 2010,2011, respectively. The operating leases generally relate to office locations and reflect customary lease terms which range from 13 to 76 years in duration.
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Notes to Consolidated Financial Statements (continued)
Escrow and Trust Balances
We hold customers’ assets in escrow and trust accounts at various financial institutions pending completion of certain real estate activities. We also hold cash in trust accounts at various financial institutions where contractual obligations mandate maintaining dedicated bank accounts for Financial Services collections. These amounts are held in escrow and trust accounts for limited periods of time generally consisting of a few days and are not included in the consolidated balance sheets. Amounts held in escrow and trust accounts were $71.8 million and $47.2 and $17.7 million as ofat December 31, 20122013 and 20112012, respectively.
21.22. 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 useused by our Chief Executive Officer to evaluate operating performance and to assess the allocation of our resources by our Chief Executive Officer.resources.
We conductclassify our operations throughbusiness into three reportable segments. The Mortgage Services segment provides services that span the mortgage and real estate lifecycle and are typically outsourced by loan servicers, loan originators and investors in single family homes. The Financial Services segment provides collection and customer relationship management
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Notes to Consolidated Financial Statements (Continued)
services primarily to debt originators and servicers (e.g., credit card, auto lending, retail credit mortgages)and mortgage) and the utility and insurance industries. The Technology Services segmentprincipally consists of our REALSuiteTM software applications, Equator’s software 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. Equator’s software applications provide comprehensive, end-to-end workflow and transaction services to manage real estate related activities and purchase related services from vendors. In addition, our Corporate Items and Eliminations segment includes eliminations of transactions between the reporting segments and costs related to corporate support functions including executive, finance, legal, human resources, vendor management, risk and six sigma.operational effectiveness.
Financial information for our segments is as follows:
| | For the year ended December 31, 2012 | | | For the year ended December 31, 2013 | |
| | | | | | | | Corporate | | | | | | | | | | | Corporate | | | |
| | Mortgage | | Financial | | Technology | | Items and | | Consolidated | | | Mortgage | | Financial | | Technology | | Items and | | Consolidated | |
(in thousands) | | Services | | Services | | Services | | Eliminations | | Altisource | | | Services | | Services | | Services | | Eliminations | | Altisource | |
| | | | | | | | | | | | | | | | | | | | | | |
Revenue | | $ | 452,796 | | $ | 64,522 | | $ | 74,189 | | $ | (23,147 | ) | $ | 568,360 | | | $ | 596,152 | | $ | 92,958 | | $ | 103,891 | | $ | (24,644 | ) | $ | 768,357 | |
Cost of revenue | | 285,586 | | 46,737 | | 54,634 | | (20,756 | ) | 366,201 | | | 374,713 | | 55,328 | | 84,538 | | (22,099 | ) | 492,480 | |
Gross profit | | 167,210 | | 17,785 | | 19,555 | | (2,391 | ) | 202,159 | | | 221,439 | | 37,630 | | 19,353 | | (2,545 | ) | 275,877 | |
Selling, general and administrative expenses | | 25,099 | | 13,415 | | 8,888 | | 27,310 | | 74,712 | | | 46,515 | | 15,571 | | 12,442 | | 39,282 | | 113,810 | |
Income from operations | | 142,111 | | 4,370 | | 10,667 | | (29,701 | ) | 127,447 | | | 174,924 | | 22,059 | | 6,911 | | (41,827 | ) | 162,067 | |
Other expense, net | | (1,713 | ) | (27 | ) | (25 | ) | (1,033 | ) | (2,798 | ) | |
Other income (expense), net | | | (136 | ) | (10 | ) | 7 | | (19,595 | ) | (19,734 | ) |
Income before income taxes and non-controlling interests | | $ | 140,398 | | $ | 4,343 | | $ | 10,642 | | $ | (30,734 | ) | $ | 124,649 | | | $ | 174,788 | | $ | 22,049 | | $ | 6,918 | | $ | (61,422 | ) | $ | 142,333 | |
| | 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 income (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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| | 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 | |
| | 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 | |
| | 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 income (expense), net | | 248 | | (34 | ) | (49 | ) | 38 | | 203 | |
Income before income taxes and non-controlling interests | | $ | 94,856 | | $ | 4,417 | | $ | 14,304 | | $ | (27,667 | ) | $ | 85,910 | |
82Our services are provided to customers primarily located in the United States.
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| | | | | | | | Corporate | | | |
| | Mortgage | | Financial | | Technology | | Items and | | Consolidated | |
(in thousands) | | Services | | Services | | Services | | Eliminations | | Altisource | |
| | | | | | | | | | | |
Total assets: | | | | | | | | | | | |
December 31, 2013 | | $ | 308,214 | | $ | 55,930 | | $ | 274,766 | | $ | 85,928 | | $ | 724,838 | |
December 31, 2012 | | 132,924 | | 37,782 | | 64,570 | | 193,950 | | 429,226 | |
| | | | | | | | | | | | | | | | |
| | Premises &
equipment, net | |
Country | | (in thousands) | |
| | | |
United States | | $ | 63,615 | |
India | | 16,404 | |
Luxembourg | | 3,217 | |
Philippines | | 4,016 | |
| | | |
Total | | $ | 87,252 | |
ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (continued)
22.23. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables contain selected unaudited statement of operations information for each quarter of 20122013 and 2011.2012. 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.
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (Continued)
Unaudited quarterly results are as follows:
| | 2012 quarter ended(1) | | | 2013 quarter ended(1)(2) | |
(in thousands, except per share data) | | December 31, | | September 30, | | June 30, | | March 31, | | | March 31, | | June 30, | | September 30, | | December 31, | |
| | | | | | | | | | | | | | | | | | |
Revenue | | $ | 141,101 | | $ | 143,988 | | $ | 144,205 | | $ | 139,066 | | | $ | 148,827 | | $ | 186,110 | | $ | 210,835 | | $ | 222,585 | |
Gross profit | | 53,685 | | 49,701 | | 51,467 | | 47,306 | | | 51,865 | | 69,138 | | 76,574 | | 78,300 | |
Income before income taxes and non-controlling interests | | 31,599 | | 30,982 | | 32,128 | | 29,940 | | | 30,678 | | 34,485 | | 38,614 | | 38,556 | |
Net income | | 31,354 | | 28,084 | | 29,352 | | 27,121 | | | 28,527 | | 32,068 | | 36,955 | | 36,243 | |
Net income attributable to Altisource | | 30,293 | | 27,024 | | 28,081 | | 25,229 | | | 27,518 | | 30,931 | | 36,008 | | 35,516 | |
| | | | | | | | | | | | | | | | | | |
Net income per share | | | | | | | | | | |
Earnings per share: | | | | | | | | | | |
Basic | | $ | 1.30 | | $ | 1.16 | | $ | 1.20 | | $ | 1.08 | | | $ | 1.18 | | $ | 1.34 | | $ | 1.56 | | $ | 1.56 | |
Diluted | | $ | 1.20 | | $ | 1.08 | | $ | 1.13 | | $ | 1.02 | | | $ | 1.10 | | $ | 1.25 | | $ | 1.42 | | $ | 1.42 | |
Weighted average shares outstanding | | | | | | | | | | |
Weighted average shares outstanding: | | | | | | | | | | |
Basic | | 23,389 | | 23,338 | | 23,316 | | 23,381 | | | 23,374 | | 23,161 | | 23,025 | | 22,734 | |
Diluted | | 25,162 | | 25,016 | | 24,846 | | 24,844 | | | 25,058 | | 24,823 | | 25,333 | | 25,005 | |
| | 2011 quarter ended(1) | | | 2012 quarter ended(1) | |
(in thousands, except per share data) | | December 31, | | September 30, | | June 30, | | March 31, | | | March 31, | | June 30, | | September 30, | | December 31, | |
| | | | | | | | | | | | | | | | | | |
Revenue | | $ | 131,956 | | $ | 109,793 | | $ | 93,268 | | $ | 88,670 | | | $ | 139,066 | | $ | 144,205 | | $ | 143,988 | | $ | 141,101 | |
Gross profit | | 47,492 | | 36,454 | | 30,171 | | 33,721 | | | 47,306 | | 51,467 | | 49,701 | | 53,685 | |
Income before income taxes and non-controlling interests | | 30,757 | | 20,805 | | 16,537 | | 17,811 | | | 29,940 | | 32,128 | | 30,982 | | 31,599 | |
Net income | | 28,191 | | 18,962 | | 14,690 | | 16,124 | | | 27,121 | | 29,352 | | 28,084 | | 31,354 | |
Net income attributable to Altisource | | 25,731 | | 17,171 | | 13,385 | | 14,825 | | | 25,229 | | 28,081 | | 27,024 | | 30,293 | |
| | | | | | | | | | | | | | | | | | |
Net income per share | | | | | | | | | | |
Earnings per share: | | | | | | | | | | |
Basic | | $ | 1.09 | | $ | 0.71 | | $ | 0.54 | | $ | 0.60 | | | $ | 1.08 | | $ | 1.20 | | $ | 1.16 | | $ | 1.30 | |
Diluted | | $ | 1.02 | | $ | 0.67 | | $ | 0.52 | | $ | 0.57 | | | $ | 1.02 | | $ | 1.13 | | $ | 1.08 | | $ | 1.20 | |
Weighted average shares outstanding | | | | | | | | | | |
Weighted average shares outstanding: | | | | | | | | | | |
Basic | | 23,692 | | 24,341 | | 24,625 | | 24,845 | | | 23,381 | | 23,316 | | 23,338 | | 23,389 | |
Diluted | | 25,142 | | 25,489 | | 25,773 | | 25,928 | | | 24,844 | | 24,846 | | 25,016 | | 25,162 | |
| | | | | | | | | | |
(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.
(2)On March 29, 2013, we acquired the Homeward fee-based businesses. On April 12, 2013, we completed the ResCap fee-based business transaction. On November 15, 2013, we acquired Equator (see Note 5).
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ALTISOURCE PORTFOLIO SOLUTIONS S.A.
Notes to Consolidated Financial Statements (continued)
23. SUBSEQUENT EVENTS
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 DISCLOSURESDISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We carried out an evaluation required byOur Chief Executive Officer and Chief Financial Officer have evaluated 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(as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Securities Exchange Act of 1934, Act,as amended (the “Exchange Act”)) as of December 31, 2012.the end of the period covered by this report. Based on thissuch evaluation, our principal executive officer and principal financial officersuch officers have concluded that as of December 31, 2012, our disclosure controls and procedures as of the end of the period covered by this report were effective to provide reasonable assuranceensure that information required to be disclosed by us in the reports that we file or submit under the 1934Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’sSEC rules and forms, and to provide reasonable assuranceensure that such information is accumulated and communicated to our management, including our principal executive officerthe Chief Executive Officer and principal financial officer,Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.disclosure.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the 1934Exchange Act. Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 20122013 based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The scope of management’s assessment of the effectiveness of internal control over financial reporting includes all of our businesses except for Equator, which was acquired on November 15, 2013 and whose financial statements represent 17% of total assets and less than 1% of revenues and net income attributable to Altisource of the consolidated financial statement amounts as of and for the year ended December 31, 2013. See Note 5 to the accompanying consolidated financial statements for further discussion of this acquisition. As a result of this assessment, management concluded that, as of December 31, 2012,2013, our internal control over financial reporting was effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Deloitte & Touche LLP has independently assessed the effectiveness of our internal control over financial reporting and its report is included herein.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended December 31, 20122013 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Controls
Our disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance of achieving their objectives as specified above. Management does not expect, however, that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected.
ITEM 9B. OTHER INFORMATION
None.
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PART III
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 in connection with our 2014 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Exchange Act.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by reference to our definitive 2012 proxy statement in connection with our 2014 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Exchange Act.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this item is incorporated herein by reference to our definitive 2012 proxy statement in connection with our 2014 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Exchange Act.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by reference to our definitive 2012 proxy statement in connection with our 2014 annual meeting of shareholders to be filed pursuant to Regulation 14A under the Exchange Act.
ITEM 14. PRINCIPAL ACCOUNTANTACCOUNTING FEES AND SERVICES
The information required by this item is incorporated herein by reference to our definitive 2012 proxy statement in connection with our 2014 annual meeting of shareholders 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. | | | | 1. | | Financial Statements | | | | | | See Item 8 above. | | | | 2. | | Financial Statement Schedules: | | | | | | Schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the related instructions or are not applicable, and therefore have been omitted. | | | | 3. | | Exhibits: | |
|
|
|
Exhibit | | |
Number | | Exhibit Description |
| | |
2.1 | | Form of Separation Agreement between Altisource Portfolio Solutions S.A. and Ocwen Financial Corporation (incorporated by reference to Exhibit 2.1 of the Registrant’s Form 10-12B/A — Amendment No. 1 to Form 10, as filed with the Commission on June 29, 2009) |
| | |
2.2 | | 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) |
| | |
3.12.4
| | Purchase and Sale Agreement, dated as of March 29, 2013, by and among Altisource Portfolio Solutions, Inc., Altisource Solutions S.à r.l., Ocwen Financial Corporation, Homeward Residential, Inc. and Power Valuation Services, Inc. (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on April 4, 2013) |
| | |
2.5 | | Purchase and Sale Agreement, dated as of August 19, 2013, by and among Altisource Portfolio Solutions S.A., Altisource Solutions S.à r.l. and the Equity Interestholders of Equator, LLC (incorporated by reference to Exhibit 2.1 to the Company’s Form 8-K filed on August 21, 2013) |
| | |
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) |
|
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| | 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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| | 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) | | | | 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†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†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†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†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†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†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) | | | | 10.16†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†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) | |
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| | |
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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| | 10.19†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†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 5,1, 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 5,1, 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 5,1, 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 5,1, 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 5,1, 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 5,1, 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 5,1, 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 5,1, 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 5,1, 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 28,21, 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 28,21, 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 28,21, 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 28,21, 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 28,21, 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 28,21, 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 28,21, 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 28,21, 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) | | | | 10.40 | | Second Amendment to Services Agreement, dated as of March 29, 2013, by and between Ocwen Financial Corporation and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on April 4, 2013) | | | | 10.41 | | Second Amendment to Technology Products Services Agreement, dated as of March 29, 2013, by and between Ocwen Financial Corporation and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on April 4, 2013) | | | | 10.42 | | Second Amendment to Data Center and Disaster Recovery Services Agreement, dated as of March 29, 2013, by and between Ocwen Financial Corporation and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed on April 4, 2013) | | | | 10.43 | | Second Amendment to Intellectual Property Agreement, dated as of March 29, 2013, by and between Ocwen Financial Corporation and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.4 to the Company’s Form 8-K filed on April 4, 2013) | | | | 10.44 | | First Amendment to Services Agreement, dated as of March 29, 2013, 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 April 4, 2013) | | | | 10.45 | | First Amendment to Technology Products Services Agreement, dated as of March 29, 2013, by and between Ocwen Mortgage Servicing, Inc. and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.6 to the Company’s Form 8-K filed on April 4, 2013) | | | | 10.46 | | First Amendment to Data Center and Disaster Recovery Services Agreement, dated as of March 29, 2013, by and between Ocwen Mortgage Servicing, Inc. and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.7 to the Company’s Form 8-K filed on March 29, 2013) |
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Table of Contents 10.47 | | First Amendment to Intellectual Property Agreement, dated as of March 29, 2013, by and between Ocwen Mortgage Servicing, Inc. and Altisource Solutions S.à r.l. (incorporated by reference to Exhibit 10.8 to the Company’s Form 8-K filed on March 29, 2013) | | | | 10.48 | | Agreement, dated as of April 12, 2013, by and among Altisource Solutions S.à r.l., Ocwen Financial Corporation and Ocwen Mortgage Servicing, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on April 18, 2013) | | | | 10.49 | | Amendment No. 1 to Credit Agreement, dated as of May 7, 2013, among Altisource Solutions S.à r.l., as borrower, Altisource Portfolio Solutions S.A., Bank of America, N.A., as administrative agent and incremental term lender and the other lenders party thereto. (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on May 13, 2013) | | | | 10.50 | | Amendment No. 2 to Credit Agreement, dated as of December 9, 2013, among Altisource Solutions S.à r.l., as borrower, Altisource Portfolio Solutions S.A., Bank of America, N.A., as Administrative Agent and the Lenders party thereto. (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on December 11, 2013) | | | | 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 | | Pursuant to Rule 405 of Regulation S-T, the following financial information from the Company’s Annual Report on Form 10-K for the periodyear ended December 31, 2012,2013 is formatted in XBRL interactive data files: (i) Consolidated Balance Sheets at December 31, 2012,2013 and December 31, 2011;2012; (ii) Consolidated Statements of Operations for each of the years in the three-year period ended December 31, 2012;2013; (iii) Consolidated Statements of Equity for each of the years in the three-year period ended December 31, 2012;2013; (iv) Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2012;2013; 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).Statements. |
*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 9188
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 13, 20132014 | | | |
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| | 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/ Michelle D. Esterman | | | | | Name: | Michelle D. Esterman | | | | | 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 13, 2013.2014. Signature | | Title | | Date | | | | | | /s/ William C. Erbey | | Chairman of the Board of Directors | | February 13, 20132014 | William C. Erbey | | | | | | | | | | /s/ William B. Shepro | | Director and Chief Executive Officer | | February 13, 20132014 | William B. Shepro | | (Principal Executive Officer) | | | | | | | | /s/ W. Michael Linn | | Director | | February 13, 20132014 | W. Michael Linn | | | | | | | | | | /s/ Roland Müller-Ineichen | | Director | | February 13, 20132014 | Roland Müller-Ineichen | | | | | | | | | | /s/ Timo Vättö | | Director | | February 13, 20132014 | Timo Vättö | | | | | | | | | | /s/ Michelle D. Esterman | | Chief Financial Officer | | February 13, 20132014 | Michelle D. Esterman | | (Principal Financial Officer and Principal
Accounting Officer) | | |
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